IS THE ECONOMIC CRISIS REAL?

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It has been argued the current economic crisis is the worst economic crisis Sri Lanka has faced since independence. Although this characterisation may be a subject of debate, its severity cannot be questioned. I figure the present crisis as a multi-dimensional and three-layered: multi-dimensional as it has extended beyond the economic sphere to political, social and diplomatic domains. The first surface layer points out to the enormous hardships experienced by the people of all walks of life with only a few exceptions. Its second layer is popularly described as a dollar crisis, meaning there’s insufficient dollars to import essential requirements. I wonder if the severity of the second layer is grossly exaggerated. In my view, out of these three layers, this is the least acute layer of the crisis. In the third layer lie the structural roots of the crisis, that mainstream economists invariably opt to avoid because the structural root may be found in the very logic of the development strategy introduced in 1977 in conjunction with the change of the Government. 

In this article, let me focus on the aforesaid second layer of the crisis. Why do I say that the magnitude of the crisis is disproportionately exaggerated? Because the data provided by the annual report of the Central Bank of Sri Lanka (CBSL) do not support the view that Sri Lanka at present is undergoing a severe economic crisis. Nonetheless, it does not mean that there is no crisis. The crisis is not exceptional, and moreover not caused by the inadequacy of foreign exchange earned by the country. It is not a dollar crisis, but a debt crisis: the crisis of accumulation of illegitimate, odious and predatory debt. Hence, before any restructuring of debt, debt monitoring by the people is necessary.  

Bank Report

Since 1977, after the introduction of the export-oriented development strategy popularly known as the open economic policy, the current account on the balance of payments has been in the red.  Sri Lanka imported more goods from the rest of the world than it exported to the rest of the world. Hence, the permanent and continuous deficit put pressure on the balance of payments. According to the CBSL Annual Report 2021, the value of total export of goods was $ 12,499 million. The net earnings from service trade were $ 1586 million while total net income flow was $ 3210 million. Since net capital flow was negligible, we may say the total dollar earnings in 2021 were $ 17,295 million. Of course, had the Government adopted more carefully planned policies, this amount would have increased to $ 23,000 million by now. Tourist earnings and worker remittances declined substantially in 2021 and the trend may continue if necessary actions are not taken. 

Although it is not always correct to assume that a similarity exists between the behavior of a family and a country, it is not harmful to compare their behaviour in a crisis situation. I conducted a small survey with a sample of fifty people consisting of trade union shop level leaders and three-wheeler drivers. When their income stream is well below their stream of expenditure, they informed they rearrange their expenditure by prioritising much-needed items always placing children first. When asked, they prioritised the import list as follows according to preference: 1) medicine, 2) Fuel, 3) agricultural and industrial inputs and 4) essential food items like lentils, and garlic; not definitely, jaggery from Indonesia or rice flakes from India. 

People’s wisdom

If we go with the wisdom of these people who represent the lower rung of society, the total import cost of these four items may be calculated. Let us once again look at the CBSL data. In 2021, the total cost of medicals and pharmaceutical was $ 882.5 million. Fuel cost in 2021 was $ 3,742.9 million. $ 8,566.0 million was allocated in 2021 for intermediate goods comprising inputs used in agriculture and industry. Let us assume $ 500 million is needed for essential consumer items. In 2021, the total value of investment goods was $4,462.7 million.

Three notes appear to be relevant here. First, many imports are over-priced while export items are underpriced. Nonetheless, this dimension was not taken into account in this analysis. Secondly, in a crisis situation, postponement of investment is common. The Finance Minister has already indicated that heavy capital investment projects would be duly postponed. In that case, assuming 50 per cent cut down in investment, the cost of machinery imports would be reduced to $ 2,230 million. Thirdly, the figures for 2021 would give only an indication about the developments in 2022. The developments that led to increase in prices may affect the total bill. For example, fuel cost that was recorded as $ 3742.9 million would increase as a result of the price hike of oil partly due to Russian- Ukraine war. The total import bill for the five items mentioned above was $ 15,921.4 million. This shows that if Sri Lanka imports only essentials, scrapping all no frills, the country may record a trade surplus of $ 1,374 million since Sri Lanka’s total dollar earnings in 2021 were $ 17,295 million.

These figures do not justify the presence of long queues for fuel and gas and long power cuts since Sri Lanka has adequate earnings to finance the importation of those essential items. The Minister of Finance, the Secretary to the Treasury and the Governor of CBSL should provide a reasonable answer to this simple arithmetical problem. The  record of the first quarter of 2022 shows that Sri Lanka was able to earn about $ 3000 million from the export of goods. It is absurd and sad to say the country that has a capacity to export goods worth 17 billion dollars has no money to import medicine worth of $ 882 million to ensure the health of its citizens. This fact in itself questions the legitimacy of the ruling classes of all kind.

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By Sumanasiri Liyanage