Urgent action needed to overcome impending Lankan economic disaster
File picture of President Maithripala Sirisena and Finance Minister Ravi Karunanayake at a recent economic forum.
The Sri Lankan economy is facing a grave economic crisis: Government revenue has plunged from 16.8 per cent of GDP in 2000 to 13 per cent of GDP in 2015. The overall budget deficit which was – 9.5 per cent of GDP in 2000 is -7.4 of GDP in 2015.
The Government therefore has to borrow and its debt grew to 76 per cent of GDP in 2015; the outstanding external debt out of this amounted to 54.4 per cent of GDP (about US$ 45 billion) in 2015. Unfortunately repayments of these debts gobbled up about 28 per cent of export earnings of $10.5 billion in 2015. What remained would not have been sufficient to pay for imports which stood at $18.9 billion in 2015, if not for about $10 billion earnings from worker remittances and tourism. The problem is export earnings are not only insufficient but are also declining while imports increase by leaps and bounds; this has been the picture since 1977. Due mainly to this continued state of crisis incomes have not increased fast enough; therefore those earning less than $2.5 per day were estimated to be 32.1 per cent of the population, including about 700,000 destitute people as of 2012/13, (World Bank 2015); these numbers normally would go up when the prices of essentials increase.
Failure to solve the problem
The previous government despite 10 years of rule failed to solve the problem. This is exactly why the people voted in a new government in 2015/16. But the new government too has failed to make any improvement; in fact the signs are that the crisis has worsened particularly because very little progress has been made both in the revenue and expenditure fronts obviously due to an absence of political will/guts to do the right things like widening the personal/direct income tax base or slashing the massive losses of the state owned enterprises (SOEs). Worse still there doesn’t seem to be any understanding as to how export earnings could be increased (and imports could be decreased). The thinking appears to be that it could be done by market expansion through trade agreements; this is a sort of ‘cart before the horse’ approach, as the actual problem is the insufficiency of capacity to increase production of goods and services for export and not inadequacy of markets. Though several local economists have pointed this out, the advice has fallen on deaf ears.
The authorities instead have consulted the Harvard University theorists! It is to be noted that this production has to come mainly from manufacturing industries to absorb the excess employment in agriculture (about 28 per cent of total employment) both to improve its productivity and to prevent the occupation of forest reserves and steep slopes by jobless and landless farmers.
Insufficient investment
Goods and services cannot be produced without investment. Sri Lanka was able to invest only about 30 per cent of GDP in 2015 .What we need an investment of more than 35 per cent of GDP to achieve a growth rate of about 8 per cent per annum. As there is a scarcity of capital and the necessary technologies locally and since locals do not have global market access for products, this investment gap has to be filled by foreign direct investors (FDIs).
However, they have been bypassing this country apparently because the risk of investing here is high (according to indices published by the OECD and others) while their prospect of earning a comfortable return is low especially as there is inconsistency of policies.
In addition approvals of projects take months and years (compared to half an hour in Dubai), as regulations are so complicated that 70 per cent of the time spent by exporters is devoted to importing and exporting processes, which in addition breed corruption. While labour laws are complex, the technical and soft skills required are scarce, the capacity and quality of infrastructure especially of power and water supplies are quite low, law and order conditions are getting worse, widespread public demonstrations which may be a form of social unrest due to the burdens created by the economic crisis are increasing though some of it may be politically motivated), there are even productivity sapping epidemics which could be due to the continued use of polythene bags and the failure of local bodies to clean up the garbage and the road side drains. In other words the internal enabling environment for investment here is absolutely negative.
There are no signs that this has been understood as indicated by the foreign promotion trips supposedly for attracting investment. In addition land consolidation has never been undertaken to increase investment in agriculture, improve its productivity and alleviate poverty among rural population of about 17 million.
Low competitiveness
There is a further complication. Just by producing goods and services for export, Sri Lanka cannot increase exports. It has to be globally competitive, which means that the unit costs/prices have to be low (productivity has to be high) and the quality and value addition of these have to meet if possible the highest standards set by customers to earn higher export earnings.
Even such basics do not seem to be understood, as heavy tariff protection of domestic enterprises continues as in the past making them concentrate on the domestic market. If import tariffs are reduced, competition among enterprises will increase, generating paranoia to expand investment and innovate to improve global competitiveness; this will also benefit domestic consumers as prices would come down with the reduction of taxes on imports.
