Sajith Premadasa on Inflation, Interest Rates, GSP+, Brain Drain, Poverty Alleviation and ICT Policy

Excerpts from the speech made in Parliament

Mr. Speaker,

A careful and intricate examination of the prevailing economic conditions through a thorough analysis of the macro-economic indicators and economic trends, amply exemplifies the dire situation that Sri Lankans of all walks of life will endure in the short, medium and long term.

In recent times many politicians and economic analysts have extolled the virtues of high economic growth rates our country has achieved. Many have interpreted these figures as exhibiting the underlying economic strength of the family households of Sri Lanka.

A more careful look at the figures illustrate a totally different picture which confirms the ever expanding economic and social divide.

When we inspect the figures stated in the HIES 2006/2007 conducted by the DCS in a scrupulous manner, it states that while the richest 20% of our society receive 53.8% of income, the poorest 20% receive a meager 4.8% of income.

The present Budget proposals fail miserably to recognise this glaring shortcoming.

If one is to assume that economic growth rate in itself is an automatic cure for the economic ills of our country, let me remind this August assembly that it was the UNP administration under the able leadership of Hon. Ranil Wickremesinghe (RW), during the 2002-2004 time period, that propelled this country into achieving high rates of economic growth, from a position of economic malaise and stagnation. If the underlying Macro-Economic precepts, and principles of the RW era were continued, our growth rates today would have far exceeded the double digit levels that are presently experienced by a large number of states in India and India as a whole.

Today we see a lowering of our country’s growth projections in the Budget as a direct result of the inept and incompetent economic decision making processes and the policy resultants, of the present administration.

Inflation which was at 14.9% in November 2001 was meticulously brought down to 2.5% in March 2004. In fact in the beginning of 2004, SL had the rare distinction of experiencing zero inflation levels which is unprecedented in the interdependent and interconnected world that we live in. Such record levels of inflation (deflation) were achieved even in the face of drastic price increases in petroleum products which amounted to 91% during the 2001-2004 periods. There is an attempt in certain government circles to state that there is a direct correlation between price increases in petroleum products and inflation.

Once again the figures that I possess exhibit that such a deduction is misleading and erroneous.

It is time that the present defenders of the Government refrained from forwarding such bankrupt theories to justify the high levels of inflation which certainly has a direct link to irresponsible and reckless printing of money, and to over indulgent deficit spending facilitated through excessive borrowing at exorbitant rates of interest.

Merely changing the way inflation is calculated CCPI to CCPI will not suffice to control inflation. Once again it will be another futile exercise in mis­leading the Sri Lankan people.

If I may now turn to the key issue of unemployment which at present stands at approximately 5.8-6%, I cannot see any comprehensive effort on the part of the present administration to address this issue in an overarching manner. May I remind this house about the 200 Garment Factory Program that was championed by the late President Ranasinghe Premadasa precisely to tackle the issue of unemployment.

At that time this project was criticised as an utter failure. His political detractors resorted to virulent vilification of the scheme calling it a program, “to get our village boys and girls to stitch knickers for foreign women”.

However, what is the present situation in terms of the progress, that the garment trade has made to date? It has become the highest foreign exchange earner for SL today earning USD 3.2b annually. The industry also provides 270, 000 direct and 700, 000 indirect employments.

This is one of the main tools of monetary policy. However, presently the Government has embarked on utilising high interest rates as a tool in controlling inflation. While this has succeeded in reducing inflation from 29% to 20%, high interest rates have resulted in crowding out private investment.

When the country was in economic doldrums in 2001, IR’s were as high as 13.7%. However the RW administration gradually brought it down to down to 7.24%, in 2004, creating a propitious environment for the inflow of valuable capital and resources into the country.

Today IR’s are at 25%. This is inimical to promoting private investment which is universally accepted as the engine of economic growth.

Let me re-iterate: high IR is a disincentive to investment. Therefore, in order to spur EG and promote economic prosperity and therefore reduce unemployment, low IR is an essential pre-requisite for any economy with growth ambitions.

