This year too, the Central Bank (CB)’s Annual Report for 2009 was completed by the Bank staff nearly one month before the statutory deadline of April 30, following the new tradition introduced as from the Annual Report for 2006.
At the presentation of the report. |
In fact, at the inception in 1950, the Bank was required to submit this report within three months of the lapse of a calendar year. But later, an amendment made in 1974 to the Monetary Law Act under which the Bank has been set up, gave the institution an additional one month’s time to submit its report. The new tradition was started by the incumbent Governor, Ajith Nivard Cabraal, who assumed the governorship in July 2006. Though it made a lot more intense work for the staff, it also freed them for the Sinhala and Tamil New Year in April, which all of them missed on previous occasions to the annoyance of their family members and relatives.
Challenging job
The report is prepared by a team of technocrats functioning under the Bank’s Director of Economic Research. This year, it would have been much more challenging, tense and stressful for the incumbent Director K.D. Ranasinghe and his staff because they had to do it in the middle of two elections, an interim IMF Mission and the completion of a major foreign borrowing programme, all coinciding with the Annual Report work. Yet, the seasoned Mr Ranasinghe whose entire career in the Bank happened to be in the research area, with the support of his able staff and other heads of department, has been able to keep to the high tradition established in the Bank. I have nothing but high regards and admiration for my former colleagues for the daunting task they have accomplished as a team.
2009 Special Year for CB Report
This year’s Annual Report marks an end of an era and the beginning of a new one, just like the Annual Report for 1977 which branded itself as a report marking ‘a watershed’ in Sri Lanka’s economic history. At that time, it was transmission from a controlled era to economic liberalisation. This year, it is the end of a devastating and costly war and the beginning of the building of a new economic powerhouse in South Asia.
All annual reports in the last three decades or so had emphasised the need for ending the war and moving to an acceptable political settlement, because it had prevented the country from attaining its potential growth and creating wealth for its citizens. When Sri Lanka’s neighbours, especially those to the East, were moving forward in quantum leaps thereby making them known and felt as noteworthy members of the international community, Sri Lanka had to lament over its poor performance year after year blaming the war and political instability. Now the war is over and moves to restore political stability are in place, the country cannot find ‘a convenient whipping boy’ any more. It has to lay a sound economic foundation supported by a policy package conducive for taking the country forward into the new era. This is a serous task to be accomplished by economic visionaries and should not be left to those with naïve ideas relating to economic policy making.
Apolitical document
The Annual Report is the key policy analysis which the CB submits to the government and the general public. In terms of the law, after the report is received, the Minister of Finance has to table it in Parliament within 14 days if the Parliament is in session or within 14 days when it has resumed its sessions after holidays. These provisions have been made in the law to facilitate the legislators to take a critical view of the existing state of the economy and, if necessary, debate its contents in Parliament. Hence, the requirement is that the report should take an apolitical stance highlighting both pluses and minuses with a critical look so that both the government and the opposition would benefit from such analysis.
In other words, the report should not be seen as a document praising the work done by the government.
As in the previous years, Annual Report 2009 covers the major economic sectors with highlights of developments, issues, challenges and what the Central Bank feels as suitable policies. It is organised from macro to micro and then to the key policy objectives of the Bank, namely, economic and price stability and the financial system stability. It is a wealth of information educating the reader of the new developments; its special Boxes, numbering 16, have been carefully selected to discuss many of the current issues faced by Sri Lanka. The multicolour printing, insertion of graphs to illustrate points at appropriate places and the marking of the first sentence of every paragraph with bold fonts have added to the easy readability of the report.
No theme
Normally, every Annual Report has a theme and this theme is boldly presented in Chapter 1of the report. All other Chapters link themselves to this theme in a coherent manner so that the reader is treated to a one full policy document on a single theme. It is the prerogative of the Director of Economic Research to author this chapter drawing facts, figures and arguments from other chapters, but presenting his unique wisdom and evaluation on the state of the economy and what reforms have to be introduced to resolve the issues. Given the uniqueness of the year covered by the Report, namely, the end of the war and the beginning of a new era, the writer expected the Central Bank to promulgate an apt theme in its report for the year.
The writer read through the report carefully for the theme, but could find none. In Chapter 1, after discussing the overall economic development of the country, a sub – section titled ‘Medium Term Macroeconomic Outlook and Policies’ has been added, but in this section, what was referred to was the ambition to attain a high growth rate of 7 – 8 percent in the medium term, that is, within the next 4 to 5 year period. Though an apt theme had not been explicitly spelled out in the Report, one may deduce what the report is trying to convey by referring to this section and the ‘five-hub growth strategy’ briefly mentioned in Chapter 3.
