Sri Lanka’s ‘over-burdened’ generation
View(s):I congratulated the Minister not only for launching a new book, but also for something else. This is a country where ‘two versions of economics’ cohabit in fighting each other. One is the economics based on principles and the other is the economics based on opinions.
It is not easy for principles-based economics to survive in the battle because its voice is silent and it’s not attractive to the audience. If it had been so, Sri Lanka would not have been in this crisis today. On the contrary, opinion-based economics is popular and it has a loud voice in public forums and even in Parliament. I congratulated the Minister for his effort in trying to convince the general public through his books with some principles-based economics.
Impossible choices
Today, I decided to pick up the main issue that I emphasised in my speech there. I had already been requested to speak on any issue related to the current economic crisis, because there was a dearth of evidence-based information on the country’s economic reality.
As reported in the book, Sri Lanka can complete repaying all its current foreign debt with accumulating interests only by the period 2043-2048. There is a break down of repayment as well. Under whichever government that comes to power this year, 37 per cent of the foreign debt must be settled. Within the next 15 years, 51 per cent must be paid; and the balance 12 per cent within the balance of the period.
While I was listening to these introductory remarks at the book launch, I began to wonder about the total duration of time that is required for repaying the current foreign debt which is about a quarter of a century or, in other words, almost a generation. Therefore, the major economic responsibility of the current generation living in the country would be to pay off this debt and, release their children from carrying the debt burden. However, it is possible only if we commit not to borrow any more. But the problem is we are still borrowing from both domestic and foreign sources.
Garments, Sri Lanka’s biggest commodity export. The country needs to increase exports.
Foreign exchange earnings
The foreign debt burden can be reduced by improving the country’s ability to pay it. That is to generate foreign exchange earnings, which is essentially a ‘medium-term’ programme. However, there has been much attention primarily on three sources of foreign exchange earnings: tourism, remittances and, of course foreign borrowings.
Tourist arrivals have been on the rise, although there is nothing that we have created as a ‘man-made tourist attraction’ in this country. Sri Lanka earned US$ 4.3 billion with 2.3 million tourist arrivals in the best year for tourism industry – 2018. This means that even if tourist arrivals double in the medium term reaching five million a year, earnings would reach $10 billion at its current qualitative standards.
After the COVID-19 pandemic-led set back, private remittance flows have been on the rise too. In the best years of remittance flows, Sri Lanka earned around $7 billion from private remittance, while its major component originated from the West Asian countries.
I cannot resist asking the question “whether the increase in private remittances of a country is a sign of prosperity”. The bottom line is that it is a sign of poverty and misery, because many people chose to leave the country and the family for working abroad because there are no jobs and, even if there are, the reward is poor.
If this is the case, increasing misery and poverty at home compels more people to leave for working abroad so that there will be increased remittance flows. Sri Lanka can reach $15 billion foreign exchange remittance flows by doubling foreign employment. But this target could be achieved only by increasing misery and poverty at home.
Sri Lanka’s chronic disease
The third source of foreign exchange earning is further borrowings from abroad. In fact, in the current context Sri Lanka’s borrowings are limited to multilateral sources, including the IMF’s extended fund facility (EFF). The success of the IMF programme is virtually the major determinant of other foreign loans too. Perhaps, the IMF programme is important not necessarily because of its $2.9 billion EFF arrangement in biannual tranches. The IMF programme has brought about some policy and regulatory discipline to the country preventing its further collapse.
Sri Lanka’s main foreign exchange problem is not any of these issues. If that is the case, we may have to say that the country is in a foreign exchange crisis because of the lack of tourist arrivals, or the inadequate migration for foreign employment, or insufficient foreign loans! No country in the world dares to declare such statements, because they are not the sustainable sources of foreign exchange earnings.
More stable and rapidly-growing foreign exchange earnings come from export expansion. Although it is true that the country cannot revive its export growth overnight, sooner or later it is the most fundamental requirement of the recovery and progress. Foreign debt burden would go down if there is sufficient export growth. Income growth and job creation would be sustained by export growth. Even the current effort of attaining and maintaining stability with lower inflation and interest rates, as well as stable exchange rates ultimately depend on export growth.
How fast and how much export expansion can we go forward? The highest and fastest increase in export expansion among the Asian countries can be seen in Vietnam; the increase was from $5 billion to $280 billion within 25 years. For a similar period of time, Sri Lanka’s export growth was from $5 billion to $12 billion only. In Cambodia – one of the least developed countries in Asia, export expansion was $5 billion to $18 billion within 10 years.
Not export-oriented
Sri Lanka has not transformed itself into an “export-oriented economy” although it was the purpose of liberalisation policy reforms in 1977. Apparently, its export-oriented policy regime began to be reversed over the past 25 years favouring expansion in non-tradeable sectors which did not generate foreign exchange earnings.
It was quite bizarre to find out recently, among more than 2,500 export firms registered with the Export Development Board (EDB), that there were no more than 10 public limited companies that are listed on the Colombo Stock Exchange (CSE). In fact, the CSE has about 300 public limited companies. Moreover, at another recent event for awarding the top-40 businesses in the country, a great majority represented non-tradeable sectors – particularly banking and finance and import trade.
Today the world’s largest free trade area is in Asia, represented by the Regional Comprehensive Economic Partnership (RCEP) comprising ASEAN group of countries and ASEAN+FTA countries. The former includes rich countries in the South East Asian region such as Singapore, Malaysia and Brunei as well as developing countries such as Vietnam and Laos. The latter group with FTAs with the ASEAN includes most of the other countries around South East Asia – India, China, Japan, South Korea, Australia and New Zealand. In the midst of integrating Asia as such, so far Sri Lanka continues to remain an ‘isolated’ economy.
Sri Lanka’s effort for achieving macroeconomic stability and debt sustainability would be meaningful, only if its economy would transform back to an export-oriented economy. It is with export growth that Sri Lanka would be able to reduce its debt burden, while how fast the country can accelerate its export growth determines how fast it can reduce the over-burdened debt problem.
By the way, as we are anticipating an ‘election year’, a key issue is that who would present a credible reform programme to restore the country’s export-oriented economy. But, I am not sure how many political parties would have any plan for that.
(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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