Mahoshada

In the heat of an election campaign it is easy to loose sight of the fact that the rest of the world is also paying attention what is being said and done in the country. This is especially true with respect to the handling of economic issues. Existing and potential investors are just like voters in trying to interpret the signals embedded in the statements of politicians.

By the very nature of their defining task, investors are inherently forward looking. To be successful they must have a reasonably good idea of the economic conditions that will prevail in the future, when the investment that they make will be trying to earn a profit. International investors typically have substantial sums at stake and mistakes are often very costly.

Politicians either forget or do not care that what they say and do has wider consequences for the people of the country. If potential investors view the economic future as poor or highly uncertain, they will look elsewhere, which will mean jobs and incomes that would otherwise come to Sri Lanka do not materialize.

Recent Bloomberg Report
For these reasons it is worthwhile paying some attention to what is being said about the economic management of the country in the international business media. One of the most respected of the international business media outlets is Bloomberg, which appears globally through television, the print media and online.

Mr Andy Mukherjee, a Bloomberg columnist on 15th November published an article on the government’s recent budget. (This is available online at www.bloomberg.com.) Some of what he has written is reproduced here as one indication of how the rest of the world is assessing the current management of the economy in this country:

“The Sri Lankan government’s annual budget for 2006 looks more like a cash-for-votes plan. Both the generosity and the fiscal imprudence were to be expected… “

“A bigger concern for investors is that instead of exposing the spending proposal for what it really is – a ruinous recipe for the economy – the island nation’s media have hailed it as a boon for growth and welfare.”

“If newspaper editorials reflect popular opinion, then there should be widespread dismay among investors that Sri Lankans are falling for a plan that will hurt corporate profits in an effort to appease voters.”

“A cash-starved, heavily indebted government spent 18 percent more money this year paying salaries than it invested in the economy to create new productive assets. If the government had managed to freeze its wage bill at last year’s level, Sri Lanka wouldn’t have needed to borrow a single cent for tsunami-related reconstruction in 2005 or 2006.”

“The fiscal situation might be even worse next year. The net effect of Amunugama’s prescriptions will be to push the 2006 budget into deficit by 244 billion Sri Lankan rupees ($2.4 billion). That will amount to a staggering 9 percent of the tea and garment export economy’s gross domestic product.”

“All of this should make it clear that fiscal restraint has a bleak future in Sri Lanka. … Buying off voters is masquerading as the government’s budget, and there is hardly any protest. To investors, that should be the most disconcerting thing about Sri Lanka right now.”

It is worth stressing the point that this columnist is not seeking to gain any political advantage within the country. His work is judged by his readers based on the accuracy of his information and the quality of his analysis and insights.

It is Not Entirely the Government’s Fault
Mr Mukherjee raises an important point not often mentioned – a large part of the blame for the misguided policies that have led to the deterioration of the country’s economy rests with the public, which has come to accept highly unrealistic and fundamentally unsound policies as though they were in fact a “boon for growth and welfare”. As his column makes clear, while the budget presented is bad enough, it is the utter lack of realism underlying the public discussion of economic issues that should be particularly troubling.

In a great many countries, simply proposing a budget with a 9 percent deficit, especially in light of the very high public debt already being borne by the country, would be cause for the collapse of the government. It is certainly not something that would be hailed in the local media and by many local business groups.

Of course one cannot put the entire blame on the politicians for proposing such a poor budget from the standpoint of the economy. They will, for the most part, give the public whatever they believe will win them the most votes. And indeed, such a strategy seems to be working well given the results of the presidential election.

Lack of Informed Debate on Economic Issues
One of the major reasons for the perpetuation of bad (unrealistic and ineffective) economic policies would seem to be the relative lack of informed, critical debate on economic issues. There are large numbers of workshops and meetings held to discuss wide ranging issues, many related to economic issues. However, very little of this seems to amount to a serious debate of the substantive issues. In any case, it evidently takes place almost entirely within a small circle within Colombo. It does not appear that the general public knows much or cares much about these issues. How else can one explain the politicians’ enthusiasm in serving up a steady supply of misguided economic policies?

The economic future of the country is going to depend on substantially improving the policies that are being implemented – and this will require a public that better understands these issues and demands better from the politicians. There is a need for more in-depth, independent economic analysis being carried out and made available to the public. At present, it is for the most part only the government that has access to the financial and technical resources required for carrying out sound economic analysis. (Much of this is done through the international donor agencies, such as the World Bank and others. However, their work is usually done under the direction of the government.) As a result, much of this analysis is not very critical of the government’s policies.

The public will have its work cut out for it. Greater attention will have to be given to the fundamental economic issues facing the country and these should be viewed with a more critical eye. More attention should be given to understanding what has worked (or not worked) in other countries. Increased private financial support will also be needed for independent think tanks and individual researchers to provide the necessary substance for this debate.

Finally, it is worth keeping in mind that the government spends a small fortune every year through the BOI and other agencies trying to convince potential investors that Sri Lanka is a desirable location in which to invest. All of this goes for naught when the international business media makes clear that the actual picture is not so rosy. Fiscal restraint has a bleak future in Sri Lanka. Indeed.