THE ECONOMIC POLICYMAKERS MUST AIM TO BUILD A HIGH VOLUME OF FOREIGN RESERVES- PART TWO
Posted on December 31st, 2020

BY EDWARD THEOPHILUS

In the 20th century, many developed countries considered establishing SOVERIGN WEALTH FUNDS and policy advisors of Sri Lanka with the strong hope of Mannar basin oil deposits advised the government to start Sovereign Wealth Fund, but the government is still talking Mannar basin oil deposits rather than realizing the oil and gas productions. The reality of Gas and oil production is that less than 15% of revenue could be generated from oil and gas fields in developing countries where oil and gas deposits are having, and if Sri Lanka’s Mannar basin would be successful only to gain 10% to 15% of total revenue that will gain from the project, and the revenue flow could use to build a sovereign wealth fund. However, the expectation of people could be realized as expected might be a vital question. If Sri Lanka invests such money, it would be successful in initiating a Sovereign Wealth Fund. Sri Lanka needs to be careful about Rogue traders’ strategies and speculative investment strategies to secure the Sovereign Wealth Fund.  Sri Lanka had experienced a Central Bank bond scam in 2015 and it is the best example that there is a possibility to emerge rogue dealers in the country and the manipulation to exploit foreign reserves could be incurred.

To maintain an expected level of foreign reserves, Sri Lanka could get a variety of policy actions.

•          The economic policy process should focus on creating a production economy and a balanced growth in the country. The idea of creating a production economy should be the first concentration and agricultural producers in Sri Lanka are lacking knowledge, skills, and experience in productivity enhancement and should be educated and trained in the enhancement of productivity and application of technology. The contribution rate of agriculture to GDP could be increased to 40% by the modernization of production, and more than $750 million annually could be saved, and generate a positive impact on saving foreign exchange reserves.  China could help Sri Lanka for the improvement of the agricultural sector and promoting Chinese investment in the sector. Many agricultural imports could be stopped if the government policy converges maintaining a proper plan for agricultural products. The current system is to encourage production when there is a shortage, for example, turmeric production is encouraged by the government and many imports could locally produce, and the policymakers need to identify the items and educate formers to participate in the production of such items if there will be an excess of production, how to deal with the situation? The government needs to educate people to maintain buffer stocks of various agriculture items. A Dutch administrator in Indonesia, Boake has written about social dualism and the situation created in the past. Economists of Sri Lanka must understand how to deal with social and technical dualism to adopt a production economy.  The cultural behavior of people in Sri Lanka is not different from Indonesians when launching the concept of the production economy. The government has taken steps despite the government policy criticized by rouge businessmen in the country urging to allow many agricultural items and the recent policy step of Mr.Gotabaya Rajapaksa to promote milk production would positively support the creating production economy.     

•          In the effort of making a production economy, the contribution from the industrial sector will be a massive quantity. Many industrial products such as household items, radio, TV, fridges, washing machines, computers can easily produce in the country if encourage foreign investments, especially Chinese investment, and quality controls need to attract higher demand from the domestic market and excess to export.  Many Asian countries adopted the strategy, especially Taiwan, Hong Kong, Thailand, South Korea, and Japan.  It was successful and the secret of building a billion of foreign reserves in Taiwan was the creating production economy, and the culture of Asian countries stimulated people to consume domestic products rather than directing import controls. The concept of creating a production economy saves magnitudes of foreign exchange reserves outgoing and could create employment opportunities for increasing labor force.  The concept of a production economy connecting to industrial products might be opposed by European countries and some Asian countries.  Germany has already expressed animosity for import controls, and that is the reality and the government of Sri Lanka must firm on its policy. International association with China would be helpful and especially the policy of Xi Jinping will help Sri Lanka in the effort to build a production-based economy and increase in contribution from the industrial sector.

•          The other significant strategy is to make arrangements for half-completed industrial products export to China, and after the improvement of quality, they could be exported to other countries as products of China. The concept of the final product is a joined product of China and Sri Lanka, and both countries will be benefited from the arrangement.  This should be negotiated with China. As the secretary to the Ministry of Finance stated without importing vehicles, China can cooperate to produce and assemble vehicles required to the country. This policy supports earning more than $10 billion annually and at least five billion of them could transfer to permanent reserves. If Sri Lanka associates with China building the Silk Road, it needs clear supports to achieve the aims of the country.

•          Sri Lanka should stop releasing foreign exchange for undergraduate education and training programs. The country can educate and train people for undergraduate programs. The direct effect of releasing foreign exchange for undergraduate education and training is the waste of foreign exchange and disadvantage to domestic education and training.  If it evaluates the contents of education and training programs in developed countries, there is no difference in the contents of local programs. Many undergraduate programs in Sri Lanka are comparable with programs in developed countries, and the government needs capacity building in the country than releasing foreign exchange to go overseas.

  • Major contributing services to foreign reserves by tourism and foreign employment should be reset while having a clear hope of contributing volume but the pace of contribution to GDP needs reducing.

The major weakness in the plan implementation process in Sri Lanka is the details of plans, the monitoring, and variance, remedial management process to achieve the objectives of the original plan are not provided to people and many plans implementation has become white elephants. If it investigates the plan implementation process during the past 50 years it could be seen that the plan implementation process was not consistent with proper monitoring and remedial management and many plans were covered by political clouds.  The role of the opposition has been the monitoring of government policy implementation and expressing of remedial strategies of the opposition.

Playing politics with the management of foreign reserves is the Boeotian method of the policy management process and the government needs to call unity in the management of foreign reserves that are beneficial to the country beyond the politics. Mr.Gotabaya Rajapaksa should give a clear approach to the government and opposition politicians. Whichever political party is in power the volume of foreign reserve base ($ 25 billion) should not be changed.     

HAPPY NEW YEAR TO MY READERS!

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