Tuesday, June 18, 2024

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Extraordinary times need extraordinary solutions

Rakimu Jayathu Lanka Chairman Hiran de Silva at the media briefing

Rakimu Jayathu Lanka Chairman Hiran de Silva opines that former Prime Minister Ranil Wickremesinghe is the ideal candidate to steer the country out of its economically malfunctioning state, with the help of the IMF. Following are excerpts of de Silva’s speech at a press conference conducted by Rakimu Jayathu Lanka on 25 April in Colombo.

The IMF has insisted that they need a DSF (Debt Sustainability Framework) to consider a RFI (Rapid Financing Instrument), the fastest facility IMF can provide from among its toolbox programs. In vanilla English, this means that IMF needs an assurance from Sri Lanka how it plans to service its debt without using a possible RFI to pay such debts. The million-dollar question is, how could one improve debt sustainability by appointing an untested and unproven jumbo cabinet and so many state ministers under various titles?

The best solution would be to form a cabinet of 10 and 19 State ministers appointed from a diverse collection of independent experts in the relevant ministerial subject using the national list (29).

The above is the best course of action this sitting president can do if he wishes to continue remaining in office while making himself really useful. “No problem can be solved from the same frame of mind and level of thinking that created it.”

He has done the damage and now the best he can do is to do nothing as he is “not doing” with the Central Bank except perhaps constitute the right cabinet. He can resign too if he is sensible and return gracefully to where it never rains.

The moment he opens his mouth, that will be enough to anger the irate public to no end.

MR should completely drop out of sight and retire to his ancestral abode to enjoy his advancing age.

Could this be the message IMF is subtly delivering?

The whole idea of fiscal consolidation begins with slashing government expenditure, capital and recurrent. Then by optimising such expenditure to deliver the highest ROCE possible out of it.

The government will then need to increase direct tax/total tax as the first step and use such revenue collected to pay for the recurrent expenditure with a minimum fiscal deficit in the short term.

Reserves building in rupees and forex must then be done with making sure there is the least trade deficit possible. The primary account of the BOP to be micro managed to at least register a marginal surplus by end of this year.

These constraints make it imperative that the current Cabinet and the State ministers are nothing but the crème de la crème and not a further burden on the Treasury.

It would be sufficient for a light but strong cabinet of ministers to meet in the Presidential Secretariat, with or without the now seemingly disoriented and helpless President until he recovers from this shock of loud public outcry.

The Parliament must be sent on extended leave and recall only when a vote is to be taken or a bill is to be debated. It is rather useless to witness a verbal bar-brawl taking place in the name of parliamentary debates every day at public expense. Let the MPs work from hometowns getting to actually know at least their own electorates and the pulse of the people as MPs of the yesteryear used to.

Only a few members in the Parliament, and probably none in the Cabinet seem to appreciate the fact that every economic principle has two perspectives, the perspective of the producer and the perspective of the consumer.

The moment credit became cheap the first thing that happened was a sharp rise in consumption before the producers can produce enough to meet this demand. Producers are constrained by production limitation, lag in procurement of inputs and the deteriorated forex position.

This country does not have the forex wriggle room to make consumer goods available by importing them until local producers could produce, while credit was made cheaper and money was made out of thin air without any underlying value creation.

What happened then was not capital investment but the fast devaluation of the rupee that resulted in the forex bearers asking for more of rupees for a unit of forex. The forex crisis therefore was actually precipitated by a rupee crisis, manmade by the powers under which such face value money printing occurred as there was no tomorrow.

In any case, we should also keep in mind that for most consumer goods, the country does not have a comparative advantage in producing them, and therefore are better off importing.

We should only produce what we have a comparative advantage on. That is the whole idea of opportunity cost. It remains to be seen if the depreciated local currency and the inflated market prices will make it worthwhile for producers to redo their planning to see it they can gain a comparative advantage against the imports. That must be what the different trade chambers, employers’ federations, and all professional outfits should be studying now, without finding fault with CBSL for their sudden and drastic tightening of their monetary policy as shock therapy to an economy gone crazy. However, we must ensure security in food and medicine.

We do not have oil, so we must capitalise on what we have, that is hydro, solar and wind power. These are the only industries that should be State subsidised, not car permits, not petrol or diesel or not food in parliament canteen for sure.

Once we target the security of the essentials to sustain life of the people, then we can think of getting rich. Now the situation has been left to become so out of equilibrium, the priority must be to curb consumption until the available goods will not become unaffordable, triggering social unrest and the country becoming ungovernable. The Government better realise soon that good economics is actually good politics while all social evils are different manifestations of bad economics. The decision makers and the private sector manufacturers and producers must also keep in mind that there are far more consumers than producers to be considered.

Going further, once the consumption is curbed drastically and people save more rather than spend, as the return on savings has now been made a far more attractive incentive than the pleasure of consumption, funds will be made more and more available for investment, only if the banks follow the lead given by the Central Bank with its extraordinary rate hike.

