Economists and economyMarch 11, 2012, 12:00 pm
By Dr.C. S. Weeraratna
The fact that the economy of Sri Lanka is in a crisis is evident if one examines the critical data for the last six years, indicated in the table indicated below.
Source- Central Bank of Sri Lanka
Note: Values given for 2011 are upto the end of 3rd quarter 0f 2011.
As indicated in the table total debts and the trade deficits have continued to increase during the last few years. GDP according to Central Bank has been fluctuating around 6.0 during the last six years. However due to a number of reasons, a high GDP does not necessarily indicate an increase in the productivity of a country and vice versa, and it can be considered a dumb value with no significance
The main factor responsible for the current economic crisis in Sri Lanka is the increasing trade deficit (TD). As indicated in the table, TD has continued to increase during the last six years except in 2009. Some economists recommend devaluation of the rupee to reduce the trade deficit while others are of the opinion that the rupee should not be devalued. Economics stick to their theories and what finally happens is that the country and the people are affected. A medical doctor when treating a patient has to identify the causal factor/s and treat the patient accordingly. Our economists are simply prescribing treatments for TD, without giving consideration to the factor/s which has caused TD to increase. It is quite obvious that widening TD is due to increase expenditure on imports and relatively lower exports earnings. Hence, what needs to be done is to reduce our expenditure on imports as much as possible, and increase our net export earnings. Exchange rate alone does not affect the economy. A large number of factors need to be considered. Plans which benefit the poor people need to be developed and implemented. We do not have plans which benefit the majority of the people. Even what we have are not implemented effectively.
One way of reducing TD is to increase our net export earnings by producing more exports at lower costs. Simply increasing exports will not increase net export earnings. The COP of our exports such as tea, rubber etc. is bound to rise due to increase in fuel prices. Hence, strategies to reduce COP need to be implemented by effective use of Science and Technology. In this regard organizations such as National Science Foundation need to have effective programmes. SME sector plays an important role in increasing exports but those who want to promote this sector appear to think that financing alone will improve it. Among the main limiting factors in the SME sector are shortage of raw-materials and lack of marketing and technology. An integrated approach is important if we are to develop this sector.
As indicated in the table, expenditure on imports has almost doubled during the last six years. The cost of importing petroleum is about 20- 25% of the total imports. The expenditure on petroleum has increased from Rs. 215 billion in 2006 to around Rs. 400 billion in 2011 which. With the devaluation of rupee and increase in fuel prices in the world market due to a number of reasons, expenditure on fuel imports will continue to rise in 2012 and beyond. A high expenditure on petroleum will widen our annual trade deficit. Hence, in trying to decrease the TD, first priority need to be given to reducing the expenditure on fuel imports.
According to some news paper reports, the Minister of Petroleum Industries has said Sri Lanka imports 70% of refined oil and if there is a problem it could import refined oil to meet the balance 30% requirement ". He appears to be not concerned about the rising cost of fuel and the increasing expenditure on fuel imports. Such decisions on critical issues which affect the economy of the country will cause serious problem. If what the Minister recommends is carried out the expenditure on fuel imports will increase, and along with it increasing the trade deficit and the debts. It will also increase local fuel prices further. Should the government simply increase the fuel prices corresponding to world market price? According to some economists, who appear to be not bothered on the future of the country, the only alternative to face the fuel crisis is to raise the local fuel prices. How long can we do this? Providing subsidies will not reduce the expenditure on fuel imports. In fact, it will have work the other war around.
The consequences of increasing fuel prices have not been given adequate consideration. Increasing fuel prices will increase the cost of production of all our food used locally, and exports including tea, rubber, coconut, garments etc, resulting in a reduction in our competitiveness in the world market. Everything will go up in price except the air we breathe! It will result in an increase in poverty and social unrest and affect the health of the people. The effects of increasing the cost of petrol, diesel and kerosene oil will enter a vicious circle resulting in disastrous effects to the people and the economy. Therefore, all the drastic effects of increasing fuel prices should be given adequate consideration before a decision is made on this issue.
The authorities responsible for controlling imports appear to be not aiming at a reduction in fuel imports. Otherwise, the import of high capacity vehicles should have been curtailed. But what happened during the last few years is promoting import of cars irrespective of the rate of fuel consumption. Duty free permits were given to some categories of workers, which obviously promoted vehicle imports. In 1970s, permits to import cars were given only to those who earned foreign exchange. The number of vehicles imported during 2011 is 150% more than what we imported in 2010. Effective plans to reduce the consumption of fuel as indicated in a previous paper by the author (The Island- 20 February 2012) need to be developed and implemented.
In 2010, we have imported food to the tune of Rs. 150 billion. Among the food imported are kurakkan, fruits, lentils, maize, milk and milk food, sugar etc. Most of these can be produced locally. We import milk and milk food annually to the tune of Rs.30 billion. There appears to be no integrated plan to increase milk production in the country. What the NLDB has done to increase milk production in the country is to import 10 Jersey bulls at a cost of Rs. 30 million. There appears to be no integrated plan to increase the cattle population by establishing breeding centers, increase the production of improved varieties of grass, improve veterinary services essential for a plan to increase milk production in the country. Merely importing Jersey bulls is an exercise in futility in spite of its cost.
We import nearly Rs. 30 billion worth of sugar annually. Pelwatta and Sevanagala sugar factories have been taken over by the government and the production at these two factories appear to have come to a standstill. There was hardly any planting done during last Maha season and the production of sugar at these two factories in 2012 is likely to be less than what was produced in 2011 and the cost of sugar imports in 2012 is likely to exceed Rs. 40 billion.
We spent nearly Rs 30 billion annually on wheat imports. There is no plan to reduce this expenditure by promoting the cultivation/production of crops such as kurakkan (which is called tropical wheat) which can be used as an alternative to wheat. Already we produce rice in excess which can be used to replace wheat.
There should be an integrated approach to solve the economic ills of the country. Simply devaluing the rupee is not going to help the problem of increasing TD. At least now the Ministry of Finance and Planning ought to take appropriate action to lift the country out of the economic mess for which they are responsible.
Last Updated Feb 23 2017 | 09:15 pm