State of economy of a state

Wednesday, 5 January 2022 

Every Government has pampered the farmer with loads of welfare facilities, small parcels of free land, free water, subsidised loan facilities, fertiliser, seed paddy and other agriculture inputs and ignored building a strong commercialised modernised agri-business and agri-entrepreneurship.  

Every economy in the world, may it be developed or developing, is a topic for discussion today. Some economies are being discussed for their achievements, sound management, good governance, high growth, overcoming crisis and other positivity. Other economies are being discussed for opposite reasons. 

Sri Lankan economy drifted gradually from former category to the latter while its peers moved in the other direction. The current Government accelerated the process. Exceptionally low rank attached by all international rating agencies, rising foreign debt, gross mismanagement, irrational untimely decision making, corruption, widening gaps in the budget, balance of payments, trade balance, foreign exchange, savings and investment, have become prominent in Sri Lanka. 

Economic pundits relate theories they learned to explain the current economic saga. They talk at length, write columns, and grin on TV screens to share their knowledge gathered from books. A few admit that what we experience are symptoms of an economy ailing from the day the word “independence” was added to our glorious long history. It is the tip of the iceberg. We have been turning inside out, walking lengths and breadths, arguing and analysing the symptoms. We have sadly failed to diagnose the disease underneath and the root causes hidden at the bottom of the iceberg. The state of an economy cannot be and shouldn’t be explained through symptoms only.

Every successive government since independence has contributed in different proportions to the current crisis. We never had a goal-oriented consistent economic development policy or a plan. 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 marginalised and facilitation with concessions, subsidies, exemptions and the list can go on. The end result is turning a prosperous, stable, model economy towards the present pathetic debt driven begging economy full of dependents. The countries which were behind, gained independence after, not in existence, born later, at bloody wars have surpassed Sri Lanka with a history of nearly three millenniums. The economy was driven by destiny rather than by destination.

Every Government pampered the farmer with loads of welfare facilities, small parcels of free land, free water, subsidised loan facilities, fertiliser, seed paddy and other agriculture inputs and ignored building a strong commercialised modernised agri-business and agri-entrepreneurship. Colonisation Schemes, Land Reforms, Paddy Land Act all have contributed to maintain and sustain the subsistent dependent farmer. As BH Farmer found in his “Pioneer Peasant Colonization in Ceylon” (1957) building up a peaceful, prosperous peasantry and agriculture development cannot co-exist.

When other countries moved with land consolidation, Sri Lanka moved the opposite direction with land alienation. When others progressed towards agribusiness with modernisation, mechanisation and diversification, we contributed to maintain subsistence, dependence and the mono culture. The officers of our research, extension and implementation agencies sit comfortably on their PhDs, facilities, farms and nurseries in well air-conditioned offices. But we enjoy the lowest productivity in all agriculture crops. We brought the farmer from Robert Knox’s royalty to a span clad dependent shouting on highways and the country from Granary in the East to a rice importer. 

The current Government is playing with rhetoric such as 100% organic agriculture, a plate of chemical-free food in place of a kidney, Parakramabahu the Great on the advice of paediatricians, dentists, Buddhist priests and any other who knows nothing about the soil, seed, farmer and agriculture inputs. It introduced jargons such as nano-nitrogen, liquid fertiliser, and organic material alien to farmers. It staged dramas with the Essential Services Commissioner, Consumer Affairs Authority and a few selected ministers. 

Up until 1977, Sri Lanka was a producing economy. It is true produce was 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 has been converted from a producing economy into a trading economy covered by a financial veil. Open economy believes private sector as engine of growth. Engine of growth suffers from lack of entrepreneurship, initiative, risk taking, managerial skills. 

It consists of traders, wheeler dealers, speculators, commission agents, movers, fast and easy buck makers. It has become another dependent seeking concessions, waivers, and exemptions. Government is in the driving seat to navigate, facilitate and steer the engine of growth. Political machinery and the bureaucracy lost the grip and let the economy drift on neutral gear. The liberal economy has become an import-led debt-ridden poverty rampant begging economy instead of an export-led prosperous economy. 

