Thursday, April 28, 2016

Has the countdown begun? මේ පෙනෙන්නේ සොහොන් ලකුණුද?




Has the countdown begun?
මේ පෙනෙන්නේ සොහොන් ලකුණුද?



The annual report of the central bank for 2015 is out and I see some noticeable changes in the writing style though the format is essentially the same. The picture that it paints is not so rosy!

Is it the good governance or central bank independence reestablished after the regime change? Several other factors do not warrant hypothesizing so. Of course, there were improvements in many fronts but central bank credibility was not one of those.

I read more sentences behind the printed lines than what they literary mean. The central bank is an organization with more Sinhala Buddhists in its cadre than the proportion in the country who belong to the semi-urban upper middle class. There’s no secret how the political ideologies of this social segment are aligned now. Of course, the central bank is a large group of professionals and there’s no direct connection between the political views of individual officers and their professional life but the group conscience of a large organization is ultimately that of the majority. If so, Governor Mahendran’s hold on the decisions of lower ranking officers may not be that strong. Is the resulting conflict reflected in the report? Perhaps, it should be something more than that.

The credibility of the numbers of the central bank has been questioned from time to time by various quarters of the society but in general these accusations reside on no strong base. Yes, while the true status of the economy at any given moment is hidden behind the numbers of the central bank, they often like to talk aloud about the country’s achievements and project an optimistic economic outlook than painting a gloomy picture. Any weaknesses or risks are presented but rarely highlighted. The economic indicator which clearly outperformed during the period, whether it is the GDP, inflation, unemployment rate or official reserve base, usually makes news.

Central bankers have a rational excuse to defend this approach. Managing an economy is managing the society, managing people, not machines. People do respond to information they have and the overall economy is sensitive to collective actions of individuals, no matter whether coordinated or random. Obviously, any pessimistic view expressed by the central bank has the potential to make things worse. So, perhaps, it’s not a bad idea to present the accomplishments first before making the society panic.

Wait a moment! Here, I have a clue.

Which sector of the economy has performed well during the past year? There lies the answer. The central bank has nothing to sell this year!

“According to provisional estimates released by the Department of Census and Statistics (DCS), the economy grew by 4.8 per cent during 2015 in real terms, compared to 4.9 per cent in 2014.”

The GDP growth is 4.8%, well below what the government and the central bank projected at the beginning of the year, significantly below the average growth during the past decade and even below the long-term average since 1977. This is what the central bank said just a year before in its annual report for 2014, the first report presented by Governor Mahendran to Minister Karunanayake.

“The Sri Lankan economy is expected to register a sustainable growth path in the medium term, with a real GDP growth of 7.0 per cent in 2015 and an average growth of 7.8 per cent over 2016-2018.”

The 4.8% growth is nowhere closer to the expected 7%. Do any of you guys anticipate “an average growth of 7.8 per cent over 2016-2018” at this point? Yet, the central bank expects that, “with appropriate policies, the economy will return to a high growth path in the medium term”.

The output is below its potential! The quarterly trend from 7% in Q2 to 5.6% in Q3 and 2.5% during the last quarter appears more worrisome but this trend is an artifact of the base effect. However, the output gap seems to be negative for the third consecutive year based on revised base-2010 estimates.

What has happened to savings and investments? Not only that the “domestic savings declined to 22.6 per cent of GDP in 2015, from 24.0 per cent of GDP in 2014” but also the gross investment from 32.0% of GDP in 2014 to 30.1%. Not a healthy sign obviously. In 2012, gross investment was 39.1% of GDP and gross domestic savings were 27.2%. The declining trend continues!

The inflation doesn’t seem to be a problem and perhaps we are witnessing a deflationary spell, something Sri Lankans are not very familiar with. Is it an achievement of the central bank? Price stability well maintained? Unfortunately, it’s not something to be jubilant. The zero-bound inflation or deflation, whatever it is, is merely a sign of low aggregate demand but not the result of prudent monetary control.

Look at the unemployment figures.

