Rebuilding and reconciliation driven by conventional wisdom
By Ajith Nivard Cabraal
About five years ago, Sri Lanka faced three daunting economic
challenges. To deal with those challenges, the Sri Lankan authorities
implemented certain pragmatic strategies that challenged conventional
wisdom.
At the time of defeating terrorism in May 2009, a massive investment
was required to restore normalcy in the terror-torn Northern Province.
Conventional wisdom suggested that the rebuilding, rehabilitation and
restoration should be carried out at a moderate pace, without burdening
the economy unduly, and without placing government expenditure under
stress.
However, even at the risk of experiencing a spike in the fiscal
deficit in the years 2009 and 2010, Sri Lanka executed a rapid action
plan to de-mine land, re-settle IDPs, and upgrade infrastructure in the
war-affected areas. That investment brought quick relief to the hundreds
of thousands of people who had suffered during 30 years of terrorism.
The cost?A staggering US$ 3.2 billion over 4 years, or nearly 6% of
GDP!The direct benefit?Rapid clearance of over a million landmines from
the Northern Province: speedy resettlement of nearly 300,000 IDPs; early
restoration of the infrastructure:considerable progress in agriculture,
fisheries and SME activity: significant increase in industrial
production and domestic tourism:major transformation in the financial
sector; and creation of new entrepreneurs and job opportunities;
The overall outcome?A peaceful country without a single terrorist
incident; significant country-wide economic growth; and sharp reduction
in poverty levels.
These incredible outcomes vividly reflected the extraordinary
benefits that had been reaped via practical wisdom.
Around 2008, the country was trapped in a 'vicious cycle' that had
hampered growth since independence: high fiscal deficits leading to high
inflation; high inflation leading to high interest rates; high interest
rates leading to low investor confidence; low investor confidence
leading to sluggish investment; sluggish investment leading to lower
growth than potential; lower growth and high fiscal deficits leading to
unfavourable debt dynamics which in turn, impacted fiscal deficits
adversely. This vicious cycle was deep rooted, and many Sri Lanka's
economists who subscribed to conventional wisdom used to lament that
this cycle was the country's 'karma' (fate), and that it would be
impossible to break free from that grip.
To escape, a radical change in policies and perspectives was needed,
and Sri Lanka responded by introducing several bold policy initiatives
across several fronts: excessive monetary expansion was contained
through unconventional monetary policies such as tight quantitative
tightening; recurrent fiscal expenditure was curtailed while preserving
public investment for infrastructure development; monetary and fiscal
policies were-coordinated to bring about overall macroeconomic
stability; new foreign investment was targeted through a steady pipeline
of major projects and investments in government bonds. These new
measures led to an average annual growth of 7.5% over the four years,
2010 to 2013and thus, the vicious cycle was converted into a new
virtuous cycle,with inflation in single digits, shrinking debt to GDP
ratios, and low interest rates.
In 2009, Sri Lanka also faced another major challenge:the threat to
its external account. The effect of the global financial crisis had
impacted Sri Lanka, and large scale overseas bond redemptions had
resulted. It was soon clear that some external support was required to
stave off this challenge, and Sri Lanka decided to avail itself of the
IMF facilities via a stand-by arrangement (SBA). The key objective of
the SBA was for Sri Lanka to build up its foreign reserves to more
comfortable levels to meet the uncertain global environment.
The issue however was that the IMF, in its conventional wisdom, was
insisting that Sri Lanka sharply depreciates its currency in order to
curb its trade and current account deficits which, in their view, would
help the country to build up reserves. The IMF also held the view that
Sri Lanka must significantly increase government revenue by raising
taxes.
In theory and normal circumstances, IMF's suggestions may have had
merit. However, the Sri Lankan authorities who had a deep practical
understanding of the socio-economic challenges facing Sri Lanka, held a
different view.
The authorities' view was that since the conflict had ended, there
was an urgent need to reconstruct the terror-affected areas, which
covered almost one third of the country's land mass, and two thirds of
its coastal belt. New economic activities had to be promoted for the
peace dividend to be realized. Such new activities would necessitate a
high import expenditure, which in turn, would create new capacity for
economic growth.
