|
Sri Lanka and the international economic
crisis – The way forward
By Milinda Moragoda
One day a wealthy Englishman travels
to Italy on business. While there he decides to buy
a hand-crafted cupboard to furnish his new summer home
in Spain. He visits an exclusive store in Rome, which
sells furniture sourced from a small carpentry workshop
in Morocco. This furniture is fabricated from wood imported
from a sustainable wood plantation in Brazil. The Italian
store-owner is sipping a cup of fine Sri Lankan tea,
which he discovered while visiting a friend in Russia,
who imported the tea from a Middle Eastern tea-broker.
This broker makes frequent trips to Sri Lanka to purchase
the tea from the Colombo auction, and while there, enjoys
staying in many of the hotels around the island to take
a break from work. His apartment building in Dubai,
was built by a multinational construction firm, which
employs many Sri Lankan professionals and workers -
who in turn remit their hard-earned savings back home
to support their families, to provide for both their
immediate needs and opportunities for betterment. Some
of this money goes into setting up small enterprises,
which create local employment, and at the same time,
provides valuable foreign exchange to help fund Sri
Lankan imports and pay off foreign loans.
The above example shows only a fraction of the ways
we are all linked in a complex web of commerce, finance
and trade in today’s global economy. Even if we
wanted to, we cannot change this fact. Just imagine
what would happen if we put up a wall around our country
to shield ourselves from the outside world. We would
not be able to run our garment, tea, spice, plastics
or other factories since we would not be able to purchase
the inputs and machinery needed to operate them. Tourism
would be limited as we would not be able to provide
the modern amenities travellers have come to expect
in an increasingly competitive global tourism industry.
We would not be able to communicate by telephone, nor
maintain our roads, dams, IT and other infrastructure
needed to run our country. Moreover, there is ample
evidence from around the world – especially East
and Southeast Asia – that locally designed integration
with the world economy has generated growth and reduced
poverty.
Experts unanimously agree that today, we are undergoing
an unprecedented financial crisis of proportions not
seen since the Great Depression of 1929-31, and that
its full dimensions still have not been played out.
Due to the complex inter-linkages in finance, trade
and commerce, every country in the world has been and
will be affected by the present economic crisis. Instead
of wishing it away, we must urgently and responsibly
face up to this fact, analyse in concrete terms the
ramifications the crisis is having and will have on
the Sri Lankan economy and find the best defensive measures
that can be taken to blunt this impact. At the same
time, we must look at how we can best position ourselves
for the eventual upturn in the market.
There is potentially some good news. Over the next few
months, we can expect the price of oil-related products
and food to drop, which should benefit ordinary Sri
Lankans and industry to some degree. However, let’s
be realistic - at present there is more bad news than
good. Moreover, for the first time since the Second
World War, international trade and capital flows to
developing countries are both shrinking simultaneously
for the first time in more than a generation.
In other countries many people are finding that they
have less money to spend. They have either lost their
jobs, have had their wages cut or are simply frightened
to spend. Before the economic crisis they may have increased
their spending by borrowing money. The trouble is, people
can no longer count on doing this. Furthermore, their
concern about their jobs and/or the uncertain future
makes them keen on building up their savings rather
than spending. In any case, banks themselves are not
lending because they are stuck with toxic assets (assets
that have fallen sharply in value) that originated from
US sub-prime loans. These have seriously damaged their
balance sheets. Banks have been reluctant even to lend
to each other, resulting in frozen credit markets.
But, you say, the governments in those countries have
been bailing out the banks by giving them money. Yes
and no. Governments have been extending money - but
only to recapitalise the banks, to enable them to lend
once more. However, as banks are not certain how much
of their assets are toxic, they are reluctant to lend,
and are hoarding money to build up their balance sheets.
Furthermore, as businesses have begun to downsize or
collapse due to the drop in demand resulting from the
drop in the value of assets, this has set off a chain-reaction
of events, which make the lending environment even more
uncertain. In such a crisis situation, banks will not
wish to lend money to any government which fails to
pay back loans or does not appear to be a good credit
risk.