Economists turn the financial veil in and out and shout we must go after IMF to get the veil mended. Unfortunately, they do not want to lift the veil to see the reality and the causes. The deficits and defects we witness today are symptoms of a serious disease caused by non-monetary reasons which cannot be cured only by monetary and fiscal measures. 

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

BOI has failed to attract foreign investment in comparison to the colossal amount of money it gobbles. BOI is an alien agency to regional administration. It has no knowledge of investment potential in the country. It has been going out to the world for the last 40 years with its package of tax concessions. It is insensitive to local and global changes taken place in investment culture. The causes for failure to attract FDI can be found in Doing Business Index compiled by the World Bank. BOI has no command, interest or an urge to address them.

EDB has become an agency that conducts post mortem at the end of each month. It has failed to promote, diversify, and improve value addition in exports. EDB does not forecast trends and prospects for exports. Economists are boasting of increased share of industrial goods exports after liberalisation. They cite the apparel exports as the success story of liberalisation. But as Professor Howard Nicholas sees it is the success story of late President Premadasa. Same applies to SLTDA. 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 from is migrant remittances. Our mothers, wives, fiancés, sisters, daughters are slaving Sheiks to help the Central Bank to narrow down the balance of payment gap. Its social economic cost is not calculated as it would send shock waves up on the spine of those who have it. The growth model anticipated with liberalisation was export-led but has become import-led.

Central Bank (CBSL) 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 realisation. Central Bank deals with primary money supply (printed by CBSL) and broad money supply (created by commercial banks). But it writes volumes on the merits of electronic transactions (invisible money) which are outside the radar of the policeman. 

Today economic think tanks and individual economists have joined the chorus of IMF but do not explain why or why not. It is argued that IMF helps a country to reduce the risk of loan default, build up confidence among investors and exporters and enabling to borrow at a low cost. IMF will teach the country to borrow from Peter to pay Paul. “Structural Adjustment Policies” is the panacea IMF prescribed for all ills. This includes budget deficit reduction, removing price controls and state subsidies, privatising state-owned enterprises, liberalising foreign trade and exchange systems, adopting flexible interest and exchange rates, and removing barriers to foreign capital flows. 

In simple words, “Let us dump any damn thing on your backyard”. More imports; more foreign exchange draining out. What an advice to a debt-ridden, foreign exchange short country. IMF remedy remains unchanged for last 70 years of its existence. We have been paying homage to IMF to get a new plaster on the wound.

Sri Lanka was a model economy at the time of gaining independence. It has walked nearly 75 years to become a failed economy. Wishful thinking instead of forecasts, goals and roadmap, land alienation instead of land consolidation, attention paid for forward linkages instead of backward linkages, liberal economy with flood gate opening for imports instead of producing economy for exports, misplaced infrastructure, prestige image building project push investment instead of strategic infrastructure pushed investment, misprioritisation, failed engine of growth, absence of management and entrepreneurship, old age rules and rule based bureaucracy, lack of consultation and coordination contributed to become a failed state. 

It is apparent that all successive governments contributed to convert a healthy well-nourished economy into a fatally ill economy. Our economists and policymakers looking at the symptoms of the ailment or the tip of the iceberg are coming out of plastering the places bleeding. They are reluctant to dissect and go deep down to the cause of the ailment. 

Finance Minister claims credit for the Rajapaksas in his maiden Budget. “The Rajapaksas have a history of never being daunted by challenges. Mr. D.M. Rajapaksa, who is known as “the Lion of Ruhuna”, who represented the second State Council in 1936, is known by the entire country. He is my father’s elder brother (loku thaththa).” And people of all walks and corners shouting on highways question whether the Government of descendants of “the Lion of Ruhuna” with a blind eye to causes and symptoms and short-sightedness, ill-advice, arrogance, insensitivity, is playing the role of the undertaker to take Sri Lanka from its sick bed to the mortuary. The fables Mahadenamutta, Andare, Kewattaya, King Kekille we heard as kids from our mothers, novels Yes, Minister and Yes, Prime Minister we read as grownups and movies Superman, Batman, Spiderman watched are no longer fairy tales or fictions on this noble land.

(The writer has served as a secretary to three ministries before his retirement. He is currently a Vice President of Sri Lanka Economic Association. He can be reached via chandra.maliyadde@gmail.com.)