In line with Mahinda Chintana policy:

From potato chips to micro chips

by Jayampathy MOLLIGODA

In terms of the 13th Amendment to the constitution, in late 1980s the Government established the “Finance Commission” to make recommendations to the then President on providing and allocating funds to the Provincial Councils from the national budget with a view to achieving balanced regional growth. Although there have been some improvements in the overall Sri Lankan GDP growth in the last couple of years we have been pointing out some disappointing statistics in terms of %GDP growth for the last 30 years even after introducing open economic policies.

Indicator 		Western 	Southern 	Eastern 	Uva 	Sabaragamuva 	Total
			province province province province 	province 
GDP Share (%) 2007 	48.4% 	10.5% 	5.0% 	4.5% 	6.3% 		100%

Socio Economic indicators
(2003/04 survey) Average
income per person (Rs.) 	6,000 	3,060 	2,900 	2,570 	2,895 		3,970

Availability of Equipments
(house holds %)

Motor Cars & Vans 		12% 	2.8% 	2.7% 	2.3% 	2.7% 		5.8%
Computers 		10% 	2.5% 	1.2% 	0.5% 	1.6% 		4.1%

(Source: Central Bank Annual Report - 2008)

What is more disturbing is the vast regional disparity in economic development activities and low physical quality of life of the people living in the rural villages. Basically, in the past whatever the little development achieved too has been centred in the Western Province, and to be more specific in Colombo and Gampaha districts leaving out Kalutara district.

We have been stressing the importance of adopting a new economic model for Sri Lanka based on home grown policies for quite some time and time has come to formulate and implement a set of national policies to improve the economic welfare of the people of this country on a sustainable basis.

Chiang Mai Initiative

The leaders of the Association of South East Asian Nations (ASEAN) during the 1997/98 East Asian financial crises reached out to leaders of China, Japan and South Korea for assistance.

The proposal from the Japanese Finance Minister for an “Asian Monetary Fund” had been scuttled by United States and rest of G7 and IMF itself. Since then they have been discussing the need to have their own initiatives in the event of any temporary financial shortfalls.

Known as the Chiang Mai Initiative, the ten members of ASEAN, or Association of South East Asian Nations, plus South Korea, Japan and China have now been able to collectively create a fund worth 120 billion dollars that the 13 countries can draw from, if financial pressures start to mount on their respective countries. And as decided in May this year, we now know that China and Japan will pour the most money into the fund, each bearing 32% of it.

South Korea will throw in 16% and the 10 members of ASEAN will pick up the remaining 20 percent. (Some 34 billion US $ have already committed to the fund by China, Japan, South Korea).Senior officials of East Asian governments and Central Banks held several meetings recently to consider, among other things, transforming the Chiang Mai Initiative (CMI) from a network of bilateral swap arrangements into a collectively managed fund-which they refer to as “CMI multilateralisation.”

The region’s dissatisfaction towards the International Monetary Fund (IMF) stems from the 1997-98 financial crises. It is useful to ask how CMI (now popularly known as “ASIAN IMF”) could evolve over the medium term.

They expect to broaden in geographic scope beyond current 13 member countries. Sri Lanka could also be benefited if we timely approach the parties (CMI) although we are not members of “ASEAN”.

Not only the Asian leaders, even the leaders from the West and some influential members of UN affiliated bodies such as the International Labour Organisation (ILO) have expressed some concerns over the manner in which the multilateral institutions work against the wishes of the developing countries own economic policies. In June this year, under the sponsorship of ILO, world leaders, employers and trade unionists met in GENEVA at a crisis summit and welcomed a new “Global Jobs Pact on employment” The French President urged the International Monetary Fund (IMF), World Bank and other multilateral agencies to respect the environment and social conditions in countries, and pushed for a new global system that finances entrepreneurs not speculators.

“The crisis has given us a licence to imagine. There is no time to retreat, more time to lose. Look... oil prices are rising again, the speculators is back,” he said, the IMF said it would move away from imposing conditions on standby credit facilities.

But Raymond Torres, director of the ILO, speaking to reporters, said many countries are waiting for the IMF decision at the April G20 meeting of leaders.

“We hope it works because some countries are asking: Where is the promised support?” he said.ln his speech, outspoken Brazilian President “Lula” Da Silva slammed U.S.-based multilateral agencies saying the ‘Washington consensus’ is over.

“We need to build a new world based on equitable distribution of wealth,” The Washington consensus refers to the World Bank and the IMF and their policies.Lula, welcoming the Global Jobs Pact, said the international community cannot allow more jobs to be lost in poor countries.

“G20 leaders promised not to bail out banks and financial institutions, but protect jobs and create jobs.

We need to build a new [economic] model that’s equitable,” he said. It seems majority of the world leaders are fed out with the existing world economic order and the policies of the multilateral financial institutions but they have not been able to come up with a viable and sustainable new economic & financial model to address their own issues on the belief that too much of protectionist policies would eventually hamper the international trade & investment activities which is counter-productive in the medium term.

IMF stand-by

Despite opposition from US, the International Monetary Fund on 24th July approved a 20-month Stand-By Arrangement for Sri Lanka in an amount equivalent to SDR 1.65 billion (about US $2.6 billion) to support the country’s economic reform program.

