Rise and fall of the Sri Lankan economy

By Jayampathy Molligoda

“‘One belt, One Road,’ China’s blueprint to tie Asia and Europe together in one vast trading network, could reshape geopolitics and the world economy” – The Economist (UK), 30 June 2016.

Standard Chartered said a few years ago that the US would eventually be replaced in what it defined as the third global economic super cycle. Standard Chartered is not the only institution to make the claim that China’s GDP growth would beat the US’s within the next five to six years. 

The International Monetary Fund (IMF) has made similar assessments over the last year. It forecasts China’s GDP to hit $ 24.6 trillion in 2020, up from $ 5.7 trillion in 2010. Meanwhile, the US economy should register GDP growth of $ 23.3 trillion, up from $ 14.6 trillion in 2010, according to Standard Chartered’s economists.

According to Dr. Dayan Jayatilleka, economically it makes perfect sense for Sri Lanka to piggyback on Chinese surpluses as well as its global projects and institutional initiatives. “The model of China as the enormous motor, which powered the much smaller motor of the Sri Lankan economy, was eminently rational, but in its ideological irrationality the UNP initially delinked abruptly from China,” he said.

One of the criticisms against the previous administration was that the then government resorted to heavy borrowing, especially from China. Contrary to popular belief, the Central Bank Annual Report 2015 presented this April revealed that total government debt as a percentage of GDP was only 71% as of December 2014, against 97% of the GDP in 2000 and under this Government it was increased to 76% by the end of 2015. Similarly the government budget deficit as a percentage of GDP, which was 9.5% in 2000, has come down to 5.7% in 2014, but unfortunately it had increased to 7.4% by the end of 2015.

Economic policy incongruences of the national government

Last week in an interview with Channel NewsAsia, Prime Minister Ranil Wickremesinghe said the Government needed more loans from countries like China, Japan and India. So it is likely that Government borrowing will rise.

In presenting Budget 2016, Finance Minister Ravi Karunanayake said last November: “We have a dream to be a developed nation. We will ensure the delivery of targets and goals set focusing on short-, medium- and long-term strategies to facilitate the transition towards an upper middle income economy. The medium-term strategies proposed consist of (a) Enhancing income levels, (b) Developing rural economies and c) Generating one million employment opportunities.” 

To me these are not strategies but a few items on the Government’s wish list. On the wish list we find among other things a proposal for signing free trade agreements with Japan, the US and South Korea, allocating Rs. 1.5 million for each Grama Niladhari division (14,022 such villages) for rural economic development, and allocating some Rs. 60 billion to upgrade 5,800 primary and secondary schools and many more. However, the deliverables are yet to be seen.

As per the budget speech, the Government is committed to following more market-oriented policies. The budget deficit of Rs. 740 billion will be entirely financed through borrowing. One can argue that the Government budget presented by Ravi Karunanayake reflects mainly the neoliberal policies of the UNP and not necessarily the policy of the SLFP, the other party in the national government. In the past, SLFP-led governments used to give prominence to uplifting the agriculture economy, which is totally neglected in this budget.

China as a superpower and India’s emerging economic model

The recent regression in Western economies and the rapid economic growth in emerging economies are shifting the global industrial centre of gravity away from the North Atlantic and raising the importance of Asian economies in world production and trade. Who will eventually emerge as the top economic power by 2030? Will today’s five largest economies—China, the US, India, Japan and Germany—maintain their places between now and 2030? 

According to the IMF using PPP, China has already surpassed the US in terms of economic power.China has the world’s largest highway system, most high-speed trains and is the largest exporter in the world. Also in terms of actual wealth, Chinese citizens save over 50% of their income compared to the US whose citizens save about 4%. 

The standard of living is growing in China and it will soon become a developed nation. The lives of China’s peasants are getting better every year due to the country’s increased wealth but the peasants of the US are unfortunately getting poorer as income inequality increases.

By other measures, such as current dollar GDP, the US is still the largest economy and it is likely that US economic dominance will continue. Many reliable and responsible future projections set real GDP growth rates for China and India at about 8% and 7% per year respectively between 2007 and 2030. 

In India, a new economic model is emerging from Prime Minister Modi’s speeches and policy statements. The model includes export-oriented manufacturing, heavy infrastructure building and urbanisation. This suggests a shift from India’s current services-driven growth trajectory to an East Asian growth model based on the mass deployment of labour and capital. 