“The unemployment rate increased to 4.6 per cent during 2015, compared to 4.3 per cent recorded in 2014”. The female unemployment, in particular, has “increased from 6.5 per cent to 7.6 per cent” something to note.

The unemployment rate was on a declining trend since 1990s and “marginally declined to 4.3 per cent in 2014 from 4.4 per cent in the previous year”. The trend seems to have reversed.

The output hovering below its potential level, deflationary trend in price levels together with increasing unemployment suggests that the economy needs a Keynesian boost. But, is the government in a position to do so? Unfortunately, the government's budgetary position is not only too weak to provide an upward thrust to the sick economy but also in need to squeeze it further for its own survival.

Here’s is the scorecard of the government in central bank’s words.

 “The budget deficit increased from 5.7 per cent of GDP in 2014 to 7.4 per cent of GDP in 2015, significantly overshooting the government’s original target of 4.4 per cent of GDP. The current account deficit, which reflects government dis-savings, increased to 2.2 per cent of GDP in 2015 from 1.2 per cent in the previous year, while the primary deficit, which excludes interest payments from the overall deficit, increased to 2.9 per cent of GDP from 1.5 per cent in 2014.”

“The central government debt to GDP ratio increased to 76.0 per cent in 2015 from 70.7 per cent in 2014, reflecting the relatively high budget deficit, lower nominal GDP growth and the impact of exchange rate variation.”

The central bank stresses “the need for strong fiscal reforms to reduce the budget deficit and accumulation of debt.”

The external sector has always been a mischievous boy, not without reason. He was misguided for decades. We face the consequences now as we did in several previous occasions but winds appear to blow stronger than before this time. Is it an early sign of a tornado?

“As of end 2015, the rupee had recorded a depreciation of 9.03 per cent against the US dollar”, of course, a necessary and inevitable correction but this happened while “the balance of payments (BOP) recording a deficit of US dollars 1,489 million” and the country’s gross official reserves declining to “US dollars 7.3 billion by end 2015 from US dollars 8.2 billion at end 2014”. In other words, if not for the central bank’s intervention which costed nearly a dollar billion of the country’s official reserve, Sri Lankan Rupee would have been fallen further significantly. This is not a game one can play forever.

How did the government finance its deficit?

“The budget deficit was largely financed by domestic sources, given the slowdown in foreign financing during the year.”

“Net domestic financing increased from Rs. 378.7 billion in 2014 to Rs. 592.7 billion in 2015, recording a significant deviation from the annual estimate of Rs. 208.0 billion. Of the total net domestic financing, 50.8 per cent, amounting to Rs. 300.9 billion, was raised from the non bank sector. Meanwhile, government borrowings from the banking sector also increased from Rs. 126.9 billion in 2014 to Rs. 291.8 billion during the year, which was also significantly higher than the annual estimate of Rs. 70.0 billion envisaged in the Budget for 2015.”

“Net borrowings from the Central Bank also increased, mainly through Treasury bills.”

Now, let's put all the pieces together.

The economy phases through a period of negative output gap at least since 2012, if I have to believe the rebased GDP numbers. The unemployment is on rise while the price level is stagnant; both reconfirm the below-potential operating status of the economy. Moreover, the savings rate as well as the investments are on a declining trend since the same year to maintain consumption level, an act of cannibalizing future growth.

The conventional wisdom suggests that the economy needs a fiscal stimulus or a monetary boost. If not, the result could be so called stagflation, a status in which the economy could succumb to the injuries. Theoretically, a natural long-term recovery is possible but we never witnessed that long-term natural recovery scenario anywhere- social unrest always precede triggering a different outcome.

Fiscal stimulus? Are you kidding?

Government’s tax revenue is just sufficient to service existing debt and additional financing is needed even to cover day-to-day expenses. Yes, we were doing this for some time now and the economy didn’t collapse. We can load the donkey as we did before but when it reaches its critical point a needle will easily break its spinal code.

