National Economy,

policy and challenges

INDRAJITH APONSU
University of Colombo
IESL 2018 PIM
“Economy
must yield
results for
all”
Economic policy statement
delivered by Prime Minister
Ranil Wickremesinghe in
Parliament
 PM _ missionstatement
…….with the planned economic remedies, we will be able to bring
back such an era of prosperity for the nation once again. In order
to be able to do so,
 able to get the economic foundation right.
 Multi-disciplined economic strength;
 local competitiveness, international trade and investments
 A knowledge based Social Market Economy built on social justice
principles
 The key areas to build. …. global opportunities for education,
 strengthening of the health system to face health concerns of
the 21st century
 to ensure social mobility successfully
PM-
Important areas of concern
……
In such a setting, we plan to pay attention in the medium
term to a few important areas of concern.
 Generating of one million job opportunities.
 Enhancing income levels.
 Development of rural economies
 Ensuring land ownership to rural and estate sectors,
the middle class and government employees
 Creating a wide and a strong middle class
More specific issues
Medium and long-term challenges
 current framework of policies is not export focused
 exports were 30% of GDP (2000) was down to 15%
of GDP (2014)
 Persistence trade deficit keeps on widening
 Direct : indirect income tax ratio 20%: 80%
 Government tax revenue 20% of GDP (2003) down
to 10% ( 2014)
 income of 43% of all Sri Lankans is around 2 US$ per
day
 Role of the state – Why government in market
function?
1. Allocative role
About allocation of resources for greater efficiency. Anti-trust,
public goods
2. Distributive role
need to balance efficiency with equity for fairness. Taxation
3. Regulatory role
enforce individual rights, protection for social justice
4. Stabilization role
macroeconomic balance for managing inflation, growth,
unemployment, etc. Running budget deficit

These roles are not mutually exclusive, and interact with one another.
Taxation affects market allocations, and stabilization function, etc.
 Government policies inaction
 Fiscal policy – taxation, expenditure pensions, infrastructure, etc.
Monetary policy – interest rates, reserve ratios, money supply
Industrial policy- measures , incentives targeting industry
 Trade policies – trade taxes, other import levies
Exchange rate policy- how exchange rate is managed
There are many areas of policy
 But, Fiscal policy is the mother of all policies
 It makes the most notice and impact and cuts across everything else It
simply tells what the big brother government does
 Fiscal policy operated via budget
Expansionary FiscalPolicy - to reduce the effects of recession

 Increased government spending or

 lower taxes or
 increased transfer payments (social security payments)
 i.e. boost GDP and reduce unemployment
 Expansionary Fiscal Policy
AS1
ASL
Price level AD1 S

P2

P1

AD2
Q2
Q1 Qp
Real gross domestic product
- in order to reduce inflation during a boom

 Decreased government spending or

 higher taxes or
 a reduction in transfer payments Coupled
with monetary policy
 Credit controls
 Raising interest rates
 Contractionary Fiscal Policy
ASL AS1
Price level AD2 S

P2

P1

AD1

Q1 Qp
Real gross domestic product
Monetary policy
 Managing interest rates
 Availability of credit
 Managing exchange rate
 Money supply and its growth
 Administration of the financial sector
 Managing financial intermediation
Why we need to be more knowledgeable
about Sri Lanka’s Macroeconomy

 Sri Lanka is at a unique point in its post-independence history

never to be missed-launch the economy to new heights
 We are in an economic environment that has to deal with
global economic changes lying at our door step.
 Sri Lanka’s geographical location
 Many opportunities await, many challenges ahead
 We need to Early warning system is a must to avoid potential
pitfalls
 Lets not forget, in the past, we missed several opportunities
 Some Reflections - Past- missed opportunities
Before 1950 • Garments take the lead export position
• 'the best bet in Asia‘ [The Washington Post, Lal 1995- 2005
and Rajapatirana,1989]; Sri Lanka's per capita
income was higher than that of Thailand and • Economic development with human face- Government
manifesto
South Korea ; heavy dependence on planation
export; most liberal economy ever 2005-2014
1956- 77 • High level of infrastructure development;
Closed economic policies, domestic complete cessation of the civil war;
industrialization led by the state, and private deteriorating civil liberties and high corruption
sector followed; socialist bias charges
1977 - 82 2014- onwards
• 'the new investment centre of Asia' (Far • Yahapalanaya - Corruption free governance as
Eastern Economic Review, 1978); Civil unrest; a mandate- ; infrastructure already in place;
FDI came and went; export-led growth; peaceful environment; high global attention

