Features

Perils to sustained growth

Published

2 years ago

2024/01/1

by Dr. G. Usvatte-aratchi

In 2013, Professor A. D. V. de S. Indraratne, the illustrious professor of Economics at Colombo, who was President of the Sri Lanka Economic Association, (they hold the 2023 sessions soon), along with his Committee, was prescient that the fiscal policies of the government might end in disaster and decided to devote the 2013 Sessions to explore ‘perils to sustained growth’ in the economy. The distinguished scholar and diplomat Jayantha Dhanapala was the Guest of Honour. I delivered the Keynote Address. The subject of my lecture was ‘Perils to Sustained Growth’.

Most economists then were troubled by the direction of fiscal and monetary policies at that time. They did not know for certain but were fearful that the massive public works that were undertaken with Chinese loans would not yield the output with which to service those loans. The greater part of the loans was to pay for burgeoning current expenditure. The government would hear none of those and went on with policies of large budget deficits.

A few weeks back, in a press release, the then President and Finance Minister and later Prime Minister of governments, shockingly took credit for reducing the tax revenue of the government year after year. It was shocking because whilst he reduced tax revenue of the government year by year, total government expenditure kept on growing. In a situation where tax revenue comprised more than 98 percent of total revenue of government, rising government expenditure had to be funded at the cost of a rapidly rising debt burden.

The debt from foreign sources had to be serviced with rising export income. Most alarmingly, the proportion of exports to GDP kept falling rapidly. Consequently, a budgetary crisis and a balance of international payments crisis would follow, as the day the night. It precipitated 2021-2022, when a President completely illiterate in economic policy reduced government revenue.

At the same time, he raised the demand for imports with agricultural policies that cut down the domestic food output. The fall in the output of export crops reduced import capacity. Little surprise that in 2022, the government had few choices but to declare bankruptcy.

In my Keynote Address in 2013, I laid bare the sequence of these likely events. I was surprised that policymakers took no notice of the clear warnings presented to them. I was shocked when the then President and Finance Minister, in late 2023, took credit for having actively contributed to that process of decay.

I had laid by that lecture because it was too long and ‘academish’ to be published in The Island, my usual outlet. (Most members of SLEA have higher degrees in economics.) There was no Review in Colombo that may have carried it. It was far too concentrated on Sri Lanka to be published in an international publication. However, after President Mahinda Rajapaksa’s claim, a few days ago, I thought I would seek the advice of the Editor of this newspaper on whether he and his readers would suffer the burden of reading that lecture. With his consent, I decided to publish it.

The text of the speech:

‘And so, we have gone on, and so we will go on, puzzled and prospering beyond example in the history of man.’Thomas Jefferson, 1812.How amazingly right Jefferson was: ‘puzzled and prospering beyond example in the history of man’! Yes, puzzled despite all the ingenuity of all economists since Adam Smith.

The central importance of sustained growth

The economic history of some parts of the world, during the last three hundred years, has been one of phenomenal economic growth. These parts include Europe, North America, Australasia and Japan. In 1,700 all people whether in Africa, Asia, America or Europe were more or less equally poor with a per capita income of about $700 per year at 1985 prices, less than $2 dollars per day. During the next 300 years these economies prospered ‘beyond example in the history of man’.

Much more recently we have had a large part of Asia, including China, Taiwan, India, Malaysia, and South Korea, Thailand and the two small economies of Hong Kong and Singapore grow at phenomenally high rates. In Latin America, after some spectacular growth at the turn of the 20th century, it is only recently that some countries have experienced sustained rapid economic growth. Africa is a late comer and there are signs that sub-Saharan countries finally may have begun to grow.

Sri Lanka has had a record of slow growth, ever since National Accounts began to be estimated but the last few years have shown an upturn in rates of growth. These rates of economic growth shorn of the fluff that the Central Bank tries to cover it with are not to be cavilled at. Your question at this session is how that higher rate of growth can be sustained, at least in the short term.

Let us not underestimate the central importance of fast economic growth to raise levels of living. C. Sivasubramonian (2000), [The National Income of India in the Twentieth Century, The Oxford University Press, New Delhi] estimated that the growth rate of GDP per capita 1901 to 1946-7 in India was 0.9 percent per year and the consequent rise in the GDP per capita was 0.1 percent per year.