Only mad men can think of such a plan to succeed

The absurd practice by commercial banks of keeping deposit rates around 7%-9% when SDFR is 13.5% and Treasury bill rate at 22% should be abandoned immediately. The banks are carrying out arbitrage business with borrowing from the Central Bank and lending to the Central Bank for a risk and cost free income of about 2.5%. Central Bank issues Treasury bill at around 24% but the commercial banks offer the same only at around 21.5% to the public. Why wouldn’t the Central Bank open the Treasury bill auction directly to the public…? 

With modern ICT, the OMO can be made completely automated where the CBSL only keeps a finger on the maximum asking yield. Either the CBSL can keep this 2.5% of trading profit or the public can be offered to benefitfrom it. When banks are offered to benefit, that indirectly creates pressure on the forex reserves to exit the country further by way of dividends on foreign held share holdings.

Once all these can be streamlined, the see-saw of inflation/demand will move the other way to effect a fall in rates and an increase in supply.

The most positive outcome of this will be the halt of excessive money printing as we have already witnessed lately. About 2.6 trillion is said to be printed for the past 18 months. That is a nearly 40% rise in base money stock. Such money entering the fractional reserve banking system at only a 4% SRR will theoretically crate 25 times more currency in the broad money supply as the amount of printed money. That is Rs. 65,000,000,000,000 in new money put into circulation without hardly any underlying growth in the economy. Only mad men can think of such a plan to succeed.

One other outcome of this is that the nominal GDP may register a rapid growth as the price levels are high. GDP is mostly (price * quantity). We can see if people are still overconsuming by looking at the GDP. If it goes up, that means, prices are high and consumption is also high.

That gives the opportunity for the Government to collect more revenue as taxes even at the existing tax rates. Let the high-interest rates prevail until inflation is back to single digits and the interest rates too can return to single digits following the rate of inflation.

If the central bank is not to excessively print money, it should maintain at least a 4% margin in interest rates over the rate of headline rate of inflation.

That is the basis of “Inflation targeting and price stability” in a nutshell for the common man. If they know this bit, that is enough to use their votes intelligently.

So, when you hear economic statements, your first action must be to ask, who says them. The economic truth is unlike the religious definition of truth. Economic truth depends on who says it and from which point in the circular action of the macro-economy it is said.

The economists who think tight monetary policy is wrong at this point in time must surely be Private sector’s economists rather than people’s economists.

Getting to the tactical action plan…! “One man could have become the Sri Lankan Churchill if he wanted to, but karma and ego prevented him from doing so”

In my opinion, there are only three people in the house who seem to understand this entire dynamic in its entirety, for better or worse, the known devil in this extraordinary case is the former Prime Minister, Ranil Wickremesinghe.

As they say, known devil is better than unknown angel.

The other two are a technocrat and a classical economist which I decline to name. All the rest are just numbers and worn out ill-educated men commensurate with the responsibilities thrust upon them.

These three are the only economic doctors in town whether we like them or not who actually have the technical competence to legally treat the economic illnesses the country is afflicted with at this point in time.

I may run the risk of being ridiculed as former Prime Minister, Ranil Wickremesinghe has been unfavourably looked upon by the electorate, but no one can deny the fact that he is the best brain in the entire Parliament, or for that matter, the entire local political landscape. The opportunity has presented itself for former Prime Minister Ranil Wickremesinghe to seek forgiveness for his past sins and make a shining comeback when he is most needed at “the darkest hour” this country has ever faced.

Let former Prime Minister Ranil Wickremesinghe have the courage to present himself to the Galle Face protestors and give them a legally binding social contract and the action plan that will hold legal water at the Supreme Court that he solemnly wishes to undertake to put his mind to proper use to untangle the country from the utter mess which put this country in to this distress in the first place.

This country should give him the rest of the term of Gotabaya Rajapaksa/Mahinda Rajapaksa, depending on the fate of the Constitution when talk is ripe about it being reverted back to 19A without the bespoke articles therein, which are apparently perceived by the public to be made to preserve the interests of former Prime Minister Ranil Wickremesinghe and against the interests of the R-clan.

I repeat, for better or worse, former Prime Minister Ranil Wickremesinghe is the only surgeon in town who can perform the complex economic surgery and take care of the post-surgery intensive care of the economy of the country into the road to recovery, whether the electorate likes him or not.

If not, we will run the greater risk of having to listen to so many other economic doctors and quacks performing economic autopsies on this country sooner than later from the corner of our dark drawing rooms listening to battery operated radios.

He could have become the Sri Lankan Churchill if he wanted to, but karma and his ego has prevented him from doing so.

The country needs a ‘constitution of the people by the people for the people’; not a constitution of the politicians by the politicians for the politicians.

If former Prime Minister Ranil Wickremesinghe can make this his clarion call, everything else ailing in this country will fall into its correct place with the help of the IMF.

That is the only way former Prime Minister Ranil Wickremesinghe can seek forgiveness for his political sins and make a comeback to do what he is capable and perhaps destined to do but didn’t.

I favour him to be given the steering wheel of the country and its economically malfunctioning engine at least until this country can be taken out of the downhill spiral it is in and back into a flat road again.

Then the people can decide his political fate during a future election.

The solution is in plain sight only if former Prime Minister Ranil Wickremesinghe can muster the confidence of the #Gotagogama residents and if he is courageous enough to give the youth the leadership they badly need, not as a UNP party man but unreservedly only as the genius he is.


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