Not only is there a strong possibility that the supply
of foreign borrowing will dry up, in addition, in regions
like the Middle East, the fall of oil revenues and the
reduced supply of money could have an adverse impact
on many Sri Lankans working there. This fall in oil
revenues has had a marked effect on the formerly booming
real-estate market, and there are already signs of a
slow-down in the construction industry. In both cases,
this not only means that there will be less money for
workers to send to support their families in Sri Lanka,
but in broader terms, a significant loss of foreign
exchange to Sri Lanka which is used to stimulate the
growth of the local economy and repay foreign borrowing
by the government.
Globally, people are spending less money as the economic
downturn impacts on jobs and incomes, and they will
buy fewer clothes, drink less tea and take fewer holidays.
This has already begun to adversely impact on Sri Lanka’s
airline, tourism, garment, spices and manufactured goods
industries. If that wasn’t bad enough, it is difficult
to predict how long this economic crisis will last and
its exact dimensions. Some experts say it will take
12-18 months for the recovery to begin; others say it
could take as much as five years. However, they all
agree that the world will go into recession, banks will
continue to struggle and credit will be limited for
businesses and people like.
We could talk doom and gloom all day – let’s
face it, we Sri Lankans love to see the bad side of
a situation. But we are clever and resourceful people,
and should be looking at how we can turn this to our
advantage.
The first thing we must recognise is that we are not
immune from the effects of a global downturn and that
we cannot swim against the tsunami of economic opinion.
There is no golden way out of the problems caused by
this crisis for Sri Lanka – or for any other country.
Though economics is a well-established science, the
crisis took experienced economists and financiers by
surprise, and none of them will venture to predict how
it will eventually play out. Another thing we must be
aware of is that the crisis and the eventual recovery
will have a lag effect. We have seen the crisis first
spread from the US to European countries and begin to
spread to Asia, the Middle East and Latin America. The
speed of recovery for each country will be largely dependent
on each individual country’s actions or inaction
in relation to changing global developments. Though
some have argued that Sri Lanka will not be impacted
since its economy and financial markets are less integrated
into that of the international economy, the signs are
there that this is not the case. The saying, “No
man is an island” is particularly true in today’s
interlinked world.
Having faced up to reality, we, then, need to sit down
and carefully analyse the impact of the crisis on our
economy so that we can take policy decisions to protect
against its ill effects while at the same time determine
which opportunities we can seize when the world economy
recovers. We must look at each of our imports and exports
and work out what will happen. How will those involved
in imports and exports all the way down the supply chain
be affected? How will the changes across the world affect
our balance of payments? Will we continue to be able
to service our debt? What are the policies we can apply
which will ease these problems? Who will be the most
vulnerable in the immediate future and how can we protect
them?
The temptation is to give handouts. In the short term
that may be attractive, but where will the money come
from to pay for these handouts? Higher taxes perhaps;
but someone has to pay those taxes, and in the end,
it will be all of us, rich and poor alike. Perhaps we
could borrow money? As we have shown above, that may
not be so easy today and what we borrow eventually has
to be paid back, if not by us, then by the generations
that follow us. There is also the issue that higher
taxes would diminish the disposable income in the hands
of investors and entrepreneurs, and thereby discouraging
the very entrepreneurship that would be required in
order to recover.
Some support for key industry sectors is necessary.
As a humane society we should and must also support
the poorest. So, some financial support is necessary,
but it should be carefully targetted, monitored and
kept to the absolute essentials so that the rest of
our people do not become overburdened. The recent stimulus
package of assistance put forward by the Government
is an encouraging start. More needs to be done. We should
also ruthlessly cut non-priority expenditures and waste.
Ultimately, though, the real answer lies in greater
competitiveness. We have to step up production of goods
which are not only cost-effective, but just as importantly,
meet the expectations of the discerning consumer. If
our products and services are better than those of our
competitors in other countries around the world, then
we can take a bigger slice of the shrinking cake. The
converse is also true. If we do not become more competitive,
we will end up with a much smaller slice. This will
inevitably lead to a destruction of jobs and incomes.
