Scrutiny of GR’s economic experiment

The current economic disaster carries the seal of President Gotabaya Rajapaksa, and unless some radical change in economic thinking takes place, the current economic pain endured by the people would continue in 2022 and beyond 

 

Thursday, 6 January 2022

What Sri Lanka is experiencing now is the total collapse of an amateurish economic experiment shaped by policies on the run from an ethno-religious nationalist president GR, who has now been recognised as ‘Sri Lankadheeshwara Padma Vibhushana’, a unique and prestigious title ever awarded to any political leader by the Sangha community. 

No sooner this president was elected to office in 2019, he got himself surrounded by a power cartel or Viyathmaga consisting of handpicked but ideologically aligned technocrats, professionals and business magnates and decided to embark on a development experiment to lead Sri Lanka to “vistas of prosperity and splendour” within a “disciplined, virtuous and lawful” society. 

With a diehard group of politicised Bhikkhus ready to back him to the hilt, even if he turns into another Hitler, and with a military dragged from the barracks not only to provide internal security to his regime but also civilian administrative services, all that GR wanted to complete his mission was an unchallenged dictatorial position where all checks and balances embedded in the country’s democratic constitution would lose their substance. The parliament’s suicidal passage of the 20th Amendment, thanks to the betrayal of Muslim Judas, accomplished the task. The ground was thus set to experiment what GR’s former CB chief Professor Lakshman described as the “alternate way” to development.

The most salient feature of this so-called alternate way and its experiment has been the focus on homemade solutions to problems of an economy that is inescapably intertwined with vagaries of an interconnected global world, while remaining at the same time trapped within an island that is strategically situated in one of the busiest international waterways, the Indian Ocean. Sri Lanka is an island only in a geographical and territorial sense, but otherwise a community in a global village. 

What this means is that Sri Lanka’s domestic policies cannot operate in isolation without impacting and being impacted upon by changes taking place outside the country. GR and his team seem to have been oblivious to this crucial fact and place too much hope on the efficacy of their homemade solutions. After two years of amateurism, the alternate way hit the rocks. Nowhere was this failure demonstrated more clearly and painfully than in the economy itself. 

The economy of the alternate way was structured on the exaggerated strength of three important pillars: self-sufficiency in food production through organic farming; a hybrid monetary policy; and IMF-free economic management. 

Self-sufficiency in food 

The first of these is laudable in principle, because self-sufficiency in food via regenerative farming would not only help reduce the country’s widening trade deficit and simultaneously narrow the same in balance of payments, but would also protect the environment. The problem however, was in the methodology of its implementation. The dictatorial GR thought that an overnight ban on imports of certain food items would automatically perform the trick. That was the logic behind his ban on the import of palm oil, which caught bakery owners totally unprepared. 

A far more ruinous measure was GR’s ukase to ban the import of chemical fertiliser which has now driven the country to the brink of a famine. Without any preparatory work done to minimise immediate damages, without the provision of alternatives, and without consultation with experts on the field, GR just assumed that his diktats would yield desired results. Even though both bans have been lifted the damage done is immense and would cost more and take long to repair. 

Hybrid monetary policy 

The second pillar was meant to provide adequate liquidity to a shrinking economy hit by a global depression triggered by the pandemic. It is worth recalling a meeting GR held with members of CB after appointing Professor W.D. Lakshman as the new Governor, where he demanded the Monetary Board to help implement ‘his’ economic policies. On that day a constitutionally empowered and the most supreme economic institution in the country lost its independence and became a tool in the hands of an autocrat. The CB chief, a respected academic, was pathetically caught between protecting his academic integrity and serving a political master.

Contrary to what Keynes thought where “practical men who believe themselves to be quite exempt from any intellectual influence, are usually slaves of some defunct economist”, the CB economist became the slave of an autocratic political leader. The monetary policy he implemented was a hybrid product of the Modern Monetary Theory (MMT), which is meant for economies with reserved currencies like that of USA. The essence of MMT is that monetary authorities could go on printing money regardless in the name of providing liquidity without the fear of inflation. 

The rupee is not a reserved currency and the inflationary effect of excess money supply became unavoidable. But the CB chief quite skilfully removed food prices from his calculation and showed a manageable but “worrying” rise in inflation. This is pure art of lying with statistics. Lakshman’s conscience must have pricked him and caused many a sleepless night. He finally tendered his resignation without serving his full term. Now, his successor, an accountant by training and schooled in politics, has no qualms in continuing the same trickery.

IMF-free economic management 

The third pillar of IMF-free economic management was chosen with the hope that with financial assistance from friendly countries, by way of currency swaps and loans, the alternate way would reach its desired destination. The shortsightedness of this strategy lies in two areas. Firstly, as more and borrowing is resorted to the ratio of debt to GDP would rise and with an economy shrinking or growing at snail pace servicing the debt would become burdensome. CB chiefs of past and present proudly advertised that the country has an unblemished record of honouring debt repayment. What is crucial here is not the past record but the rising credit riskiness as the above ratio rises. 

This is the reason why international credit agencies like Fitch has downgraded Sri Lanka’s credit risk to CC, which means the cost of borrowing would rise and foreign investors would be discouraged to invest funds in Sri Lana. IMF participation would send different signals to international agencies and inject some confidence among foreign investors. 

Secondly, the hunt for help from friends and neighbours, such as the latest economic and financial package from India to the tune of $ 1.9 billion and China’s credit for $ 1.5 billion, is not free of foreign policy implications. Sri Lanka’s economic misery has driven it deeper and deeper into Indo-China geopolitical tensions, which in the context of an undeclared cold war between US and China has even wider foreign policy dimension. With or without this assistance, Sri Lanka is destined to pay a price for just being strategically situated in the Indian Ocean. IMF involvement in the economy would indirectly help reduce at least some of the pressures emanating from Western quarters and India. 

Thus, of the three pillars on which GR’s economic experiment was structured, one became inoperable because of practical difficulties and the other two lacked theoretical soundness. On top of these there were several other problems like internal corruption, the political power of a market mafia, lax tax administration, a disunited cabinet and so on. Apart from these, there is one issue which has not received adequate attention from economic analysts.

Even if shortcomings in all of the above could be rectified, how could the economy prosper and develop without the active involvement of at least one-third of the country’s population? GR’s sole commitment to protect and advance the status of Sinhala-Buddhists is an open endorsement of a claim from ultra-nationalist monks that the country belongs only to Sinhala Buddhists and that other communities are only long-term tenants. This is virtual devaluation of the citizenship of minorities. 

It is surprising that neither GR nor his brother Prime Minister and for that matter not any from either the Government or Opposition has denied so far, this dangerous claim. The only one who dared to refute it is no more with us. At the same time, the tolerance shown by GR to blatant injustices committed by his ultra-nationalist supporters against minorities and the president’s own preparedness to trample on human rights of minorities and his political opponents shows that he is a partisan President acting in the interest of ultra-nationalists. How then could economic development succeed with a disunited and mostly disgruntled population?

The current economic disaster carries the seal of President Gotabaya Rajapaksa, and unless some radical change in economic thinking takes place, the current economic pain endured by the people would continue in 2022 and beyond. 

(The writer is attached to the School of Business and Governance, Murdoch University, Western Australia.)