Bureaucrats and aristocrats
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Fuel queues, a result of poor policy decisions.
A couple of weeks ago, I received a mail from one of my British friends, Matthew McCartney, saying that “he is in Colombo”. Matthew, until recently, was a Professor of Economics at the University of Oxford and then shifted to a research institute in London.
I haven’t seen him for about four years now; the last time we met was in Lahore as we both attended a conference there at the Lahore School of Economics. Over the past two years all of us have been in lockdown in our home countries with travel restrictions as well as, intermittently in our own homes too, due to the global pandemic.
Experiencing shortages
As he spent a couple of weeks in Sri Lanka, staying in the suburbs of Colombo and travelling to Kandy, Galle and some other places, he had already had a glimpse of the economic debacle of the country. He himself had experienced the commodity shortages, power shortages, fuel shortages and all sort of market uncertainties and disruptions and so on.
One day he sent me a text message saying that “today we have a power cut from morning to evening; so, I can’t work there in our apartment and we decided to come out and spend the time at Waters Edge”.
Although there are tourists arriving in Sri Lanka now and we are also eagerly waiting for them to come, the arriving tourists must be experiencing the “shortages” one way or the other. I also noticed tourists who have hired motorbikes were lining up along the long fuel queues down south. A tourist comes here only for a limited number of days to get the maximum out of a short-stay; they don’t have time to keep standing in long queues or to roam around searching for goods to buy or to experience how difficult life would be without electricity and so on…!
Whatever the “shortages” are, Valentine Day was special; Matthew told me that they were unable to reserve a hotel restaurant for dinner on February 14, as the hotels were full of guests for Valentine Day celebrations.
Advice of bureaucrats
Matthew’s wife is Indian. Therefore, her parents and other in-laws from Bangalore also made it an opportunity to visit Sri Lanka for a few days’ vacation and, of course, to see their daughter as well as the little grand-daughter. Before their departure, we all met over a dinner.
The popular topics at the gathering were related to both politics and economics in both India and Sri Lanka, among other things.
As the discussion progressed, Matthew’s father-in-law, a retired top-ranked civil servant, said that “according to the Indian political culture, politicians get advice from bureaucrats so that the bureaucrats are above the politicians”. Then, he asked me: “How is it here in Sri Lanka?”
I replied: “Here it is the other way around!”
My answer led him to ask another question: “Are the politicians educated enough?” The question first surprised me, but I quickly realised that it was a sensible one. What he implied was that bureaucrats are educated enough to handle policy matters so that they can advise the politicians. If they are not in that position, of course, politicians should be educated enough!
I gave a loose answer: “It doesn’t matter whether they are educated or not, because it doesn’t determine their position”.
He got the point and responded: “Of course, it is right; but definitely it determines the ‘position’ of the country! So, what’s the responsibility of bureaucrats then?”
I said: “They have to follow the politicians and endorse what politicians want to do”.
Policy-making
Later I further delved deep into the question he raised. The decisions are primarily “political decisions” for which there is hardly any professional advice or evidence-based guidance. Dozens of decisions have been made all contributing to the current crisis, whereas the bureaucracy is deployed to endorse and implement them.
On the contrary, “policy-making” is something that we have abandoned for a long time and even hard to comprehend in the context of the current economic chaos. In the absence of policy-making, we are groping in the dark.
If Sri Lanka had better policy-making, we would have considered seriously why we didn’t have enough export growth and why we didn’t have enough private investment. In the absence of adequate export growth, we let the exchange rate float on ‘volatile’ borrowings. Knowing clearly that our balance of payments is weaker due to inadequate export growth, we opened the government security market for foreign investment and started risky commercial borrowing.
In addition, knowing clearly that our fundamentals of fiscal operations have been weak for a long time, we made a series of political decisions putting the budgetary management in further disarray; and the rating agencies too started downgrading the country’s credit worthiness.
The COVID-19 pandemic exposed the problem that has been hidden under absurd political statements. We cannot meet our debt obligations without import controls and without further borrowings. We cannot sustain import controls as they fuel domestic shortages and inflation and, damaging the businesses that are dependent on imported inputs. Thus, we have initiated ‘self-defeating’ strategies to keep the economy floating around until ‘things get better’.
Multiple exchange rates
Some of the practical issues that they had to face here appeared to be bizarre to them as India has already passed that stage long ago. As Mathew and I were the only economists in the group, they wanted to know our thoughts. One of the interesting issues that they brought into discussion was the exchange rate of the Sri Lankan rupee because they had to deal with it as tourists.
“The hotel gives 170 rupees a dollar, while the bank gives 195 rupees, whereas the private money changers offered us 240 rupees!” They wanted to know: “Why is that?”
The hotel’s mandate is for a different business; whether you choose to sell your dollars to the hotel or not, it doesn’t affect their primary business. Banks will give you as per the rate decided by the Central Bank. Private money changers supply currency according to market demand and supply.
It led to another question for clarification: “Then how do banks get dollars, when they offer lower rates?”
I replied: “Yes, the greater the regulations, the thinner would be the formal sources of foreign exchange earnings. And, compared to the formal channels of foreign exchange flows, informal channels must grow limiting the foreign exchange flows to the banks.”
Way out
In a situation where we don’t know when and where our next meal comes from, there is a short-term issue to be dealt with. While the survival of the economy in the short-run is important, it would not bring an end to the current crisis. Given the magnitude of the problem, recovery of tourism or the sale of assets or a couple of investment projects would not rescue the economy.
It requires policy-making with the objective of pushing the economy above and beyond recovery. The longer we wait, the harder it would be the ability to get out of the debt crisis, which would further aggravate the credit worthiness of the country. Import controls and inflationary pressure would contribute to the same problem with additional burdens. Sri Lanka has to turn to ‘policy-making’ with a broad-based reform agenda for export growth and investment growth.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and
follow on Twitter @SirimalAshoka).
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