1990-94 2015-2018
• The private sector declared the "engine of • Growth rate plummeted; investment dried up;
growth” for the first time in 1992, and the 1990s inconsistent policy; political turmoil; major
the 'decade of exports' scandals ; history repeats itself ; increased tax
burden on public;
A framework to look at the full dynamics of the machine

Output
What we aim
to achieve

 Productive capital  Mobilization of • Faster economic

stock financial capital growth
 A sound financial  Growth in capital • Reduced
system stock
unemployment
 Sound  Growth in
infrastructure productivity • Higher standard of
living
 Disciplined  New technology –
workforce means of production • Greater social welfare
 Appropriate policy  Learning by doing • Economic strength
and strategies • Political stability
 More savings for
 Visionary political investment
leadership
 Growth in human
capital
Development process and outcome
– both desirables and undesirables

Inflation

Reserves Rise in per capita

exchange rate
Reduction of
unemployment
Uneven income distribution Closing income
Taxes and other Fiscal measures gaps

Budget deficit Public debt

In global context

• Asia poised to faster economic growth @ 7%+

• Current account surplus to continue
• Inflation remain well contained
• Prospects for capital flows look good
• Risk due to a more than expected slowdown in
US
• Higher oil prices can hamper growth prospects
• Inflation will result due to high costs and
financial volatility
• Rapid growth in China, later India, provide
mixed blessings for the region
Regional Economic Outlook, IMF
Economic indicators come under:

• Production, income and employment

• Price levels and inflation
• Fiscal policy also referred to as budget policy
• Demand management policies also referred to
as monetary policy
• Trade and industry policy – framework for
creating growth
• Balance of payment – foreign exchange flows
and rates
• International wealth and liabilities
Selected Indicators - Economic
• The rate of growth of GDP
• The rate of growth of per capita GDP
• The rate of unemployment
•
• The rate of inflation
• The rate of domestic savings
• The rate of national investment
• Change in the structure of the economy
• The capital output ratio
Economic Indicators

• The Budget surplus/ deficit current account

and overall
• Revenue as a percentage of GDP
• The growth of public debt

• Balance of Payments Current Balance /

Overall Balance as a percentage of GDP
• The terms of trade
• The level of external reserves
Social Indicators
• Life Expectancy at Birth
• Male
• Female
• Infant Mortality rate
• Maternal Mortality rate
• Crude Birth rate
• Crude Death rate
• Total Fertility Rate
• Literacy level
• Male
• Female
• School enrolment rate
• Primary
• Secondary
• Prevalence of under 5 child malnutrition
• Poverty Head Count
Political Indicators
• Regularity of Elections
• Freedom and Fairness of Elections
• Sharing of Power
• Devolution of Power
• Multi- party system
• Freedom of Speech
• Freedom of Association
• Freedom of the media
• Incidence of political violence
• Incidence of grave crime
• Violations of Human Rights
• Governance
• Transparency
• Independence of Judiciary

• Corruption
Have a look at
Happiness Index

• Life Expectancy

• Life Satisfaction

• Ecological Footprint.
Selected Qualitative Indicators

• Process Indicators
• Indicators of good governance
• Transparency
• Accountability
• Non- Discrimination
• Equity
• Inclusivity
• Participation
Real Growth (also called Growth)
Most vital is the Rate of Growth in GDP
It reflects the vitality of the GDP
US grew @ nearly 5% during 1990-2000 ( exceptional)
• Developing countries should achieve faster growth (used to be over
5%, now over 7% is the bottom point)
• Typically, rich countries grow slower (below 5%);
• East –Asia grew in excess of 7-8 percent, for a long-period. China is
galloping @ 10%+ , for over a decade
• SL hit 7%+ in 2006 while India notches 8%+

Most economic policies are targeted at Real

Growth. Sustained high growth makes the economy looks sexy
 GDP per Capita Income
(Real GDP/ Mid-year Population)
• Income each citizen gets if GDP distributed evenly
• A crude, yet the most common, measure of Standard of
living
• Indicator of the overall economic well-being
• For businesses, a barometer of purchasing power
• For Foreign businesses, how attractive economy looks
(especially for smaller economies)
Sri Lanka – US $ 1000+
took 50 years to get to Low –Middle income range ($800+ -3400+)
require another 25 years to Upper-Middle range (3400+ -10,000+) if we grow at
7%+
( Nicholas)
Malaysia – US $ 4,900+
achieved within 50 years
Other products of GDP
(long term indicators)………………………..

