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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » A LITTLE KNOWLEDGE IS A DANGEROUS THING

A LITTLE KNOWLEDGE IS A DANGEROUS THING

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1A LITTLE KNOWLEDGE IS A DANGEROUS THING Empty A LITTLE KNOWLEDGE IS A DANGEROUS THING Fri Jun 26, 2015 1:40 pm

StockGuru

StockGuru
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
By Dr. Nalaka Godahewa


Jun 26, 2015 (LBT) - When Ajith Nivard Cabraal, the governor of the Central Bank of Sri Lanka during the 2005-2014 period, was interviewed by Derana TV a few days ago, I felt disappointed. I was not impressed with the depth of the questions asked. Here was a man who was at the forefront of managing the economy for 9 years under President Mahinda Rajapaksa. What an opportunity it would have been to grill the man on real economic issues. There were questions, which are of national interest that could have ben discussed with him. I was also keen to hear Nivard’s views on the recent ‘bond fiasco’, at central bank which hit national headlines. What better person than a former governor to explain the internal procedures of central bank in handling such a bond issue. We could have asked him, whether there are any grounds to suspect foul play in this particular case. Instead of focusing on these critical questions, which would have been of benefit to the public, the interviewer took a different approach. He tried to humiliate the former governor and focused his questions mostly on gossip and various politically motivated accusations against him. I must say that Nivard Cabraal handled the interview well, and cleared his name on several issues. This performance would have made him personally satisfied and happy. But I am not sure as to what extent that interview helped the public as core issues we not addressed. For example, the interviewer completely avoided discussing the Bond issue, which I am sure most of the viewers were waiting to listen to.


Over the last 6 months we have been watching TV, reading newspapers and listening to radio to understand the political situation as we are in between two elections. From the government side, 90% of the time we hear nothing but various accusations of the previous regime. As a professional who has worked in both the private sector and the state sector for the last 20 years, my personal experience is that it is the incompetent people who waste time criticizing their predecessors. That is because they themselves do not know how to do the job assigned to them. On the other hand a competent person would immediately get on with the job and look to the future. Let me quote an example from my last assignment with the government. When I was appointed as chairman of SEC in July 2012, the Colombo stock market had been going through a crisis for 18 consecutive months. During the next 2-½ years, a committed team of commission members and the competent staff at SEC, with the support of the industry, turned around the capital market and ensured over 300% growth. But never during those 2 ½ years, did we waste time criticizing our predecessors. That is because as a team we knew our job. When leaders of the present government come on media and talk only about their predecessors, it begs the question whether these people are doing any work on their own. Isn’t it this negative attitude that is reflected in the rapidly deteriorating economy?


Let me share some of my views about the country’s economic management during 2005-2014 period. No government in this world is perfect. It is obvious that the Rajapaksa Government had its strengths as well as weaknesses. What is more important, therefore, is to compare the merits and the demerits of the previous administration against the alternative that we have voted in.


The primary reason for the defeat of Mahinda Rajapaksa on 8th January 2015, in my opinion, was the very effective propaganda campaign of the then opposition. They were quite successful in projecting the Rajapaksa clan as a totally corrupt lot. Despite all efforts by the Rajapaksas to convince people otherwise, this forceful campaign had a huge effect on those who voted for the common candidate. That’s why 6.2 million people representing 52% of the voters wanted a change.


But the situation is quite different today. The present government, which came to power promising a government of good governance and a 100-day program, is still hanging on to power. Not everything that they promised has been delivered. Instead many other things that we suspected are happening. We no longer see the same excitement amongst the voters who asked for a change, now that they have experienced the reality for 6 months.


In a few months time the citizens of this country will be going to the polls once again to vote in a new parliament. Therefore, perhaps time has come to put aside the emotions and engage in a more meaningful evaluation of the situation now and then. There are many aspects such as deteriorating economy, challenges to national unity, radical shift in foreign policy, national security concerns, corruption charges against the new government, accusations of political interference with the judiciary, concerns on misuse of state machinery etc., that need to be addressed. However in this article, I intend to focus only on matters directly related to the economy.


What Mahinda Rajapaksa inherited from Chandrika Bandaranaike in 2005 was almost a divided country. Most parts of both North and East were under the control of terrorists. After so many defeats and loss of lives, the military was demoralized. The economy was struggling. It was just one year after the devastating ‘boxing day tsunami’ hitting the country with serious socio-economic implications. Parliamentary majority for the Government was thin and the political instability was quite evident.