What we therefore require is a steady improvement in
productivity – more output from the same resources
or reduced resources.
Government has a central role to play in fostering competitiveness
by creating the proper economic policy framework and
climate, fiscal discipline and prudence, because the
budget deficit is often the main source of instability
in the system – as it fuels inflation, increases
the cost of funds in the economy and puts pressure on
our balance of payments and exchange rates. First and
foremost, the Government must maintain macroeconomic
stability by means of low inflation and a strong balance
of payments position. Without these conditions, we cannot
achieve a competitive economy.
High budget deficits have many pernicious effects on
the economic growth. Firstly, they lead to an increase
in prices, as more money chases the same supply of goods
and services. Inflation is particularly pernicious because
it impacts most adversely on the poor, who do not have
the compensating benefit of owning assets whose value
increases as prices rise.
Large budget deficits also result in high interest rates,
which discourage investment. With no investment, businesses
stagnate, which in turn results in fewer jobs, lower
productivity and falling incomes. High costs in doing
business are not conducive to developing competitive
enterprises.
In addition, large budget deficits also put pressure
on exchange rates by fuelling inflation. The competitiveness
of an economy is eroded if domestic prices are increasing
faster than those of competitors and trading partners.
This situation has to be overcome by adjusting the exchange
rate to address the inflation differential. A strong
rupee at the moment is hurting exports and making imports
cheaper. That is not helping us to be competitive.
A
more realistic exchange rate for the rupee against other
currencies will give us a competitive advantage at this
stage.
Depreciation of the currency does increase inflation
and the cost of living. However, the effects of a misaligned
exchange rate are much worse. By trying to protect the
exchange rate, one utilizes valuable reserves at a time
when one needs a healthy cushion to cope with the negative
impact of the global downturn. This destroys businesses,
jobs and incomes. Furthermore, the global drop in food
and fuel prices provides an opportunity for governments
to make the necessary adjustments.
Turning to the specific situation in Sri Lanka, there
is no doubt that a large part of the macroeconomic pressures
that are buffeting our country originate outside our
shores and are linked to the adverse global economic
environment. However, we cannot get away from the fact
that domestic policies are also adding to our travails
and making it more difficult to withstand the external
developments.
We come back to the problem that unsustainable budget
deficits are the root cause of the macroeconomic problems
that we face. High interest rates and a non-competitive
exchange rate are symptoms of this underlying malaise.
We need to take a system-wide view and bring the economy
into better balance to restore its growth impetus. This
is not a new problem. Large budget deficits have often
existed in the past. But in the present situation in
which the entire world faces an unprecedented economic
crisis, we face a very hostile global environment and
this places a higher necessity on good house-keeping.
How do we deal with the crisis? Normally, the first
thing to be sacrificed in an economic downturn is skills
training. Yet this is the most critical time for us
to give our people the skills to be competitive. Rather
than cutting back on training, we should be offering
as many opportunities, especially in languages such
as English, but also in the new market languages of
Chinese, Hindi and Arabic.
We can also be better at providing the energy needed
to run our factories, keeping the costs of all utilities
down, by being more resourceful in exploiting alternative
energy opportunities, as well as careful purchasing
of fuel oil while world prices are low. This will benefit
all of our businesses - micro, small, medium and large.
We also need a concerted plan to promote conservation
through increased energy efficiency.
There are other things that we can do which today are
deemed unfashionable by some in our midst, but if conducted
correctly, could give us a competitive advantage. We
could and should exploit our geographical position as
the gateway to India, as our neighbor has a fast-growing
middle class and a massive market. Colombo port has
been doing this successfully for years. Another example
of this potential is demonstrated in the fact that since
“Open Skies” and “Visa on Arrival”
policies were extended to India, Indian tourist traffic
has increased to become the largest single country source
of tourism in Sri Lanka. We need to widen that out to
the rest of the economy. Completing and signing the
Comprehensive Economic Partnership Agreement (CEPA)
would be the most powerful thing we could achieve in
this direction during these difficult times.