In such circumstances, if the Sri Lankan Rupee were to depreciate
sharply, it would lead to a significant reduction in the imports
necessary for reconstruction and a slow-down of new economic activities.
Those outcomes, together with the resulting higher levels of inflation
would have kept Sri Lanka trapped in the vicious cycle.
Accordingly, through negotiations, the Sri Lankan authorities were
able to convince the IMF that Sri Lanka would commit itself to building
its reserves, but would do so, while allowing the exchange rate to
adjust according to economic fundamentals and market conditions,instead
of forcing an artificial, sharp depreciation of the currency.
The Sri Lankan authorities also took the view that lower tax rates
would spur growth and ultimately increase revenues, and based on such
view, they were able to convince the IMF that it would be better to
lower tax rates and encourage economic activity. Subsequent economic
outcomes have since confirmed the wisdom of both these moves by the Sri
Lankan authorities.
Although this trio of major challenges have now been effectively
addressed through the application of unconventional wisdom, Sri Lankan
authorities realize that they must continue to practice innovation in
order to reach their long term goals. At the same time, Sri Lanka must
also preserve the country's peaceful environment and political
stability, in order to make these outcomes sustainable.
In this regard, Sri Lanka is now facing a fresh challenge, where
human rights advocates of the US and the West, are focusing on the last
phases of the 30 year war on terror, and raising certain human rights
issues and prescribing various 'foreign' solutions to those perceived
issues. In this situation too, just as conventional economists did not
appreciate the practical benefits of the innovative economic strategies,
theoretical human rights activists also do not seem to appreciate Sri
Lanka's strategy of ushering long lasting peace to its communities in a
practical and effective manner, without inflicting further anxiety, pain
and anguish on the people.
Sri Lanka is a vibrant, practising democracy and a country with a
2,500-year history, emerging out of long and bloody terrorism. It has
the maturity and the ability to deal with issues confronting the
country, in accordance with its own systems, culture and democratic
traditions.
So far, all Sri Lankans have been able to enjoy peace, by practising
a hybrid system of restorative justice and rapid economic and political
development. In that background, it is vital that the country is not
pushed into 'foreign-grown' solutions of international agencies and
others, who unfortunately, sometimes appear to be influenced by certain
human rights crusaders,who have been well-known terror activists in the
past.
It is also worthy to recall that, in its commitment to the principle
of restorative justice following the conflict, the Sri Lankan Government
has already granted amnesty to more than 11,000 former Tamil Tiger
terrorists, some of whom have even committed grave crimes. In such
circumstances, if the government were to open new investigations as
proposed by some, it could turn the clock back and cause great anxiety
to those offenders who have been forgiven, and may even lead to some of
them reverting back to violence. At the same time, some of the
proposed 'foreign' interventions that seem to be narrowly focused on the
conduct of the Sri Lankan armed forces only, could also be construed as
unfair and/or selective treatment towards the Sri Lankan armed forces
who defeated terrorism, and could lead to a consequent de-stabilization
of the country.
Practical wisdom would therefore suggest that reconciliation between
communities must be allowed to follow a 'home-grown' path in keeping
with the time and space as set out by those who suffered the agony of
terror, and those who are today responsible for maintaining the peace in
the country. Needless to say, such reconciliation cannot and must not be
'imposed' by foreigners who do not carry the burden of being
responsible to the Sri Lankan people.
As every Sri Lankan living in the country would readily acknowledge,
Sri Lanka's overall objective in defeating terrorism was not only to win
the military battle, but also to place the country firmly on a
sustainable path of peace, prosperity and growth for all of its people.
For that objective to be achieved, Sri Lanka must follow its own time
frames and priorities, and if need be, challenge conventional wisdom as
proposed by outside parties, however well meaning their intentions may
appear to be.
The writer is the Governor of the Central Bank of Sri Lanka.
Courtesy: Forbes Magazine |