Undertake proper diagnostic study to achieve GDP growth
Despite heavy taxes and increased tax collection, the government budget deficit for the period end May 2023 has increased to Rs. 1,015 billion which is 59% increase against 2022 end May figures. (See table) Another negative feature is that due to heavy taxes and very high bank interest rates, the economy has not grown and GDP growth rates have been negative. Although inflation-point to point- has decreased, the cost of living has gone up. These have been predicted by the writer’s previous articles published in The Island and elsewhere.
Despite domestic debt restructuring efforts have concluded successfully, it is unlikely that the government budget deficit will decrease in the near future. The government policy makers are targeting a strategy of ‘primary surplus’. This IMF/CBSL strategy of trying to achieve primary surplus is being challenged by many eminent economists. As these economists have been advocating, the government must focus on GDP growth rate increase – meaning real economics not financial numbers (transfer payments) etc only.
In simple terms, the fundamental solution lies in making one thing to happen,” economic and business activities must be happening everywhere”
GDP growth = C+I+ G+ (exports-imports)
Where, C- consumption and I- investment, G- government spending.
It is true that no country has experienced a rapid growth without adherence to sound economic principles such as market- oriented incentives, property rights, sound monetary and fiscal policies. But these can be implemented via policy arrangements that are quite un-conventional. Also, attempts to emulate policies successfully implemented elsewhere often fail. Empirical studies conducted by eminent economists reveal that successful policy reforms are those that package sound economic principles around local capabilities, constraints and opportunities. It does not take a whole lot of reforms to stimulate economic growth. However, it may be difficult to identify where the binding constraints lie.
The government should do everything possible and allow the private sector including SMEs to produce everything possible to a level that some surplus (after consuming locally) is first created and then exported. In addition, we must develop the service sector, non- merchandise-tourism, travel and inward remittances- do everything to keep (without migration) skilled and professional staff /people including doctors, engineers, IT and finance professionals, academics, highly skilled technicians, etc., and prevent businesses /factories to be relocated outside Sri Lanka. Let us try and export unskilled labour as much as possible with multilateral agencies backing, if they are sincere in their advice. Further, the government must synchronise everything between (i) business activities, SME’s producing goods, growing crops and other services and (ii) government departments to facilitate smooth functioning-for an example- release water to farmers in a timely manner.
Empirical studies have revealed that reforms are necessary but their outcome is heavily dependent on circumstances. In short, growth strategies require considerable local knowledge. It seems that the policy makers including IMF have not undertaken a serious diagnostic study to identify real causes of economic downturn and select few, relevant structural reforms first to put into practice focussing GDP growth. Initial recovery and sustained growth strategies are two different aspects. Let us concentrate on simple things such as how to make businesses and people work in order to increase GDP growth. The most important question is how to get entrepreneurs interested in investing, meaning all their activities such as expanding capacities, producing new products, bringing new technologies, etc. Local conditions matter not because economic principles change from country to country, but because it requires local knowledge.
Jayampathy Molligoda
