How Sri Lanka Became a Nation of Beggars

Photo courtesy of Asia Times

CHANDRASENA MALIYADDE-01/05/2022

Every economy in the world, developed or developing, is a topic for discussion today. Some economies are being discussed for their sound management, good governance, high growth and overcoming crises while other economies are being discussed for opposite reasons. Sri Lanka’s economy drifted gradually from the former category to the latter. The current government accelerated the process. Exceptionally low rank attached by all international rating agencies, rising foreign debt, gross mismanagement, irrational decision making, corruption, widening gaps in the budget, balance of payments and trade deficits, a foreign exchange crisis and low savings and investment have become hallmarks of the economy.

Every government since independence has contributed in different proportions for the current crisis. We have never had a goal oriented, consistent economic development policy or a plan. The policy pendulum has been moving from one extreme to the other with every change of government. Priority was decided on sensations, momentary situations and issues, instant thoughts, concerns for have-nots and socially marginalized and facilitation with concessions, subsidies and exemptions. The end result was turning a prosperous, stable, model economy into a pathetic, debt driven, begging economy full of dependents. The countries that were behind have surpassed Sri Lanka. The economy was driven by destiny rather than by destination.

Every government pampered the farmer with welfare facilities, parcels of free land, free water, subsidized loan facilities, fertilizer, seed paddy and other agriculture inputs and ignored building a strong commercialized modernized agri-business and agri-entrepreneurship. Colonization schemes, land reforms and the Paddy Land Act contributed to maintain and sustain the subsistence dependent farmer.

When other countries moved with land consolidation, Sri Lanka went in the opposite direction with land alienation. When others progressed towards agri-business with modernization, mechanization and diversification, we contributed to maintain subsistence, dependence and the mono culture. We have the lowest productivity in agriculture crops. The current government is playing with rhetoric such as 100% organic agriculture and has introduced jargon such as nano-nitrogen, liquid fertilizer and organic material that is alien to farmers.

Until 1977, Sri Lanka was a producing economy. It is true products were below quality and standard and not cost effective, innovative or competitive. The malady was found in the import substitution policy; remedy was found in the liberal economic and open trade policy. Sri Lanka was converted from a producing economy into a trading economy covered by a financial veil. The open economy believes that the private sector is the engine of growth. The engine of growth suffers from lack of entrepreneurship, initiative, risk taking and managerial skills. It consists of traders, speculators, commission agents and easy buck makers. It seeks concessions, waivers and exemptions. The government is in the driving seat to navigate, facilitate and steer the engine of growth. Political machinery and the bureaucracy have lost their grip and let the economy drift. The liberal economy has become import led and debt ridden instead of export led  and prosperous.

Economists shout that we must go to the IMF. Unfortunately they do not want to see the reality and the causes. The deficits and defects are symptoms of a serious disease caused by non-monetary reasons that cannot be cured only by monetary and fiscal measures.

Since 1978 the service sector grew much faster than the agriculture and manufacturing sectors. Some attribute the slow growth of the manufacturing sector to civil conflict, youth uprising and natural disasters. Since 2005, the government has implemented large infrastructure projects with little or no economic impact with borrowed funds at market rates of interest. These projects consume imported items, draining foreign exchange out.

The Board Of Investment (BOI) has failed to attract foreign investment in comparison to the amount of money it gobbles up. It has no knowledge of the investment potential in the country. It has been going out to the world for last 40 years with its package of tax concessions. It is insensitive to local and global changes that have taken place in investment culture. The causes for failure to attract Foreign Direct Investment can be found in Doing Business Index compiled by the World Bank; the BOI has no interest in addressing them.

The Export Development Board (EDB) has failed to promote, diversify and improve value addition in exports. It does not forecast trends and prospects for exports. Economists talk of the increased share of industrial goods exports after liberalization. They cite apparel exports as the success story of liberalization. A correct assessment would show that the net foreign exchange earnings from exports and tourism are not much above zero, virtually with no value addition. The exporters and tourism operators seek and get concessions and facilities from the government but want to retain their earnings abroad as the market exchange rate is higher than the official rate. Rather than increasing export earnings through adding new products and markets, they want to make an extra buck through speculation and manipulation of monetary policy imbalances.

The only source that the country gains net foreign exchange earnings is migrant remittances, which come at a huge social cost.

The Central Bank is the policeman in the financial world but it is more undisciplined than the rest of the actors in the financial market. It does not forecast; if forecasted, it is way off the realization. The Central Bank deals with primary money supply (printed by the bank) and broad money supply (created by commercial banks) but it writes volumes on the merits of electronic transactions (invisible money) that are outside the radar of the policeman.

It is argued that the IMF helps a country to reduce the risk of loan default, build up confidence among investors and exporters and enables borrowing at a low cost. The IMF will teach the country to borrow from Peter to pay Paul. Structural Adjustment Policies are the panacea the IMF prescribes for all ills. This includes budget deficit reduction, removing price controls and state subsidies, privatizing state-owned enterprises, liberalizing foreign trade and exchange systems, adopting flexible interest and exchange rates, and removing barriers to foreign capital flows. This will result in more imports and more foreign exchange draining out. The IMF remedy remains unchanged for the last 70; we have been paying homage to the IMF to get a new plaster on the wound.

Sri Lanka was a model economy at the time of gaining independence. It has taken 73 years to become a failed economy. Wishful thinking instead of forecasts, goals and roadmap; land alienation instead of land consolidation; attention paid to forward linkages instead of backward linkages; a liberal economy with floodgates opening for imports instead of a producing economy for exports; misplaced infrastructure; image building projects instead of strategic infrastructure; a failed engine of growth; absence of management and entrepreneurship; a rule based bureaucracy; and a lack of consultation and coordination have contributed to becoming a failed state.