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CBSL - Road Map 2014

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1CBSL - Road Map 2014 Empty CBSL - Road Map 2014 Thu Jan 02, 2014 5:42 pm



2CBSL - Road Map 2014 Empty Re: CBSL - Road Map 2014 Thu Jan 02, 2014 6:32 pm


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Excellent performances in the economy according to this report

So why try to manipulate Stock market. ?

Pl create environment in the stock market to
work price mechanism freely

Pl learn  a lesson from the past specially after 2009.

If the above report is correct definitely we can see

general upward trend during the year 2014

Pl allow market forces do that

Last edited by D.G.Dayaratne on Thu Jan 02, 2014 10:18 pm; edited 2 times in total (Reason for editing : to explain more)

3CBSL - Road Map 2014 Empty Re: CBSL - Road Map 2014 Thu Jan 02, 2014 9:15 pm


Associate Director - Equity Analytics
Associate Director - Equity Analytics

Thanks Sriranga i was searching for it. thanks

4CBSL - Road Map 2014 Empty The Road Map for Monetary Policy for 2014 Sat Jan 11, 2014 10:35 pm



by R.M.B Senanayake

The Central Bank Governor who introduced the practice of announcing the road map giving the background for monetary policy for the forthcoming year has published this document for 2014. It was more a road map for the economy. In 2013 the real economy had recovered from the lower growth of 2012 to 7.2% per annum for 2013. This has drawn a lot of flak from the press. There is an allegation that the third quarter figure was massaged upwards to produce the higher 2013 growth figure. This figure is critical for the rest of the statistics like Investment GDP ratio or the Budget Deficit /GDP ratio.

There was no controversy regarding the reduction in Headline Inflation which fell to 4.7%. But the GDP Deflator is 7%. This figure too is critical for economic analysis for it determines the real per capita income of the people which is the relevant measure of the improvement in living standards and not the nominal income which is to increase to $ 4,000 in the forthcoming years. If your income has increased by Rs 500 but the prices of the goods you consume also increase by Rs 500 your living standard is the same. Unemployment continued to be low. In fact the economy is facing a shortage of labor.

The budget deficit has been brought down to 5.8% of GDP from the 6.4% of the previous year (2012). Bringing down this ratio is critical as the Fiscal Management (Responsibility) Act provides for and achieving that reduction is fine. But what is important is to contain government expenditure against government revenue and tax revenue has fallen. The Governor pointed out that expenditure also has fallen. True, but unfortunately lot of payments are in arrears and deferred for the next year. This goes against the spirit of the principle since the ratio is based on paying for the services obtained during the year itself.

Government accounting is on a cash basis and not accrual basis. So the government is extracting credit from the private sector and the figure of payment arrears is said to be 0.4% of the GDP according to Treasury sources. Postponing payments has a deflationary effect on the private sector. The least the government should do is to pay interest on the payments in arrears. Parliament as the monitor of public finances should insist on the disclosure of the figure for payments arrears at the end of each financial year. Running up payment arrears cost Russia dearly under President Yeltsin for it led to stagnation in the economy. Such payments arrears will keep on increasing over the years unless expenditure is reduced. It is difficult to reduce public expenditure since we are faced with a structural budget deficit. Our fiscal deficit is not sustainable and sooner or later corrective action will be required.

Agriculture has expanded by 4.1% for 2013. But the third quarter increase in paddy production was 56.5% compared to the comparable quarter for the previous year. There were also other unusual increases in the third quarter. Labor productivity, on which ultimately the sustainability of our living standards depend, showed an increase although it was still below what is desirable. But we calculate productivity by dividing the GDP by the labor force which is a crude approximation for productivity. We need more detailed studies of labor productivity through field surveys of enterprises.

The external sector which covers our economic relations with the rest of the world showed an improvement. Export earnings grew by 5.6% and registered $9,400 million from Jan-November 2013. It is expected to be $ 10,450 million showing an increase of 6.9%. Imports are expected to be $19,050 million a decline of 0.7% over the previous year. But the decline was in intermediate goods and capital goods. We need to curtail imports without sacrificing growth.

