New ammunition for the New Year
View(s):As we are at the doorstep of 2024, I thought of looking back at the most difficult years that we passed through and looking ahead at the New Year’s challenges that we must deal with. We have an ambitious vision to make a rapid journey towards a prosperous economy in 25 years, while it all depends on the decisions we take and choices we make today. In this respect, it is apt to make an assessment of where we were this year and where we would be in the coming year.
Double punch
Sri Lanka exhibited the economic, political, and social characteristics of a “crisis-ridden” economy, but as per global standards in a mild way. The countries that were plunged into economic crisis prior to Sri Lanka such as Greece, Venezuela and Lebanon all had a terrible experience of an economic crisis. Among these, the debt crisis in Greece started in the aftermath of the global financial crisis in 2009. But it had the support of not only the IMF, but also the European Union and the European Central Bank. In spite of all that it took more than 10 years for Greece to achieve some economic stability.
Majority of people are in the informal sector, working to survive not to thrive.
Venezuela and Lebanon are both still in a deep crisis. In these two countries, the economic, political and social impact of the crisis is catastrophic. In the aftermath of the COVID pandemic, the weak economic immunity was evident in some other countries too which are in the verge of collapse.
The nature of the crisis-ridden economies is that there is a “double punch” over the ordinary people pushing them into poverty and social unrest. The first is that they must suffer from the bitter consequences of the economic crisis itself – loss of incomes and jobs, skyrocketing prices, shortages of basic supplies, and the vanishing value of savings. It is the struggle for survival, not for thriving.
The second blow is the negative impact of the policies and policy reforms adopted as remedies to bring the economy out of the crisis. Such policies and reforms may entail price adjustments, higher taxes, expenditure cuts, tight monetary policies and reduced social security measures. They all further dampen the economic hardship that mostly the ordinary people must face, at least temporarily.
Accordingly, whichever the government that is in power it may have to deal with a policy dilemma. It must either adopt bold policy reforms to remedy the crisis or, in case afraid of that, allow the crisis to drag on and settle itself. Neither will satisfy the public, which must suffer either way.
Economy on the fence
Having caught up in a crisis, the case of Sri Lanka is not an exception. The only exception is that it could turn around within a short period, though it is too early to say that the economy is either recovering or progressing.
The real GDP that contracted by 7.8 per cent in 2022, further contracted by 4.9 per cent during the first nine months of 2023 too. While the agriculture sector has shown a positive growth rate of 2.5 per cent, both industry and service sectors continued to shrink. Accordingly, it is not possible to anticipate a bigger change in the economy for the year 2023 or the coming year 2024. It may recover and grow slowly but achieving a progressive growth path for the economy over the medium-term remains a major challenge.
Sri Lanka made a significant improvement in taming its hyper-inflation primarily for two reasons. The first is, in the face of the economic crisis the loss of purchasing power of people – the consumers and producers – which resulted in a subdued aggregate demand. The second is the monetary policy discipline that targeted the inflationary pressure. For both the policy success in containing credit expansion and the in-built downward pressure on aggregate demand anchored hyper-inflation.
It is the success of fiscal consolidation which is yet to be seen in the coming years. The Budget 2024 has already predicted with estimated income-expenditure outlays that 2024 is a challenging year. Even though the unbearable public debt is at the heart of the economic crisis, the Budget 2024 shows little improvement in fiscal consolidation; in fact, it wanted more borrowings to meet the government’s expenditure obligations including the repayment of loans.
Poverty, inequality
and insecurity
Therefore, the country is far from reducing its debt burden as a policy option, other than the anticipated success of debt restructuring. While the government revenue is estimated to be little over Rs. 4,100 billion in 2024, the borrowing requirement is Rs. 7,350 billion. The main weakness of the government’s poor revenue collection is its inability to establish an effective mechanism to broaden the direct tax base.
In the absence of a technology-based direct tax system covering income, property and wealth as well as covering the whole population, the fiscal management must rely more on ad hoc income tax collection, increase in indirect tax revenue and further borrowings. It contradicts the recovery as both have negative implications on the effort of achieving fiscal consolidation.
The gradual decline in poverty in the country reversed due to the economic crisis with over one-fourth of the population falling below the national poverty line. The loss of livelihoods and incomes has pushed the people to seek refuge more and more in the informal sector to find ways and means of survival. While Sri Lanka is a country where the majority of its people are occupied in the informal sector, the economic crisis has multiplied this issue.
Apart from the poverty issue, the economy is characterised by acute income and wealth inequality. The top 10 per cent of the population earns nearly half of the country’s total incomes even before the crisis; the bottom 50 per cent of the population acquires only about 10 per cent of income. Wealth ownership also follows a similar pattern.
While the crisis has exacerbated the poverty and inequality issue, the resulting economic insecurity has been overwhelming. Recent evidence suggests that household debt issue has been staggering for consumption purposes. More importantly the loss of hopes for a ‘better future’ has affected the younger generation. Sri Lanka also has a history of youth struggles in the past, fueled by the unmet youth aspirations, while the evidence suggests that the issue has become multiplied with the adverse impact of the economic crisis over the youth population of the country.
Dawn of the New Year
At policy-making level, we are focusing more on achieving debt sustainability and economic stability with fiscal and monetary policy. Yet the deeper issues that are much more complicated and that have been exacerbated by the economic crisis are yet to be addressed.
Stability should be achieved, but it should also be maintained with structural reforms aimed at growth which is fundamental to economic expansion, income generation, job creation, and poverty reduction. Even ‘growth must be sustainable’ too, as Sri Lanka’s growth scenario since the turn of the Century has been unsustainable; it was fueled more by public investment on the one hand and expansion in ‘non-tradable’ sectors on the other hand.
Accordingly, the challenges in the New Year – 2024 are much more complicated than what the government has dealt with so far in 2023. The economy has to make a decisive shift from its debt-dependent and government-dependent non-tradable sector growth towards a private investment-dependent tradable sector growth. Without which the crisis-ridden Sri Lankan economy is still vulnerable to external shocks.
By the way, it’s an election year too so that ‘election heat’ may overwhelm the significance of policy reforms for recovery and progress. In fact, reforms may bring new ammunition to fight at the election campaign, so that there is greater possibility to undermine and dilute the need for a comprehensive reform agenda.
I wish all our readers, renewed hopes for the New Year!
(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal
@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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