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Some beliefs on current economic and financial crisis, debt sustainability, Central Bank independence, transparency and accountability

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By Jayampathy Molligoda

What is Belief?

“Belief is the central problem in the analysis of mind. Believing seems the most “mental” thing we do. The whole intellectual life consists of beliefs, and of the passage from one belief to another by what is called “reasoning”. Beliefs give knowledge and error; they are the vehicles of truth and falsehood. Psychology, theory of knowledge and metaphysics revolve about belief. What makes a belief true or false I call a ‘fact’. The particular fact that makes a given belief true or false I call its “objective.” – Bertrand Russell, The Analysis of Mind (1921), Lecture. XII: Belief, p. 295

Price stability as core function of CB:

One popular belief is that the government of the day could continue to print money to service its domestic debt and meet other expenditure, but it cannot roll over foreign debt so easily and therefore it is associated with sovereign risk, meaning government is unable to repay its debt. Therefore, the debt sustainability needs to be constantly evaluated by comparing future debt obligations with available reserves to ascertain whether it could meet the debt obligations.

It is generally known that a Central Bank mandate is basically to keep the money that the CB has issued at a given period of time at a ‘stable level’. In other words, one of its main objectives are the price stability; means “maintaining inflation at a low rate’- then it would not discourage people to save and businesses to plan for their future activities, taking into consideration a long- term view on price stability. Some eminent economists are of the view that, having undertaking extensive case studies of economic situations and series of financial crises in several countries over a long period of time, the only one task the Central Bank could accomplish well is ‘maintaining price stability’ through regulating the money supply and interest rates. That’s another belief.

Before 2002, the price stability was the supreme objective although there were many sub objectives assigned to the CBSL. In order to attain ‘price stability’ with certain level of economic growth, the CB is required to keep the money supply of the country at an appropriate level so that the total demand for goods and services known as the ‘aggregate demand’ is just equal to the total supply of goods and services called ‘aggregate supply’. Under Monetary Law Act, the objective of price stability and financial system stability becomes the mandatary rule for the CBSL. As for financial system stability, there is a separate department handling banking supervision at the CB. In the event some banks are in trouble and the CB wants to bail out by giving them some loans, it amounts to printing new money leading to increase in money supply, thus facing difficulties in containing core inflation. Therefore, one belief is that the CB should not compromise its prime ‘price stability’ objective, if inflation becomes the most pressing problem at a given period.

In 2002, the then Governor and the monetary board of the CBSL changed the objective clause to state as “economic and price stability” meaning an additional objective of achieving the country’s economic growth. Some economists believe that achieving the economic growth should be the responsibility of the government and not the Central Bank. Retired Senior Central Banker, Dr. W.A Wijewardena stated in his book on Central Banking published in 2017 that he and many in the Central Bank did not fully understand the wisdom enshrined in the mission statement and then Governor’s belief. It should be mentioned here that there are different economic theories put forward by various eminent economists from time to time and for example, Keynes presented his theory in the form of deficient demand that leads to economic recession during 1929 period in the US and he believed that printing money and spending through government budget would eliminate deficient demand and improve economic growth.

When the government expenditure increases, it raises aggregate demand in the country and policy makers would expect some increases in goods and services through capital formation. In addition, the government could reduce taxes as a policy to induce investments through increased capital formation and together with low interest rate regime, it was expected some increases in the economic growth. The Sri Lankan government adopted this policy since beginning 2020 till end of 2021 with a view to providing relief to people and businesses in order to overcome negative effects due to the COVID 19. However, the economy did not really produce goods and services to the extent that is required, resulting in high inflation from beginning of 2022. It is also true that during the year 2020 the recorded negative growth rate of 3.6% due to the COVID 19 impact has thus been converted into a positive growth rate of 3.7% in 2021. From the beginning 2022, the CBSL adopted a policy of tightening the monetary policy by increasing the interest rates in order to avoid over spending by private and public sector economic players.

