Advice To Presidential Advisory Committee Of Three Economic Experts!

By Hema Senanayake –APRIL 8, 2022

Hema Senanayake

On April 07th President has appointed three experts, namely Dr. Indrajit Coomaraswamy (former Governor of the Central Bank), Dr. Shanta Devarajan (former acting Chief Economist of the World Bank and Sharmini Coorey (former Director of the IMF’s Institute of Capacity Development), to help with the IMF program.

Looking at their credentials, one might think, who the hell is this writer to advise them. Yet, if my advice is sensible take it or if not just throw it away.

Sri Lanka is in a dire economic crisis. It needs a quick and short-term solution. But this is a situation where no short-term solution is possible without designing a long-term macroeconomic strategy. Already, IMF has conveyed that message to Sri Lanka. In its recent report IMF’s Executive Board recommends “… the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability…” So, it is clear that the country needs to devise a long-term strategy and coherent plan to ensure macroeconomic stability and for economic recovery. Then only we will be able to discuss the short-term plan for quick financial assistance. Long-term strategy for macroeconomic stability is what is priority. But there is a problem. No long-term strategy and plan for macroeconomic stability is possible unless the said strategy cannot unify the country behind that strategy even though the country is divided politically. Period.

What does this mean? Former Prime Minister Ranil Wickeremesinghe answered this question when he had an argument with Basil Rajapaksa at the recent all-party conference. He said that the IMF’s report must be submitted to the parliament. It is true. You cannot unify the country if the government deals with IMF secretly. IMF doesn’t like secrecy. Similarly, our long-term strategy and coherent plan for economic recovery which is to be submitted to the IMF must be submitted to the parliament. Let it be discussed and debated openly in financial centers, in business circles, in universities and even by trade unions. That is how a country can be unified to support your long-term strategy for macroeconomic stability. This point is clear. Perhaps what is not clear might be the designing of the strategy itself or the philosophical underpinning of it. I would suggest, begin with macroeconomic fundamentals.

Economy is a system. It is a wonderful system put in place by human imagination to achieve the goal of optimum wellbeing for all the members of the society or all global citizens. This system works in a unique way. Understanding it properly, provides an opportunity for policy makers to maneuver certain macroeconomic variables to change the country’s destination towards sustainable and robust economic growth. IMF wants to know whether the country knows this. IMF knows that it doesn’t know everything in every country. That is why IMF tolerates (allows) certain home-grown economic policy approaches even though such experiments could crash within a few years. One notable example is the implementation of the Argentinian Currency Convertibility Act in early 1990s, which was highly admired by Noble laureate Robert Mundell as an example to other Latin American countries. After a short-lived economic boom period that system crashed causing enormous economic meltdown in the year 2000. But at the beginning IMF tolerated the Currency Convertibility Act designed to peg its domestic currency to U.S. dollar. The point is that this example shows that IMF allows certain domestic policies, if they can be well justified on theoretical basis. But IMF is certain that if a country’s macroeconomic stability fails, the country’s economy might crash sooner than later. That is what is happening in Sri Lanka right now.

Having said that our fundamentals should begin by understanding that there are no various methods of developing the country. This means, if we forget about the corruption (corruption can be eliminated by a country’s legal structure), there is no separate economic plan for SLPP or SJB or JVP or even FSP. Why am I saying this?

One fundamental economic principle is that a country will grow economically only if it could increase the capital formation and consumption allocation on continuous basis. Again, from the consumption allocation part will be deducted as tax for the government to produce “common interests” of the society. As such no ad-hoc tax policies should be devised. So are profit reserves which contributes to capital formation, and it should be invested because it is the society which allows for capital formation. These are fundamental macroeconomic principles. No political party can change these fundamental principles which means the whole country will be unified to accept them. Good! Now, the next obvious question is, how the capital formation and consumption allocation could be increased. This can be understood if we know the origination of both allocations. Both are originated from one source, that is the total national proceeds or total sellable output (not GDP). This makes our problem easy. Then what should we do to increase the total proceeds? We have to expand the entrepreneurial base, if the entrepreneurial base expands in a way that contributes positively to the national current account, it is much better. So, far the whole country is unified on these economic principles

Then, what is the criteria that affects to the expansion of entrepreneurial base? It is the business confidence. Let me reiterate, it is the business confidence that matter most for the expansion of entrepreneurial base so as to increase the total national proceeds. But amazingly government promises do not help in ensuring business confidence. Instead, business confidence is fully depended upon the stability of the domestic currency. Stable domestic currency determined by the market forces shows the macroeconomic stability of economy, including trouble free balance of payment situation. IMF wants to know whether the country and the cabinet knows this, and the IMF knows that the present government does not understand it. Irrational government expenditure and illogical monetary policy including the printing of money enormously show the bankruptcy of the economic wisdom of the present government.

The above said macroeconomic fundamentals could unify the country for a pragmatic and theoretically sound long-term macroeconomic strategy. It helps to devise a long-term economic recovery plan. Once we have that strategy and plan, obtaining quick financial assistance from IMF and other multilateral and bi-lateral donor agencies, would be feasible. Also, then, it would be feasible to rollover foreign currency denominated loans because lenders are sure that their loans will be paid back as our macroeconomic strategy is sound and is backed by whole country. This is one aspect.

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