Waning Economic Euphoria And The Impending Crisis Of Governance
Dr. Muttukrishna Sarvananthan
The immediate post-civil war years of 2010 and 2011 in Sri Lanka were trumpeted as record-breaking eight percent or greater annual real growth rate of the Gross Domestic Product (GDP) for two consecutive years including the highest ever economic growth rate of 8.3% recorded in 2011. However, the GDP growth rate in 2012 is unlikely to exceed six percent and the prospect for 2013 is even less. Besides, post-civil war economic growth rates all over the world are always in double-digit and therefore there is nothing to gloat about the high single-digit growth rate in Sri Lanka in 2010 and 2011.
The quarterly GDP growth plummeted to 4.8% during the third-quarter 2012; lowest quarterly growth rate since third-quarter 2009 (4.2%). The agriculture sector, in particular, recorded negative growth of (-) 0.5% during the third-quarter 2012 largely due to severe drought. The agriculture sector is expected to have declined even further during the fourth-quarter 2012 because of severe floods in the major agricultural districts throughout the country in the Eastern, Northern, North Central, and Southern Provinces causing extensive damage to the agricultural crops. The last and first quarters of a calendar year are the main agriculture season (Maha) in the country. More critically, the services sector growth rate of 4.6% during the third-quarter 2012 was the lowest quarterly growth of that sector for more than a decade. The deceleration of the services sector growth rate is critical because the services sector accounted for 58% of Sri Lanka’s GDP in 2011 whereas the agriculture sector’s contribution was only 12%.
The external sector of the economy is even more precarious because the trade deficit in the first eleven months of 2012 was (-) $8.6 billion and is likely to have reached at least (-) $9.5 billion by the end of 2012. While total exports (in terms of US$ value) declined by (-) 6.6%, total imports declined by (-) 4.5% during the first eleven months of 2012. About half of the trade deficit would be compensated by net income from services trade and net transfers (foreign remittances). That would still result in about (-) $4.5 billion deficit in the current account of the balance-of-payments in the external sector in 2012. The total income to the capital account of the balance-of-payments is unlikely to erase the huge deficit in the current account. Therefore, there is a serious likelihood of the overall balance-of-payments in red (deficit) by the end of 2012 for the second consecutive year; probably by a lesser amount than in the end of 2011. The overall balance-of-payments was in deficit by (-) $1.1 billion by the end of 2011. Read More
Dr Nandalal Weerasinghe Confirms Stanley Fischer: Central Banks Should “Never Say Never”
Dr W.A. Wijewardena
Fischer’s last lesson to central banks: never say never
The reputed economist and Central Bank’s Deputy Governor Dr Nandalal Weerasinghe, in a public lecture delivered last week at the Central Bank under the theme “The Role of Central Banks in Macroeconomic and Financial System Stability” is reported to have concluded his presentation quoting Stanley Fischer, presently Governor of the Bank of Israel and formerly the Deputy Managing Director of IMF and Professor of Economics at the Massachusetts Institute of Technology. Weerasinghe has quoted the ten lessons which Fischer had drawn for central banks from the ongoing global economic crisis dubbed by some as the ‘great economic recession’ in a Dinner Lecture titled “Central Bank Lessons from the Global Crisis” delivered at the Bank of Israel in 2011 (available at: http://www.bis.org/review/r110414f.pdf ). While all the ten lessons of this veteran economist and respected central banker are inspiring, the conclusion of his tenth lesson is the most important: In that, Fischer had advised his fellow central bankers that they should never say ‘never’.
Though this slogan appears to be puzzling, Weerasinghe could not have chosen a better phrase to summarise his lecture in just three words.
Though this slogan appears to be puzzling, Weerasinghe could not have chosen a better phrase to summarise his lecture in just three words.
Central banks should not be guided by fixed dogmas
What Fischer meant by this slogan is that in a crisis situation, one may be forced to adopt measures that are totally unconventional and out of the box. Hence, if one sticks oneself to fixed dogmas and goes by the stand that he will never deviate from those cherished dogmas, he is at a difficulty in finding a fast and appropriate solution to the crisis. Hence, ‘never’ is a dangerous word for a central banker. Instead, a central banker should be open minded, ready to try out new solutions and flexible enough to change his path if it becomes unsuitable. In other words, it is not appropriate for a central banker, and for that matter for any other policy maker, to frame laws for the future when sometimes they may have to violate them. This is because the future is uncertain and fraught with new problems for which old solutions may not work. As a result, crises may require them to adopt policy measures which they would not have even thought of adopting under normal circumstances. This piece of advice from Fischer which Weerasinghe left with his audience, mostly of fellow central bankers, is sensible enough.