In order to boost the economy through a fiscal stimulus government budget has to be stressed further and that will require more debt. More debt will increase interest expenses and exacerbate government’s budgetary issues. This is not a feasible option. In fact, right at the moment the government attempts to solve its own budgetary problems through tax hikes which will hard hit the already beaten up economy and slow down the GDP growth further.

What about some loose central bank action?

Yes, the Governor can turn the valve. There won’t be an immediate issue since the inflation is almost zero but in time it will take its toll. Private sector credit is already growing at 25.1% compared to the 8.8% growth in 2014 and the broad money has grown by 17.8%. The only thing we miss to make a bad soup is high inflation. She is on the way but the central bank can give her a fast ride if it wishes.

This still is not the worst situation that we can imagine. The IMF will be able to rescue the economy out of this mess for this time too but potentially igniting some political turmoil. The country needs some economic vision beyond the IMF’s financial programming and policy framework. The IMF is an organization established to help countries that faces BOP crises to come out and they will have policy prescriptions just to do that. It is quite likely that the government will not be able to implement the austerity measures potentially suggested by the IMF given the political conditions of the country.

“Short term fiscal and monetary stimuli are inadequate to support economic growth continuously, and tightening policy spaces and resource constraints point to the fact that such short term stimuli are no longer affordable.” 

This is how I read what the central bank says.

“Sorry, guys! We have done our best but there’s nothing more we can do! We can play with the economy for a while and stretch it a little bit but that stretch is cyclical. It returns to where it was. We can’t pull it any harder without facing the risk of breaking it.”

The crab in the pot who knows how to read a thermometer can notice his fate before the others feel the heat. Central bankers are the ones to be blamed first if the economy crashes and they know that. The annual report this year contains a clear message from these guys.

“Well, we said it in advance!”

Of course, the present government is not the one to be blamed for this whole mess. They adopted someone else’s child. But, the same applies to the previous regime too. The entire country has been enjoying the dividends from a massive pyramid scheme for decades which ultimately will collapse.

Mahinda Rajapaksha did not take over an economy without problems. All current structural weaknesses were there even before him. However, we finally ended up in this mess as a result of the economic policies during the most recent decade which completely ignored the long-term consequences but the day-to-day survival.

Anyway, Mahinda Rajapaksha is not a stakeholder of the current regime. The responsibility of avoiding a cash landing lies at the hands of present rulers, not on the ones who are retired.

Yes, I said ‘avoiding a crash landing’. The choice is not between a takeoff and a landing but between a crash landing and a smooth landing. So far, the present regime too is running towards the disaster, but not away from it. I do understand the political challenge they face in bringing in reforms. But, that’s where the political leadership is needed.

(Sorry, guys! I have no time to type this in Sinhala. Feel free to email me if you want a pdf of this.)

37 comments:

  1. Econo,

    This is a fantastic analysis of the current situation and what we are going to experience in the near future (very near future) unfortunately you have written this in “SUDDA’S” language.

    I think this //“The entire country has been enjoying the dividends from a massive pyramid scheme for decades which ultimately will collapse.”// Is the golden truth.
    However to our people “Austerity” is a dirty word.
    This is why some time back in Mathalan blog I said most prudent thing at this point is to buy US Dollars by the individuals, because value of the rupee will fall drastically, within next 3 months, well that is my prediction (please note I did not consulted this issue with indika thotawaththa)
    However I see a small way out. Let me explain ..
    If this government is prudent first thing they will need to do is improve the postal service with tracking code support, then develop an efficient Escrow service (An escrow account is a temporary pass through account held by a third party during the process of a transaction between two parties. )

    Once these two are in place government bank need to setup a Payment gateway solution to small and medium scale Business, for each transaction government should charge a commission base on the total value of the sale.
    Now one might say that even now Bank’s like Sampath bank provide this type of service, but the problem is very high cost, whether you do business or not you have to pay Rs60000 per year that is ridiculous and no small time person will ever be able to try these solutions.
    By implementing this type of basic service people should be able to sell their products to the world, this may seems small but thousands of business people start to do business automatically balance of payment problems can be solved.

