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IPS’s State of the Economy Report 2018 is a

demonstration of its independent analysis of
the economy

National Policies and Economic Affairs Deputy Minister Dr. Harsha de Silva
(centre) speaking at the launch of the State of the Economy Report 2018 by
the Institute of Policy Studies. Others from left are Fitch Ratings Lanka
Country Head/CEO Maninda Wickremasinghe, IPS Executive Director Dr.
Dushni Weerakoon, Economic Advisor to the President Dr. Sarath
Rajapatirana and Lion Brewery (Ceylon) CEO Suresh Shah – Pic by Shehan
Gunasekera
Economists blamed for failing to predict the present crisis

Monday, 22 October 2018

Economists are at the receiving end of society today when it comes to
economic crises. They have been blamed not only for giving confusing advice,
but also for failing to predict accurately the oncoming economic catastrophes.

Critics say that they have been good at analysing what has happened in the
past. But, when it comes to future, their predictive power has been stunted.
Their failure to predict the global economic crisis of 2007-8 has been an often
quoted instance. The present foreign exchange crisis which Sri Lanka is
undergoing today is another. The economists at the Central Bank have been
blamed for the crisis not only by an ex-Minister of Finance but also by a
former Governor and a former Deputy Governor of the Bank.
But IPS had predicted the crisis long before

Contrary to what many seem to believe, the present crisis had been predicted
as early as 2011. All previous publications of the country’s independent think-
tank, Institute of Policy of Studies or IPS, had drawn the attention of the
government in power to the need for fixing the oncoming economic crisis in its
State of the Economy reports released from 2011 onwards. The latest added to
this series has been the Sri Lanka State of the Economy 2018 released last
week.

In all these reports, IPS, working under the constraint of being a
Government-owned think-tank, had politely but very strongly warned the
Government of adverse consequence which the country would face if no
urgent remedial actions were taken.

Track record of IPS

In its report for 2011, IPS had warned the Government of the risk associated
with commercial borrowings to fill the foreign exchange gap created by high
local demand for imports and other foreign services. The report for 2012,
while recognising that infrastructure projects are useful to lay the foundation
for economic growth, had emphasised the need for introducing the economy-
wide reforms in order to come out of the ongoing economic crisis.
The report for 2013 was from a different perspective. While still maintaining
that economic reforms are needed, it had critically analysed the state of the
economy from the point of getting snared in what is known as the ‘Middle
Income Trap’. Once a country gets into this trap, it cannot maintain its
growth in competition with its peers because it no longer enjoys the benefit of
cheap labour. It cannot move up either because it does not have the modern
high technology to compete with rich countries. IPS had warned that if no
reforms are introduced, it was inevitable that Sri Lanka would get into a
serious economic crisis in the years to come.

The report 2015 had delivered a strong message to the Government that came
to power in January 2015 that unless it would concentrate on fast-tracking
economic reforms, the country would inevitably face dire consequences.

The State of the Economy reports for both 2016 and 2017, released after the
present Government came to power, had emphasised the medium term
challenges which the Government would be facing in its attempts at fixing the
economy. The foremost of them were the slowing of the export growth,
overhanging of external debt, low foreign direct investment flows and rising
dependence on foreign borrowings to build foreign exchange reserves as well
as gain capability for servicing the maturing external debt.

The needed policy reform, as the report for 2017 had outlined would be ‘some
unpopular belt tightening measures’ and implementing ‘a set of painful policy
adjustments to reverse the steady deterioration of Sri Lanka’s export
competitiveness in international markets’.

I also in my regular articles in this series warned the Government of the
impending economic crisis from around 2012. These articles were addressed
to both the previous Government and the present Government. However, the
response that I received was the display of a lukewarm attitude to the
economy. What it proved was that an economist can take a horse to the water
but would not be able to make it drink that water.

Continuation of the heritage of IPS by its new management

The Sri Lanka State of the Economy 2018 has been released by IPS in this
background. All the previous reports had been prepared under the direction
of IPS’s Executive Director, the late Dr. Saman Kelegama, a fiercely
independent economist. The present report has been prepared under the
direction of his successor, Dr. Dushni Weerakoon, who had been mentored by
Kelegama when he was its ED. Weerakoon has demonstrated in this report
that under her leadership, IPS would continue as an independent think-tank
without compromising its high ideals.

The theme of IPS 2018 report

Every IPS report has a theme and the theme of the Report 2018 has been
‘Climate Change, Food Security and Disaster Risk Management’. All these
are critical issues faced by Sri Lanka in the present background of
deteriorating economic conditions. A country can think of taking measures to
fix climate change only if it does well on the economic front.

Climate change is a global issue for which all the nations will have to be united
to find solutions for it. However, if the domestic economy of a country is
faltering, it will have to first fix that issue before turning to climate change.
Given the present situation in Sri Lanka, it is natural that the country would
choose economy instead of an unseen global issue like climate change.
However, that global issue has a bearing on the prosperity of Sri Lankans in
the long run. For that, a proper marriage between the economy and climate
change is needed. IPS 2018 is an attempt made toward that direction.