This fact is amply illustrated by the substantial cuts in IR through out the major economies in the world from USA, UK, China, Japan, and SK in order to counter the impending global recession.

Let’s now look at the issue of foreign exchange reserves. Presently the status of foreign exchange reserves is precarious to say the least. Recent months have seen a precipitous drop from USD 3.4b in August to 3.1b in September and 2.6b in October.

One of the main reasons for this is the “capital flight” syndrome as markets and investors deem SL as a high risk country to invest.

It is essential to maintain currency stability. However, this should take place at a realistic currency value, that does not adversely impact on export competitiveness and import costs.

The GSP plus issue is an impending economic and national disaster of enormous proportions. This facility bestowed upon us by the EU provides SL with preferential tariff free access to the world’s largest market numbering USN 16 trillion. The exponential rise in SL exports to the EU from USD 1.3b to 2.8b after the implementation of the GSP plus scheme, is a clear indication of the immense value of the scheme to our country. In 2007 alone SL apparel exports to the EU amounted to l.1b Euros.

With the expiration of these concessions coming to fruition in a few months, I believe the Government has completely mishandled and botched up the negotiation process.

Right at the inception there was ministerial conflict and bureaucratic wrangling over who should get the credit if negotiations were successful. Ultimately the policy prescription prescribed by the Government, amounted to a bailout package with a one off payment amounting to USD 150m in return for the Government obtaining redeemable preference shares in each company to the value of the investment.

All I can say is, that RP would have handled this issue in a manner that would have been in the long term interest of the industry and the country.

The brain drain issue continues to be an important policy issue that is consistently ignored by this Government. The possession of a highly skilled, capable, talented, educated work force is an indispensable pre-requisite to the functioning of a successful economy.

Statistical evidence with regard to brain drain paints a sorry picture as far as SL is concerned.

According to SLBFE figures in 2003, 1541 professional workers left the country and this figure rose to 2678 in 2005. Between 2003 and 2005, a total of 45,590 skilled workers have left the country. What policy prescription has the Govt. designed to address this fundamental issue of national importance?

There is universal acceptance that providing support to sustain high nutritional standards especially amongst the most vulnerable sectors of our society, that is infants, mothers and children is of superlative importance if a country is to succeed and prosper.

Here again statistics indicate the persistence of acute and chronic· malnutrition among the vulnerable sectors in SL.

Under these circumstances why has the govt. failed to formulate and implement a comprehensive integrated national nutrition policy?

The Samurdhi programme that has been apparently designed to achieve this objective is a dismal failure. The measly amounts that are dished out to the poor in the form of Samurdhi stamps are woefully inadequate in providing adequate resources to the target groups to overcome poverty.

When one examines the record of this Govt. in this field, there is a visible disparity in rhetoric and reality. When our neighbour and friend India have made significant strides in the ICT arena (where the ICT industry grew to USD 51 billion in 2006-2007) Sri Lanka continues to vacillate and hesitate to take the next great leap forward.

President Rajapaksa in his 2008 Independence Day speech claimed that SL has attained 25% computer literacy, but according to the figures provided by DCS CL has increased only from 9.7% in 2004 to 16.1 in 2006-7.

DCS survey also asserts that 46.9% of Sri Lankan households cannot afford to purchase a computer. How constructive it would have been if the govt. introduced a subsidised scheme for computer purchases and the expansion of computer literacy projects.

It is obvious to any lay person, that the current PA administration has totally ignored the external economic and political environment prevailing globally in formulating economic policy.

As a responsible and accountable administration, it should have taken account of the impending global meltdown. It is my humble premise that Sri Lanka’s Economy is in dire straits.

If one dares to question whether the situation is redeemable, the frank answer to that is “of course it is possible”.

However, it would take a paradigmatic shift in the design, structure and substance of public policy to achieve this monumental task.

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