Following the Executive Board discussion on Sri Lanka, Deputy Managing Director and Acting Chairman, Takatoshi Kato stated:

The global financial crisis has had a significant impact on Sri Lanka’s economy. Persistently high budget deficits forced the Government to rely on short-term financing from international markets. The global shock resulted in a sudden stop to this financing.....”

Upon the Executive Board’s approval, an amount equivalent to SDR 206.7 million (about US$322.2 million) becomes immediately available to Sri Lanka. The remaining amount will be phased in, subject to quarterly reviews...”

“Reducing the Central Government fiscal deficit, while preserving spending on health and education and protecting the most vulnerable in society from the economic downturn, is a central goal of the Government’s program....”“The program aims to rebuild reserves to prudent levels while allowing the flexibility in the exchange rate necessary to boost the competitiveness of Sri Lanka’s exports.

At the same time, the Central Bank’s policies will aim to control inflation while ensuring adequate credit to the private sector,” Kato said.

It is also interesting to reproduce (IMF release) the para in summary form on welfare measures.“Social protection: With 15 percent of the population living below the poverty line and a large number of people in the North and East of the country displaced by the conflict, the program envisions protecting expenditures on social transfers to the country’s most vulnerable.

Spending on post-conflict humanitarian assistance will be also secured through savings from spending cuts and external financing and grants from multilateral institutions and the donor community.”

Neither the US Secretary of State Ms. Hillary Clinton nor British Foreign Minister David Miliband could prevent IMF Executive Board approving the Stand-By facility to Sri Lanka, although five countries namely US, UK, France, Germany and Argentina abstained from voting. My own view is the conditionality attached to the loan is not unfavourable to Sri Lanka.

However maintaining a budget deficit around 5% during the next year (2009-7%) is a difficult task given the global economic downturn and the resultant drop in export/import tariff revenues to the Government and also the anticipated heavy expenditure on infrastructure and recurrent public spending.

It may be true that lending institutions agree to commit more funds towards development, but it is more likely that the Government of Sri Lanka would have to set aside substantial amount of money by way of counterpart funds if we are to fast track the ongoing/new infrastructure projects.

Also it is essential that the policy-makers take a holistic and integrated approach to fiscal policy and growth strategy where there needs to be a balance in trying to maximize government revenue by way of increased custom duty on heavy imports on say wheat flour, milk powder, other imported items etc. at the expense of overall expected growth in domestic agriculture/animal husbandry sectors. It is in this context the prioritizing the “5% budget deficit target” should be viewed.

Dialogue

However it is happy to note IMF also accepting “social protection” and need to protect country’s most vulnerable and the other day the main opposition party also has come up with an alternate economic policy framework based on socially oriented open economy as reported in the media.

Nevertheless let us resolve that this stand-by facility of US 2.6 billion be the first and the last such loan from the IMF and Sri Lanka would not seek any such fund by way of loan or stand-By facility or grant or donation in future.

In the event any need arises we must have some kind of bilateral swap arrangements from Central Banks from friendly countries or make early arrangements to initiate a dialogue with “Chiang Mai Initiative” itself.The writer published an article in 2005 arguing the need to adopt a more socially- oriented market economic model for Sri Lanka as opposed to Free Market economic model where the benefits of economic development are not concentrated in a few but shared by all.

In a recent article in the Sunday Observer I did mention that there was nothing wrong in borrowing long term concessionary funds for capital development projects where repayment terms could include grace periods and low interest rates. I have predicted that more Foreign Direct Investments (FDIs) may flow into the country followed by IMF funds once infrastructure is in place.

Sri Lanka has a superb window of opportunity viz other countries if we are able to obtain FDI’s and fast track “ongoing infrastructure development projects”; then the country could drive the economy out from the current temporary downturn and improve the quality of life of rural people and also reduce the regional disparity of income and opportunities available for rural forks.

During the height of southern violence in the 87-89 periods, the then administration had been accused for not providing enough facilities by way of education, health and vocational training opportunities for rural forks and the phrase “COLAMBATA KIRI GAMATA KAKIRI” has been used in the media to illustrate the point.

With the launch of ground breaking Sinhala Language Interface Pack (Tamil version to come) for the Windows Operating System with the assistance from Microsoft owner Bill Gate, “GAMATA IT” programme would open the doors for people in rural communities. Eventually, they would learn computers in their local language, and learn how to access the Internet; as well as tackling the reluctance to use of computers due to a lack of proficiency in the English language.

Not only the most popular packages such as Microsoft office-word, excel, power point etc. they could learn Adobe, 3D Max etc. also. I could imagine village youth using software packages like “3D Max” and developing design models for new development projects undertaken in their own areas; for example Hambantota/Weerawila airport, Solar power electricity generation stations, Waste disposal/Garbage recycling plant etc. The work load done by the Information and Communication Technology Agency (ICTA) of Sri Lanka, to revolutionize the IT knowledge of the rural population is commendable.

Since Microsoft is not an open source system, may be ICTA to negotiate and get further concessions from Microsoft could also be explored. A word of caution here that some point of time the rural youth should get used to software application in English language as well. Otherwise they will not be in a position to learn and apply English words and technical terms quickly in day- today work thereby depriving market/job opportunities that may come in their way to earn more revenue. GAMATA IT programme could really add value to agro based economy in the rural villages and transform the dualistic nature of hitherto underdeveloped basic agricultural activities into a vibrant agro based industrial sector.