Adverse climate change affects agriculture and food security

IPS report has summarised this position as follows: ‘There are unmistakable
signs to indicate that Sri Lanka is a highly vulnerable country to climate
change. In the recent past, the country has experienced climate induced
disasters that bought about immense losses to economic and social life on a
regular basis....Besides the damage caused by continuous onslaught of disaster
events, an analysis of meteorological data indicates a gradual change in
climate parameters all over Sri Lanka. An increase in ambient air
temperature has been reported countrywide and observations suggest that the
established patterns of rainfall are fast becoming erratic.’
Hence, the future projections of climate patterns show that Sri Lanka’s wet
regions will become wetter and dry regions will become drier showing a
polarised weather pattern. Therefore, it is necessary to take proactive
measures to avoid catastrophes in this area in the future.

Double prejudices arising from affected agriculture

Food security and disaster management are pressing domestic issues. Yet,
they are highly related to changes in the climate. Hence, all three come
together and have to be addressed simultaneously. Among key sectors,
agriculture is likely to face the impacts of climate change most, says IPS.

While the subdued performance of the domestic subsistence agriculture would
bring in severe shortages leading to food insecurity, the export agriculture
would suffer from low output and its consequential corollary, low
performance in exports. Both will affect the country’s balance of payments
adversely.

Low domestic food production will require Sri Lanka to fill the gap through
imports creating an unplanned drain of its foreign exchange earnings. This
will also cause immeasurable miseries to rural farming population which is
already living from hand to mouth. It will entail a serious social and economic
cost on Sri Lanka.

On the other side, low performance in export crops will reduce foreign
exchange earnings compounding the issue. Since Sri Lanka’s external
financing still depends pretty much on the foreign exchange earnings by this
sector, any unanticipated decline in foreign exchange earnings will be highly
critical to Sri Lanka.

The IPS report has made a detailed analysis of how these two sectors would
make Sri Lanka vulnerable to an impending economic crisis through climate
change. The bottom line of the IPS report is that proactive policies should be
taken by Sri Lanka to avert these adverse consequences. It is therefore,
necessary to act today when the issue is still at a manageable level.

Needed policy measures
The necessary policies, according to IPS report, are numerous. It has
recommended that climate change issues should be made a part of the
national economic policy framework so that all economic policy measures
which will be implemented by Sri Lanka will give due recognition to them. It
will enable Sri Lanka to have a coordinated approach at climate change. It
also involves a suitable adaptation strategy to mitigate the risks arising from
climate change.

In the case of food security, IPS has recommended the introduction of farming
practices that are suitable for more arid climates. It will also save water which
is now a scarce input for farming. This was a point I raised in my previous
article on the subject under the title ‘Resolving the paradox of rice-poverty
amidst plenty: increase yield, eat less and divert surplus to industry’
(available at: http://www.ft.lk/columns/Resolving-the-paradox-of-rice-
poverty-amidst-plenty/4-658623).
It was pointed out in this article that paddy farmers have to use about 2,500
litres of water to produce one kilogram of rice and about 1,000 litres of that
usage get wasted through evaporation and percolation to the earth. But with
erratic rainfall systems, water becomes scarcer and Sri Lanka should find
varieties of paddy that war drought resistant and adopt farming practices that
use less water. Unless this is done on an urgent basis, Sri Lanka’s paddy
farming and paddy farmers will not be sustainable.

China’s Belt and Road Initiative

IPS report has provided a detailed analysis of China’s Belt and Road
Initiative or BRI from the point whether it would be a sustainable economic
partnership for Sri Lanka.

Economic relationships which Sri Lanka had with China date back to many
thousands of years. Sri Lanka had exported elephants, ivory and spices to
China while importing silk and other fine clothes from that country. After Sri
Lanka’s independence in 1948, these relationships were renewed through a
historic Rubber-Rice Pact in which China would buy Sri Lanka’s rubber at
premium prices while supplying rice from international markets at a discount.
This was a blessing for Sri Lanka in 1950s, 1960s and 1970s when the country
was facing a severe foreign exchange crisis.

In more recent times, Chinese loans at market rates and investments have
helped Sri Lanka to build its infrastructure facilities. These infrastructure
facilities have been criticised on the ground that they are not economically
and financially sustainable. Hence, in the new BRI, it is necessary that
Chinese investments should be attracted by Sri Lanka by paying careful
attention to their economic, financial and environmental sustainability. IPS
report has emphasised on these requirements.

Five objectives of BRI

There are five major objectives of BRI, as highlighted by IPS.

First, there will be policy coordination among the nations participating in the
initiative. It will not only avoid conflicts and delays but also help countries in
the programme to get the best out of economic policies. Second, people along
the new belt and the road will be digitally connected enabling them to use
advanced technology for commerce, interactive communication and exchange
of views.

Third, there will be financial integration. Fourth, trade would be conducted
among the belt and road nations without impediments. Fifth, it will enable
people to have person to person contacts. This objective along with digital
connectivity will help people along the belt and the road to develop as a
unified group of Homo sapiens.

According to Oxford historian Peter Frankopan who has documented the
history of the old Silk Road under his 2016 book titled Silk Roads, religions,
faiths, philosophies and arts spread through the old Silk Road from China to
the West. IPS has documented a number of benefits which Sri Lanka could
derive through BRI in the form of increased trade, tourism, investment and so
on.

Overall, the IPS report on the State of the Economy 2018 is presented in a
readable manner with a host of infographs to illustrate its points. I see a
weakness in the report because it is produced as a black and white document.
But if it is printed in multicolour, it would definitely be more appealing to the
readers.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri
Lanka, can be reached at waw1942@gmail.com.)
Posted by Thavam