Economic crisis and the Blame Game
Posted on November 20th, 2022

Sugath Kulatunga

Rather than adopt export-led development and aim at a healthy balance of trade and payments and provide productive employment, all past governments resorted to devaluation and prolific borrowing as the remedy. The outcome of the multiple devaluations and IMF prescriptions has been negative as far as the trade balance is concerned. The LKR which was 8.83 in 1976 declined 15.56 to a US dollar after the 1977 devaluation and slumped to LKR 100 per dollar in 2005 and 135 to a dollar in 2015 and today it is frozen at 365 per one USD.

In 1977 before devaluation there was a positive balance of trade of 41 million US dollars which became a minus 680 $ in 1978, minus 3656 in 2007, and rocketed to 10,343$ million in 2018.

The panacea adopted to solve the trade deficit was to devalue the currency with a view to discourage imports and encourage exports. Devaluation has been a futile exercise in Sri Lanka where at the time of independence in 1948 the US dollar was only 3 rupees and now it is over 350 rupees. We continue to chase the dollar without focusing on the real problem of poor export performance. We were lulled into complacency with the increasing revenue received from the repatriation of income from foreign employment and returns from tourism. As usual, we did not realize how vulnerable they are to global conditions and unexpected health issues. When the covid hit the world and Sri Lanka both these sources dried up.

We are now in a dire strait and people are demanding to know who is responsible. Already a case is before the courts against the political leaders of the time and the Governors of the Central Bank. The culpability is not with a few individuals but with the prevailing system in making crucial decisions on monetary and fiscal policy. In the blame game of looking for the culprits of the present economic crisis, there are a few parties that are left out.

The Central Bank is considered the repository of knowledge in economics in the country. It is staffed with the cream of the intelligentsia of SL who are well-trained and well-paid. This august body is responsible for the national monetary policy. In addition, it has been the recent tradition that senior central bank officials are seconded to the Ministry of Finance to serve as the Secretary of Finance and as advisers and are directly involved in the formulation of the fiscal policy of the nation. Thus, it is the Central Bank that is responsible for both the monetary and fiscal policy of the country. In addition, they are often located in the Ministry of Planning too. Ministers of Finance and Planning may come and go but these panjandrums stick around like Tennyson’s Brook. These economists write in their annual reports on the status of the economy and produce volumes of statistics on the persistent adverse balance of trade and its impact on the balance of payment. But they have not offered a long-term solution.

A partner in the crime is the Constitutional malefactor the Parliament. Although at the national level the Parliament is vested with full control of public finance vide Article 148 of the Constitution this supreme body of our representatives ignored the chronic deficit in the current account balance over the years.

The opposition in Parliament has to bear the major share of the blame. It is their responsibility to expose glaring policy faux pas by the government and direct the government on the correct path. This was a problem with all oppositions as they were guilty of the same blunder. The only contribution of the Yahapalana government was to cry hora hora against MR while ransacking the Central Bank. The list (100 pages) of the beneficiaries of the scam is still concealed in the Archives and the GR regime was not keen to reveal it.

 It is noted (CBSL statistics) that for the last 71 years from 1950 to 2021 the current account was positive only in 8 years. The easy solution resorted to by our brilliant ministers of finance was to devalue the currency. At the time of Independence, the US dollar was only LKR 3 and now it is LKR 360. The country has gone to the IMF with the begging bowl 17 times and adopted structural adjustments and other IMF devices eagerly of which import liberalization was at the core. The other nostrum was to borrow. The nation has now to bite these two magic bullets.

Media too has to take a share of the blame as it too has not brought into focus the hard issues involved. In many other countries, the media plays a vital role in probing and identifying the real issues and creating public opinion to force political authorities to deal with the core problems of the economy.

The revolutionaries’ think tanks, Universities, and professionals have been blind to the fundamental issue. The solution was export-led development with industrialization. It is also the sensible answer to reduce unemployment.

The present crisis is the result of a national collective criminal negligence from generation to generation.

Sugath Kulatunga

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