Monday, April 9, 2012

The Criteria used to measure success – an alternative view - On the state of the Economy

Interestingly today’s FT printed a Central Bank propaganda piece titled ‘REALITY’ Behind the Headlines. The Lankadeepa also had the Sinhala version of it titled “Sirasthala athara sangavuni aththa kathawa”, which no doubt those with some knowledge of economics, and students of Commerce will be able to understand. They are just performance indicators to ‘in essence’ show that all the indicators are positive and that the CB and the Govt. are doing a sterling job despite all the claims to the contrary.

The first point I question very sincerely is ‘Is the Central Bank or the Govt. the body who should take the credit for some of the positive indicators? No, it is the people of Sri Lanka both within and outside who have contributed much to the success.
Another point of contention is the massive infrastructure projects, namely the road development work that has given jobs to a lot of people. There are two sides to it. One is the amount of money borrowed on market terms, and soft terms to finance this, as well as the high cost of market borrowings. The second is the inflated cost of this project where there is a significant leakage, as much as 40% of the total cost of the projects. That is a heavy cost for future generations to repay along with the high US$ borrowing rates from Banks such as EX-IM Bank of China.

Then there is the intervention that kept exchange rates artificially high for years, and the Govt. is apparently taking credit for that, saying they were able to keep the exchange rate steady during this period of high inflation, which effectively was a period of exchange rate appreciation where imports relatively were cheap and more people found it cheaper to go overseas and holiday, rather than in Sri Lanka, worsening the balance of payments situation. This was also made possible by the huge inflow of remittances that helped to keep the exchange rate high, and also stimulate the economy from the rural areas, as well as pay for the foreign cost of the armaments imports, all thanks to our hardworking citizens overseas who remit.

I did not go into detail on all the graphs that are presented, and I do not doubt the positive growth in the economy, but I repeat that if there was less interference by Govt. and less of the policy shifts we saw as well as the uncertainties that come with it, we could have actually had better performances, trickling down to all segments of our society, something that this supposed growth has failed in.

Now all the indicators are taking a turn for the worse, so before it does the CB wants to blow their own trumpet before it is too late!!

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