    Unfortunately this government is not taking these steps.

    ReplyDelete
  2. සින්හල බොග් කියවන හාදයන් ට තිත්ත ඇත්ත කියාදීම නැමති බයානක වැරැද්දේ ප්‍රතිබන්දනය හේතුවෙන් ඔහෙට ලබනපාර නෙලුම් යායෙන් සම්මාන නොලැබෙන බව කරුනාවෙන් සලකන්න.

    ReplyDelete
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    1. සාරස සම්මානය ලැබෙයි කියල හිතනවා!

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  3. // Anyway, Mahinda Rajapaksha is not a stakeholder of the current regime. The responsibility of avoiding a cash landing lies at the hands of present rulers, not on the ones who are retired. //

    ආයිශ් අම්මා ගුන්ඩූ

    බොමුද සිද්දාලේප අසමෝදගම්?

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  4. Replies
    1. හැලිය රත්වෙනකම් තව ටිකක් කල් ඇදගන්න පුළුවන් වෙයි.

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  5. සැක්.. හිංගලෙන් තිබ්බනං...
    ජයවේවා..!!

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    1. මේක හිංගලෙන් තිබ්බත් ගොඩක් අයට බරපතල වැඩි ලෙස තේරෙයි, ගස් ලබ්බ. සාමාන්‍යයෙන් මෙවැනි ලිපියක් සිංහලෙන් ලිවූ විට කියවන පිරිස කොහොමත් කියවල තියෙනවා. එය පළමු කරුණ. මහ බැංකු වාර්තාවේ සිංහල පිටපතෙන් හරියට කොපි පේස්ට් කරන්න බැහැ. මහ බැංකුව පරිවර්තනය කර තිබියදී මම වෙන විදිහකට කරන එකත් නිවැරදි නැහැනේ. අළුතින් ඒකම ටයිප් කරන්න තරම් වෙලාවකුත් නෑ. එය දෙවන කරුණ. ඉංග්‍රීසියෙන් ලියූ තෙවන කරුණ මගේ බ්ලොග් එක කියවන බව මම දන්න, රටේ තීරණ වලට බලපෑමක් කළ හැකි කිහිප දෙනෙක්ට තේරුම් ගැනීම පහසු කරන්න.

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  6. Race and religion of the Central Bank officials are important through the group conscience? Scary !!!
    We truly have attained the status of a banana republic then.

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    1. That's something happening everywhere. It doesn't necessarily mean something bad but we can't ignore the potential impact of these factors when analyzing certain situations and outcomes.

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  7. I'm pretty sure that i can't understand this article even that was in Sinhala. So no need to talk about the English version of it. heh...

    Only thing which hardly realized is that "the Ship is sinking."

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    1. You are correct, Senna. If you don't find this article understandable it's most likely not because of the language.

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  8. Our general public is not lucky enough to read this kind of balanced analysis. All the rubbish we read in mass media is themed for either mud slinging or apple polishing. A good job Econ

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    1. Mud slinging to Mahinda is not wrong. Because mahinda destroy the country economy. But people cant blame to mithri. Mithri only man to save sri lanka economy. Economy growing fast. fool people cant see it.

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    2. // AnonymousApril 29, 2016 at 5:52 AM
      Mud slinging to Mahinda is not wrong. Because mahinda destroy the country economy. But people cant blame to mithri. Mithri only man to save sri lanka economy. Economy growing fast. fool people cant see it. //

      මෙවුවා මහින්ද මහත්තෙයා ගේ වැරදි....

      රටේ මිනිස්සුන්ට හරි හමන් ඉන්ගිරිසි අජ්ජාපනයක් නුදුන්නාම මේ වගේ කොමෙන්ට් වැටෙනවා නේන්නම්!

