With a new cabinet sworn in, a stable government in power and war and terrorism ended, the government has the opportunity to put the country on a high trajectory of economic growth.
However these favourable conditions alone would not suffice to achieve self sustaining high levels of growth. They must be complemented and supplemented by many other prerequisites for economic development. These preconditions for development, though they are indeed essential are not sufficient. It is the responsibility of the government and policy makers to ensure the framework of policies that would be conducive to investment and economic development. It is a time for a long term perspective for economic development.
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Development of a high order cannot be expected as a matter of course. The second half of last year demonstrated how some areas of economic activity were revived and contributed to a higher growth. Agricultural and fisheries production and increased tourist earnings were among the contributors to post war growth. These gains will continue but their thrust will be inadequate to achieve the high rate of economic growth that is expected. It requires much more than that. Economic policies and good governance that are conducive to investment both domestic and foreign are needed.
It has often happened at times like these in the past that governments have been lulled into complacency. This must not happen at this juncture when the country is expectant of a resolution to its economic problems of unemployment and poverty and the achievement of higher levels of per capita income. There should not be any complacency about the economic conditions in the country derived from a false sense that the economy is sound. What is needed is a realistic appraisal of the economy and a positive resolve to solve the bottlenecks to economic development.
There are several factors that may lead to such complacency. One is to expect the end of the war by itself to generate economic growth. There is no doubt that there would be initial gains in the economy as a consequence of the ending of the war. This was seen in the economic performance in the fourth quarter of last year, when the economy grew by 6.2 percent owing to the favourable conditions for agriculture, fisheries, tourism and internal trade. Yet this initial thrust in growth is inadequate. New and higher levels of investment are required to bolster the economy.
A second problem is what economists call the “Dutch Disease”. Inflows of capital and large reserves could lead to misguided policies. The country continues to have a large reserve of US$ 5 billion. This tends to make policy makers not take the continuing trade deficit as a serious problem. The large reserves have a propensity to keep the problem of poor performance in exports as not being a serious problem. Consequently remedial actions to improve export performance are not a priority. Worse still the exchange rate may appreciate or be allowed to appreciate and thereby the competitiveness of the country’s exports would be eroded.
In addition to this, the large inflow of remittances aggravates the “Dutch Disease” effect. For instance although the country had a trade deficit of US$3,122 million, the current account of the trade balance was a surplus. The trade deficit was more than offset by the inflow of remittances. While exports declined by 12.7 percent, remittances increased by 14.7 percent. The country must take the declining exports as a serious and fundamental problem and attempt to bring down the trade deficit to manageable proportions. The large inflow of remittances should then be a means of improving the balance of payments and redeeming some of the debt.
The healthy foreign reserve position is for the most part due to a large amount of foreign borrowing. This foreign debt leads to high debt servicing costs. Even though the current external debt servicing cost is less than 20 percent of exports and remittances, it is still a strain on the balance of payments. The remittances are a good means of relieving the large debt and foreign debt servicing costs that also have serious implications for the fiscal deficit. For this the trade deficit must be reduced significantly by increasing exports.
Last week we quoted the Central Bank’s prescription for economic growth. While these require to be underscored, there are other fundamental prerequisites to get the economy and indeed the country moving. These are national harmony, good governance and firm economic policies to resolve the fundamental weaknesses in the economy. Each of these has a bearing on the country’s economic performance. If the problem of national integration is solved it would provide an excellent background for economic policy and much better focus on economic issues. Good governance would enhance the productivity of investments and be an inducement for foreign investment. Firm and predictable economic policies that are long term in perspective are a sine qua non for rapid economic growth and development.
W.A.Wijewardena until recently the Deputy Governor of the Central Bank, commented on the latest Annual Report of the Bank.
His remarks shed light on the issue of long term development. He says the “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.” He makes the very important point that “such a goal requires far reaching reforms across the board in all sectors of Sri Lanka’s economy: health, education, infrastructure, government services….” He points out further “at macro level, appropriate monetary, fiscal and exchange rate policies have to be pursued to incentivize 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.”
Quick fixes and responding to economic crises have been the strategies for quite some time. No doubt the war and political instability have been some of the underlying reasons for this. Now that both these adverse conditions have been removed, it is opportune for the stable government that has been voted in with a handsome majority to address the fundamental weaknesses in the economy.
A pragmatic approach based on ground realities that address the fundamental problems of the high public debt and debt servicing costs, the continuing large fiscal and trade deficits, inefficiencies in administration and policy implementation, reforms in loss making public enterprises that are a huge burden and reforms in education and health are among the priorities. These challenges require a long term vision for the country and a political will and resolve. The new government with its large mandate can and must surely view economic issues from a long term perspective for economic development. |
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