Excessive government expenditure including subsidies and debt sustainability:

The responsible governments in other developing countries make every attempt to maintain their expenditure within the revenue and any deficit to be financed through non-inflationary borrowings. As for Sri Lankan situation, there has been a current account deficit in the Balance of payment (BOP) every year -except few years. This means, the FOREX receipts from the transactions with rest of the world are always below the FOREX outflows, even before the foreign debt repayment mainly due to excessive import bill. The tourism proceeds and inward remittances from expats are not enough to bridge the trade deficit. There has not been a single year a ‘surplus’ in the government budget for the last half a century.

Exports as a % of the GDP has come down from 28% during 90’s to 12% from 2014 to date. The GDP of the US $ 25 billion in 2004 has increased to the US $ 85 billion during the last 17 years mainly through services sector- infrastructure development expenditure without corresponding increases in revenue from exports. However, it would have helped to improve tourism proceeds and some export sectors by improvement in the ‘incremental capital out- put’ ratio. my belief is that no proper assessment on the economic cost: benefit of these infrastructure development projects has been undertaken by experts and presented to the ordinary people. My belief is the current crisis has aggravated partly due to the ‘twin deficits’ for a long period of time, meaning the current account deficit in the BOP, which was only US $ 215 million in 2001, thereafter ever increasing and it was US$ 3,343 million in 2021. The government budget deficit of 4-6 %, which is now exceeding 12% (not even a primary surplus before debt service, except in 2017). Further, the GDP per capita in the economy did not really increase to the extent that is required, resulting in high inflation. (GDP at current market price was US $ 85 billion in 2021 compared to US $ 75 Billion in 2014)

Even with the current exchange rate of Rs 366 per dollar, compared to say, Rs 230 per $ as determined by CBSL on 06 March 2022 (thereafter has adopted some kind of a managed float with upper bands), the FCY accounts of commercial banks are still not receiving sufficient foreign currency inflows There is a lack of dollars to meet import bills either through LCs, DP/DA terms or TTs. Almost the entire export sector and other foreign exchange earning businesses are in the hands of private sector, but 25-30% of the import bills of the country consists of most essential items/goods have to be imported by the government through trade finance facilities and credit lines, thus creating further issues on foreign debt sustainability. (See table)

Central Bank independence, transparency and accountability:

Prudent and cautious economists believe that there must be a sound, practical and legal mechanism guaranteeing the independence of the Central Bank, whilst making the CBSL accountable and transparent. John Exter, the founding Governor of the Central Bank of Ceylon, in his report stated that Governor of the Central bank should be of unquestioned integrity and responsibility. This is very critical because an independent CB is essential for maintaining price stability. Dr H.N. Thenuwara, former Director, Economic Research, Central Bank during 2004-6, in his book, ‘Money, inflation and output’ published in 2015 argued that the simplest test is whether the CB can resist demands from the government (a) to print money and/or (b) continue to maintain low interest rate regime, when a higher interest rate is necessary to maintain price stability meaning containing inflationary pressure. This is because the government of the day would naturally tend to push economic growth rates to run at a faster rate than its capacity limit permits and their desire to incur budget deficits by securing funds borrowed from the CB. The section 12 of MLA, the President can appoint any one as the Governor of the CBSL based on the recommendations by the Minister of Finance. However, we believe that the appointment of key positions such as the Governor, CBSL and other Monetary board members should not be solely in the hands of the incumbent President or the Prime Minister, but by the Constitutional Council set up with eminent personalities as its members. The independence of the CBSL must be strengthened along with accountability and transparency task as well. According to the CBSL annual report,2021, the total borrowings by State Owned business Enterprises (SOBE’s) from the banking system continued to expand in 2021 (Rs. 186 billion in ’21, in addition to Rs 184 billion in 2020, thus reflecting weak financial position. My own belief is that the CB must focus on price stability as its core mission as well as ‘financial system stability’ till the current precarious situation is arrested in order to contain the core inflation and fluctuations in the external value of foreign currencies including the US $.

