The new government has the formidable task of resuscitating the economy. This task is becoming difficult, as the economic problems inherited from the previous regime continue to haunt the present one. Daily power cuts have come back. There are indications of inevitable price increases of certain consumer goods.
Export earnings, in dollar terms, fell by 9 percent in the first ten months of this year, according to trade statistics released recently. A 15 percent decline in imports in the first ten months helped to narrow the external deficit. But the fall in imports of intermediate goods by 11 percent and investment goods by 24 percent is rather alarming considering its negative impact on economic growth. These imports need to be boosted substantially to accelerate GDP growth and this will put enormous pressures on the balance of payments in the coming months. The fiscal situation, dominated by a huge budget deficit, is dreadful. With its empty coffers, the Treasury has been depending heavily on banks, particularly on the state banks, to meet its day-to-day cash needs. The outstanding public debt now exceeds a year's GDP.
The new government can learn several lessons from the mistakes made by the PA government. Policy blunders were a major cause of the economic crisis, as I said in this column earlier. The right polices were not implemented at the right time. Even the few correct policies that were implemented were done so at the wrong time, and therefore, it was impossible to redirect the economy along the correct path.
The ill-fated Stand-by programme agreed with the IMF is a classic example of how the policy makers in this country miscalculated the ground situation. We did not hear much about this programme in the last couple of months and it is almost forgotten now. The Central Bank and the Treasury were instrumental in designing that programme. It was aimed at restoring macro-economic stability by means of lowering the fiscal and external deficits. Several macro-economic targets were set for 2001. But none of those targets was met. The target GDP growth was 4.3 percent, but the actual is going to be close to zero. The annual inflation has shot up to 15 percent as against the target of 8 percent. The budget deficit now exceeds 10 percent of GDP, compared with the target of 8.5 percent. The external current account deficit is going to be much higher than the target of 3.1 percent of GDP. Thus, the targets set by the Central Bank and the Treasury in April 2001 after much consultation with the IMF were violated within a few months. By October 2001, that is barely six months after the launch of the Stand-by agreement, the economic programme looked completely shattered. The GDP growth fell to almost zero, and annual inflation rose to 14 percent. By that time it was also evident that fiscal and external deficit targets were unsustainable. So, the Stand-by programme had to be abandoned without drawing the second credit installment from the IMF.
How did the Stand-by agreement collapse so fast? It is questionable as to why the Central Bank Governor and the Treasury Secretary agreed to implement an unattainable economic programme. The failure of the programme within a very short time span has considerably damaged the credibility of the PA government's economic policy. The Central Bank and the Treasury painted a rosy picture of the economy to convince the IMF that everything was fine. But even at the time the agreement was signed in April 2001, the economy was in a crisis situation with low GDP growth, high inflation, a rising budget deficit and falling reserves. Nevertheless, a contrasting picture was shown in the programme and optimistic targets were set for a high GDP growth, low inflation, and reduced fiscal and external deficits. Despite the continuous economic slowdown, the Central Bank authorities publicly announced that the economy was sound. Such statements were geared to mislead not only the public but also the then-government. This kind of trumpeting continued until the collapse of the PA government. At the same time the bureaucrats blamed outside forces like the weather and the world economy for the poor performance of the economy. The impediments created by their own policy lapses were never mentioned.
It is important to maintain the credibility of economic policy. Once credibility is lost, the general public, business sector and international community will begin to question the reliability and integrity of the economic programmes. This is exactly what happened to the PA government. Usually, the ruling political parties are blamed for the bad policies and in turn, they lose power. But the bureaucrats who were directly responsible for designing such policies manage to escape conveniently and continue to thrive, despite their poor track record. The revival of the economy will not be feasible unless the decision making structure is revamped expeditiously so as to formulate transparent, dynamic, and consistent policies.
Letter
Minister of Industrial Development Policy, Professor G.L. Peiris said last week that government finances were in critical condition with revenue much lower and expenditure far higher than anticipated.