Tourist arrivals showed a healthy increase by15% to top 1 million tourists with earnings from tourism increasing by 24% to US$ 1,120 million. Services provided to foreigners too increased. Computer and Information services showed an inflow of $471 million whereas in 2012 it was $436 million. Transportation services provided to foreigners increased by $ 254 million to $418 million. Port services are an important source of foreign earnings to us and hopefully with the Colombo South Port coming on stream and development of Hambantota, such earnings should grow in the years to come. The most important source of foreign earnings is the remittances from our workers abroad. They remitted $6.7 billion in 2013, up from $ 6 billion in 2012.

The current account deficit in the balance of payments which measures the health of our external sector continues to show a large deficit of $2.6 billion. But there were adequate foreign capital inflows to fund it without having to reduce our imports. As a ratio to GDP the current account deficit fell to 3.9% in 2013 from 6.6% in the previous year. But here again this depends on the nominal GDP figure. The current account deficit was covered by Foreign Direct Investment inflows of $870 million for the first nine months compared to $ 615 million in 2012 comparable period. The balance of $1,730 million was covered by project loans of $1.5 billion and with foreign borrowing by the banks ($1,548 million). Gross Official Reserves rose to $7.11 billion by the end of 2013. But it is still not adequate to cover the entirety of short term foreign debt arising from inflows to the bond and stock markets which makes us vulnerable. Do banks need to borrow at such high rates of interest on foreign loans?

So what is the final verdict? Even if the growth rate is 7.2 % or 6.8%, still the growth rate is good. But the GDP is best used to measure the size of the economy rather than the progress in human welfare. It is not the best measure of welfare of the people. But it is commonly used and the public have come to place too much unjustified faith in it. The Economist magazine once called the Gross Domestic Product the Grossly Distorted Picture. Too many people place too much faith in the GDP figure. The economist Reuven Brenner has likened macroeconomic calculations to dangerous mythmaking that sustains "the illusion that prosperity is necessarily linked with territory, national units, and government spending in general. It is this excessive faith in the figure and its derivative, the GDP per capita, as measuring the welfare of the people that prompts governments to distort the GDP. One economist called the GDP of the Soviet Union the ‘Phantom GDP." But Presidents George Bush and President Obama too have been accused of distorting the GDP figures. Of course they did not resort to outright falsification but to changes in methodology.

In calculating GDP some values have to be imputed because market prices are not available for them, since they are not transacted in markets. The most important imputation is with regard to the services provided by the government. Such services as policing, defense, adjudicating through the courts system are not tradable. So the practice is to add the entire expenditure of the government on these services as well all other expenditures as part of the GDP. So a government which expands it expenditure irrespective of its revenue will increase the GDP. Is this an increase of people’s welfare? Not likely since the government employs a larger number of people than necessary and also does not carry out its functions economically.

Even a war increases GDP although some countries like the USA do not include such expenditure in the GDP. There are also other imputations like imputing the value of benefits provided to employees in kind, the rental value of owner occupied house, farms, the value of food and fuel produced and consumed on farms etc. These have all to be estimated and cannot be verified objectively. When it comes to the Real GDP which is the nominal GDP converted to a base year figure to set off the effect of inflation it carries with it the risk of under-estimating inflation. So there are severe deficiencies in using the GDP as measure of people’s welfare improvement.

But Economists and policy makers need to prepare and use economic indicators like the GDP and inflation. If they are faulty they will delude themselves. Alan Greenspan was said to be good at playing with numbers to create rosy pictures of the economy. He left out numbers that did not support his thesis. But the private sector which bases its business decisions must note the deficiencies in the figure of GDP in any country. Investors in business or in the stock market must allow for the deficiencies in the computation of the GDP and not be guided too much by GDP growth figures. They should carry out their own market surveys and projections in making investment decisions.


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Central Bank Governor Ajit Nivard Cabral presented the Road Map for 2014 on January 2 against a backdrop of scepticism about official statistics. Revelations in parliament disclosing evidence of massaging national accounts figures hurt credibility of official statistics. Nevertheless, the wide-ranging Road Map is a review of the country’s recent economic performance and expectations in 2014 and beyond. It is a useful exercise begun by Governor Cabral eight years ago as it provides valuable data and information for discussion on economic performance. However, its one-sided glowing depiction of economic performance and expectations ignores fundamental macroeconomic problems. It is not a balanced scorecard.

