Holistic Approach
"We can achieve these targets if we have proper fiscal, monetary, external sector and governance policies," economist W A Wijewardene, a former deputy governor of Sri Lanka's central bank said told Sri Lanka's Organization of Professional Associations.
With the population growing an average 1.1 percent a year, to double per capita Gross Domestic Product in 10 years to 4,000 dollars Sri Lanka needs to attain a minimum nine percent average economic growth rate.
To achieve this growth rate investment has to be about 35 percent of GDP.
"The first challenge is to increase our savings ratio," Wijewardene said. "There are two paths - convert the government to be a saver and encourage private citizens to save much more."
Sri Lanka historically has been a notorious consumer, consuming 80-85 percent of income after independence from Britain as the state became a chronic deficit spender.
In Singapore, the savings rate is around 50 percent of GDP and in Malaysia 35-40 percent bolstered by public sector savings, with state corporations in particular running large surpluses.
"So the miracle we have to perform is to convert from a low saving economy to a high saving economy for which the responsibility devolves on both government and, with suitable government policies, people like us - private citizens," Wijewardene said.
Dis-Saver
The government has been a notorious 'dis-saver'," Wijewardene said, by living beyond its means.
"As private citizens if were we to perform this miracle - of consuming more than what we earn, there must be some one else - an 'Almighty God - to help us do it, fill the gap.
"But fortunately for the government there has been an Almighty God - people like us," Wijewardene said.
From 1987 the state started to deficit spend on the current account of its budget frittering away investible savings of private citizens and dragging down the national savings rate. In 2009 the revenue deficit rose to 3.8 percent according to provisional data.
Private citizens' savings have also been destroyed by high inflation generated by the central bank which eroded their real value.
"To promote private savings, it is most important to have an appropriate monetary policy," said Wijewardene, a former deputy governor of the Central Bank.
"Monetary policy will promote private savings if we can maintain a low inflation regime.
"What has happened is we're encouraging people to consume by giving a negative rate of return. So we need to maintain low inflation so people who save will get a better rate of return for their savings."
Stealth Tax
Double-digit inflation levels from 1978 to 2008 meant the nominal return people got for their savings was less than the rate of inflation, resulting in savers getting a negative rate of return.
"This does not encourage anyone to save but to consume," said Wijewardene.
Financial sector stability is also essential so people who save money are confident their money is safe.
"Safety plus rate of return are the most important factors for people to save," Wijewardene said.
High inflation and negative real rates allow the government to deficit spend and 'inflate away' its debt, by nominally bloating the economy and making it grow at a faster nominal pace than the debt stock.
"With inflation rising at double-digit rates during 1978-2008, every year as private citizens we're transferring our own real resources to the government through the imposition of an inflation tax," Wijewardene said.
"And we allow governments to consume more than what they earned."
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