Re-Thinking Macro Management Of Money & Economic Development 

By Hema Senanayake –OCTOBER 13, 2018

Hema Senanayake

Politicians think that they can manage the country’s money, and can they do it? This was one of the important questions raised by a curious gentleman at a seminar convened by the Sri Lanka Association for Political Economy [SLAPE] together with the Economics Students’ Association of the University of Colombo [ESA]. This seminar was held in Colombo, a few months ago, to be exact on March 29, 2018. I happened to be the speaker. Professor W.D. Lakshman moderated the event. Professor S.S. Colombage and Professor Sumanasiri Liyanage acted as panelists. A couple of Parliamentarians were also in attendance. This is the same question that might have crossed the minds of all citizens of Sri Lanka right now when the rupee depreciated to Rs. 170 against the dollar. This is an important subject to discuss when the government is ready to present its budget.

I answered him that politicians do think that they can manage country’s monetary system but the effect of what they do would soon reflect in the country’s current account and in turn in the currency’s exchange value. He got the point. But not this government. In fact, even the Central Bank of Sri Lanka (CBSL) cannot micro mange the country’s monetary system. What it should do is to set the policies to ensure that the country would have best possible macro-economic fundamentals. 

Perhaps an average reader might not grasp what those macro-economic fundamentals and policies are and how such an environment could be created. First, in the above I mention the basic parameter you should investigate, is the country’s current account. If you need a more accurate parameter, I would say that you take the balance of debt-free inflow and outflow of dollars (or foreign currencies). This is important. If the government could maintain a positive balance or at least a zero balance or even a very small (I mean very small) deficit of this account, then we may have a stable rupee no matter what changes occur in the policy environment of the U.S. 

Now, if the above said account (which is not the same as Balance of Payment (BoP) account as the BoP accounts foreign loans) posts an increasingly large deficits, even if the U.S. reduced its rate of interest, the rupee will be depreciated rapidly. Period. How this phenomenon applies to Sri Lanka? You may now examine what happens primarily in the current account and the BoP account excluding the component of outflows and inflows related to foreign loans. 

In this decade, in 2011, Sri Lanka had the highest (or the worst) current account deficit which amounts to USD – 4.6 billion. This has been diminishing subsequent years during the Rajapaksa regime. In fact, some economists hoped that Sri Lanka would post a positive current account balance in 2015 because at the end of 2014 current account deficit has reduced to USD – 2.0 billion. The hope to have a positive current account balance in 2015 diminished with the regime change in January 2015. Even though the decreasing current account has been posted in 2015 which was USD – 1.9 bn. and 2016 which amounted to USD – 1.7 bn., in regard to the country’s potential to have a positive current account balances in those years, the decreases occurred in 2015 and 2016 were not achievements. Even that situation began to deteriorate in 2017 posting a current account balance of USD – 2.3 bn. Why this change has happened? To find a quick answer look at the country’s Trade Balance account which is the account of imports and exports.  

Trade balance for the years 2015, 2016 and 2017 were USD – 8.4, – 8.9, – 9.6 respectively. This deterioration is without considering the increasing amount of dollars required to service foreign debt obligations. Is there anybody to blame for this deteriorating condition? Whatever the case might be, Minister Mangala Samaraweera admitted a limited responsibility. He said that, “he would not have given the concessions given in January 2015 if it was he who had been finance minister at that time” (Daily Mirror, Oct. 09, 2018). It was this change of fundamentals that causes the current deterioration of rupee. That is not all. Therefore, let us try to capture as to how we should approach this important problem. 

Our economic development limits by the debt-free inflow and outflow of foreign currencies. So, when this government won in 2015 August election they promised to establish various kinds of projects such as 45 High-Development-Zones, Industrial Hi-zones, Agricultural Hi-zones etc. Immediately after the election, I wrote that, “I would suggest them to begin with the country’s current account and balance of payment. Then simultaneously they can move into the fiscal and monetary policy. All these areas constitute the essentials of macroeconomic regime. The ultimate objective of maneuvering these fundamentals is to achieve the optimum efficiency in production and distribution of distributable output. In fact, production and distribution of distributable output are what matters for the wellbeing of the people” (Colombo Telegraph, Aug. 21, 2015). What the Minister of Finance now admits is that they have ignored this approach.

So, how this approach could practically be used. I wrote it too, on the same article. I wrote that, “when a country increases its consumption and investment, there are chances in increasing the current account deficit. Establishing of 45 High-Development-Zones can either be consumption or investment or both. Whatever the case may be, it increases the current account deficit. If the government could ensure that enough or sufficient inflow of debt free dollars which transactions recorded in the country’s financial account, then we do not have to worry that much in regard to the money which is to be expended in the establishment of the said zones. Also, if the High-Development-Zones could bring in dollars in the future or positively contribute to the current account by reducing imports then establishing of them would be economically justified even with borrowed dollars if FDIs are not sufficient to balance out the current account deficit. From the above discussion, you may easily understand that any development project must begin by assessing its impact to the current account and balance of payment. By undertaking this exercise, it defines well, the potential monetary scope of projects. Thereafter only we should bring the project into the national budget which affects the both fiscal and monetary policy. In that way the government can handle the macroeconomic parameters better. If the government begins from project formulation end, then there are chances in messing up macroeconomic fundamentals sooner than later.” 

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