SL Govt’s artificially created “growth” and its long-term consequences

SL Govt’s artificially created “growth” and its long-term consequences

By Lahiru Fernando

11 May, 2017 | 10:09 am

The Sri Lankan government’s fiscal management and policies is a topic argued and discussed by a majority of Sri Lankans far and wide. As usual, some defend the government’s decisions and plans while the rest criticise them from top to bottom.

But no matter who says what, all that matters is what the Central Bank Governor Indrajit Coomaraswamy has to say about it.

And recently, The CBSL Governor did just that, while emphasising the importance of better governance and effective fiscal management.

The Governor pointed out how the government “artificially loosened policy and create a sugar high in growth” instead of a sustained growth.

Coomaraswamy says that in the government’s constant quest for growth, it artificially creates growth through:

  • Pumping money in through the budget
  • Keeping interest rates artificially low
  • Keeping the exchange rate overvalued

All this to suck in imports and create economic activity. Governor Coomaraswamy says that it can be done for a year or two and “then you have a crunch a balance of payments problem, inflation picks up and if you look at our last 30 40 years since the liberation economy, you see this happening again and again.”

Speaking of the expenditures of the current government, the Governor revealed that it has spent two billion US dollars worth of reserves, borrowed reserves largely, and then had to depreciate the currency by 10%.

“It’s a double whammy. it doesn’t make any sense, i mean its one thing to spend your reserves if you can actually defend the currency. But if you waste your reserves and have to depreciate the currency anyway, clearly that’s a no brainer. You don’t do that“, he added.

The CBSL Governor’s statements were applauded and appreciated by Former Chairman of the Ceylon Chamber of Commerce Chandra Jayaratne

Jayaratne said: “The politicians in charge of state finances appear to expect the Central Bankers to be magicians. No amount of external recognition, awards, self acclaimed praise, said to have been articulated in the international forum, can convince the intellectual community and civil society to favour the alternative macro-economic model that is being promoted by the politicians in an arrogant, all-knowing, egoistic way in managing the finances of our country.”

Governor Coomaraswamy on effective fiscal management

The CBSL Governor said that Sri Lanka has one of the most regressive tax systems in the world. Making adjustments come from the revenue mainly – as far as fiscal deficit reduction is concerned.

Why aren’t we focusing on reducing expenditure? Our total expenditure comes out at about 20% of GDP. But there are issues in relation to the composition and quality of public expenditure.”

“Are we spending money in the areas of we should be spending money on?”

“And the money that is allocated, is it being spent effectively?” – Indrajit Coomaraswamy, CBSL Governor

Has the government got its priorities right?

A supplementary allocation of Rs. 330 million was recently tabled in Parliament to buy vehicles for six ministers, a governor and an official.

When the matter was brought up to debate during our Face the Nation program, Deputy Minister of Foreign Affairs Dr. Harsha De Silva admitted to it saying “Well that is not fake, that is true”

Dr. Harsha De Silva said: “It is difficult to explain, but each individual minister must prioritize what he or she is spending his or her money on, I mean yes, I have an allocation, have I bought a car? No, because that is not priority. Some of these ministers who have new cars, don’t need new cars.”

“Let me be quite blunt” said Dr. Harsha, “I am not necessarily in support of buying brand new cars for every minister, every ministry. Some of the ministers, some of the ministries don’t have (vehicles), because they’ve been recently established. Perhaps they need (the vehicles). So therefore, I cannot explain this, and I’m not in favour. That is my personal view”