Weaknesses in data
The weaknesses in economic data have been known for decades, but manipulations to increase critical performance statistics are recent. The disclosure that the 2013 fourth quarter growth was massaged to give a higher GDP for 2013 has serious implications. Although a few decimal points up or down in GDP growth is not an issue in assessing economic growth, its exaggeration distorts many critical economic indicators, as conventional assessments of the economy are based on the GDP as the denominator. The public debt, fiscal deficit, trade deficit and several other indicators are in relation to the GDP. A higher GDP results in lower ratios of these and distorts key economic indicators.

Exaggeration of the GDP is however double-edged. Some indicators turn out to be unfavourable precisely owing to the overestimated GDP. A significant such statistic is the revenue to GDP ratio that has been declining in recent years from about 15 per cent of GDP to only 13 per cent in 2012. Although revenue collection has been higher, the ratio has been declining as the GDP is increasing. The international experience is that of the revenue to GDP ratio increasing when GDP increases. This too casts doubts of the GDP figure.

Sources of growth
The Road Map disclosed that the economy grew by 7.2 per cent in 2013, somewhat lower than the expected 7.4 per cent. Even a GDP growth of 6 per cent is a good economic performance in the global context. More significant than the overall growth rate are the sources of growth. According to the Road Map the agricultural sector grew by only 4.1 per cent, while industry grew by 8.1 per cent and services grew by 6.7 per cent. Growth in industry and services matter most for overall growth since agriculture contributes only 11 per cent to GDP, while industry accounts for about 30 per cent and services for 59 per cent.

The high growth components of these sectors are construction by 10 per cent, mining and quarrying by 12.5 per cent, hotels by 13.6 per cent, electricity by 11.2 per cent and transport by 11.8 per cent. In contrast, manufacturing grew by only 6 per cent. This poses the question as to whether the 7 per cent growth is a healthy and sustainable one.

External trade
The Road Map takes pride about the increase in exports in 2013. The turnaround of western economies and the depreciation of the rupee were responsible for this. The improvement in exports, especially in the last quarter of 2013, when monthly exports reached over US$ 1 billion, is heartening especially as the increasing trend in exports of manufactured goods is likely to continue. However, exports of US$ 10.5 billion were only 55 per cent of the value of imports of US$ 19 billion. Although the trade deficit is expected to be lower in 2013 than the large trade deficit of US$ 9.4 billion in 2012, it is still high at about US$ 8.6 billion.

Public debt
It is irresponsible to be complacent about the large public debt merely because the debt to GDP ratio has been declining due to the increase in GDP. The public debt has increased sharply in recent years: a more than threefold increase from Rs. 2.2 trillion in 2005 to over Rs. 6 trillion in 2012. In addition, the Government has used state banks to finance government expenditure. When these contingent liabilities of the Government are taken into account the public debt is higher.

The debt servicing cost as a proportion of revenue is a better indicator of the crippling effect of the large public debt. In 2012, debt servicing costs absorbed more than the total revenue (103 percent). What is it likely to be in 2013 and 2014? Revenue is likely to be inadequate to meet debt servicing costs in 2013 too because of the increasing debt servicing costs and tardy increases in revenue.

The inadequacy of revenue to meet even debt servicing costs means that all current and capital expenditures have to be met by further domestic and foreign borrowing. This vital issue in public finances does not merit attention in the Road Map.

Foreign debt
The increasing foreign debt that was discussed in last week’s column is another serious concern that the Road Map does not address. Foreign debt tripled between 2000 and 2012 and doubled between 2007 and 2012. By the end of 2012 foreign debt increased significantly to US$ 28 billion and it’s servicing absorbed 21 percent of export earnings. This is a strain on the balance of payments and raises the issue of foreign debt sustainability.

Besides the increases in foreign debt, recent loans have been commercial borrowings at high interest rates. In 2012, the debt profile shifted more towards commercial borrowing rather than concessionary loans from bilateral and multilateral sources. This shift increases the debt servicing costs due to both higher interest rates and short-term nature of such debt.

Foreign borrowing is not inherently bad. It can spur an economy to higher levels of economic growth than with domestic resources. However, there are concerns on the extent, costs, terms of borrowing, and use of funds for sustaining economic growth.

In conclusion
The country has made much economic progress recently. The economic growth rate even adjusted for any exaggerated statistics has been high. There is every prospect that 2014 could be a year of higher growth. However, it is important that evaluations and expectations of the economy do not portray only a glowing picture glossing over fundamental problems.

The Sundaytimes Sri Lanka

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