Everybody knows that the new president Mahinda Rajapksa ended the 30 year long war in just 4 years. But many people do not understand what he actually did with the economy during his tenure of 9 years.
When I was studying at the Engineering Faculty of University of Moratuwa, a professor once told us the biggest difference between the Sri Lankan students and those he has thought elsewhere is the tendency of our students to believe anything that is tought without challenging. This may not be true for all, but vast majority are like that he said. I believe this an inherent cultural problem of Sri Lankans. When a powerful politician who was known for managing Rajapaksa’s 2005 presidential campaign, crossed over from Mahinda side to opposition in 2007, he advocated a fresh formula to the UNP to win elections. This gentleman explained to the UNP political hierarchy that the only way to defeat Rajapaksa was to take the attention of people away from the development work carried out by the Government. He advised the opposition to adopt a multi prong communication strategy to project all Rajapaksas as rogues who are indirectly benefiting from these development projects. It is what is commonly known as gobble’s theory. Joseph Gobbles, advocated Hitlers propaganda machine in the 1930’s to lie about opponents. Gobbles said ‘ If you tell a lie big enough and keep repeating it, people will eventually come to believe it’. UNP took the advice serious. Rajapaksas were accused of for corruption using every possible medium. It was a brilliant strategy. People forgot about the benefits they were deriving from the development projects and started discussing all the negative things they hear about these projects. Yes, it took 7 more years for the UNP to achieve the final objective using the gobbles theory. But by January 2015, the message had sunk in sufficiently enough in the minds of the voters to send Mahinda Rajapaksa home.


In order to understand this better, lets take an example from Maithripala Sirisena’s manifesto it self. This printed published document makes some direct allegations about corruption. On page 9 of the manifesto it refers to the construction of the Kadawatha Kerewalapitiya highway. It says commission included in the construction price of Rs 7.2 Bn per kilometer is Rs 5.2 Bn. The total length of this road is 9.32 Km. The original estimate for the construction of this road was Rs 68.04 bn. So according to Maithripala Sirisena’s manifesto the total commission included in this was Rs 48.46bn. Many people, who believed these corruption allegations on manifesto would have believed it and voted for a change of government.


What is of interest is what happened thereafter. Mahinda Rakapaksa lost and the responsibility of constructing this part of the highway fell upon the current Government.


According to the calculation in the Maithripala’s manifesto, if the commission of is removed the actual construction cost of constructing the 9.32 Km of this highway should have been Rs 19. 57bn. But according to cabinet paper recently submitted by the minister of highways, the government will be signing contracts for the construction of Kadawatha –Kerawalapitiya highway for Rs 66.64 Bn. But this is also after reducing number of lanes from the originally planned 6 to 4 which results in a further cost saving. Saving is Rs 1.4bn per kilometer. If we calculate based on the numbers given in Maithripala Sirisena manifesto, the actual cost of the highways after the above saving should have been Rs 18.17bn. Then government has a responsibility to tell the public what happened to the difference between Rs 66.64 bn and Rs 18.17 bn, which works out to Rs 48.46bn. Is someone in the new administration pocketing this out as a commission? If there is no commission now then there would have been no commission then too.


If voters intelligently analyzed the accusations against Rajapaksas mega deals one by one, they would have found the same patter in all those. That’s why even after 6 months the new government has not been able to expose a single mega deal that they were talking about during election time.


But the politicians on the government side have now come up with a new theory. This was recently explained at a press conference by none other than their chief propaganda manager, Mangala Samaraweera. According to him, Mahinda Rajapksa has deposited over USD 18bn of stolen money in off-shore bank accounts. He argued that it would take up to about 10 years to investigate and locate all this money. A very convenient argument, that would give those in power a grace period of 10 years to prove what they told during election time was correct.


But once again Mangala is making a mistake. He is assuming that all voters are stupid. Unfortunately for him not all voters are stupid. Yes, some may be - but not all.


Let us analysis his fresh numbers. For Rajapaksa to rob and siphon USD 18 Bn over 9 years, it must come mostly from the public investment component of government expenditure. But the total public investments during the 9 years of Mahinda Rajapaksa presidency is only around USD 16 Bn. So if Mangala’s theory that Rajapaksa siphoned USD 18 billion from the country then someone else has spent money on all the development work such as building ports, airports, power plants, highways, schools, hospitals, irrigation projects etc., in addition to funding the 4 year long war. Not only that; the philanthropist who spent that money on behalf of Sri Lanka government has donated an additional USD 2bn to Mahinda Rajapaksa, which is the only way the former president can deposit USD 18 Bn in off shore accounts.


I am not saying that Mahinda Rajapaksa managed the economy exceptionally well. I have personal criticisms about some of his economic policies such as the over reliance on the state sector. More than the policies, I have concerns about the way we kept missing opportunities due to lack of teamwork amongst his key officials. But overall, the economy was managed quite well by the Rajapaksa administration. One only has to compare the performance of the Rajapaksa government with the performance of the current government to understand this.


