ECONOMYNEXT – Sri Lanka economic and trade freedoms denied to the public by the state is a key driver of corruption in the island, which is a trend seen across countries, a Canada based researcher has said.
Sri Lanka ranks among the bottom of the 165 countries ranked annually by Fraser Institute dropping 12 places to 116 in the latest compilation which is based on 2021 data.
Not an open economy
Many analysts have pointed out that Sri Lanka no longer has an ‘open economy’ as import duties, and para tariffs, as well as import licensing progressively worsened over the past 15 years.
“Out of 165 jurisdictions we measure, Sri Lanka comes in at 156, right down at the bottom,” Fred McMahon Resident Fellow at Fraser Institute told an economic forum organized by Colombo-based Advocata Institute.
“You talk about corruption all the while. When you set up a whole bunch of barriers between your nation and the rest of the world, making it difficult get anything in or out of the border, my goodness, you’ve someone to pay off to get things across the border.”
“Regulatory barriers are sources of fuel for corruption.”
Sri Lanka’s economy is “largely cut off from the world” based on Fraser data.
Sri Lanka has severe trade controls involving import bans, import controls as well as high taxes to drive ‘import substitution’ and give high profits to ‘domestic producers’. The controls are justified on the basis of ‘saving foreign exchange’.
Bad Money
Sri Lanka has forex shortages due to bad money produced by a reserve collecting central bank in the course of bureaucratically cutting rates through inflationary open market operations and standing facilities (printing money).
Import and exchange controls were tightened in 2020 as extreme macro-economic policy was deployed to target ‘potential output’ a number that the International Monetary Fund gave technical assistance to the country to calculate.
Instead of tightening controls on the central bank, targeting potential output was legalized in a new monetary law, critics have pointed out.
Sri Lanka also has exchange controls, denying free flow of capital to the people, to maintain the priviledge of having a reserve collecting central bank which can also cut rates rates bureaucratically through various liquidity tools and re-finance facilities and produce unsound money, critics say.
In the end both interest rates and inflation goes up.
Sri Lanka ranked 147th in sound money, according to the last compilation by Fraser, before inflation rose to 70 percent due to extreme macro-economic policy involving tax cuts made possible by liquidity injections to rates low.
Sound money is co-related to many indicators in economic freedom index, he said.
Complex Regulations
When regulations are opaque and complicated corruption worsens.
“If you have complicated, unclear, discretionary regulations, then there is someone to pay off to get through,” McMahon said.
Sri Lanka ranked below 105 in regulations with uncertainty seen, he said.
Singapre scores high in trade freedoms as well as sound money and rule of law.
Sri Lanka’s corruption stated to worsen in the 1970s amid tight economic controls and price controls.
In the 1970s, monetary policy in developed nations also went haywire with the collapse of the Bretton Woods system firing so-called ‘Great Inflation.’
Sweeping economic controls, including price controls, led to blackmarkets and shortages were ended by then President J R Jayewardana as part of what was called the ‘open economy’.
“It brought to an end to shortages, queues, black-markets with their corrosive effect on personal integrity,” Singapore’s economic architect and Goh Keng Swee said in a report in 1980 to President Jayewardana, as the country ran into forex shortages and an IMF program.
Goh who developed Singapore’s sound monetary system also advised Sri Lanka not to allow the central bank to buy Treasury bills and depreciate the currency, but the advice was not followed by macro-economists who engaged in central bank re-finance and sterilizing interventions to target a policy rate.
In Singapore does not have a buraucratic policy rate, allows interventions to be largely unsterilized.
(Colombo/Jan29/2024)
