Trust begets trust

by Usvatte-aratchi

The president’s rhetorical claims on Galle Face Green on February 4, 2023, amplified in Parliament on February 8 that there have been no dehydrating long queues at petrol stations and no protests by peasants demanding fertilizer because of good economic management since he assumed office hid from the public many facets of the slide down to that ‘stability’ at a low level. The economy is in some temporary and unstable hysteresis. The policy changes that brought it about were implemented well before the present president’s accession to office.

Let us look closer at what happened. The country went into default on its foreign debt in April 2022, four months before the new president took office. That action saved for other uses the foreign exchange that we would have paid in interest and capital to foreigners up to that point. That relieved pressure on the balance of payments. By implication, it also saved the value in rupees that would have been necessary to buy the foreign exchange to pay the debt owed to foreigners. That helped to relieve the pressure on the domestic budget. Those resources were released for other uses, contributing to that temporary relief.

What we can expect for the next two years and more is about the same level of resources augmented with the first tranche of the Extended Funds Facility, after the Fund and our government agree on terms. The president’s promise of higher pay for public servants later in the year is pie in the sky. Consequent upon the default on foreign debt payments and the perceived higher risks of lending to Sri Lanka, interest rates on borrowing from banks rose beyond 35 percent per annum. Few enterprises could function with funds borrowed at those rates of interest.

Banks loans, renewed year after year, are a common source of capital for enterprises in this country, in the absence of developed capital markets. The economy shrank in response to higher interest rates as the monetary multiplier became effective in its own time. Bad loan books in banks bloomed. Business activity slowed down and will shrink further. The policy decisions that brought about these changes were made before the present president took office. The recent fluctuation in the value of the rupee is a minor play in speculation. Like all bubbles of this sort in markets, it will break in its short time. Ignore the share market. It does not matter to the economy.

The ratio of imports to GDP, about 40 percent, is a fairly constant number in this economy. Selected imports were banned and the economy necessarily shrank, again. Crop failures called forth mainly out of ignorance and prejudice (with viyath maga [Wise Guys] as partners of government!), severely cut down the income of farmers and peasants and the results of that fall in income worked themselves throughout the economy Major policies and programmes that depressed total income and total demand that brought about the so-called stability antedated the advent of the new president. The central bank cannot raise the supply response as that response is governed by other stimuli: high risks of lending to a bankrupt nation.

In 2022, remittances from workers overseas rose in some degree, with the rise in the rupee value of the dollar. (Elementary, Dr. Watson.) There was some increase in tourism but far too small to compensate for losses in the economy elsewhere. Tourists came partly because foreign currency could buy a lot more after the May 2022 devaluation than before it. A room priced at $100 in 2021 (Rs 20,000) is now available for $ 75, (Rs26,3750), a lower price to the tourist and a higher price to the hotelier. Along with the shrinkage in the economy, the demand for energy fell. The ratio of energy use to GDP is (again) fairly constant. (The former Prime Minister of China, Li Keqiang, devised his own index number for the growth of GDP in China using the quantity of electricity consumed, freight carried and another as guides.)

The sale of petrol in 2022 fell by about 30 percent of its use in (say) 2018, the last year when the economy worked close to capacity. The demand for energy also fell more steeply consequent upon the sharply higher domestic prices, reflecting the higher prices of petroleum and related materials in international markets. (Both price and income effects were at play.) The fall in the quantity of petrol and other fuel sold in 2022 accounts for the disappearance of dehydrating queues in petrol stations. At my neighbourhood petrol station, I have not seen a line of cars waiting to fill up for many months.

Casual evidence of the fall in demand is the sparse traffic on roads even at times of congestion, evident earlier. There were four three-wheeler drivers who, for many years, operated from the top of our lane and there has been none from about mid-2021. The total effects of all this will be evident in the rate at which the economy shrank in 2022 when the figures will come out later this year. (That funny neologism NEGATIVE GROWTH is a challenge to make nonsense intelligible.) These adverse developments were consequent upon policy decisions made by the Gotabaya Rajapaksa government and inherited by the Wickremesinghe government.

