‘Decouple economic management from politics’ | Sunday Observer

‘Decouple economic management from politics’

Prof. Lalith Samarakoon
Prof. Lalith Samarakoon

The road to high income is challenging but Sri Lanka has the potential to achieve high single digit growth with a long-term, integrated national socio-economic development policy framework aimed at increasing the rate of investment and productivity of capital and labour, said Secretary-General and Chief Economist of the National Economic Council, Prof. Lalith Samarakoon in an exclusive interview with the Business Observer last week.

Excerpts:

Q. How do you view Sri Lanka’s journey towards graduating to an upper middle-income country?

A The Sri Lanka’s average economic growth over past 10 years since 2009 has been 5.4 percent and it graduated to an upper middle-income economy in July. This is indeed a significant achievement. But we must take time to reflect on the difficult challenges ahead and plan to make further progress towards a high-income economy.

Q. But growth has slowed down in recent years. Isn’t that a concern?

A Yes, economic growth has been declining recently, and it is indeed a concern.

Growth was very robust in the five-year period from 2009 to 2013, which was the period immediately after the end of the 26-year civil war. The economy grew at an annual average rate of 6.5% during that period. However, this upward growth trend reversed in the following five years. During the last five-year period from 2014 to 2018, the average annual growth declined to 4.2%. This is a significant drop of more than 2 percentage points. Growth has continued to moderate since 2015 ending with a 3.2% growth in 2018, the lowest in 16 years. Due to the economic impact of the Easter Sunday attacks in April, growth is expected to be 3% or lower this year.

Clearly, we need to arrest this subdued growth. It is not easy since there is increasing evidence that global economy is slowing down.

Q. What is the basis for classification of Sri Lanka as an upper middle-income economy?

A The World Bank’s classification of countries into income groups is based on the Gross National Income (GNI) which measures all the income of residents and businesses including net foreign factor income.The GNI threshold to become a upper middle-income country is 3,996 dollars and Sri Lanka’s GNI for 2018 of 4,060 exceeded this threshold.

We are now in an exclusive club which includes China, Malaysia and Thailand. Of course, it is important to realise that these are much larger economies. Relative to size of the Sri Lankan economy of 89 billion dollars last year, China recorded a GDP of 13.6 trillion dollars, Thailand was 505 billion dollars while the Malaysian economy reached 354 billion dollars. On a per capita basis, the GNI was $10,460 in Malaysia, $9,470 in China, and $6,610 in Thailand.

Q. What is the income threshold for a high-income economy?

A The next level of income category is high income for which the threshold as of now is 12,376 dollars. This threshold can go up over time. Therefore, Sri Lanka’s GNI has to increase threefold to reach a high-income economy. High income economies in Asia include Hong Kong, Singapore, Korea and Taiwan, among others.

Q. How long would it take for Sri Lanka to reach high income status?

A Past evidence suggests that the median number of years it took a country to transition from upper middle income to high-income has been about 15 years. China and Thailand have been upper middle income countries for 10 years since attaining upper middle status in 2010. Malaysia has been in the upper middle income category for 25 years (since 1994). At current economic growth rates, the World Bank has indicated that Malaysia could achieve high income status by 2024. Then, it would have taken Malaysia 30 years to transition to a high-income economy.

The time it takes to reach high income depends on several factors including future economic growth rates, exchange rate, inflation rate and population growth etc. The National Economic Council (NEC) has done some estimates on this recently. Assuming an annual average population growth rate of 0.5%, inflation of 5%, annual rupee depreciation of 3% and a real GDP growth rate of 6% a year Sri Lanka could reach the level of GNI per capita of approximately 8,000 dollars in 10 years (by 2029) and 12,000 dollars in 15 years (by 2034).

On the other hand, a lower growth path of 5% per year, higher inflation at 6%, higher rupee depreciation of 4%, and higher population growth of 1% will increase the transition time to a high-income economy to 20 years. These estimates indicate that it will take 15-20 years to become a high-income economy.

Q. What is key to achieving high-income status for Sri Lanka?

A The key is the rate of economic growth. With a growth rate of over 6%, we can hope to achieve that status at a shorter amount of time. But growth does not come by accident. We need a concerted effort to craft our economic future. We need to break away from annual and ad-hoc economic plans and constant changes to government policies.

All successive administrations must commit to a long-term economic plan. Economic management must be decoupled from politics and should be left to competent professionals.

That is where a high-level economic policy body such as the National Economic Council becomes important. Many countries follow this model.

The NEC has been advocating the administration about the importance of a five-year National Economic Plan and has taken steps to prepare one. 

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