Sovereignty of the people and Separation of power:

One of the most important aspects under the Constitution is the ‘separation of powers’ under peoples’ sovereignty – Article 4. The powers of government under peoples’ sovereignty namely, the Executive, the Legislature and the Judiciary – three most important pillars, must be further strengthened and separated. The writer is of the belief that the Cabinet must consist of only from the members drawn from the National list, except the Prime Minister elected by people through parliamentary elections (in addition to the President). This is to reflect aspirations of the people at grass root level through the elected MPs, as PM could take up those views at the cabinet deliberations before taking decisions. The Cabinet of ministers are charged with policy formulation and if necessary, the concept of District ministers could be introduced and such appointments could be made from other elected members in the parliament, the government expenditure for maintaining the PC system and other duplicate political institutions such as PSs, Municipal , Urban Councils need to be reduced (PC/PS acts of parliament during 1986,7 period) Even the Parliamentary seats can be reduced to 160 based on electoral districts, plus maximum 20 national list members whom they select the cabinet. However, it is important to strengthen GA system and Divisional secretary level administrative powers stemming from ‘Grama Niladharis’ empowering them with ICT.

Evidence- based policy shaping through facts finding-reasoning:

This is a time of reckoning when we need to come together and set aside ideology and egos and focus on problem solving. The positive side – there is an opportunity for the government, if genuinely interested to restructure Ceylon Petroleum Corporation, unbundling CEB, arrange Private: Public partnerships (PPPs) of many institutions like ‘Sri Lankan airline’, PPPs for port development etc. Further, some strategic actions such as any amendments to Monetary Law Act of 1949 thus re -defining Central Bank mandate and mission statement, restructuring finance ministry (MOF) and amalgamate duplicate semi government institutions, close down some other SOEs etc.

The government must make every endeavour to maintain their expenditure within the revenue and any deficit to be financed through non-inflationary borrowings and strengthen accountability and transparency to the people through parliament. We can re-build the economy by eliminating the twin deficits as long as the highest authority level, The President and Prime Minister would handle the geo political realities, especially relationship with India, China, US and create a conducive environment to attract Investments and private sector to operate without unnecessary red tapes. Ideally, this must be done in consultation with the leader of opposition after reaching consensus on nationally important subjects. The issue, since 1952 has been this excessive rival party politics and divided loyalty of voters to different political parties, and unwanted trade union protests etc., whoever in power, have made the government of the day inactive and inefficient and thus resorting to malpractices. The enforcement of law and order and discipline in the society must be strictly enforced.

As articulated by Bertrand Russell in his ‘Analysis of Mind’, belief of people gives knowledge and error; they are the vehicles of truth and falsehood. Therefore, opinions expressed (beliefs) by our ‘Key opinion leaders’(KOLs) such as the religious leaders, eminent academics, professionals top level administrators, the educated youth, the politicians including Cabinet ministers, are either truth or falsehood, but what makes a belief true or false, Russell calls a “fact.”. One can shift his own belief to another belief through the passage from failed one to finding ‘truth’ by what he called “reasoning. This applies to every policy matter, may be hybrid middle path solutions can be the most practical, relevant and appropriate. Therefore, the name of the game is evidence- based policy shaping with clear focus on addressing implementation snags through proper monitoring systems.



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Opinion

Panadura debate: special exhibition most welcome

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The special exhibition displaying original manuscripts relating to the Panadura Debate at Rankoth Vihara is welcome and, as Nishantha Peiris mentions (News, 30 Aug), the debate gained international interest following the publication of a book containing the speeches made in the debate. The credit for this must be given to John Capper, the then editor of the Ceylon Times. He published an account of each day’s proceedings in his paper and the full text of the speeches in a book entitled ‘Full Account of the Buddhist Controversy Held at Pantura in August 1873.

