The ways to speedily overcome economic crisis

A few suggestions..!

(Professor Milton Rajaratne)

The economic crisis that emerged small way during the past many years has now become a vicious cycle in which the economy is heading towards its bottom. The chronic cause of the economic crisis has bearings to the expenditure of the government that constantly surpassed the public and foreign incomes. This expenditure pattern granted the people undue and unearned happy life. The comfortable life we all spent during the past few decades thus was facilitated by the proceeds collected from pawning the future incomes. The country, in short, was living on credit. Sri Lanka has been consuming seeds, but not the harvest. 

Extremely excessive facilities were granted to the politicians and then to the civil servants, military chiefs, public servants, and academics etc. which included foreign trips, duty free vehicle permits, duty concession on vehicle imports, paid leave, entertainment allowance, telephone allowance, attendance allowance, overtime payments, and hundreds more. Then the welfare programs like Samurdhi, Enterprise Sri Lanka, Gam Udava extensively spent public money without any achievable purpose. Poor handling of BOI and poor supply of local industrial entrepreneurs together were unable to effectively increase exports. Sri Lankans enjoyed low price of imports due to holding low exchange rate. Hardly there were any attempt to control soaring imports for consumption. Sri Lanka had to live on both domestic and foreign borrowings and as a result finally became domestically and internationally bankrupt. 

By now, the domestic and foreign public debt of Sri Lanka has surpassed its annual gross Domestic Product. The most irritating component of debt at present is foreign debt. Foreign debt was accumulated due to chronic Trade Balance, Balance of Payments, and financing the Budget deficit with foreign borrowings. The public debt stands above US$ 50 billion at present. The government declared that the foreign debt cannot be paid back as the country did not possess sufficient foreign reserves to pay back liabilities admitting the country is externally bankrupt. This signal suppressed the credit facilitated imports which led to shortage of essential supplies such as drugs, LP gas, petroleum, food items etc. On the other hand, the excess expenditures over public income led to increase in domestic debt also. To mend the income gap, the government resorted to excessively print notes which in turn increased money supply and thus inflation. Country is now at the verge of internal bankruptcy also as it is facing difficulties in paying the public sector salaries. This suggests that the country is both domestically and internationally bankrupt. This article investigates the ways to overcome this crisis in the short run. 

The Central Bank of Sri Lanka has apparently not performed its key functions to safeguard and elevate the economy and thus is the chief respondent of this crisis. Nor it now seems to be doing any useful thing to help the country to overcome the crisis. Governors came and went and advisory committees were appointed. But conceivable, pragmatic, and effective measures have not yet been taken to take the economy out of crisis. It also should be noted in this connection that there is no evidence that these governors and advisors have published substantially on the economic problems of the country during their career. Without taking drastic actions to increase exchange earnings and decrease exchange expenditures, the Minister of Finance and the Centra Bank together believe IMF assistance as the only option to overcome the crisis. While IMF assistance will be helpful, effective measures are needed for acutely recovery. 

Seemingly, what is required at the moment is some strategic thoughts that help the economy to come out of the present state. It is evident is that neither politicians nor economists or professionals seem to have ‘out of the box’ thoughts that could help the economy. Some intellectuals are overwhelmingly interested in political and constitutional reforms. Yet what is more acute at this moment is the solutions to the economic crisis. If the economic crisis is not sufficiently addressed instantly, the crisis would become worse where minor remedies would not answer. Thus, this article intends to suggest a few acute remedies to overcome the crisis within a very short period of time.

(01) The list of imports must be re-checked to determine what purpose those goods serve. The goods must be re-categorized and essentials and intermediate goods must be treated useful and other goods as less useful or useless. Accordingly, tariff and non-tariff controls must be applied to them. These controls should intend to save at least US$ 250 million to US$ 300 million monthly which amount is required to import the goods such as drugs, LP gas, petroleum, fertilizer etc. every month. In case more savings are generated from the success of this exercise, the supply of other essential and intermediate goods also can be increased. 

