{"id":20336,"date":"2013-04-19T00:36:39","date_gmt":"2013-04-19T04:36:39","guid":{"rendered":"http:\/\/dbsjeyaraj.com\/dbsj\/?p=20336"},"modified":"2013-04-19T00:39:40","modified_gmt":"2013-04-19T04:39:40","slug":"top-economist-warns-easing-monetary-policy-and-bringing-down-interest-rates-would-not-help-country-sustain-high-economic-growth","status":"publish","type":"post","link":"https:\/\/dbsjeyaraj.com\/dbsj\/?p=20336","title":{"rendered":"Top Economist Warns That Easing Monetary Policy and Bringing Down Interest Rates Would not Help Country Sustain High Economic Growth"},"content":{"rendered":"

A respected senior economist said yesterday that easing monetary policy and bringing down interest rates would not help the country sustain high economic growth unless measures were taken to address long-standing structural deficiencies in the economy.<\/strong><\/p>\n

“The euphoria of the war victory and commencement of the US$ 2.6 billion IMF standby facility arrangement prompted a relaxation of fiscal and monetary policy to stimulate economic growth which saw economic growth average 8 percent in 2010\/11, but could not be sustained due to structural problems in the economy which saw growth slip to 6.4 percent in 2012,” Institute of Policy Studies Executive Director Dr. Saman Kelegama said.<\/p>\n

<\/p>\n

A balance of payments problem emerged during the second half of 2011 but authorities, in denial, failed to act fast, and instead ostracised many economists and analysts that highlighted the problem.<\/p>\n

In February 2012 a much delayed stabilisation package with a flexible exchange rate and higher interest rates capped by higher tariffs on number consumer durables came into effect. This managed to reduce the current account deficit of the balance of payments to 7.8 percent of GDP in 2011 to 6.6 percent in 2012.<\/p>\n

“But exports faired badly in 2012. While imports fell by 5.8 percent in 2012, exports fell by 7.3 percent, which could not bring the current account down further despite the remittances inflows of US$ 6 billion and tourism earnings of US$ 1 billion,” Dr. Kelegama told the launch of the UN-ESCAP 2013 annual report in Colombo yesterday (18).<\/p>\n

Gross reserves, amounting to US$ 6.9 billion as at end 2012 comprised borrowed funds not net earnings, he pointed out.<\/p>\n

“Given this scenario there is limited space for relaxing monetary policy this year. It can be done. Easing monetary policy would bring down interest rates and boost economic growth, but growth will not be sustainable without structural macroeconomic reforms,” Dr. Kelegama said.<\/p>\n

“We need to improve competitiveness of our exports and increase productivity in the agriculture and public sectors.”<\/p>\n

The government is engaged in a spate of infrastructure projects, but these investments suffer productivity problems.<\/p>\n

“The incremental capital output ratio was above 4.5 percent in 2012, whereas with a growth rate of 6.5 percent and investment amounting to 30 percent of GDP, this ratio should have been 4 percent, an indication that we have problems with productivity,” he said. <\/p>\n

The UN-ESCAP report said governments need to place greater emphasis on the quality and composition of public expenditure, rather than aggregate budget deficits and public debt.<\/p>\n

“Current expenditure was lopsided with interest payments ( 5.4 percent of GDP), wages and salaries (4.6 percent of GDP) and Transfers and Subsidies (3.1 percent of GDP) accounting for 13.1 percent of GDP, the same as the overall revenue in 2012. That is the reason why Sri Lanka has not been able to show a surplus in the current account of the budget deficit for the last several years. For instance, in 2012 the deficit in the current account of the budget was 1.4 percent of GDP compared to 1.1 percent of GDP in 2011. A surplus in the current account is always helpful to maintain capital expenditure at a high level of close to 6 percent of GDP, a must in the absence of PPPs for infrastructure projects.”<\/p>\n

Dr. Kelegama said there has to be a reprioritization of expenditure.<\/p>\n

While only 2.3 percent of GDP was allocated for education, the lowest compared to many countries in the region, nearly 3 percent of GDP was allocated to cover losses of state owned enterprises: CPC losses amounted to 1.2 percent of GDP, CEB losses 0.9 percent of GDP, Sri Lankan and Mihin losses 0.3 percent.<\/p>\n

“Had these losses not been there, at least an additional 1 percent of GDP could have been allocated to education expenditure to be on par with Korea,” Dr. Kelegama said.<\/p>\n

“The decline of the budget deficit from 6.9 percent GDP in 2011 to 6.4 percent GDP in 2012 has been brought about mainly by cutting capital expenditure which was 5.5 percent of GDP in 2011 to 4.9 percent GDP in 2012 and from the long term growth perspective, this is not a desirable policy,” he said.<\/p>\n

Dr. Kelegama pointed out that revenue was lopsided and declining, making it difficult for the government to finance development.<\/p>\n

“The tax base has not broadened in line with increase in income or economic activities. The reasons for this situation may be rampant tax evasion, poor tax administration, a plethora of tax exemptions and many discretionary measures being prevalent,” he said.<\/p>\n

In 2012, revenue declined to 13 percent of GDP from 14.3 percent of GDP in 2011, mainly due to tax revenue declining from 12.4 percent of GDP in 2011 to 11.1 percent in 2012.<\/p>\n

Revenue from VAT declined by 0.8 percent of GDP in 2012 compared to 2011 (3.5 percent to 2.7 percent of GDP), mainly due to many exemptions or zero ratings.<\/p>\n

Income tax declined from 2.4 percent GDP in 2011 to 2.3 percent of GDP in 2012 due to rate adjustments not being matched by broadening the tax base in 2012.<\/p>\n

The ratio for direct:indirect taxation in Sri Lanka is close to 20:80.<\/p>\n

“As long as the revenue from direct taxation remains low, this ratio will prevail and this in turn means that the bulk of the burden of indirect taxation will be felt by the poor people,” Dr. Kelegama said. He said the ideal was a ratio of 40:60.<\/p>\n

“At a time when public debt per GDP is 79 percent and Sri Lanka is depending on a debt roll over strategy for settling maturing debt and a time when infrastructure development is taking place rapidly it is all the more important to enhance domestic resource mobilization, especially by enhancing revenue.<\/p>\n

“Recognizing this, the Presidential Taxation Commission (PTC) was appointed and its recommendations were submitted in October 2010. Some of its recommendations have been implemented but there are many more to be implemented and they have to be done soon if the revenue levels are to be enhanced close to 20 percent of GDP,” Dr. Kelegama said.
\nCOURTESY:THE ISLAND<\/strong><\/p>\n

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A respected senior economist said yesterday that easing monetary policy and bringing down interest rates would not help the country sustain high economic growth unless measures were taken to address long-standing structural deficiencies in the economy. “The euphoria of the war victory and commencement of the US$ 2.6 billion IMF standby facility arrangement prompted a …<\/p>\n

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