The preface of the book stated: ‘In the belief that an authentic account of the Controversy which took place at Pantura in August last, between a Buddhist Priest and two Ministers of the Protestant religion, will be read with interest by a large number of persons here and in Europe. I have produced the proceedings in the present form. The report has been revised by the respective disputants, so that it may be taken as a correct account of what passed’.

Capper’s book was picked up by J M Peebles who was in India, who then published an extended version in the United States. If an original copy of Capper’s book is available in Sri Lanka, it should be exhibited in the Rankoth exhibition.

Yours faithfully,

Dr R P Fernando,

19 Danetree Close,
Epsom UK

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In Memory of Dr Upatissa Pethiyagoda

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Dr. Pethiyagoda

It is with a deep sense of sadness that I record the passing of Dr Upatissa Pethiyagoda, who died on 27 August 2026 at the age of 94. To many, he was a distinguished scientist, accomplished administrator, diplomat and public intellectual. To me, he was much more than that.

Dr Pethiyagoda was a proud product of Trinity College, Kandy. At a time when a first class in Botany was a rarity, he obtained one and subsequently pursued postgraduate studies in London. His scientific career reflected not only his knowledge but, more importantly, an enquiring and restless mind that was never satisfied with simply accepting what was known.

In the 1970s, he headed the Plant Physiology Department of the Tea Research Institute of Sri Lanka. He was part of a formidable team of scientists that included Drs R L de Silva, R L Wickramasinghe, P Sivapalan, Tilak Wettasinghe and W Danthanarayana. They were scientists who contributed enormously to the development of the tea industry in Sri Lanka, and Dr Pethiyagoda stood comfortably among them.

In 1978, he moved to the Coconut Research Institute as its Director. It was there that I had the privilege of working with him. Those years left a lasting impression on me.

Dr Pethiyagoda was, in every sense, a complete scientist. Although his formal specialisation was plant physiology, he was remarkably comfortable discussing almost anything scientific. What distinguished him was his curiosity. He questioned the science behind the ordinary things that most of us simply accepted. I remember his asking questions such as, why is an orange green in Sri Lanka? It was typical of him: an apparently simple observation would lead him to ask what lay behind it.

That curiosity never left him.

After his tenure at the CRI, he undertook an FAO assignment in the Middle East, working on the improvement of date palms. There he was exposed to agriculture under conditions of severe water scarcity. He pursued this further during a visit to Israel, learning about agronomic practices suited to such environments. Later, when he worked with the Mahaweli Authority, he was able to translate that knowledge into practice, introducing high-value horticultural crops to Systems B and C.

What impressed me was not merely that he acquired knowledge, but that he connected knowledge from one context to another and turned it into practical solutions. His enquiring mind and analytical ability enabled him to do this with remarkable effectiveness.

He was equally impressive as a communicator. Dr Pethiyagoda was an eloquent speaker, whether he was talking about science, agriculture, public policy or the everyday affairs of our country. His speeches were often laced with wit, humour and the occasional tongue-in-cheek remark. But beneath the humour was a very serious mind. He was forthright in his opinions and, importantly, he was not afraid to express them, whatever the possible repercussions.

His contributions to the media demonstrated this courage.

Writing about the travel to London by a former President, he observed:

“Where a person enjoys immunity by virtue of his position, this carries a reciprocal obligation to exercise an abundance of exemplary behaviour. In effect, immunity is best exercised, when the need to invoke it, is never allowed to arise.”

[Immunity Does Not Confer Impunity – Colombo Telegraph]

That was quintessential Pethiyagoda—precise, pointed and impossible to misunderstand.

He was equally outspoken about the government’s decision to ban inorganic fertiliser with ‘immediate effect’. He was deeply distressed by what he believed would be the consequences for farmers, particularly the poorer farming community. He would speak about it almost every day, driven not by political considerations but by his conviction that science and evidence had been disregarded.

