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The stabilisation of macroeconomic fundamentals by reducing the fiscal deficit, addressing the serious balance of payments crisis and containing the onerous debt burden is the immediate imperative. These have to be addressed by new directions in macroeconomic policies. The external financial crisis requires assistance from the International Monetary Fund (IMF) to tide over the balance of payments crisis through another structural adjustment program.

Furthermore, the government must address the fundamental macroeconomic imbalances it inherited from the previous regime and aggravated in the last ten months by its inaction and ineffective policies. Consequently the country has arrived at a juncture when without fundamental and comprehensive reforms, the economy would be unable to maintain an adequate growth momentum. Therefore macroeconomic policy adjustments have to be complemented with comprehensive reforms that alone can ensure the country’s medium and long term economic development. This however is the tough challenging task ahead.

IPS focus
The need for reforms that has been repeatedly stressed by economists has fallen on deaf ears. The economy has now reached a stage when both stabilisation measures and fundamental reforms are imperative. The Institute of Policy Studies (IPS), in its State of the Economy 2015 report that focuses on ” Economic Reforms: Political Economy and Institutional Challenges’, stresses the importance of initiating policy reforms on a wide range of issues. These include trade and investment, labour market, foreign employment, education, health, social protection, agriculture, and environment.

It points out that overhauling Sri Lanka’s tax system, tackling loss making state-owned-enterprises, improving labour market efficiency, filling skill gaps in the work force, improving productivity of agriculture, delivering a better safety net to the poor and vulnerable are amongst the reforms that are needed to propel the Sri Lankan economy. It stresses the need for reforms and actions to strengthen interactions between institutions, policy processes and policy outcomes and examines in detail the many interrelated reforms that touch on important policy areas.

Formidable challenges
These are formidable challenges in the political context and political and societal milieu of the country. The IPS recognises that such reforms are politically difficult to deliver through the legislative phase and are often even more difficult to implement.
It notes that reforms generate distributional impacts that create ‘losers’ and ‘winners’, entailing short-term adjustment costs to gain the potential long-term benefits. While reforms need to be ambitious in scope, it admits that ambition may have to be tempered by political realities.

The IPS report points out the importance of initiating reforms that attempt to strengthen interactions between institutions, policy processes and policy outcomes and examines in detail the many interrelated reforms that touch on important policy areas. It points out that the environment in which many of these sorts of transitions take place is strongly influenced by broader factors such as the quality of institutions and governance in a country.

Fiscal constraints
Dr. Saman Kelegama, Executive Director of IPS, told the audience at the launch of the State of the Economy Report that fiscal constraints, the demographics of a contracting labour force and skill deficiencies suggest that a rise in infrastructure investment will spur growth only temporarily and that sustaining higher growth in the long run must come by means of a competitive export sector through improvements in productivity, notably innovation and investments in human capital.

He also stressed that overhauling Sri Lanka’s tax system, tackling loss making State-owned-enterprises (SOEs), improving labour market efficiency, filling skill gaps in the workforce, improving agricultural productivity, a better safety net for the poor and the vulnerable are among reforms that need attention. Such reforms are politically difficult to deliver through the legislative phase and are often even more difficult to implement. Reforms generate distributional impact that creates ‘losers’ and ‘winners’, entailing short-term adjustment costs and the potential for long-term benefits.

Reform or perish
The implementation of this range of policies is critical for development. As former Deputy Governor of the Central Bank, W.A.Wijewardena has said forcefully, “If Sri Lanka does not want to be the Greece in South Asia, it has to take the message delivered by IPS through its State of the Economy 2015 seriously” There is no possibility of sustained high economic growth without a wide range of fundamental administrative, social and economic reforms. Unless such reforms are implemented effectively, the country’s economic future is bleak. In Wijewardena’s words, the choice is “Reform or perish”.

Politically difficult
IPS has argued that a wide range of reforms should be undertaken by the Government if it wants to take the country out of the malaise to which it has fallen today. However it also states that unless the country is hard-hit by a crisis, it would be difficult to sell the reform agenda to the people. This is the Albert Hirschman thesis that governments undertake reforms as a response to crises.

As Wijewardena has pointed out the crisis is upon us, it has already hit the country and “people just do not see it because government has failed to communicate it effectively to the electorate.”

Concluding exhortation
Reforms are essential though admittedly difficult to implement in the socio-cultural and political culture that has developed over the years. Even though the government has a majority in parliament, fissiparous tendencies within the government itself may result in opposition to politically unpalatable reform imperatives. It is in such a context that the quality of leadership matters.
The Wickremasinghe-Sirisena leadership must act in a statesman like manner and take bold economic measures to contain the crisis and undertake the much needed reform agenda.

They need to shun immediate political popularity for longer term economic progress and political success. They must explain to the electorate the plain truth of the economic crisis and the need to face up to hardships to get the economy out of the crisis and stagnation through a wide-ranging reform program. Reforms would be painful at first but the country could taste the fruits of the economic success in the fullness of time.