According to experts, the new strategy will require keeping the Rupee weak and dramatically expanding the financial system. International experience shows that the model can generate growth and jobs but sustaining such rapid financial expansion is not without risk.

Indian Ocean strategy and China’s 21st Century Maritime Silk Road

During the 2006-2009 war, India wanted the LTTE defeated despite objections from the Tamil Nadu political leadership. Since then, the Indo-Lanka bilateral relationship was seen as going through a bad patch. 

As articulated by Bandu De Silva, an eminent career diplomat, under the ‘Panikkar Doctrine’, Sri Lanka was conceived as essential for India’s forward defence system in the direction of the Indian Ocean. It was clear that the Rajapaksa administration had failed to dispel India’s concerns about a growing tie-up between Sri Lanka and China and how it impacted India’s national security. However, this situation has dramatically changed since the present Government came to power.

In 2013, the US and India signed two landmark agreements - their first commercial nuclear deal and an accord between the two governments to enhance defence cooperation. The Indian Government intends to use US nuclear technology at commercial power sites it is developing in Gujarat and Andhra Pradesh. 

Professor Cheng Enfu, Chairman of the World Association of Political Economy, in a symposium held recently in Sri Lanka, said that with the Indian Ocean being the lifeline of China’s foreign trade, energy and raw material transportation, Sri Lanka will undoubtedly play a crucial role in the strategy of the 21st Century Maritime Silk Road with its unique geographic advantage. 

However, the critical issue here is the ‘Indian interests’. Indian foreign policy is based on a fundamental principle of ‘In diplomacy there are no permanent friendships but permanent interests’. 

Sri Lanka is compelled to follow this principle governing Indian foreign policy to further strengthen its bilateral relationship with India. It is in that context that the vital issue of keeping the Indian Government informed about the details of the present strategic alliance and the growing tie-up between China and Sri Lanka should be viewed. 

Sri Lanka needs to emphasise the importance of forming a strategic alliance with China and come to some kind of a tripartite agreement to safeguard the Indian Ocean forward defence line and promote the ‘maritime silk route’ strategy for greater economic benefits for the three nations. 

Already India and Sri Lanka have a Free Trade agreement (FTA).The proposed FTA between China and Sri Lanka will allow Chinese companies to set up large-scale industries in Sri Lanka so that they can make use of the Indian FTA to accelerate trade with India and at the same time re-export products back to China. 

Here we are talking about tapping a 2.5 billion target market of customers in both countries. Sri Lanka will stand to gain more. During former president Rajapaksa’s visit to China in 2013, both countries agreed to a strategic cooperative partnership and in September 2014 Chinese President Xi Jinping visited Sri Lanka and announced the FTA negotiations. 

It seems that the present President and Prime Minister have now realised the importance of this three-pronged approach and are keen to finalise the proposed FTA with China and develop a port city in Colombo and allow more concessions to Chinese companies while promoting trade and investments with India through the ECTA.

Economy caught between the devil and the deep blue sea

As I argued in my previous article ‘Ultimate goal of Geneva resolution’, published in the Daily FT of 17 March 2015, the real motive behind the move by the US at the UNHRC is not to promote reconciliation, human rights and accountability in Sri Lanka. The United States, the UK and the West are now concerned that China will gain superpower status economically, thus dominating the Indian Ocean region economically as well as militarily.

The ultimate goal of the US is to regain full control and dominance over the Indian Ocean region. 

In order to achieve that they need to ensure that emerging Asian countries like India, Sri Lanka and China will not get together and form a “regional strategic alliance”. This can only be done through creating divisions among those countries. 

The first strategic move by the US was the signing of the above accord with India to enhance defence cooperation. The second ploy was to make use of the alleged human rights violations and other “good governance issues” to deliberately interfere with the internal affairs of the Sri Lankan Government and annoy the leaders. 

The motive is to destabilise Sri Lanka through the mechanisms available under the UNHRC. It seems that the present Government is trapped between the Geneva resolutions and geo-economic considerations and internal conflicts of China and India. 

In a recent newspaper cartoon, an English teacher is asking her students in the class, “One day Sri Lanka will become a highly developed country. Which tense is this?” A student answered: “Future impossible tense.”

(The writer is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka. He has obtained his MBA from the Postgraduate Institute of Management and has also successfully completed an Executive Strategy Programme at Victoria University Melbourne, Australia. He was conferred the “Professional excellence awards-2014” at the CMA national Management accounting conference. At present he serves as the Director/ Chief Executive Office of a leading regional plantation company.)