Structure of the economy

Each major sector’s contribution (%) to the GDP
Reflects fundamental character of the economy
Poor – Agriculture dominates ( South Asia)
Fast growing – Industry dominates ( Asia –pacific)
Highly advanced – Services dominate (US)
Other products of GDP…..
Gross Domestic Savings Ratio – Savings/GDP
• Portion of investment financed by GDP
• Corporate savings by firms+ household savings+
public savings
• Reflects what has not been consumed from the
domestic production ( but, does not reflect what is
available)
National Savings ratio – Savings adjusted for net
inflows/ GDP
what is available within the economy
Asians command high levels of savings
What makes the GDP click?
Rate of Investment - Investment /GDP
• Main measure of capacity and future production potential
• A higher value indicate greater growth potential ahead
• Poor ratio indicate a fundamental bottleneck to growth
• Raising investment is a relaible forecast for faster growth
• Very cyclical in nature ,a dn quite sensitive to growth expectations ( profit expaecations)

SL around 25%; Malaysia 33%+

Spoilers of the GDP party
Inflation
An unwelcome, yet inevitable by product of growth
Bad, because,
 it blurs the market signals and affects efficiency
 Notoriously unpredictable, hence, creates uncertainty
 Affects income distribution

Originate from two fronts:

 Demand-pull created due to rising budget deficit, credit expansion, wage
rise due to labour shortages, tax cuts
 Cost-push is caused by import prices, exchange rates, commodity price
volatility,
Poor Double digit inflation is worrisome
Rich More tight margin for inflation
Modest inflation is inevitable: excessive control harmful
Measuring inflation

• Control on inflation affects growth prospects

• Too much inflation affects competitiveness
• Attracts tight fiscal and monetary policy

CPI is the inflation index

most common and most timely
Reflects only consumer prices

WPI is the lead indicator of inflation – producer index

Most critical to competitiveness
Affects exchange rate via the trade balance - negative
High inflation makes imports good and exports bad

Rising WPI indicates CPI inflation to come and vice

versa
Budget policies – government’s impact on
finances
Problematic Yet can’t be without-
Government expenditure / deficit
As share of GDP high in LDCs
Influences imports
Pressures costs up and hence inflation
Foreign borrowings backed expenses boosts forex

Government revenue
higher revenue gives more flexibility
more tax on the private sector
Deficit
The means of financing has implications
Size of it too
Reduction of defcit too have implications
Finance with the rest of the world
Terms of trade
Price of imports in terms of that of locally produced
Deteriorating TOT is a sign of exchange trouble and
Sign that Foreign exchange is leaking out
Trade balance as % of GDP
Exports minus imports
Usually, as a proportion of GDP
Widening trade balance is bad as country is
overspending
Country’s financial credibility
hinges upon:

Balance of payments
• Composite statement of all currency
transactions
• Degree of liberalisation directly
correlate to the Forex
• Degree of Capital controls
• ( SL, China, India still have capital controls,
Malaysia has not. All Rich countries have
liberal capital accounts)
Millenium Development Goals

• Eight goals to be achieved by 2015, with 18

quantifiable targets and measured by 48 indicators.

Eradicate extreme poverty and hunger

Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV AIDS malaria and other diseases
Ensure environmental sustainability
Develop a global partnership for development
Analysis of Indicators

• Targets /Indicators for the goal of eradication of poverty

• Proportion of population below poverty line

• Poverty gap ratio

• Share of poorest quintile

• Growth rate of GDP per person employed

• Proportion of own account workers

• Proportion of underweight children

• Proportion of population below minimum energy consumption

Sri Lanka’s Place in the International Indexes

• The Human Development Index 99 out of 174

countries

• The Quality of Life Index Economic Intelligence Unit - 43 out of

111 countries

• The Happiness Index - 22 out of 179

countries

• The Fredom House Index -

partly free

• The Integrity Index. Overall rating Very Weak 58 out

of 100
Challenges in news
GDP story – does not look great

•
GDP per capita and growth – 2 eras side by
side
Origins of GDP
Long running current account deficit
Imports galore, what ? Oil, cars etc.
Exports stuck in garments
GDP per capita looks not so bad
Fiscal cliff
Revenue expenditure dilemma
Other4 emerging challenges
Q and A

•Its question time