One other thing we should do which has become quite
controversial in recent times, is to aggressively seek
international aid which may be more freely accessible,
and offer better terms than commercial borrowing. Recently,
there has been a trend towards criticizing and demonizing
international aid agencies and international NGOs, which
is counterproductive to our interests. Now is not the
time to be making enemies, now is the time to seek support
for locally designed priority programmes and to build
alliances. That is why we should be talking to the World
Bank, International Monetary Fund and Asian Development
Bank and other bilateral and multilateral donors - not
in a subservient way, but with dignity and mutual respect.
These institutions have assisted us in the past and
many of them continue to do so. Given our long relationship
with them, they must be treated as partners. Of course,
the ultimate decision-making power rests with us.
We should also bear in mind that international NGOs
have become increasingly important players in providing
funds for development, with the new phenomenon of social
entrepreneurs. For example, the Bill and Melinda Gates
Foundation has a fund larger than the whole of the USAID
budget.
Some in our midst prefer to ignore the importance of
the international community in our development. It is
back to the wall I described earlier; throw up a wall
and you deprive our people of many things they cannot
obtain any other way. Some say that we are surrendering
to colonial interests, yet look at Vietnam, South Korea,
Singapore, Malaysia, Taiwan and yes, even India and
China – all of them have actively sought to integrate
into the world economy, while successfully maintaining
their independence, integrity and identity, have grown
into strong economies. We can easily follow these successful
examples. Sometimes I wonder if the blindly inward-looking
argument is more a reflection of fear and insecurity
within ourselves, than anything else - a convenient
excuse not to face up to unpleasant realities. More
so, at a time when every nation is on high alert, pulling
together their best minds to find workable ways to weather
this grave crisis as it hits its citizens, we too, must
proactively ensure that we are taking responsible steps
to safeguard our country from this threat. At this juncture,
it is every country for itself, and only the fittest
will prevail.
It must be emphasized that the present global economic
crisis began with a meltdown in the financial sector
- which rapidly spread to other sectors in the real
economy. In Sri Lanka, we, too, need to be vigilant
to prevent any crisis within our financial sector from
triggering a full-blown crisis in the rest of the economy.
We need to be careful in handling the problems we are
presently facing within this sector and also in the
way we handle our relationships with the international
banking community.
We should be clear, this crisis was not of our making
- but it does affect us all. And, we achieve nothing
if we are divided. There are times in the life of any
country when national unity becomes paramount. At such
times, political differences should be cast aside for
the sake of the people. Now, more than ever before,
we Sri Lankans need to work together for the betterment
of Sri Lanka and our people. The extremes never produce
the solutions we need – the middle way does. No
doubt the Opposition will want to treat this crisis
as an opportunity to undermine the government, but before
they do so they should think long and hard. If they
were in government could they handle the current situation
alone? The answer to that is clearly, no! Equally, the
government does not need to be defensive; that can only
make matters worse. Do they need the opposition to support
them at this difficult time for our country? Yes!
Hank Paulson, the previous US Treasury secretary recently
stated that “We are dealing with a historic situation
that happens once or twice in 100 years.” The eminent
Harvard Economic historian Niall Ferguson, in an article
for the London Financial Times, opined that, “It
is all but inevitable that we shall see serious political
and geopolitical upheavals in 2009, as the recession
takes its toll...” The vast proportions of the
current economic crisis call for us to urgently engage
in a comprehensive national discussion on the direction
our country should take over the next ten years.
There is no time to lose. We need to convene a national
economic conference which will bring together a cross-section
of experts from government, business and academia. We
could also invite eminent expatriate Sri Lankan experts
to join in this important dialogue. By analyzing, debating
and working out a strategic plan and economic policies,
our chances of weathering this financial storm will
be increased. Working together to face this crisis,
we can carry our country along with all of our people
through to a prosperous and stable future.
|
