The wild and irresponsible Manifestos of the political parties

By R.M.B Senanayake

The different political parties have put out their Manifestos for the General Election due shortly. Here is what the UPFA promises:

They say they will raise the minimum wage in the government sector to Rs 25,000, and raise the Cost of Living Allowance to Rs 10,000. They also want to dictate to the private sector to raise their wages by Rs 3,000. They will up the Mahapola Scholarship Allowance to Rs 6,000 and give a book allowance of Rs 10,000 for each University student.

They also promise to raise wages in the estate sector to Rs 1,000 per day and also make several other grants to people. Not a word has been told about how they hope to raise the money. How credible and responsible are these promises since we already have large budget deficits which are causing high current account deficits in our balance of payments? Fortunately we are receiving foreign capital inflows which are being used to fund these existing deficits. But does this mean that we can run any deficit? Unlike individuals or families, it is true that a nation has an indefinite lifespan, and can therefore continually roll over its debt as long as markets deem it a worthy creditor. As long as a nation’s economy is growing, its capacity for borrowing grows as well. But if the debt grows at a rate faster than the economy, then it will eventually exceed the nation’s ability to repay.

I give below our recent foreign debt figures. Economists say there is a prudent level of foreign debt for any country. Countries that exceeded such levels found themselves in difficulties and unable to repay foreign debts as they fell due. They could also not borrow from foreign sources even at high rates of interest. Greece is in this position today unable to pay its creditors. It was hitherto rolling over foreign debt by borrowing afresh to repay the maturing foreign debts. This is only possible as long as foreigners are willing to lend to the country all that it requires. Initially the foreign creditors will demand higher rates of interest on the new borrowings. But there will come a time when they will just refuse to lend if they think the country is over-borrowing and will be unable to repay the foreign debt.

What level of foreign debt is sustainable?

Economists are unable to come up with a figure for it will depend on the varying circumstances of each country. The financial crisis and European debt crisis have a root in excess borrowing. Sometimes economists add the real growth rate to the rate of inflation and consider that figure as the sustainable debt/GDP ratio for it keeps the total debt/GDP ratio constant. In our case it would mean a ratio of at least 12.5% with real growth of 7.5% and 5% inflation. But many economists set the sustainable deficit threshold at only 3% of GDP, and EU rules formally set the budget deficit threshold at 3% as well.

But can we ensure the current rate of inflation and the current rate of economic growth, both of which are difficult to maintain. Inflation has a tendency to develop its own momentum particularly if the practice of money creation to fund budget deficits goes on unabated. Our governments are now well into the habit of running budget deficits and funding them by borrowing from the Central Bank and the banking system which is the equivalent of creating money. In any case we have already reached the prudent levels of budget deficits and any further increase in the budget deficit will have adverse consequences by way of higher prices and/or worsening deficits in the current account of the balance of payments which requires the running down of our Foreign Exchange Reserve unless we can increase our exports or transfers from abroad which is hardly possible in the short run. Our Foreign Exchange Reserves are built up not from export earnings but from borrowings which themselves have to be repaid.

Unsustainable populist promises

The UPFA has made a plethora of promises outlined above in their election campaign. Additionally, they also promise Rs 200,000 for every marriage in low income families and a pension scheme for writers and artists. Nowhere have they given the costs of these promises or stated how they will find the money. Isn’t it plain trickery on their part to hoodwink the poorer people among the voters?

They will also dictate to the private sector to raise wages by Rs 3,000 and ensure that the wages in the estate sector are raised to Rs 1,000 per day. What will happen if these cost increases cannot be passed on to the customers of the estates who are primarily foreigners? It could mean that we are unable to export all our tea and rubber which are mainly for the export markets and not for the domestic market.

What is the total cost of implementing these promises?

The Manifesto does not disclose how much these promises will cost in the aggregate and how the party hopes to find the money when the budget is constantly in deficit already. Do they merely want to add to the existing budget deficit? That would be the only presumption that the public can have. How much will the budget deficit then increase to? But economists warn that even the existing budget deficit is too large and must be reduced to about 5% of the GDP a target which has eluded us so far. What are the likely effects of increasing the budget deficit? Economists say they could cause higher inflation and larger deficits in the current account of the balance of payments. The latter deficit cannot be funded unless foreigners continue to lend to us as before. Will they do so?

May be but there will certainly come a time when foreign creditors will think the country is too much in foreign debt and they may refuse to lend at all. Then we would be in the situation that Greece faces today. The only lender then is the IMF which insists on strict conditions in giving loans to its members who are in financial difficulties. They say that the country has lived beyond its means and must practice austerity until the foreign debt is repaid. We are a country too dependent on imports even for our food and hence austerity imposed by a lending institution will be painful. So unless we curb our foreign borrowings we could end up like Greece.

Many economists set the sustainable deficit threshold at 3% of GDP, and EU rules formally set the budget deficit threshold at 3% as well. We should aim to bring down our budget deficits to below 5 % at least. It’s important that politicians understand the government’s true borrowing capacity and do not mislead the people by promises which are no different from those in the past which said rice would be brought even from the moon to supply to the people at below market prices if not free.

If there is political instability following the elections and/or if a Mahinda Rajapaksa led coalition comes back to power, the country could face a financial crisis unless bailed out by China. Such an eventuality could also polarize ethno- religious impediments in society, undermine the rule of law and freedoms and undermine international relations with the West. The economy will deteriorate further since our exports are largely to the West and we depend on foreign capital inflows also from the West.

Good Governance

Good governance is much talked about today. It is not a magic formula. It means our political leaders must act with a sense of morality recognizing that which is good and that which is bad. They must be in short moral citizens. For too long we have ignored the need to be moral human beings. ? No sector of the economy will be able to produce value adding sustainable contributions to growth and prosperity, unless there is political stability and good governance. We require significant and deep reforms in governance if we are to have political stability, peace and harmony among the people. We have tolerated racists and other rabble rousers for too long and the good men have been silent while the racists have stirred up the people against minority ethnic and religious groups. We need to pass a law against such rabble rousing as India has done so that those rabble rousers can be charged under the law before they create social chaos. The present provision in the Penal Code seems to be too weak. We cannot allow rabble rousers to incite hatred in our society if we are to have peaceful economic development.
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Thanks Sri.
හරක් will remain හරක් but sensibility will WIN again on the 17th.

UPFA ‘handout’ manifesto could cost over Rs. 400 bln to implement

The election manifesto of the United People’s Freedom Alliance (UPFA) with a host of ‘handouts’ to be given within 30 days of capturing power would cost the Treasury much more than the usual spend in a national budget.

A comprehensive analysis by some financial experts with national budgeting experience, considering the financial implications to any government, put down the cost of 20 of the main proposals at Rs. 404.2 billion, more than four times the total amount of Rs. 95.5 billion set for expenditure measures in the last 2015 interim budget. There were no revenue proposals given on how such funds would be raised.

According to the Revised 2015 Budget, total expenditure and net lending was Rs.2,990 billion of which recurrent expenditure was Rs.1,465 billion and capital expenditure and net lending was Rs.685 billion.

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Promises will cost only zeros as, after coming to power, they will give nothing..

Above manifesto is the funniest ever I have seen

Person who prepared UPFA manifesto is a...