(02) The second immediate action is to encourage foreign remittances. Due to distrust of the economy and government, and the higher prices fetched for the dollar at the black market, the workers refrain from remitting their earnings. This has caused monthly remittances to fall below US$ 300 million which is equivalent to one half of the normally received remittances monthly. Monthly remittances of US$ 600 million could again be restored if effective incentives, preferences and privileges to the individuals who remit their earnings were introduced. Health and life insurance, special privileges in public service, schools for children, permits for imports, priority in land alienation etc. would be useful incentives to attract more remittances instantly.

(03) The choice for organic agriculture weakened domestic food supply, export income from agriculture, but increased food imports. This reveals organic agriculture policy influenced to expand trade deficit. Therefore, agriculture must be revitalized to address the issue. The food and dollar shortage can be mended to certain extent by regaining agriculture. Fertilizer, pesticide, insecticide, and weedicide and other agricultural inputs must be immediately imported using the foreign exchange raised through the above measures. Further, as the farmers are cashless now, lavish financial support also must be extended to them for a season or two. Through this action, work and livelihood for the farmers, inputs for industry, food, and exports incomes can be restored.

(04) Another strategic action is to train the educated youth imparting language and work skills within a short period of time and arrange foreign employment for them though international collaboration. New source of remittances can be realized through this measure within a short period of time. Labor is Sri Lanka’s only effective export good. Therefore, this crisis should be seen as an opportunity to prepare the youth for foreign employment which in the short and long run also would be a sustainable source of remittances. Preferably, this definitely is a better option than obtaining further loans. As, the unemployment rate also is soaring at present, this option would help to address both unemployment and foreign currency shortage simultaneously.

(05) The present crisis was caused by excess expenditure of local and foreign currency through steady borrowings from local and international sources. The expenses of the government are the key component of all expenditures. The government should now learn a lesson from the mistake and turn into thrifty governance. Financial discipline of the politicians and public institutions are essential to cut down expenses and to reduce tax burden on people and businesses. Efficient use of public resources, reducing retirement age of public sector employees, and cancellation of privileges would help overcome the domestic financial shortage. The principle of a thrifty government must be adopted at all levels of the public service.

(06) Borrowings from IMF or any other organization will not completely resolve the problem. The way out lies only in sustainable earnings of foreign currency and thrifty expenses. The countries in South America and Africa that encountered crises like ours are still struggling to overcome after decades. While the above-mentioned remedies, among many others, would provide short-term relief, intermediate and long-term solutions must be in place to systematically overcome the crisis. In order to serve this purpose, strategic economic planning and implementation is imperative. For this, the government must establish National Economic Operations Council. This organization must be set above the Central Bank in the hierarchy and should be the institution that advise the government, Central Bank, public sector organizations etc. This council must be comprised of practical economists with clever statisticians to measure, analyze, and forecast the economic response of every policy implemented. Service of experts from areas such as agriculture, industry, technology, health, education, and international affairs etc. to perform SWOT analysis and formulate strategies must also be obtained. Medium and long-term economic policy planning, development planning, and macroeconomic management etc. must be functions of the said economic operations council.  

(07) As the Central Bank has proven its incapability in governing the economy, the government must turn to ‘Dollarization’ option to stabilize the economy. Indian rupee could be the most appropriate currency to adopt as it deserves the state of regional currency in the SAARC region. Also, Sri Lanka does much of its trade with India. With this strategy, Sri Lankan rupee is dropped and converted to Indian rupee to be used as local currency. This would help transfer our foreign debts to India and then to settle them in Indian rupee. This will also help reducing the inflation rate, financial stabilization, and enhancing opportunities for economic development. However, in the Dollarization move, financial sovereignty of the country has to be sacrificed. That will create geo-political issues also. One may rise against this pointing out that this will invite Indian invasion which could make Sri Lanka an Indian territory. However, this proposal should be viewed in presence of incapable and unsuccessful Central Bank of the country. Sri Lanka can learn much from European Union common currency regime. (This is a complex and sensitive topic to be discussed by the proposed economic operations council.)