At that rate you would have needed 700 years for GDP per capita to double! Contrast that with the experience between 2000-2001 and 2010-2011 when per capita GDP grew at 6.0 percent per annum. [These numbers are from Jean Dreze and Amartya Sen (2013), An uncertain Glory, India and its Contradictions, Princeton University Press, Princeton, NJ]. If that rate of growth were sustained over 35 years, living standards would rise eight times during the lifetime of an individual. However, recently we have seen perils to those high rates of growth.

‘… bang, confidence collapses, lenders disappear, and a crash hits.’

Perils to sustained growth have been studied over a long period of time. In the 20th century itself it was a major field of study. In those times this subject went under the title Trade Cycle. The last volume I remember is Robin Matthews’ ‘The Trade Cycle’ that came out in the year after I graduated. Wesley C. Mitchell’s ‘What Happens during Business Cycles’ had come out beyond the Atlantic much earlier in 1951. The subject is now studied as ‘Crises’, much of that literature coming out in America.

The most recent major study is Reinhart’s and Rogoff’s ‘This Time Is Different’ [2009], in which they studied debt default, whether domestic or foreign, which brought about crises that broke the process of sustained growth. Disruptions to growth arising from such crises are now the major threat to sustained growth, at least in the short and medium terms.

It was Reinhart’s and Rogoff’s conclusion after careful study that ‘… failure to recognize the precariousness and fickleness of confidence, especially in cases in which large short-term debts need to be rolled over continuously, is the key factor that gives rise to the ‘this-time-is-different syndrome’. Highly-indebted governments, banks, corporations or households can seem to be merrily rolling along for an extended period, when bang, confidence collapses, lenders disappear, and a crash hits.’ As you know this happened in the US and Europe in 2007-2008 and it almost took place in India in July-August this year.

The development of crises in the modern sense [the term has a respected longer-term usage] started in the 1970s. President Nixon freed the dollar from the price of gold in 1973. Petroleum exporting countries amassed large volumes of savings looking for financial investment opportunities. So was born the phenomenon of ‘petro-dollars’.

As emerging developing countries grew fast on the strength of exports, they amassed huge surpluses on the external account which formed sovereign wealth funds. The sum of such sovereign funds now probably exceeds $ 15 trillion sufficient to swamp any probable attempt to defend a rate of exchange of a country against adverse movements. And the electronic transfer of funds made it possible to jump from one market to another to profit from even small differences in interest rates, giving a new meaning to D. H. Robertson’s 1926 terms ‘money on wings’. Market opportunities became well known to advisors with the incredibly rapid transfer of information.

With these developments, major economic policies of countries, except those whose currency was acceptable for payment anywhere in the world and those others with huge exchange reserves, found their major domestic policies, ransom to market forces in international capital markets. India with $285 billion in foreign exchange reserves dared not defend the rupee against capital flight in mid-2013. Don’t take seriously the bravado here that $7 billion can do anything to protect the Sri Lanka rupee against even a small shift of short-term capital out of the country.

We spend more than we earn

I have used that extended quotation in the previous but one paragraph because the fundamental problem in our economy is that our economy spends more than it earns [GDP]. That gap is closed with resources from overseas. [This is explained extra-ordinarily well in Arvind Panagariya [2008], India, The Emerging Giant, Oxford University Press, Oxford].

A part of this gap is closed with savings of citizens of this country working overseas and remitting those savings to their home country, with foreign investments directly in the economy, another part with spare resources from accumulated foreign savings if any, and, in its absence, loans from overseas. In our case, in the domestic economy, the private sector does not invest all that it saves.

The government borrows a part of private savings to cover its own expenses. The balance savings it needs are borrowed from overseas. Our economy during the last five years has been accumulating foreign savings by borrowing from abroad, mainly to hedge against fast movements of short-term capital which comprise a part of our national debt. The flow of debt accumulates to form the foreign debt stock of the country. That part of the foreign debt owed by government has been high and fairly stable over the last few years.

To foreign markets and the short end of the market

There has been a marked shift to borrow from overseas and to borrow in the short term. This drive has been motivated by the need to keep interest on government debt in check because interest payments on government debt like all other government expenditure must come out of the Consolidated Fund to which all receipts of government in turn are credited.

