ECONOMIC LIBERALIZATION POLICIES IN SRI LANKA: BOON OR BANE?
Posted on January 14th, 2021

BY EDWARD THEOPHILUS

The Sunday Observer (10/01/2021) reported that the Central Bank of Sri Lanka is going to review economic liberalization policies, it is a good and overdue task. Economic liberalization policies initiated by President J. R. Jayewardene and it would have done when Mr.J.R.Jayawardane ended the presidency, and he was the right person to explain why Sri Lanka implemented economic liberalization policies, and why didn’t his cabinet ignore to correct indiscipline at the operational level? Mr.J.R.Jayawardane commenced good economic policies in the country and the tourism initiatives and related business were the best policies he introduced in 1965 as the Minister of State. Tourism has become a major area for foreign exchange earnings and the provision of employment. Why did the Central Bank of Sri Lanka ignore to get an opinion from Mr. Jayewardene is a question to be answered by the Central Bank, and the Minister of Finance in 1978 is alive and can get an opinion from him?   

Economic liberalization policies came to effect with the budget of 1978, this doesn’t mean that Sri Lanka hasn’t had economic liberalization policies before 1978. It was a necessary evil to the economy.  Under the financial controls of the Currency Board System, Sri Lanka had economic liberalization policies, and the central banking that began in 1951 also allowed to work liberal economic policies until the ending of the Korean War in the early 1950s, and the influence of socialism in economic policymaking and the shortage of foreign reserves influenced to get away from liberal economic policies in 1956.

The economic policies of Sir John Kotelawala attractively reflected liberal economic policies, and the Six-Year Development Program introduced in 1954 showed how to use liberal economic policies promoting indirect import substitution and practical liberal economic policies covering regional Sri Lanka. Many economic policymakers assumed to not read and understood the Six-Year Development Program, 10 Years Plan, and Five-Year plan in 1972. The political changes in 1956 forced Sri Lanka to get away from liberal economic policies and consumers and producers suffered from inward-looking strategies, and the economic policy of 1978 directed to adopt outward-looking policies hoping to change the economy to generate positive benefits to the country.

The Sunday Observer (10/01/2021) reported that we will test the performance of the open economic policies and its economic agents could follow a focused approach to becoming an industrial economy.” stated the governor of the central bank. To become an industrial country, the contribution from the Industrial sector to GDP must be over 50% and it is not an achievable target when considering the current contribution from the industrial sector to GDP. Sri Lanka is an agricultural economy, and an input-output analysis could show that the highest contribution to GDP is made by agriculture. The governor may have a correct opinion, but the reporter of the Sunday Observer may not understand the jargon expressed, and I have a question about the organization of the report, as it seems the nature of the writer lacking knowledge of the economy.

What is the new macroeconomic policy framework? The macroeconomic policy framework is a broader area and international economists in the past explained that it is like a jungle which comprises many varieties of plant. After the Cold war, the world bank advised making policy correction and microeconomic reforms were needed to successfully work macroeconomic variables.  The best example was after the cold war developed countries did microeconomic reforms and such reforms worked well to improve macroeconomic variables and the productivity enhancement and improvement of competitiveness should have essential ingredients in liberal economic policies.

There is nothing wrong with the economic liberalization policy and the problem has been the policy implemented without disciplines. The central bank did not advise the government what were the disciplines and how they should have implemented them in the country. As I found as a village person, the positive aspect of the liberal economic policy was getting the right price for products and services of rural areas. The opportunity to take part in economic activities was received by all, and this positive aspect was ignored by many critiques. The negative aspect of the liberal economic policies was the rapid decline of the Sri Lanka rupee and it lost the financial gains of rural people. The depreciation of currency value has been a common nature in all countries despite this situation the government policy process has not addressed the issue to satisfy rural people.  Therefore, people looked for foreign jobs rather than engage in productivity and competitiveness improvement. The government did not educate the public on the role of liberal economic policies and how it should be protected and how it should use to take part to achieve economic objectives of them.

In the liberal economic system, the central bank is the regulatory authority in the financial system which comprises the trading bank market, non-bank financial intermediaries, stock market, merchant banks, superannuation market, and many other markets providing clear policy guidance to protect the market and eliminate crooks from markets.  The market of non-bank finance intermediaries has been entirely swollen by crooks, and the central bank has not worked with coachmanship and acumen ship to prevent this situation.  In Sri Lanka regulator (Central Bank) works as a market operator and this is wrong. For example, the superannuation market comprises EPF, pension funds that are managed by banks and other institutions. If the government takes policy action to combine all super institutions to establish a mega super organization it could provide employment opportunities to over 10000 unemployed graduates and practical finance education could broaden in the country. Many people in the rural area are illiterate in practical finance and they have caught crooks and lost hard earn money. The central bank handles this situation, and the bank has not developed policies to protect the financial system.

In developed countries, the management of superannuation organizations is not a role of the central bank, and many independent companies play the role.  If Sri Lanka can manage the central bank as the regulatory authority in the finance system, it would help to strengthen the economic performance of the country.  Why it is impossible to manage a superannuation organization that integrated all super funds in one organization is a question, and my feeling is policymakers are either lack knowledge or they are playing politics with funds. As the regulatory authority, the central bank can supervise and regulate such an independent organization.

The privatization of public assets is supported by liberal economic policies, and many people in the country have no clear understanding of the policy. The privatization of public assets aims for various purposes and in Sri Lanka it should be focused on attracting private capital, sharing the economic burden, reducing government spending and retiring public debt, etc. The central bank should educate people about privatization.

Economic liberalization should use as a boon to the country, and it is not the bane. The problem in Sri Lanka is people were not educated about the policy, therefore, a misconception is traveling around.            

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