Managing The Crisis: The Solution!

By Hema Senanayake –DECEMBER 28, 2021

Hema Senanayake

I stole part of the above caption from a recent article of Dr. Dayan Jayatilleka as this article discusses the same subject.

Ajith Nivard Cabraal’s “Six Month Road Map” is failing. The crisis is unprecedented and about to explode. Therefore, it requires quick radical reforms. However, Dayan Jayatilleka warns that, “the more radical the reform, the more radical the reaction. The more radical the economic reform, the more radical the ideological, social and political reaction. Therefore, the liberal policy intellectuals who advocate radical reforms as the only way out of the crisis had better be prepared for a radicalism of the Right or a radicalism of the Left as outcomes.”

On the contrary, more erudite thinkers and true leaders think differently. They think, the graver the crisis, the more the opportunity to unify the country, the more the opportunities to unify Right and Left on a well-thought pragmatic, quick but lasting solution. Unfortunately, this is the kind of thinking that lacks in our country. But Dayan points out some existing ideas in the political realm for crisis-management. According to him, it would contain a National Government, a rush to the IMF, privatization of State-Owned Enterprises (SOEs), the scrapping of SriLankan Airlines, reversion to the 19th amendment, abolition of the executive presidency and restoration of a parliamentary system etc. He argues that these are neo-liberal policies and for example if Sri Lanka goes to IMF, the awaken trade unions might launch a general strike. So, he argues “middle path” is the solution. In economic reforms, there is no middle path I can ever think of. There is only one way to do it, at least when we consider macroeconomic fundamentals on which the progress of whole economy rest upon.

There is no unique path for President Gotabaya Rajapaksa. There is no path unique to SJB or JVP or any other coalitions, including FSP. There is only one path to reform the economy. Let me explain it.

The growth of economy depends mainly on two factors. One is the increasing allocation of money for capital formation and the other is the increasing allocation for consumption out of which a part will become taxes. Now, from where, do these two allocations of money originates? It is from the sellable output or in other words the money allocation for capital formation and consumption originates from total national proceeds. Therefore, if any political party promises to ensure economic growth, then there is only one way to do it. That is to expand or increase the total national proceeds (not GDP) or total sum of sales. This understanding may unify the country, possibly may unify the SJB, JVP and much injured Gotabaya presidency.

The next obvious question is how we increase national proceeds. As I said earlier, proceeds are the sum of sales coming from sellable output. So, who produce the sellable output? Not government, because government is an institutional consumer or home gardens, home gardening is good for a hobby. Sellable output originates from entrepreneurial activity, nowhere else. Then what should we do? Now you know the answer. You all might say that we have to expand the entrepreneurial base. This understanding again, may unify the country. It might unify the SJB, JVP and much injured Gotabaya presidency. This understanding might unify the employers of the entrepreneurial sector and trade unions of that sector.

Then comes the most important and tricky question. How do we expand the entrepreneurial base? There is no political answer for this question. Entrepreneurial base expands only when entrepreneurs invest capital in expanding the existing businesses or new businesses. If these business activities change the country’s national current account positively, the expansion of entrepreneurial base is much more beneficial. In this game “business confidence” among entrepreneurs is the most single important factor. This understanding leads to another question. How do we increase the “business confidence?” In fact, “business confidence” is not a tangible thing but instilling “business confidence” among true entrepreneurs depends on very important tangible macroeconomic parameter. That is none other than the stability of domestic currency. When there is a significant difference between the official exchange rate in banks and non-banking money exchangers, entrepreneurs know the massage, that is the domestic currency is not stable. Further they know, the country’s balance of payment might be worsening. Right now, the “business confidence” is at its worst. On this point the country is unified. Employers and workers are unified. This understanding may unify the SJB, JVP and much injured Gotabaya presidency. So, what is the solution? Or what is the immediate solution?

The problem we identified above is clear. It is a problem in the national current account and at a more overall level, a problem in the Balance of Payment. Unfortunately, there is no domestic solution for this crisis. Cabraal proposed a Road Map for Sixth Month beginning from October 01, 2021, to get out of this crisis. Launching this Road Map Cabral promised to bring in USD 10.85 billion (net amount) before the end of the Road Map period on March 31st, 2022. Almost half of the period gone by now. How much dollars he has brought in? Anura Priyadarshana Yapa answered and said “nothing.” This is the bitter truth. Similarly, there is no unique solution for this problem for the SJB, JVP or FSP or any other political entity Right or Left. This understanding may unify the country again. So, what is the solution?

The solution begins by going to IMF. Its mandate is to support to solve the Balance of Payment crises of any member country and Sri Lanka is a member country of IMF. The IMF will not solve all the problems, but it can help to stabilize the exchange value of country’s domestic currency at a realistic value while helping to increasing the credit ratings facilitating a chance to rollover old debt at a favorable interest rate. This will be a major part of the solution as it would instill the “business confidence” among entrepreneurs local and foreign. This is important to broad base the entrepreneurial sector which will in turn increase total national proceeds or total sum of sales. If we can ensure the expansion of entrepreneurial sector, the IMF would not demand the privatization of SOEs. I am pretty sure about it. Instead, the IMF would request us to increase the economic efficiency of SOEs by putting them to run by professional managers not political cronies.

IMF has no magical economic solution. If its economists know everything, then India would have done economic wonders by now because India appointed Dr. Raghuram Rajan, a former chief economist of IMF itself as the Governor of Reserve Bank of India (RBI) in the year 2013. He did not perform well rescuing India’s economy and its dwindling currency during his tenure and as a result his governorship was limited to a one term even though he was promised two terms in office.

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