Interest rates overseas continue to be lower than at home and interest rates at the short end are usually lower than interest rates at the long end. But these shifts to foreign sources and the short end itself are themselves fraught with serious risks. Any rise in interest rates in other markets shifts money sitting here short term immediately to fly to those other markets. Any loss of confidence in direction of domestic economic policy has the same consequences. To that degree, domestic economic policy is ransom to foreign investors.

Our governments have spent more than they collected in revenue for many years. In 2012, the ratio of total revenue of government to GDP was 13 percent and of total expenditure to GDP 20 percent. The ratio of government revenue to GDP has fallen consistently for several years. There has been some check on the growth of public expenditure, obviously not so severely as to bring down considerably the need to borrow from overseas. In any case, it is hard to make a case for cutting down government expenditure in this economy.

We know too much about the dreadful neglect of education and health in the aggregate and the dire need for reconstruction and development both in the Eastern and Northern Provinces and in the plantations in the central region. There must be immense restraint on the desire of an essentially populist government to control government expenditure in this manner.

Government cannot really cut down expenditure anymore without raising the ire of the public to boiling point. We are too close to what happened in Greece and Spain to risk that. Government must seriously consider why government expenditure on defence and public order and safety must remain at 15 percent of the total both in 2009 and 2012.

It certainly cannot raise government expenditure without first raising government revenue. It is the same populist inclinations which make it hard for government to tax people on whose vote it depends to win elections. Government has taxed heavily consumption of high-income groups. Without taxing the general public, it is in no position to raise revenue to pay for higher expenditure. And a populist government will not do it. That is the point at which long term growth becomes hostage to short term stability.

(To be concluded)

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Features

From stabilisation to transformation without delay

Published

13 hours ago

2026/05/26

Sahan Weerasooriya

At a symposium on reconciliation organised by the National Peace Council last week, more than 250 religious clergy, civic activists and political representatives from different communities gathered to discuss the country’s future. Speaking at the event, Minister Bimal Rathnayake explained the government’s approach to national reconciliation. He said the government viewed the country’s recovery in terms of a three stage process. The first stage was stabilisation, the second was development and the third was transformation. Reconciliation, he implied, would come in that final stage. The participation of Opposition Leader Sajith Premadasa at the same symposium, and the constructive nature of his comments, strengthens that hope.

When the present NPP government took office in 2024, the country was emerging from one of the gravest crises in its post Independence history. The economic collapse of 2022 had led to shortages of fuel, food, medicines and electricity. Inflation soared, foreign reserves disappeared and long queues became part of daily life. The political upheaval that followed culminated in the resignation of former President Gotabaya Rajapaksa after mass public protests under the banner of the Aragalaya movement. The country was then governed by a leadership that spoke the language of reform and reconciliation but was widely perceived as lacking a direct popular mandate.

Sri Lanka’s past experience suggests that stabilisation and transformation cannot be treated as entirely separate stages. Postponing reconciliation until some future moment risks repeating the failures of the past. If transformation is endlessly delayed until a supposedly perfect moment arrives, there will always be new crises and new reasons for postponement. Minister Rathnayake’s contention that the government’s immediate priority has necessarily been stabilisation flows from the government’s awareness of the precarious situation the country is. Over the past two years, the government has succeeded to a significant extent in restoring economic and political stability. Inflation has reduced, shortages have ended and public institutions have regained a degree of functionality.

Guaranteed Changes

On the other hand, the country’s development continues to face challenges due to adverse global conditions, including disruptions caused by conflict in the Middle East and extreme weather events that have affected tourism, trade and the cost of living. The danger is that reconciliation may be indefinitely postponed in the name of stabilisation. This danger can be reduced if the government works proactively with the opposition and civil society to commence practical measures of transformation now rather than later. The participation of Opposition Leader Sajith Premadasa at the symposium, and the constructive nature of his comments, has strengthened the sense that bipartisan engagement on reconciliation may now be possible.

