Economy – Fantasy vs. Reality

 Economic downturnBy Chandrasena Maliyadde,
Former Secretary,
Ministry of Plan Implementation.

Sri Lanka Economic Association (SLEA) has concluded its Annual Sessions on Saturday the 26th October. The theme selected for this year’s session was “The Way Forward for Sustained Growth”. Theme was important and timely; presentations during the sessions were analytical, revealing and filled with rich data; discussions were live and contributory. SLEA is the forum available for researchers, academics, students and practitioners of Economics in the public, corporate and banking sector in the country. Presenters at the Annual Sessions represented all such groups. Unfortunately, that diversity was not reflected among the audience.

Discussions were revolved round relationship between (a) fiscal deficit, public debt and foreign borrowings and (b) indices such as growth, innovativeness and Human development. I am not going to reproduce what transpired at the annual sessions but will take up a few concerns raised by presenters and discussants relevant to the sustained growth.

A Sunday paper carried a picture of the recently declared open Colombo-Katunayake Expressway on its front page. There were large crowds that have flocked to witness a wonder for the first time in their lifetime. What they have ignored was that this is not only the first time but also the last time they would be able to take a stroll down the road. They were taken to a celluloid world. They were either ignorant or did not have a clue on the cost of erecting this wonder. The news item next to the picture provided the clue, construction cost of the expressway which is Rs.1.8 billion per Kilometer totaling to Rs.47 billion.

Colombo-Katunayake expressway is one among many infrastructure projects which have come up in an unprecedented manner during last few years. All such projects were funded with borrowed funds and for that matter foreign borrowing. No doubt, infrastructure is an essential component in development; it accelerates growth. Infrastructure is a prerequisite for promoting tourism and investment. Infrastructure adds to a country’s wealth. It contributes to GDP. In that respect all and any infrastructure project would display a positive correlation with growth. Rising public debt is justified on that ground. The ever increasing public debt and foreign borrowings have resulted in massive, unprecedented infrastructure development in the country. Construction of roads, expressways, flyovers, airports, sea ports, convention halls, play grounds are all over. But, statistics on projects and on their cost alone would not reflect the reality- the status of the economy. This would have been the reason why my Statistics lecturer at Peradeniya commenced his lecture series with the following remark.

“Statistics-lies and dam lies”

Then what does state the status? One has to go beyond and behind the statistics to distinguish between reality and fantasy.

A country is compelled to borrow under one or more of the following situations.

= Savings < Investment or/and

= Government Revenue < Government Expenditure or/and

= Export Earnings < Import Expenditure or/and

= Foreign exchange Inflows < Outflows

All the four situations above are applicable and relevant to Sri Lanka. What options are available for a country to overcome the situation? There may be several but I can think of three.

1. Contain variables on the right – Investment; Government expenditure; Import Expenditure; Outflows or/and

2. Increase and promote Savings; Government Revenue; Exports Earnings; Inflows or/and

3. Resort to public debt and foreign borrowings.

Sri Lanka has chosen option 3-resorting to public debt and foreign borrowings. Constant borrowing is akin to taking pain killers. Pain killers would give an immediate but temporary relief but do not cure the ailment. It does not address the root cause. Temporary pain killers- the borrowings will not help to address an economy ailing due to structural causes. Then why does Sri Lanka continue to borrow within and outside? Has the country exhausted other options?

I read two interesting articles appeared recently. First one was contributed by Kaushalya Artygalle of IPS to Island paper on 15th November under the title of “Reforming a post – war economy in four years”. The writer has beautifully explained how Georgia, a former Soviet state has overcome similar difficulties faced by Sri Lanka today. The country has undergone several civil wars after gaining independence from Soviet Union. Post-war Georgia has managed to find the right balance and ranked among top 10 easiest countries to do business. Georgia, through Fiscal Policy reforms has increased its tax revenue by 450% amounting to 25% of GDP. The government has focused on enhancing local and foreign investment. In four years Georgia realized a threefold increase in FDI. The article, sighting the post-war Georgian experience, has concluded that coherent and focused efforts can bring about significant transformation and it can happen in just four years. World Bank has named Georgia the number one economic reformer in the world.

