Retrieving SL’s economy from the mud
Prime Minister Mahinda Rajapaksa presenting the budget last week.
Our economy is in deep trouble. Even before COVID, foreign reserves had dwindled, deficits have skyrocketed and our debt burden was nearing 100 per cent of our meagre GDP.
In 2019 President Gotabaya Rajapaksa walked into this fiscal crisis. And unwisely, he gave a hasty and massive tax cut that blew a hole in the government revenue to the tune of a massive Rs. 650 billion. While it was meant to spur growth, it did end up as a short sighted blunder we could ill afford. The tax cut amounted to a 4 per cent of our national economy that runs around a tiny US$87 billion. We were already heading to a massive debt burden of around $4.5 billion which was the largest ever in our history. Added to that was the depreciating rupee, dwindling reserves and worsening deficits.
To stop the forex drain, the president stopped non-essential imports including motor vehicles. He curtailed some of the staples too.
Since then COVID hit. Our economy, like almost all others took a nose dive. Tourism that generates 12 per cent of our revenue and associated jobs dried out quickly. Revenue dwindled over 20 per cent, the economy shrank by around 15 per cent and expenditure shot up mostly due to rapidly increasing health care costs to meet the COVID threat. Credit agencies cut our rating, debt repayments were rescheduled, our bond yields went up and the outlook for our economy looked hopeless.
End of the war
After the war, then President Mahinda Rajapaksa and later, the Maithripala Sirisena/Ranil Wickremesinghe regime went on a massive spending spree with borrowed billions. According to the Central Bank (CB), in 2010 our total external debt was around $30,000 million. By the time Sirisena/Ranil took over it had grown to around $46,000 million. The Yahapalana duo further raised it to around $55,000 million by the time they left. Also in 2010 our debt/GDP was running at 72 per cent. When Sirisena/Ranil took over it was hovering around 75 per cent. They raised it to around 85 per cent before handing over to Gotabaya in 2019. These are all CB figures. How much of these statistics are politically influenced is anybody’s guess. My hunch is that the actual numbers are a lot worse.
So today we are deeply in mud. I would dare say there is no way out other than more borrowing. The only silver lining if we can call it that, is the fact the entire world economy except may be China is in mud too but not to our extent.
So looking forward to 2021, how can Gotabaya plot our future toward the next few years? Is he going to be inward looking encouraging local farming, closing our doors to imports etc or is he going to follow JRJ (J.R. Jayewardena) in 1977 and launch a massive drive to bring in foreign direct investment. We have tried the former during Mrs. B’s (Sirima Bandaranaike) times, pre 1977 and that was a failure. We are far too small a country to beat world market prices in agricultural products. This was cleverly explained by JRJ’s Trade Minister Lalith Athulathmudali. We need to go full steam ahead on a Singapore model.
FDI is the mantra. In 2018/19, the US attracted the highest direct investment to the tune of $275 billion followed by China at $136 billion. Tiny, tiny Singapore at the 5th place attracted $62 billon; a little short of our own economy.
It is widely believed that investors will only flow capital into countries with stable democracies and a stable economic policy. They don’t want to dump their millions into a country where changing governments have drastically different economic policies or countries with constant civil rife. They like to come for the long haul. For example, no matter which party is in power in the US, investors know it is a stable democracy with a stable economic policy; capitalism. The band might change but the tune is the same. Same with Singapore, Hong Kong or Brazil, all of whom were the top FDI beneficiaries in 2018/19.
The other key ingredient for investment is a clean and efficient bureaucracy. Now many believe Gotabaya has made good headway in that department.
I hate to say this as I do have some respect to the left leaning parties on their social agenda but not the fiscal policies. The rhetoric by the parties like the JVP scares the heck out of investors. They don’t like the word socialism. While there are lots of good things socialism has done to the world, it is not a friendly word to any business community by and large. I have to however mention that when the small team of JVP members in our legislature screams corruption, I salute them. As an opposition, that is their constitutional obligation. But if you want to attract foreign investment, the likes of JVP do not help. I might even go to the extent of saying the world has outright rejected the worst form of socialism called communism some 40 years ago.
Stable government
What more stable government can Sri Lanka wish for than what we currently have? The 20th A gave Gotabaya all the power he needs and more. His immediate family is holding top posts in the government including the much respected Prime Minister.
With power comes responsibility. With absolute power comes absolute responsibility. So it is Gotabaya’s land to win or lose. If he fails, he has no one but only himself to blame. He has been known as a man of action. He has done some good things so far too. But nothing is more important than the economy; peoples’ bread and butter. But as President not only does he need action but lots of wisdom too. A short sighted decision like the 2019 tax cuts can come back to bite him bad.
In the short term the key word will be borrow to survive. But in the long term, the magic word should be foreign investment. Now that will be the real challenge for Gotabaya – the man of action!
(The writer is based in Washingon and can be reached at aseneviratne@PyramidHotelGroup.com)]