This implicit message is fast-track to prosperity by leapfrogging Sri Lanka’s neighbours and making a quantum leap in Sri Lanka’s current development initiatives. Such a goal requires far reaching reforms across the board in all sectors of Sri Lanka’s economy: health, education, infrastructure, government services, environmental management have to be fully reformed and geared to the target; at macro level, appropriate monetary, fiscal and exchange rate policies have to be pursued to incentivise the private sector participants to contribute to prosperity, since the government sector does not have the necessary resources to play a key role in this connection. Such an approach would have displaced the current narration which has simply documented what the government has done without critically assessing their efficacy and efficiency.
Five-Hub Growth Strategy
In the opinion of the writer, the five-hub growth strategy briefly mentioned in a single paragraph deserves much more elaborative treatment in the Annual Report. These five hubs that are being proposed are the development of a naval hub, aviation hub, commercial hub, energy hub and a knowledge hub in the country so that Sri Lanka could sell these services to the rest of the world, innovate a new growth sector and create wealth for the nation. There have been two earlier occasions in Sri Lanka’s economic history where such new innovations contributed immensely to wealth creation and employment generation. The first is the development of the commercial plantation crop sector in the early part of the twentieth century and the second is the introduction of garment and apparel exports as a part of the country’s industrial sector after 1980s. Both represent real products, but the new strategy underlined in the hub development constitutes the production of invisible services. With limitation for further expansion of the commercial agriculture, it is the services sector which has to be exploited to the maximum in Sri Lanka’s future growth strategies.
Credibility of Numbers
The Annual Report refers to Sri Lanka’s attainment of a growth rate of 3.5 percent in 2009. This is based on the national income computations made by the Department of Census and Statistics of the government. Prior to 2007, these numbers were computed by the CB itself, but with the development of the Census’s capacity to produce these numbers in time, the computation of national accounts was handed over to the Census people as is the practice in other countries. Though the CB avoided the duplication of work through this change, the risk is that it now has to depend on a secondary source of data over which it has no control for assessing the performance of the economy.
At a recent public forum, the writer was questioned at length by the audience on the reliability and credibility of these numbers. The bone of contention was that the Department of Census and Statistics is a government department which does not have the same freedom as the CB to act independently and the Census has kept its computations in a black box so that the market does not know how it is done or what is taken into account when computing these numbers. The writer did not have an answer to what the Census does but he explained to the audience that when these numbers were computed by the CB, it had to comply with the General Data Dissemination System (GDDS) of the IMF so that there was an independent audit of the whole calculation process.
Necessary firewalls had been erected, in terms of these standards, between the top management of the Bank and those statisticians who computed the numbers. Once the numbers were prepared, they were scrutinised by a committee headed by a deputy governor as to their reliability, consistency, comprehensiveness and accuracy. They were then released in terms of an advance release calendar and the Bank’s Monetary Board or the Ministry of Finance came to know them only after such release. The procedure adopted in GDDS prevents any undue interference in the computation of growth numbers by anyone outside. The writer is unaware whether the Census has subscribed to GDDS, and if so, it behoves them to disclose it to the public. If not, the writer urges the Census and, requests the Bank to see to that, to immediately subscribe to GDDS so that by following international best practices, they could avoid such public suspicions.
Resilience only through overall macroeconomic stability
Referring to the growth rate of 3.5 percent achieved in 2009, the Annual Report says that it has demonstrated the country’s resilience. On the face of it, this is good news. But what we mean by a country’s resilience is not the improvement in growth, but the resilience of the whole macroeconomy to stand to unexpected shocks on its own. It is similar to a patient who has the capacity to recover from an externally inflicted illness on his own. For an economy to be resilient, it should not have any imbalances in any of the macroeconomic sectors. In other words, there should not be any pressure in the balance of payments, no pressure in the inflation front and no pressure in the government’s fiscal balance. When there are either positive or negative pressures in any of these sectors, the economy lacks its own ability to recover from a shock.
What is inferred in Chapter 2 of Report as a resilient economy is not supported by the data that have been presented in relation to other major macroeconomic sectors. For instance, the balance of payments which has been under pressure due to the chronic imbalance in the trade account and the current account gets a temporary lease of life due to inflow of capital, basically in the form of hot money which is reversible and loans which are repayable.
It is not a sustainable improvement in the balance of payments. Similarly, the government sector in chronic deficit is unable to resolve its issues. Inflation has temporarily subsided in 2009, but the pressure in the goods market will create imbalances and lead to reflation of the economy.
Hence, all the macroeconomic indicators reported elsewhere in the Annual Report are inconsistent with the spirit or the letter of a resilient economy.
The Report has been presented in a readable manner. The occasional spelling and grammatical mistakes may have tarnished its quality, but are excusable on account of the great hurry in which it has been produced by the staff. |
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