"We're in a situation where revenue from every single tax has come down," he told the 40th annual general meeting of the Ceylon National Chamber of Industries. "The goods and services tax, national security levy, import levies - the projected revenue has not been realised from any one of these taxes. So while revenue is down, expenditure is going through the roof."
The previous government had spent seven billion rupees in the last two months and had borrowed a total of Rs. 30 billion from the two state banks, he said. "That's why they are in crisis," he added. Divestment had not brought in one-third of the expected revenue mainly because of the delay in listing Sri Lanka Telecom, he also said.
"The main cause of the haemorrhage is the huge debt which is mind boggling," he said.
"The debt of the Ceylon Petroleum Corporation alone is Rs. 21.5 billion - enough to build the Colombo-Katunayake expressway, enough to pay for the Samurdhi for two years and half the cost of the Mahaweli project," Prof. Peiris said. "That's the loss from one single corporation. But the CPC is a poor second to the Ceylon Electricity Board."
He described the CEB's losses as a "really staggering example of incompetence and corruption." Sri Lanka's economic growth rate for this year is estimated at 0.6 percent," Prof. Peiris said.
"For the first time in 30 years the economy has registered negative growth," he said.
"But there's no need for despair if you start working methodically and systematically," he said.
Right now, the mood in the country, especially in the business community, was "one of buoyancy and expectation", Prof. Peiris said, adding that this was evident from the phenomenal rise of the stockmarket soon after the United National Front won the election. "So the level of expectation is very high."
But the mood of buoyancy and expectation, although necessary, was not enough.
"What is required is the invigoration of the macro-economic environment in the country," Prof. Peiris said.
One of the government's top priorities was to have "a firm, durable and realistic fiscal and monetary policy," he said. "We cannot build castles in the air."
Another priority was the peace process. "Business can't function in a vacuum - how can you attract investment to a country ravaged by war, with eight-hour power cuts?" he said. "Peace is a sine qua non."
The peace process will begin soon after Prime Minister Ranil Wickremesinghe's visit to India, he said. "This is the last opportunity we have," he said. "For 35 years, efforts to find a solution to the ethnic problem had failed because of the rivalry and hatred between political parties."
It was time for all the anger, hatred and vituperation to be forgotten, he said.
"The public wants the government to get on with it," he added.
The Colombo Stock Exchange picked up on Thursday on news of an offer of a LTTE cease-fire, after bearish trends in the first three days of last week. As a result, the market rose by 10.4 and 29.1 points in the All Share Price Index and the Milanka Price Index, respectively.
Brokers said a large number of shares of the National Development Bank were traded during the week, which also saw foreign investors pulling off in some areas. On Wednesday Caltex Lubricants Lanka Ltd announced an interim dividend of 41.5%.
Brokers said they expected a quiet Christmas week with only two days trading on December 27 and 28 before the year ended.
By Murali Jayadeva
The government intends to negotiate with banks to help businessmen in financial trouble reschedule loan repayments, Minister of Rural Economy and Deputy Finance Minister, Bandula Gunawa-rdene said last week.
"We will liaise with banks to ensure that entrepreneurs who are unable to pay back loans in terms of the original contract due to the unsettled business environment are allowed to repay them by rescheduling the repayment terms," he said in an interview.
"These measures, we strongly feel, will set the mood and tone to encourage a definite revival in investment," he said.The government was also trying to encourage Sri Lankan professionals living abroad to return to the island and help in its development, he said. "We have already sounded out our intellectuals living in foreign climes to help us to pull this country out of the present economic morass," he said. "Some of them who are retired have agreed to offer their services free in the development process. We will very soon make arrangements to use their services for the betterment of this country."
Mr.Gunawardene also said the government would introduce a number of investment promotion programmes offering incentives such as tax relief for import of capital goods and purchases of land. "We will also bring in new technology to increase productivity and take steps to inject confidence building among the investors."