This government reversed some stupid decisions by the former president, who single-handedly and ‘beyond the call of duty’ (as touted to boost his candidacy), destroyed the livelihoods in agriculture including fisheries on a massive scale. Peasants who cannot afford the new high prices for transport with a lower total income are mournfully protesting still, not on the Galle Face Green in Colombo but in rice fields, which ought to be luscious green mid-maha, now sickly brown affected by infection with insects, viruses and bacteria. Infested compost used in rice fields after the ban on the import of chemical fertilizer introduced substituting chemical fertilizer may have introduced pests to fields. The devastation of crops, both rice and corn, is rampant in Ampara, Polonnaruva, Anuradhapura and Kurunegala, all districts that contribute heavily to the marketable surplus of rice and provide feed to poultry farmers.

While the present policy regime is a distinct improvement on the inconsistencies, ignorance and stupidities of the preceding half-military regime, it (the present policy regime) contains standard prescriptions dictated for situations of economic austerity necessary to bring down the level of economic activity to what is affordable; affordable with low import capacity. Following the Hippocrates oath, the government, mercifully, has not harmed the economy in contrast to the earlier regime. The economy cannot work at higher capacity without hitting the ceiling of foreign exchange resources available. Go to Greece a decade back, Thailand 16 years back, and Korea several decades back. (I had written about the impending disasters in this newspaper and spoken about them in other fora for several years. Read a clear warning as early as 2013 in my address to the Annual Sessions of the Sri Lanka Economic Association.)

In no instance, that I cited, was there a surgeon present. But there is work for a team of surgeons and a whole lot of other medics in this instance. WHO will need to send plane loads of surgical supplies. A carbuncle with foul-smelling wounds spread all over this economy and the body politic now presents a serious risk of septicaemia (sepsis). The death rate from sepsis, is 50 percent, more or less, of those affected. Clean up the foul infection of corruption generated and spread by former presidents and their family members, hordes of members of parliament and local government bodies, gangs of government employees and armies of private citizens who helped to spread the bacteria. Some need to be made harmless and others quarantined long-term. The large crowds that throng to hear Anura Kumara Dissanayake, I reckon, are attracted by their persistent, substantiated and convincing promises to eliminate corruption in this society.

Fail in that and the JJB had better find places to hide in. The promises by the president of a bill that will be presented in Parliament to cure these ills in the future is neither here nor there. Every government that came to office after 1994 promised to kill the wild beast of an executive president who still rages savagely, unmolested. The present president who was a powerful figure in the Parliament 2015 -2020 did promise with great solemnity and even more bombastic celebration, that he would revise the constitution to deprive that office of the very powers that he now exploits. So will this bill against corruption be ‘Great Expectations’? To change the entire scene metaphorically, ‘Who is Sinhabahu enough ( ‘kuriru, darunu mee saturaa maranata) to slay this ferocious and woeful foe?’

The time to act is now. The elimination of this gangrene and septicaemia is essential for the revival of the economy. From casual observation, most people will not accept the sincerity of ‘unpopular policies and programmes’ that the president foretold until the general public trusts policymakers’ sincerity. The claims made by politicians of the government and some senior civil servants that there is no money to hold local government elections is another way of saying that among all the payments the government may make in the financial year 2023, holding elections has the lowest priority.

These claims and activities betray a deep-seated distrust of democratic ways of government. All people in democratic societies ought to protest at that ghastly assertion. Most people in our society will be further convinced that this government should not be trusted. Few things will restore trust in government as a frontal attack on corruption in the economy would. Government cannot carry through programmes that hurt the public in the short term without reviving the trust of the people in government which the government had lost much earlier. (I wrote about this in early 2020.) That restoration requires surgery to eliminate the foul and deathly carbuncle. (Recall the ‘restoration’ after (the Short (1640) and Long (1640-1660) Parliaments, the execution of Charles I of England in 1649 and the death of Lord Protector Oliver Cromwell in 1659. The English throne, from which Charles III reigns now, has never been vacant ever since.)