Originally appeared on The Morning
By Dhananath Fernando
Where Sri Lanka went wrong and pathways to recovery
Too many comparisons have been made between Sri Lanka and Singapore. Once upon a time, becoming Sri Lanka was Singapore’s dream. Today, Singapore has been Sri Lanka’s dream for quite some time. Many credit the success of Singapore to the charismatic leadership given by Lee Kuan Yew. However, little is known about the work done by Dr. Goh Keng Swee on setting up the right architecture for a series of market-oriented policies in Singapore.
Relatively, Sri Lanka’s economy must grow at about 6% per annum for the next 40 years without failure in order to reach where Singapore is today, by 2061. In order to reach the kind of growth Malaysia has reached, Sri Lanka needs to grow at a steady rate of 6% until 2031.
Visionary Singaporean leaders realised that a country the size of Singapore cannot be self-reliant. With a minimum stock of resources, the country has to depend on imports to maintain the overall wellbeing of the people.
Policy consistency as well as establishing the right economic fundamentals set the country in the right direction. Consequently, the currency and monetary system became stable. Having a monetary system which focused on open market policies brought certainty and increased investor confidence. Special emphasis was placed by Singaporean policy makers to ensure that the wealth of the people was not eroded by unnecessary inflationary pressure.
Embracing open market policies attracted global multinationals and regional players to move their headquarters to Singapore, making Singapore a global hub for strategic industries in the region. Many multinational oil companies which left Sri Lankan shores due to nationalisation were welcomed with open arms to operate in Singapore. Even today, without a drop of oil, Singapore is a key player in the fossil fuel trade. They became competitive, efficient, and productive as they embraced the global market with an open mind and attitude geared towards development and prosperity.
Singapore also realised the role of the government. In fact, the world class Singapore AirLines and public housing is still state owned. Many Sri Lankans take these two examples to showcase why a state sector should engage in business like Singapore does with their airline. Many who put forth this argument conveniently forget that the management of some of the state entities are done on a Temasek Model on a competitive basis, where the government has no intervention in business. The professionals running the business earn the same as in a private company and the work culture is set right from the beginning to be competitive.
Unfortunately, Sri Lanka did not make any effort to create an open system. Instead, we closed ourselves from the world of trade and from connecting with global supply chains. In fact, many Sri Lankans once thought that Singaporeans would take over the jobs of Sri Lankans through the Singapore-Sri Lanka Free Trade Agreement. We missed an opportunity of a grand scale due to the pressure from trade unions and some professional groups to showcase to the world that we are trading with countries such as Singapore, and are ready for business and investment. As a result of shortsighted, irrational policies, our financial system became very fragile.
Another issue that holds back our potential is central bank intervention. Our Central Bank continues to intervene in market activity. “Price” can be looked at as being the same as body temperature. There has to be constant diagnosis by a physician. This monitoring without intervening is the role of a central bank in achieving efficient resource allocation. Therefore, intervening in the price signaling function has caused Sri Lanka damage beyond recovery.
Recently released data by the Central Bank indicated about 9.9% Year-on-Year (YoY) inflation compared to November 2020. YoY food inflation is 17.5%. There are many contributory factors behind the price rises such as global commodity price hikes, fertiliser ban, and continuous rains. However, one key reason which cannot be ignored is that over the last few weeks, a money supply of about Rs. 1.48 trillion has been injected from July 2019 to September 2021. This is a primary reason for the uptick in inflation .
Poor people will be the most affected, and as per the Advocata Bath Curry Indicator, the cost of rice and curry for a family of four members has gone up by 35% compared to last year. The poorest sections of society, who spend a greater amount of their money on food, now have to either receive a pay hike or cut down on their regular food intake.
This could also add pressure on private sector businesses, with employees requesting more wages and driving an increase in the cost of production. The high cost of production would impact existing investments, and with inflation Sri Lanka would not be an attractive investor destination.
On the Government front, the 1.5 million state workers will add more pressure by requesting further pay hikes with the new election circle. Making this more complicated, we have now accelerated a dual exchange rate offering, with an additional Rs. 10 for remittances as a measure to incentivise the usage of legal channels.
Singapore avoided most of the above problems we face by setting up a framework on a market based system, understanding the role of the government. As a result, they have developed a strong monetary system. This is a testament to getting macroeconomic policies right.
We can’t simply copy Singaporean policies blindly. Often policies have to be evaluated based on culture and dynamics, from a socio-economic context. However, the principles behind the policies remain the same. It has to be based on price signals and driven by the private sector, with the government only taking the role related to essential public goods such as the judiciary system.
An easy point to begin with is making our Central Bank an independent institution and moving away from ad hoc interventions. Moreover, we should let the markets work rather than having central bank intervention in foreign exchange through different strategies from time to time. Simply, our Central Bank has to work similarly to a currency board and the structure has to be made to facilitate this requirement.
At the same time, the structure has to be revised to ensure the independence of the Central Bank as the monetary policy can erode the hard earned money of poor citizens.
If Sri Lanka is serious about economic growth, it is of paramount importance to have a stable financial system which is an outcome of an implementation of a market based economic policy package. As Karl Schiller famously said: “Stability is not everything, but without stability, everything is nothing”.
The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.