By Dhananath Fernando
Originally appeared on the Morning
The story of how Singapore wanted to emulate Sri Lanka and how Sri Lanka later aspired to be like Singapore is widely known. This narrative has been discussed at many forums and political rallies.
Less known, however, is that Dr. Goh Keng Swee, the architect of Singapore’s financial system, advised the Sri Lankan Government and the then President in the 1980s. He clearly outlined what needed to be done and what should be monitored in our economy. Unfortunately, we did not heed Dr. Goh’s advice. He was then the Deputy Prime Minister of Singapore.
What Dr. Goh recommended remains relevant for whoever is elected as the new president on 22 September. His focus was mainly on the financial architecture of the country because he knew that without stability in the financial system, other achievements would be impossible. As it is famously said, ‘Stability is not everything, but without stability, everything is nothing.’
Dr. Goh’s first advice to the President was to monitor the Central Bank of Sri Lanka’s (CBSL) Government securities holdings, which essentially means the money printed by the CBSL. He noted that should the Government continue to print more money beyond the rate of economic growth, it would be a sign of significant trouble and unsustainability.
Evaluating Sri Lanka’s data since 2020, this issue is evident. The Government’s total securities holdings, which were about Rs. 400 billion in June 2020, rose to about Rs. 1,500 billion in September 2021 and exploded to almost Rs. 3,000 billion by June 2022.
Dr. Goh explained that excessive money printing indicated three things: first, the government is spending more than it can afford. Second, it cannot afford to borrow and spend because borrowing from the market will raise interest rates. Thus, excessive printing means spending beyond our borrowing capacity at market interest rates. Third, it points to leakages in revenue.
Essentially, a government that prints too much money fails in all three areas. Therefore, the new president must avoid money printing at all costs. Although the new CBSL Act imposes limitations, the bank can still add excessive money when buying US Dollar reserves while collecting reserves for upcoming debt repayments.
The second metric Dr. Goh advised monitoring was the CBSL’s reserve levels; how the bank accumulates or depletes reserves signals financial stability.
The third indicator to monitor was the exchange rate, which should be observed alongside reserves and money printing. If reserves are depleting while the exchange rate remains stable, it means the currency is being defended at the expense of reserves. Conversely, if the exchange rate depreciates without reserve depletion, it might indicate influencing forex demand by printing more money.
Dr. Goh’s last two parameters were the consumer price index and the cost of construction materials. Printing too much money leads to inflation, raising consumer prices. If the cost of construction materials is high, it indicates slow development. Economic growth involves building and investing, mainly in the construction sector.
It is unfortunate that the Cabinet recently approved an increase in the cess on cement clinker, which will raise cement prices and open room for corruption. Higher cement prices slow down the economy. When construction costs rise, people cut back on other expenditures, shrinking the overall economic cycle and slowing the economy when growth is most needed.
Dr. Goh’s advice to then President J.R. Jayewardene remains valid for the new president, whoever that may be. The real victory lies not just in electing a president through a massive political campaign, but campaigning for an economic programme that can rescue us from the ongoing crisis.