THE BLACK ECONOMY IN SRI LANKA: HOW IT IMPACTS ON THE MACROECONOMY.
Posted on August 26th, 2020

BY EDWARD THEOPHILUS

A black economy could be described as economic activities in a country that the revenue flow from economic activities doesn’t officially add to the gross domestic product. The revenue generates from the black economy may connect with the official economy indirect way in some areas, for example, suppose a person buys a motor vehicle earned money from the narcotic business, and the transactions related to the motor vehicle are related to the official economy and they cannot easily separate the part that is related to the official economy. The traditional economy was considered static (the economy was equal to consumption plus little bit savings) that did not involve in the black economy which comprised of a massive volume of illegal activities generating revenue to the economy. Two reasons to consider the static status, one there was no official calculation of the value of the domestic products and services in the economy to add the total volume of the economy, and the second was no official tax base that was effective in the country, neither citizens nor non-citizens paid taxes using valid money to the government.

It seemed that the economy was independent of government intervention. The history of Sri Lanka gives evidence that people paid taxes to the government by providing services and materials that they produced and it was government intervention to a certain extent. The size of the traditional economy had not been officially accounted for, or calculated to express the value of the economy, and the results of the performance were not published to know people in the country or overseas. There was clear evidence that economic rules on account of activities did not effective such as registration of businesses and paying tax for business operations and many others.

After the economy becoming a dynamic, which means the government activities, savings, and investments, imports, and exports (C+S(I)+G+ Ex-Im=Y) added the official calculation of the gross national product commenced, and the monetary value of the economic activities doesn’t add to the gross national products, are brooded as the black economy. To accurately calculate the value of the economy the equation should be changed as Y= C+S(I)+G+ Ex-Im+BE(black economy).  In any country, there is a black economy in the modern era despite many regulations exist, however the official value of the black economy is less than 2% of the GDP. It is believed that if a Robinson Cruso economy does exist in a country in the modern world the black economy might not exist as there are no indirect economic activities, and Cruso may use a fishing rod to catch fish and consume.

When critically evaluates Sri Lanka’s economy since the 1930s there had been evidence for a circumspect black economy and after the independence in 1948, the black economy operations have been contemplated a large volume and after 1970 the value of the black economy could have risen to estimated millions and now it has a value of rupees billions or more than a trillion. Not an economist estimated the volume to quote in this article.

What are the activities and services included in the black economy in Sri Lanka?  Since 1970 the black economy has been commenced dramatically expanding and the market economy began in 1978 supported the black economy from the deregulation process, the deregulation process implemented without disciplines, and the following activities could be treated as visible contributors to the major roles of the black economy.

  • Narcotic business (Heroine, Ice, and other chemical substances).
  • Illicit liquor production and sale.
  • Businesses are related to illegal substances such as opium, marijuana, Cannabis, Coken, and others.
  • Prostitutions, underaged sex operations, child molestation, teledrama business-related young women abuses, and much other business using young women and male. It is believed that the tourism business is involved in this area.
  • Immoral dealings of night clubs, terrorist work, killing people for money, ransom taking from business and personnel, and bribery offering and taking for official activities (for example, to admit a kid to school takes money from parents although the education is free in Sri Lanka).
  • Under invoicing for imports and domestic sales to reduce indirect taxes, commission payments, and hampers for bank employees and many others.
  • Demanding or charging a secret fee or commission from foreign or domestic investors, the best example was a secretary of the president (Mr.M.Sirisena demanded to sell an industrial firm for scrap metal).  

The size of the black economy is massive and if it assumes that Sri Lanka has no black economy and adds the outcomes of all economic activities to the official statistics and the population is about 12.0 million Sri Lanka is economically better than Singapore. However, the above-mentioned economic activities could not convert to officially authorized economic functions because many of them are internationally illegal economic activities and people who engage in such economic activities are punishable offenders in any country. Although a monumental volume of money generates from the black economic activities the impact of such activities is considered harmful and highly strung on people are poor and disadvantaged communities in Sri Lanka.  

What is the economic and social impact of the black economy? The main economic sock is the increasing inflation which cannot be controlled by the monetary policy of the central bank.  The government policy-makers in a wrong estimation that the effects of inflation are equally distributed among all communities in the country. It is a wrong assumption and the worse affected people are disadvantaged communities. The price of bread, rice, and consumer items has sky risen and poor people cannot afford the prices.  The black economic activities add more monies or supply more money to the economy increasing the demand (demand-pull theory and cost-push). As these activities are working as a result of the black economy policy-makers are innocent to implement an inflation tax as stated by Professor Milton Freidman. In this situation, the best policy action is crackdown the black economy. The entire macroeconomy has been impacted by the black economy.

The other negative impact is declining in the domestic and foreign value of Sri Lanka rupee and if the black economy effectively crackdowns the exchange value of Sri Lanka rupee could be improved to a US $ to Rupees 100. When it critically evaluates foreign transactions have been increased after 1978, many people used money earned from black economic activities to demand foreign exchange while there was slower growth in foreign exchange supply in the country. The demand for foreign exchange was for legally valid reasons in terms of exchange control regulation of the central bank such as education, business investment, imports, and many others.  The demand for foreign exchange was for services that supply in the country and to purchase goods that could have been produced in the country. A considerable volume of foreign exchange earning used for black economic activities such as purchasing houses overseas and other transactions. Trading banks and finance companies in Sri Lanka provided credit facilities against expected foreign exchange flows that could have assumed to generate from illegal economic activities.

The black economy has created intractable trade issues in the trade balance, balance of payment adjustment, terms of trade, and many problems. The impact of these factors should be analyzed by a multi-regression analysis and determine the pace of impact.  The task many not easier and economists in the central bank should do such research and analysis.

The truth is, Sri Lanka has a massive black economy, which has been gradually expanded since 1978 as there were not effective disciplines in the implementing process of the market economic system.  Now there is a challenge Mr.Gotabaya Rajapaksa to crackdown the black economy.  It is not easy work because the black economy has been involved with international black economic activities and the underworld. Many developed countries could not crackdown the black economy, however, the pace of black economic activities in developed countries is less than two percent of the official economy, in Sri Lanka’s situation is different because the black economy might equal to the official economy.  Many governments new about the black economy but, but they were silent when the country’s moral values have been degrading because the black economy helped politicians to the front of voters say that the country is developing under their administration.   

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