The tragedy is that Sri Lanka has never made an attempt to be competitive in large scale production (to improve productivity) for export to world markets by reducing tariffs (as logically required by all small nations with small domestic markets), except for a brief period after 1977. The question is why has this happened?
Ineffective politicians/leaders
Most of the politicians who have emerged after 1956 appear to have been driven by short term political gain; they would not hesitate even to arouse communal conflicts to gain this end (thereby increasing the risk of investment), indicating a complete absence of a passion for serving the people; instead there is an inclination to enjoy life at the expense of the taxpayer and even to loot the Treasury. They have failed to make the people aware of the ways of improving their wellbeing, for instance by expansion of investment, especially FDI, on manufacturing for export. The current economic crisis is thus the result of all these adverse trends.
Avoiding social and
economic failure
A complete failure of the Sri Lankan economy to deliver, e.g. essentials at reduced prices and well-paying jobs as well as to alleviate poverty, could thus be imminent, resulting even in starvation and much social unrest (the IMF could prevent it temporarily). So there is an immediate need for the government to act fast on the following much delayed priority areas to improve the wellbeing of the people (on the basis of the Sustainable Development Goals and Targets, including poverty alleviation approved by the UN in 2015):
1)Â Â Â Â Â Â Â Â Â Â Â Â The government has to work with the opposition to solve the crisis; in fact it is in the interest of the opposition parties too to cooperate with the government to face the crisis off with the following common programme as problems would worsen when and if they come to power if not resolved right now. In this context the treatment meted out to the 50 MPs in the so called Joint Opposition by reducing their time of discussion of issues, giving rise to juvenile delinquent type of behaviour even by seniors, is unwise; the excuse is the existence of obstructing Standing Orders. Parliamentarians however have all the power to enact new laws or regulations for greater cooperation by both sides of parliament.
2)Â Â Â Â Â Â Â Â Â Â Â Â The high risk in the enabling environment for investors particularly
FDIs for production of export products has to be drastically reduced by (a) enacting a strong new constitution mainly for introducing good governance including the separation of powers among the executive, the judiciary and the legislature, devolving power to the provinces and ensuring equal rights for all particularly to root out any fear of another outbreak of communal violence, electing representatives to constituencies instead of districts to reduce high election campaign expenditure which breeds bribery and corruption and to create a new generation of educated and effective leaders/politicians as well as by (b) removing the laws and regulations that hamper the efficient operation of businesses such as labour laws ( c) passing a law to create a one-stop-shop for approval of projects, and (d) improving the law and order situation significantly.
3)Â Â Â Â Â Â Â Â Â Â Â Â Widening the tax net to collect more revenue from personal income,
while plugging the leaks in revenue collection due to corruption as well as converting the loss making SOEs to public private partnerships (PPPs) to reduce the budget deficit drastically, a step by step reduction of import tariffs, setting up a powerful office responsible only to parliament along with stringent laws to root out corruption speedily and creating a consistent policy environment to invigorate the private sector, the ‘engine of growth’.
4)Â Â Â Â Â Â Â Â Â Â Â Â Signing agreements with countries such as China and India to develop the Hambantota Port, the Trinco Oil Tank Farm and industrial areas respectively on a PPP basis especially to reduce the external debt/produce export products.
5)Â Â Â Â Â Â Â Â Â Â Â Â Introducing a new system of education/vocational training to upgrade the technical and soft skills including communication in English (while importing the skills temporarily) and development of infrastructure particularly power generation, stopping non-essential construction projects, temporarily, and developing renewable energy sources to reduce imports, but prioritising the cleaning up of the natural environment to prevent epidemics.
6)Â Â Â Â Â Â Â Â Â Â Â Â The consolidation of the fragmented subsistence farm- holdings by giving ownership of the land to the farmers, while undertaking a programme to de-silt all reservoirs and repair bunds and canals, to enhance rural incomes.
7)Â Â Â Â Â Â Â Â Â Â Â Â NGOs concerned with saving the economy from collapse have to carry out a public awareness campaign to create pressure to speed up development and specifically to build a national consensus regarding the need for additional export oriented investment by the private sector especially FDI by showing the close connection between investment and poverty alleviation/ reduction of income inequality.
A failed economy/ state status could be avoided only by introducing/implementing these priority programmes within the next two or three years along with the opposition parties as well as the stakeholders concerned and putting these in charge of people (such as Karu Jayasuriya and Gotabaya Rajapaksa) who can get things done speedily.
(The writer is an economist and comments on the articles should be sent to loyani@sltnet.lk)