In one of his writings on the subject, he remarked:

“What the ‘Vipathmaga’ caper taught us was that advice of sundry ‘Experts’ can be disastrous. Professors of Surgery, clergymen and Pediatricians are not the best equipped to advise on fertilisers, as much as a Soil Scientist should not prescribe treatment for a sick child.’ [Some Lessons That Can Be Learned Even From Disasters – Colombo Telegraph]

And in another article, his frustration was summed up in the memorable words:

“Stupidity, like History, has a way of repeating itself.”

[Unscrambling eggs – Colombo Telegraph]

These were not simply provocative statements. They reflected a scientist who believed deeply that public decisions, particularly those affecting agriculture and the livelihoods of farmers, should be based on evidence and sound scientific advice.

Perhaps, what I will remember most about Dr Pethiyagoda is that his curiosity survived almost to the very end of his life.

Very recently, he was still asking questions and pursuing ideas. He was interested in the possible genetic differences between the waraka and wela varieties of jak, because he wondered whether the wela variety might have commercial potential for cellulose extraction. He was disappointed that he could not find relevant scientific literature in Sri Lanka. More than the particular subject, what struck me was that at 94 he was still thinking about a scientific question, looking for evidence and wondering whether an apparently ordinary resource could have an important national application. He lamented the lack of interest among scientists and academics in such questions of national importance. That concern, too, was very much part of who he was.

Dr Pethiyagoda also served as President of the National Academy of Sciences, Sri Lanka. Unfortunately, he was unable to complete his term because he was appointed Ambassador to Italy, with representation at the Food and Agriculture Organization in Rome. Even in that role, he remained very much the scientist. I understand that he made a significant contribution to FAO discussions. As Ambassador, he also had the unenviable task of entertaining Sri Lankan Ministers of Agriculture who attended FAO sessions. I know from my own conversations with him that those informal dinners were not merely social occasions. He would discuss agricultural issues with the Ministers, and I have little doubt that his views—and the force with which he expressed them—sometimes influenced their thinking.

Looking back, what I admired most about Dr Pethiyagoda was not any particular position he held or any particular achievement. It was the way he thought.

He questioned.
He analysed.
He connected ideas.
He challenged conventional wisdom.
And he was willing to say what he believed to be true.

He also demonstrated that science should not remain confined to laboratories, research papers or academic institutions. For him, science was a way of looking at the world and, ultimately, a means of improving the lives of people.

It is perhaps ironic that, only a few months ago, he wrote about “The Cost of Dying”, as distinct from the “Cost of Living”. In that article, he reflected on the manner in which our mortal remains should be disposed of, observing: “I am in two minds regarding the manner in which the mortal remains are disposed of, ‘according to the will of the deceased’. But with the cessation of the breath, ownership or tenancy ceases.” Even in contemplating death, he brought his characteristic questioning mind to the subject. What particularly caught my attention, however, was his explanation of the Buddhist practice of holding dânes (almsgivings) for monks of the local temple in the seventh day and third month following a death. I had never really thought about the significance of this practice before. That, too, was typical of Dr Pethiyagoda: he could take something that we had accepted as ordinary and familiar and make us stop, think and see it differently.

His passing has created a colossal vacuum in Sri Lanka’s scientific community. People of his intellectual breadth, curiosity, courage and independence are rare. We may not always have agreed with everything he said, but we could never doubt that he had thought deeply about it and that he had the courage of his convictions.

For those of us who had the privilege of knowing him, there is sadness in his passing. But there is also gratitude—for having known such an extraordinary mind, for having learnt from him, and for having witnessed at close quarters his unwavering commitment to science and to the development of our country.

I shall remember Dr Pethiyagoda with great affection and immense respect.

Ranjith Mahindapala
Past President, National Academy of Sciences of Sri Lanka.

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Opinion

A neighbour’s view of India’s strategic strengths

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What India chooses to do with the strategic freedom it has built over eight decades may be the defining question of its next phase

by Milinda Moragoda

In the emerging global economy, countries will increasingly seek multiple sources of energy, technology, capital, minerals and markets. India can contribute by helping create an open network rather than another exclusive bloc.

