Sri Lanka’s problem is not of “debt” but of “foreign debt”. In fact, it has deteriorated further from 42% to 50% from 2014 to now. This yet again proves that the inability to pinpoint the core problems have resulted in a deterioration of the core problems – Pic by Shehan Gunasekara
Views of two economic experts caught my eye last week. While one has given a scathing criticism of the Government for its handling of the economy, the other has given an analysis of the so-called “debt problem” of Sri Lanka.
Doomsday scenario by one
One of them has claimed that the opening of economy in 1977 was the most important moment in economic history for Sri Lanka. He has also stated that from 2005-2014 Sri Lanka underwent a period of “De-liberalisation” and that since 2015 modest success have been achieved in terms of macroeconomic stabilisation.
I couldn’t help thinking that all these statements were erroneous. Leaving that aside, he has painted a perfect doomsday scenario that “Sri Lanka is faced with a choice between the devil and the deep blue sea”.
Traditional analysis of debt by the other
The other one, analysing the “debt problem”, claims that economic growth, fiscal deficit and debt pose the biggest challenge to macroeconomic stability. He goes on to opine that “higher interest costs reduce the fiscal space and flexibility”.
This is the textbook style diagnosis of the economic problem we always hear from the traditional experts.
A broader dialogue needed by experts and analysts
The common factor that I noticed in both these views (actually in almost all cases when experts discuss the economy) is the absence of a concrete and clear solution. It is always vague and terribly short of practicality. In my opinion, a greater criticism should lie with the experts and analysts themselves rather than the politicians for being unable to come up with practical solutions which could be implemented by the politicians. A broader dialog has not been initiated by the fraternity which would have resulted in a more sensible economic plan.
It is this void that I intended to fill with my recently-released book ‘A Simple Plan for Sri Lanka,’ with the hope that a dialogue would be initiated which would result in the creation of a doable and sensible economic plan for Sri Lanka.
Idenifying the right problem
Going back to the earlier view “economic growth, fiscal deficit and debt pose the biggest challenge to macroeconomic stability,” I do agree that poor economic growth is at the centre of Sri Lanka’s problems (not just economic problems). However fiscal deficit and debt are not equally critical. In fact, the deficit in the external current account is a more significant problem.
Therefore, what I proposed is a strategy of higher economic growth through higher foreign earnings, which would turn the external current account from a deficit to a surplus. We need not worry if the fiscal deficit and public debt deteriorates in the medium term in the quest to achieve the said objective.
Practical plans have opportunity costs
A plan becomes practical when it identifies its costs. Resources are scarce and limited, whether it’s time, finances, man power or anything else. Therefore only a finite amount could be achieved in five years. Trying to rectify all problems is a sure way to make no progress with almost all problems as we have realised over the last 70 years.
For instance who can come up with a magic formula to revive growth, reduce fiscal deficit, reduce external current account deficit, reduce debt, keep inflation low, etc.?
Address the problem of foreign debt
Sri Lanka’s problem is not of “debt” but of “foreign debt”. In fact, it has deteriorated further from 42% to 50% from 2014 to now. This yet again proves that the inability to pinpoint the core problems have resulted in a deterioration of the core problems. The root cause of the escalation in foreign debt is the external current account deficit – The fact that imports are way higher than all the foreign exchange earnings. The day Sri Lanka wipes out the external current account deficit, the problem of foreign debt would be greatly solved. If in the process the domestic (rupee) debt escalates, it is not a major problem. The Central Bank of Sri Lanka is the authority of the rupee, but it has no control over foreign currencies.
Fiscal support to boost growth
Foreign exchange earnings led growth cannot be initiated without strong fiscal support in the form of focused Government expenditure and tax benefits. It is just not good enough to say that “we do not have the fiscal space”. As mentioned above, fiscal deficit should be allowed to expand and financed with rupee debt in the quest to promote foreign exchange earnings.
Academics versus practitioners
There is no doubt that academics have a role to play in policy discussions. However text book theories and solutions are grossly inadequate to solve real-life problems. Real-life problems could be solved by practical solutions which involve calculated risks. Therefore an entrepreneurial approach is desperately needed in devising economic policy.
It is possibly that entrepreneurial approach that has been lacking in our economic policy making over the last 70 years, while the politicians had become the convenient scapegoat of the public.