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    3. සරසයෝ.....ඒ මිනිහා දන්න විදිහට හරි ඉංග්‍රීසියෙන් ලිව්වාම ඒකේ ඇති වැරැද්ද මොකක්ද? මොකෝ මහින්ද මහත්තයා කියලා ඉංග්‍රීසි පකීර් යැයි? මේ පසුගාමි චින්තනයෙන් අයින් වෙයන් බන්. සුද්දන්ටවත් නැති ඉංග්‍රීසි උනක්නේ උඹ මතු කරන්නේ. අපි එකෙක්වත් සුද්දන්ට ජාතක වෙච්ච එවුන් නෙමේ නේ. මිනිස්සුන්ව මානසිකව වට්ටන්න එපා භාශාව නිසා.


      සරස මෙහෙම ලිව්වාට තරහ ගන්නවා නෙමේ හිටන්.

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    4. In my opinion, Sa rasa has stated that this person has not been able to understand what has been written on the above post in a proper way. His entire comment demonstrate that either he hasn't read the post properly or could not understood what it articulates.

      Isn't it Sa rasa? Correct me if I'm wrong.

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    5. I do respect your opinion on behalf of Sarasa, but I have noticed this hidden insult to some people who comments in English in some other blogs as well. How can we justify it? It is disgusting.

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    6. // Isn't it Sa rasa? Correct me if I'm wrong. //

      You are on the spot Ano!

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    7. // සරස මෙහෙම ලිව්වාට තරහ ගන්නවා නෙමේ හිටන්. //

      තරහ ගත්තා හිටන්....

      මොනා කොරන්නද අරූ හිටන් නේ... ඒ හන්දා තරහා නිවා ගත්තා හිටන්...


      ඉන්ගිරිසියෙන් ලියපු එකා පෝස්ට් එක කියවලාද කොමෙන්ට් කෙටුවෙ කියලා සිතා බලන්න අරූ හිටන්!

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  9. Cant the indian reserve bank help us out. India will not like anarchy near its ass.

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    1. It looks like we have managed to solve the problem for the time being through the assistance from the IMF, World Bank and ADB. However, what the country needs is a long-term way-out, not just some means to delay the disaster. The government has proposed an ambitious reform package to the donors but implementing those reforms will be highly challenging in current political atmosphere. Let's wait and see.

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  10. Cant the indian reserve bank help us out. India will not like anarchy near its ass.

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  11. https://www.youtube.com/watch?v=4o3h4ZL9fCg

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    1. මම සාමාන්‍යයෙන් දිග වීඩියෝ බලන්නේ නැහැ. ලියා ඇති දෙයක් ඉතා වේගයෙන් කියවන්න පුළුවන් වුනත් වීඩියෝ එකක් බලන්න එහි මුළු කාලයම යනවා. විමල් වීරවංශ කියන්නේ (ගණන් බැරි වුවත්) දක්ෂ කථිකයෙක් හා අදහස් ප්‍රවර්ධකයෙක්. මෙතැනත් ඔහු සැබෑ දෙයින් තනිකරම ප්‍රතිවිරුද්ධ දේවල් ගොඩක් ඇත්ත බවට තර්ක කරනවා. ඒ අතර, ඔහු කියන ඇතැම් දේ ඇත්ත. තවමත් බැලුවේ මුල විනාඩි කිහිපයක් පමණයි.

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  12. What the problem is Mithri can sole the problem. Mahinda destroy the country. Mithri develop this country near future. Central bank no problem. Bank problem is lies of mahinda supporters. There no issues. arjun mahendran is good. Dont confuse with mahindas peoples lies. Join with mithri to development country.

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  13. Replies
    1. මම ඔහුගේ ප්‍රවේශයට කැමතියි. රෝලටත් දාගත්තා.

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  14. Interesting and brilliant, as usual! Ok, so what do you suggest? How the crash landing could be avoided or at least make it a little less bumpy?

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    1. Thanks, Udaya! Of course, what I have written is incomplete without some proposals. I wanted to continue this and go back to the root of the problem and make some suggestions. Now, it appears that the government has proposed a reform package to the IMF and other donors which, I believe, can make it less bumpy if implemented as planned.

