1977 Economic Secret

CEYLON TODAY | Published: 2:00 AM Mar 5 2021

Central Bank of Sri Lanka (CBSL) Governor Professor (Emeritus) W. D. Lakshman at his ‘regular’ Media briefing, held yesterday, said that they were studying as to why credit to the progressive sectors of the economy such as manufacturing and agriculture weren’t growing.

This was in the context that while consumption-led credit growth heralded by an uptick in personal loans showed a marked improvement, however, credit to the growth sectors of the economy remained sluggish.

A study by CBSL is now on to ascertain the reasons behind the low growth suffered by the progressive sectors of the economy.

 Nevertheless, a major contributory factor for this situation may be current import restrictions that have dampened credit demand or banks’ aversion to lend to certain growth sectors of the economy because of uncertainty.

Nonetheless, private sector credit growth which is at a ‘low’ 6-7 per cent, currently, is expected to end the year at double that rate at 14 per cent, according to CBSL.

CBSL also envisages the economy to grow by between 3-3.5 per cent in the first quarter (1Q) of the year, year on year, from a low base of a negative 1.6 per cent growth rate experienced in the 1Q of last year. They also forecast the economy for the totality of the year to grow by between 5.5-6.0 per cent, from a low base of a negative 3.9 per cent for the totality of last year.

Meanwhile, a constrictive action that has impeded growth is Government of Sri Lanka’s (GoSL’s) and CBSL’s exchange controls to protect the country’s sparse foreign reserves. Sri Lanka’s foreign reserves, January over last month fell by US$ 200 million to $ 4.6 billion probably led by GoSL’s foreign debt servicing commitments. 

This $ 4.6 billion in reserves value is also a near 12-year low, where a figure lower than this last took place in 2009, the year Sri Lanka’s 26-year Tamil terrorist conflict reached an apex, before terrorism was totally eliminated on 18 May 2009. Reserves subsequently picked up after the GoSL clinched a $2.6 billion IMF facility in July 2009.

The IMF endorsement led to foreign funds once more reposing confidence on Sri Lanka’s economy, resulting in the renewed growth of the country’s foreign reserves.

 Sri Lanka’s current foreign reserves position of $4.6 billion also has to be looked at in the context that among its other foreign debt servicing commitments for the year, it has to meet a maturing sovereign bond totalling $ one billion due in July, further depleting the country’s reserves position.

CBSL, led by Lakshman, has been ‘talking’ to the growth sectors of the economy such as the apparel sector yesterday morning and previously the plantations, IT, tourism, remittances (foreign employment) and gem and jewellery sectors and such like. They also have plans to initiate discussions with portfolio investors.

Sri Lanka’s current economic outlook led by exchange controls is almost similar to the economic system that prevailed in the country during its closed economy era practised for 21 years beginning in 1956 and ending in 1977.

During that period the country suffered from low growth and high unemployment that led to the abortive April 1971 JVP insurrection which caused the deaths of 13,000 Sinhala youth. This was despite the fact that inflation and lending rate then were relatively low, similar to conditions that currently exist, factors theoretically supportive for high growth, at least in the Sri Lanka context.

Lakshman also hinted at the possibility of re-imposing rate caps on the 91- and 182-day Treasury (T) Bills in the weekly T Bill auction to rein in rate pressure, which pressure Lakshman said was unwarranted. Currently only the yield of the 364-day maturity is capped. 

Though a low interest rate regime theoretically is required to spur growth, however, what was unique was that in the immediate aftermath of the post-1977 open economy that saw both inflation and interest rates rise to the double digit level, nonetheless, the economy grew and unemployment fell, then.

The current inflation rate in the country is in the low single digit range, which CBSL doesn’t expect to exceed six per cent in the worst case scenario. When considering Sri Lanka’s contemporary economic history, an inflation rate of six per cent cannot be perceived as being a stumbling block for the economy to takeoff.

The 1977 economic secret, if that era could be considered as an era which was a fillip to the economy, was the country’s attraction for foreign direct investment and the receipt of foreign aid led by grants, spurring massive infrastructure investments in the country.

 Therefore, the panacea for growth and rebuilding the island’s foreign reserves is by strengthening foreign relations, an action that will also lead to the rebuilding of investor confidence, a move, which however, may be beyond the mandate of CBSL. 

CEYLON TODAY | Published: 2:00 AM Mar 5 2021

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