As India marks eight decades of Independence, its strategic position has changed almost beyond recognition. Yet the central question of strategic autonomy remains. What India chooses to do with the strategic freedom it has built over eight decades may be the defining question of its next phase.

India has spent the past decade expanding its strategic choices — deepening ties with the US, Europe and Japan while maintaining important ties with Russia and strengthening engagement with the Gulf, Africa and Southeast Asia. Australia and New Zealand are also becoming increasingly important partners in the wider Indo-Pacific. At the same time, India has sought a larger voice for the developing world in international institutions. Strategic autonomy has traditionally been understood in diplomatic terms: the ability to maintain freedom of action without being drawn into competing power blocs. In an increasingly interconnected world, however, that freedom will depend just as much on economic choices.

The objective should be strategic interdependence — building sufficiently diverse relationships that dependence on any one country or economic system does not become a vulnerability. India is unusually well placed to pursue this. Its geography connects the Gulf and wider West Asia, the manufacturing economies of Asia, Africa across the Indian Ocean and the Eurasian space extending through Russia. The opportunity, therefore, is to become a connector between economies increasingly fragmented by geopolitical competition.

India’s relationship with Japan is extending into advanced manufacturing, technology, energy, semiconductors and critical minerals. Its engagement with the US is deepening across technology, investment, advanced manufacturing, energy and strategic cooperation, while its engagement with Europe is becoming increasingly economic and technological. Its relationships with the Gulf are expanding beyond energy into investment and connectivity. Australia and New Zealand add an important southern dimension to its wider Indo-Pacific engagement, while Southeast Asia provides pathways into wider Asian production networks.

Russia remains an important part of this equation. India’s continuing engagement with Moscow, alongside its deepening relationships with Washington, Tokyo, Europe and the Gulf, demonstrates that strategic autonomy gives India the flexibility to maintain important relationships across geopolitical divides.

China inevitably occupies a special place in this landscape. India’s answer cannot be either excessive dependence or complete separation. It will require strengthening domestic capabilities, diversifying supply chains and building partnerships elsewhere, while retaining space for engagement where interests permit.

India possesses another asset that few countries can match: a large, globally active and influential diaspora. Yet the diaspora can also present challenges, as political currents within these communities do not always align with India’s interests and can occasionally create sensitivities in its relations with host countries. The greater opportunity lies in nurturing the economic, intellectual and cultural connections the diaspora can create, while respecting its diversity and independence. In the emerging global economy, countries will increasingly seek multiple sources of energy, technology, capital, minerals and markets. India can contribute by helping create an open network rather than another exclusive bloc.

Ports, shipping routes, energy corridors, digital infrastructure, supply chains and trade agreements increasingly shape strategic influence. India’s challenge is to bring these strands together without turning them into a closed sphere of influence.

India’s economic rise will be more sustainable if other countries see themselves as participants in its growth rather than simply as markets for it. The value for India lies in making these relationships complementary rather than choosing among them. India’s leadership of the Global South can now move beyond representation in international forums towards creating an international economic environment in which developing countries have greater choices. India’s own experience is relevant here. It has moved from a relatively closed economic model towards deeper global integration while retaining a strong emphasis on domestic capability. The lesson is that openness and strategic autonomy need not be contradictory.

As the G20 meets again in Miami in December, India can continue to argue that the Global South should not merely seek greater representation within existing institutions, but a greater stake in shaping the economic networks and institutions of the future. An economically integrated Indian Ocean could allow countries such as Sri Lanka, Bangladesh and the Maldives to participate more deeply in regional supply chains, logistics, energy, tourism, technology and services. Influence based on shared prosperity is more durable influence based on dependence. India’s strategic opportunity, therefore, lies in becoming one of the principal connectors of a changing world.

(Milinda Moragoda is founder of the Pathfinder Foundation, strategic affairs think tank, and can be contacted via email @milinda.org.)

Courtesy Hindustan Times

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