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  15. මට නං හිතෙන්නේ ආණ්ඩුව ආපු ගමන් තෙල් මිල අඩු කරලා හොදටම ඇණ ගත්තා කියලා...තෙල් අඩු කරපු එකෙන් ජනතාවට ඇඟට දැනෙන ප්‍රතිලාභයක් හම්බ උනේ නෑ.....කලින් තිබ්බ කෑම ගනන් එහෙමමනේ....

    ජයසුන්දර ලොක්කා ගහන්න හිටපු ට්‍රම්ප් කාඩ් එක මේ ගොල්ලො ආපු ගමන් එලියට දලා ත්තුරුම්පු කොලේ පෙන්නලා ඇණ ගත්තා වගේ....

    මොනා උනත් රනිල් ලොක්කා අමාරුවෙන් යන්තමට හරි ගොඩ ආවොත් ඒ වෙන්කොට මිනිස්සු හෙම්බත් වෙලා හිටින නිසා ආයේ වෙස්සන්තර කෙනෙකුට පහල වෙන්න පුලුවන්

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    1. ඔබ සමඟ කරුණු තුනටම එකඟයි, මයියා.

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  16. ////In order to boost the economy through a fiscal stimulus government budget has to be stressed further and that will require more debt. More debt will increase interest expenses and exacerbate government’s budgetary issues. This is not a feasible option. In fact, right at the moment the government attempts to solve its own budgetary problems through tax hikes which will hard hit the already beaten up economy and slow down GDP growth further.///////

    ඉකොනොමැට්ටා ....මම මේ ලිපිය දන්න ඉංග්‍රීසියෙන් වටහා ගත්තා. මේ ණය උගුලෙන් බේරෙන්න නම් ආපහු ණය වෙමින්, ණය වෙමින් මේ යන ගමන යනවාද? නැත්නම් ජනතාවට ග්‍රීසියේ සිදුවූවා මෙන් තත්වයකට මුහුන දෙන්න වෙයිද? එදා සිට පටන්ගත් මේ ආරවුලේ වන්දිගෙවන්නන් ලෙස ජනතාව පටි තද කරගන්නවාද..එසේ නොමැතිනම් වරක් ඊස්ට් ඒසියාවේ තායිලන්තය වැනි රටවල්හී ඇතිවුනු ආර්ථීක අර්බුදයන්හී එහි ජනතාව පෙන්වු පරිත්‍යාගශීලිත්වය, අපට කල හැකිද? පාලිතයාට වඩා පාලකයා මේ වෙනුවෙන් කොතරම් පරිත්‍යාගශීලි වී ඇත්ද යන්න මේ ලිපිය පුරාවට මට ඇතිවූ උභයකෝට්කයන්ය.

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    1. correction pls ///උභයකෝට්කයන්ය.///
      උභතයෝකෝටිකයන්..dilemmas..

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    2. ලංකාවේ තත්ත්වය සහ ග්‍රීසියේ තත්ත්වය අතර බොහෝ සමානකම් තියෙනවා. දෙරටේම ආර්ථිකයන්හි ඇති අසමතුලිතතා/ප්‍රශ්න මූර්ත, විදේශ, රාජ්‍ය, මුදල් හා මූල්‍ය යන සියළු අංශ වලට පැතිරී ඇති යටින් ඔඩුදුවා ඇති තුවාල වගෙයි. ආසියානු අර්බුදයට ප්‍රධාන වශයෙන්ම හේතු වුනේ විදේශ අංශයේ ඇති වූ අසමතුලිතතාවක්. ඔබ දකින උභතෝකෝටිකයන්ට පදනමක් තියෙනවා.

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මෙහි තිබිය යුතු නැතැයි ඉකොනොමැට්ටා සිතන ප්‍රතිචාර ඉකොනොමැට්ටාගේ අභිමතය පරිදි ඉවත් කිරීමට ඉඩ තිබේ.

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