The urgency of transformation came through strongly in the presentations made by representatives of the Sri Lanka Tamil and Malaiyaha Tamil communities. ITAK parliamentarian S.Shritharan spoke of the frustration caused by unresolved post war issues in the north and east. He referred to disputes regarding land occupied during the war years, including controversies linked to Buddhist temples and state sponsored settlement activity in areas claimed by local communities. He also pointed to the continuing large scale presence of the security forces in the north and east nearly two decades after the end of the war. These grievances have remained central to Tamil political discourse since the end of the armed conflict in 2009. Families displaced by war continue to seek the return of ancestral lands. Civil society organisations in the north have repeatedly called for greater civilian control over local administration and a reduction in military involvement in civilian life.

Academic research and practical work on the ground have shown that reconciliation cannot be separated from questions of dignity, equality and justice. Former minister Mano Ganesan, leader of the Democratic People’s Front, focused on the longstanding problems faced by the Malaiyaha Tamil community. He spoke passionately about continuing housing shortages, landlessness and economic marginalisation, issues that have persisted since Independence. He also highlighted the devastating impact of recent extreme weather events on estate communities that remain socially and economically vulnerable. The condition of the Malaiyaha Tamil community remains one of the enduring social justice issues in Sri Lanka.

After Independence in 1948, a large proportion of them were denied citizenship and voting rights through legislation that rendered them stateless. Though citizenship rights were eventually restored, the social and economic consequences of exclusion continue to be felt generations later.

Many families still lack secure housing and land ownership despite their immense contribution to the country’s plantation economy. Minister Rathnayake’s responses to both these concerns were politically significant. He argued that recent political developments, including the declining influence of narrow ethnic politics across communities, indicated a major shift in public attitudes. According to him, the political ground has changed in ways that make it increasingly difficult for politicians who rely primarily on ethnic division and communal insecurity to retain public support.

Inter-Connected

There is evidence to support the assessment about the changing political grounding which sees future prospects in the resolution of long standing problems. . The economic collapse of 2022 affected all communities alike and generated a new politics centred on governance, anti corruption, accountability and economic justice. The Aragalaya protests brought together Sinhalese, Tamils and Muslims in a common demand for political change. Although ethnic grievances have not disappeared, the crisis created space for a broader understanding that the country’s future depends on cooperation rather than division. Opposition Leader Premadasa’s comments at the symposium reflected this changing political climate. He emphasised that national reconciliation could not be separated from economic justice and the need to address disparities between regions and social classes.v He also mentioned the need for civil society organisations to take this message to the community. This wider understanding of reconciliation is important because ethnic inequality and economic inequality have often reinforced each other in Sri Lanka’s history.

Academic studies have identified the denial of citizenship rights after Independence as a historic injustice that set back the Malaiyaha community for decades. The challenge now is to ensure that transformation becomes part of the stabilisation and development process itself. Practical first steps are both possible and necessary. The release of civilian lands still under state control, greater devolution of administrative authority, reduction of military involvement in civilian affairs, language equality in public administration and accelerated housing and land ownership programmes in the plantation sector are all measures that can begin immediately without waiting for a final stage of transformation.

The government’s recent commitment that provincial council elections will finally be held this year is therefore significant. These elections have been repeatedly postponed by successive governments. Holding them would not solve the ethnic conflict by itself. But it would signal a willingness to restore democratic institutions and share power in a meaningful way.

Sri Lanka has repeatedly postponed difficult reforms in the hope that a more convenient political moment would eventually arrive. But opportunities are invariably created and fought for instead of being provided as a gift by a benevolent government.

The present moment, shaped by the economic crisis and public demand for accountable government, offers a rare opportunity to move simultaneously towards stability, development and reconciliation. Provincial council elections can be the first meaningful step. But they must not be the last.

by Jehan Perera

Features

Researchers to shape new environmental policy framework

Published

13 hours ago

2026/05/26

Sahan Weerasooriya

Some of the researchers at the meeting

In a significant move aimed at steering Sri Lanka’s environmental governance towards a more science-based and evidence-driven path, the Ministry of Environment has initiated a new collaborative mechanism to integrate leading researchers into national policy formulation and conservation planning.

The initiative was discussed at a high-level meeting chaired by Dr. Dammika Patabendi at the Ministry of Environment on Tuesday, where top environmental scientists, wildlife experts and researchers were invited to contribute towards what officials described as a “strategic transition” in the country’s environmental management framework.