Let us look at some of Mahinda Rajapaksa’s achievements during 2005-2014 periods. We must remember, half of that time was spent fighting a war with one of the most sophisticated and well-funded terrorist group. .
The GDP which was only USD 25 Bn in 2005, grew to USD 75 Bn by 2014. It is important here, to recognize that it had taken 57 years since independence for the GDP to reach USD 25 Bn. That’s why this 3-fold improvement within 9 years of Rajapaksa administration should be considered a remarkable achievement. The per-capita income that was only USD 1,240 when Mahinda Rajapaksa assumed duties as president, had reached USD 3,625 by 2014. The country was well on course to become a USD 100 Bn economy with per-capita income of USD 4000 by 2016. The country has already entered the domain of a middle income emerging economy and the next target would have been to reach the high middle-income status. The average GDP growth hovered around 5.9 % during period 2002-2005 improved to 6.7 % during the period 2006-2014. Particularly after the war since 2010, the GDP growth curve shifted upwards to embrace a higher trajectory at 7.5 %. According to the Central Bank Annual Report 2014, the projected growth rates for the next three years are 7.5%, 8% and 8% respectively. However, I am not sure whether we will achieve these numbers anymore. It is quite disheartening to note that GDP growth has slowed down since the new administration took over. The first quarter growth in 2015 was only 6.4%.


The Derana 360 interviewer asked Nivard Cabraal, whether there is any purpose of a government taking pride in development work, if people are hungry. The interviewer didn’t substantiate how he came to the conclusion that people were hungry during the Rajapaksa administration, when the actual poverty levels had come down year on year during last 9 years. But I thought Nivard gave the right answer. He asked the interviewer whether a parent would only concentrate on feeding a child, if he or she really loves the child. The parent would be also interested in securing a future for the child, which requires investment into education, saving for future events, investing in properties etc. Mahinda Rajapaksa focused heavily on infrastructure development of the country because he had a vision for the country. If Sri Lanka is to emerge as a regional economic hub, we need to expand and upgrade our ports, airports, road networks, power plants, irrigation systems, schools, universities, hospitals, telecommunication networks etc to international standards. Just to understand the implications of these investments let us look at some of the social indicators of the country. In 2005, only 78% of households had electricity but by 2014 it had increased to 98%. In 2005 only 36% of household had pipe water but by 2014, 44.5% households had pipe water. Telephone penetration had increased from 36.5% to 120% during the same period. School density had increased from 6 per square kilometer to 6.5 per square kilometer. Number of hospital bed per 1000 patients had increased from 3 to 4. University admissions had increased from 14% of those who are eligible to 17%. The rate of unemployment, which was 7% in 2005, had reduced to 4.3%. To achieve all these, Mahinda Rajapaksa had only 4 years of peace after the war.


We hear members of the present government complaining about the heavy borrowings of the previous Government. It is true that the government debt has gone up from Rs 2,222 Bn in 2005 to Rs 6,518 Bn in 2014. But what they don’t tell the public is that the government debt as a percentage of GDP has in fact reduced from 90.6% in 2005 to 75.5% in 2014. They also don’t tell the public that the public investments as a percentage of GDP has increased from 3.9% in 2005 to 5.5 % by 2014. For an economy to sustain growth, continuous flow of investments are required. But what is the situation today with the new government? The government keeps borrowing but we do not see investments. According to newspapers, they have already utilized almost the total allowable borrowings limit of 2015. All key projects have been halted. So obviously, this money has not been spent on development work. The only conclusion one can arrive is that all the money has been spent on recurrent expenditure. Can a government be more irresponsible than this?


Year on year, the Rajapaksa administration was building up foreign reserves and by end December 2014, the foreign reserves stood at USD 8.3 bn. However since the present government came to power, the foreign reserves have started eroding. Last we heard was that it had shrunk to around USD 6.2 Bn. Currently, the Central Bank is closely guarding any information related to foreign reserves. Even the Central Bank Annual Report 2014, which was released in May 2015, has avoided any mention about the status of foreign reserves.


We can keep analyzing, but all of this analysis leads to one simple conclusion. Under Mahinda Rajapaksa the country was developing at a steady phase. But all good things come to an end. The voters of this country who wanted a change have put a spoke in the wheel. The machine has not stopped yet. But it seems to be falling apart while moving. This reminds me an old English proverb, which says an ounce of prevention, is worth a pound of cure.


Courtesy - http://lbt.lk/index.php?option=com_content&view=article&id=9347:a-little-knowledge-is-a-dangerous-thing&catid=65:expert-advice&Itemid=98

Senior Citizen

Senior Citizen
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Change for the reason of change is dangerous if not shortsighted.

If it is a plan to gain time to regroup and come up with strong leadership it would have been somewhat better.

The actual scenario is that there was no plan and there's no leadership. All want to be leaders and not let the real leaders lead and others support!

Capitalone


Equity Analytic
Equity Analytic
Kudo's to previous regime for ending the war & subsequent development projects. Ending the war was the biggest achievement no two words about it.

After all, all the Sri Lankan's expected a peaceful living environment, rule of law & transparency in public fund management after the end of 30 year long war. Did that happen?

The previous leader of the regime was rejected by people on january 08. Why????? The main reasons are 
01. No rule of law, 
02. No transparency in managing public funds, 
03. No freedom of speech, 
04. Encouraging or turning blind eye on promoters on religious disharmony...etc.
05. Rulers & family members ran the country as if it's their inherited personal property

The above facts were even accepted by the former president. 

It's true that no point blaming the previous regime for everything but it's too early to evaluate this minority government too.......... End of the day all are Politicians..........

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