Professional Documents
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to attain the
envisaged targets
Vision 2025: Part 2
Analysis so far
Monday, 25 September 2017
In Part 1 of the article series on the Governments Vision 2025 published last
week (available at: http://www.ft.lk/columns/Vision-2025--Part-1--Need-for-
moving-from-a-wish-list-to-a-concrete-plan/4-639757), it was pointed out that
the present vision document was just the fourth of such visions pronounced by
the Government during the last two year period.
These documents which started from the election manifesto of the United
National Party presented to the electorate in August 2015 had one underlying
theme.
That was the new economic philosophy of the Government which was styled as
Knowledge-based Highly Competitive Social Market Economy, a concept
adapted from Germany which had introduced it after the Second World War.
Germanys vision had been to have a third way, different from the Western
capitalism and Soviet Unions communism which had been ruling the world at
that time and proved to be ineffective to meet the aspirations of all the people in
a country. Apparently, UNP too had felt that it needed a new ideology, different
from the extreme state expansion policy which had been adopted by the previous
Mahinda Rajapaksa administration.
However, it was pointed out in the previous article that three shortcomings in the
first three policy statements, namely, lack of consensus among the ruling coalition
parties on economic policy, failure to sell it to people and the Minister of Finance
taking the country in the opposite direction, had hampered their proper
implementation. Hence, the need of the day had been identified as translating the
wish list in the vision into implementable concrete plans.
In the intermediate target of elevating Sri Lankas PCI to $ 5,000, the country has
to maintain on average a continuous growth rate of 9% per annum in each of the
years from 2018 to 2020. Similarly, to become a rich country by 2025, Sri Lanka
should have a PCI of little over $ 12,000, according to World Banks classifications.
That requires Sri Lanka to accelerate its growth rate to above 16% per annum
during 2021 to 2025.
Hence, there will still be a gap between potential savings and the required
investments. That gap, known as the savings-investment gap, has to be filled by
using savings done by people in the rest of the world. Those savings are mobilised
by a country by making foreign borrowings or attracting FDIs or allowing
foreigners to invest in the countrys securities market, known as portfolio
investments or simply getting foreigners to give free gifts or grants or by using all
of them. In the past, Sri Lanka had tried to fill the gap mainly by borrowing from
abroad but it had increased the countrys foreign debt to unmanageable levels.
growth record
Sri Lankas past track record with regard to economic growth has also not been
very encouraging. On average, during the whole of the post-independence period,
Sri Lankas annual economic growth has been at around 4.4%, as shown by Figure
1. In the first half of 2017, its growth has been still worse at 3.9%. Though the
authorities have expressed hope that there would a bounce-back in the second
half of the year, all the available indicators such as agricultural production and
growth of exports have shown that the country would finally end up at an average
growth of 4% in 2017.
As pointed out in the previous article, this acceleration had nothing to do with the
countrys perceivable economic cycles. Instead, it had been linked to the
countrys election cycle in which there would be two Parliamentary elections one
in 2020 and the other in 2025. The Governments wish to secure victory at these
two elections is understandable. But the goals which it has set for itself and for
sale to the electorate have been too challenging for its built-in capability.
However, remittances are not a source of funding on which Sri Lanka can make
too much of dependence since they are subject to constraints. On one side, Sri
Lanka cannot send people out for employment without experiencing a labour
shortage within the country. On the other, the employing countries also cannot
do so continuously due to domestic political and economic problems.
cut is challenging
Hence, it is safe for Sri Lanka to rely on domestic savings rather than
national savings to finance its target level of investments. But to do so, it has to
force all Sri Lankans to cut their consumption at least by another 10% of GDP
allowing the country to increase its domestic savings rate from the current 20% to
30%. However, it requires everyone politicians, bureaucrats and ordinary
citizens to take a cut in the present welfare levels. The biggest challenge for the
Government is to change the mindset of both politicians and bureaucrats to take
this hit.
for FDIs
However, even when the countrys domestic savings are increased to 30% of GDP
through enforced austerity measures across the board, there will still be a
sizeable savings-investment gap which has to be filled by using savings made by
foreigners. Since the country is already in a foreign debt trap and the Government
has made announcements that it does not want to increase these debt levels any
more, the only available source has been the attraction of FDIs. In the
intermediate targets set in Vision 2025, the Government wishes to increase FDIs
from the present less than $ 1 billion to $ 5 billion by 2020. Based on the track
record of the country, this is again an uphill task.
Hence, every time a new index result was out, there were angry retorts and
promises of compiling Sri Lankas own indexes to represent its true state to the
rest of the world. However, they were only promises and none of these
homemade indexes was release subsequently.
New Governments track record of attracting FDIs is not better than previous
Government
When the new Government came to power in January 2015, the promise of Sri
Lanka as a destination of worthwhile FDIs was substantially increased on account
of the pledge it had given to the rest of the world that it would usher an era of
good governance, transparency, rule of law and law and order. Yet, FDIs it could
attract during 2015 and 2016 amounted, on an annual average, only to $ 789
million, almost same as the countrys record during the previous post-war period.
However, this claim is not being borne out by the data that have been published
by the Central Bank in its Annual Reports based on the data compiled by the
Department of Census and Statistics. According to the Central Bank, as at the end
of 2014, the number of people employed in the country had amounted to 8.424
million. As at the end of 2016, this number has declined to 7.948 million recording
a decline of employment by 476,000.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
can be reached at waw1949@gmail.com.)
Posted by Thavam