The discussions focused on strengthening the scientific basis of environmental conservation programmes and national policy decisions while creating a more research-friendly environment for academics and field scientists engaged in biodiversity and ecological studies.

Particular attention was paid to long-standing concerns raised by researchers regarding procedural and operational difficulties encountered when conducting studies in collaboration with the Department of Wildlife Conservation and the Forest Department.

Minister Patabendi stressed the need for environmental policies to be guided by credible scientific data rather than ad hoc administrative decisions, ministry sources said.

Among the key proposals discussed was the establishment of a streamlined mechanism that would reduce bureaucratic obstacles faced by researchers in obtaining approvals, accessing field sites and sharing scientific findings with state institutions.

The Minister highlighted the importance of building stronger partnerships between policymakers and the scientific community at a time when Sri Lanka is grappling with escalating environmental challenges including deforestation, biodiversity loss, human-elephant conflict, climate-related disasters and ecosystem degradation.

Environmentalists attending the meeting had also highlighted the urgent necessity of incorporating empirical research into national decision-making processes to ensure long-term ecological sustainability and better resource management.

The meeting brought together several of Sri Lanka’s leading environmental researchers and academics including Rohan Pethiyagoda, Saminda Fernando, Sewwandi Jayakody, Samantha Gunasekara, Dinidu Devapura, Himesh Jayasinghe, Manoj Prasanna, Mendis Wickramasinghe and Suranjan Karunarathna.

Director General of Wildlife Conservation Ranjan Marasinghe also participated in the deliberations.

Officials said the proposed framework is expected to pave the way for a more transparent, data-oriented and scientifically credible environmental governance structure capable of addressing emerging conservation challenges more effectively.

The government expects the new mechanism to support the implementation of practical and scientifically robust programmes aimed at safeguarding Sri Lanka’s ecological future while enhancing cooperation between state agencies and the country’s growing community of environmental researchers.

By Ifham Nizam

Features

Back home … for a special occasion

Published

13 hours ago

2026/05/26

Sahan Weerasooriya

Seven Notes: Sri Lankans based in Dubai – with Niluk (second from left)

Niluk Uswaththa, of Seven Notes fame, based in Dubai, surprised many when he and his wife Apeksha, turned up in Colombo, last week … unannounced.

Yes, they had a purpose in their surprise visit … to wish Apeksha’s mum for her birthday, which was on Monday, 18th May, and what a surprise it turned out to be!

In an exclusive chit-chat with The Island, Niluk said that the scene in Dubai is improving and Seven Notes do have work coming their way.

Since the members of Seven Notes are all employed (doing day jobs), they operate only on Saturdays and Sundays.

Niluk: Didn’t come prepared to perform, but obliged
friends in Galle

In fact, to get to Colombo for the birthday surprise (on Monday, 18th May), the band had to skip their 17th May, Sunday gig.

“Although it’s a short vacation, my wife and I are enjoying the setup here,” said Niluk, adding that they spent two days in Galle and that their next destination is Anuradhapura.”

Niluk didn’t come prepared to perform, but he obliged the crowd present, at a friend’s birthday celebrations, in Galle, singing and playing guitar.

They are scheduled to leave for their home, in Dubai, in the first week of June.

Seven Notes is an outfit made up of Sri Lankans and the band has been around for almost nine years.

Niluk came into their scene nearly seven years ago.

“When I went to Dubai, I had offers coming my way but it was Seven Notes that impressed me because of their acoustic style.”

The Dubai’s entertainment scene is showing clear signs of bouncing back and even levelling up in the next few months.

Niluk and Apeksha: Enjoying their short vacation

After a slowdown earlier this year due to regional tensions, shows and festivals are back on the calendar, and organisers say late 2026 could be the busiest concert season in years.

Time Out Dubai says “the 2026 concert calendar is filling up nicely” and “the city is ready to party once again” after some reschedules.

Dubai Summer Surprises in July brings retail activations, comedy nights, and indoor art exhibitions.

Organisers point to a backlog of postponed events that are being rescheduled for late 2026 and early 2027.

Yes, Dubai is calm on the surface but on alert. Life is mostly normal in the city, but there’s a “balancing act” as people watch for escalation.