The second article appeared in Sunday Times on 17th November under the title of “Recent Budgets and fiscal consolidation in Sri Lanka”. This was contributed by P. Guruge, Tax and Investment Consultant. He has highlighted that the expenditure over revenue during the last seven years was a massive Rs.2, 788,817 million and the deficit was mainly financed from borrowings within and outside the country. In his article, Mr. Guruge, has pointed out the avenues for increasing tax revenue collection through reducing tax evasions, avoidance and inefficiency in collection. The article has also discussed about reducing Government expenditure.

According to both writers there is a great deal the country could do before or at least while resorting to public debt and foreign borrowings. We have not harnessed the full potential for increasing revenue, export earnings and FDI and reducing Government expenditure and import expenditure.

Sri Lanka is an island with a population of 20 million which is over represented in the Cabinet, Parliament, Provincial and Local Authority level. Moreover, it maintains an excessively large army of public servants. We are a country which imports anything to everything without any concern to the environment, safety, health, pollution and finally the national interest. In certain parts of the world, Sri Lanka is identified as a dumping yard for rejects and used. How many imported drugs, food items and several consumer items were rejected and condemned for contamination, expiry of validity and many other grounds by authorities themselves. Remedial actions taken are too little and too late or none. They were all bolting the stable door after the horse had jumped out. Sri Lanka is the only country which uses 22 million mobile phones by a population of 20 million.

Public debt and foreign borrowings have grown in multiple proportions during recent years. Economists believe that the country has already reached threshold levels and cannot go beyond without repercussions. It is late but better be late than never to reconsider other options available. Immediate intervention is required to contain government expenditure, to rationalize imports and to reduce payments abroad. There are monetary and fiscal measures as well as non monetary and non fiscal measures available to the government. Simultaneously, government has to take concerted efforts to increase domestic savings, government revenue, export earnings and foreign receipts. They are long term measures but need decisive structural changes. Opportunities for diversification of export products and markets, promoting migration of skilled workers, attracting foreign investments must be explored and exploited. It is easier said than done but not impossible. Government has to distance itself from fantasy and be realistic to make long term planned remedial/corrective interventions. They are hard and difficult but essential.

Another aspect to borrowings is what the country utilizes them for. Infrastructure development improves quality of life. But the repayment capacity is not necessarily generated. For instance Mahaveli Development Project had two main objectives namely agriculture related development and electricity generation. According to some studies, the latter which improves the quality of life was achieved but not the other which has an effect on GDP, employment and repayment capacity. Southern expressway has made possible for my son to take me to Bentota for a surprise dinner on my birthday but is yet to make a contribution to the production and thereby to repayment capacity generation. Yes, fantasy is achieved but at the expense of the reality.

A careful, thorough feasibility study and an EIA should be carried out before undertaking a project. It is necessary to pick and choose and prioritize the projects considering their contribution to the national economy including their ability to generate repayment capacity. Most of the infrastructure projects have failed to achieve this. They remain standing as wonders and show pieces.

My Applied Economics Guru at Peradeniya, Professor Budhdhadasa Hewavitharana taught me about economic variations and trends. He said variations of economic indices would happen during the short term i.e. quarterly, monthly, weekly or even daily. Most of recent presentations, reports and publications made reference to such short term economic changes. A Fantasist can make himself and others happy by looking at such short term changes. But what matters for the future are the trends which are shaped by aggregated short term variations. An economy has to take cognizance of and manage not only the short term variations but trends as well.

Infrastructure projects are necessary; they make wonders; but always come with a cost. Wonders are not sans cost. In addition to visible financial cost, there are other hidden costs i.e. environmental cost, socio-cultural cost and opportunity cost. In creation of infrastructure, a country may overstep social, economic and planetary boundaries. More often than not the carrying capacity and the repercussions on the fabric of society are disregarded. There is a great deal of possibility to create patterns of inequality, loss of livelihoods, unemployment and exclusion.

Anyway projects for prestige are yet another issue.

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