Out of the woods, now?
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The number of the poor in Sri Lanka’s population has increased.
In 2015, I gave an interview to the Sinhala newspaper “Deshaya” which was published in its September 6 issue. The literal meaning of the title of this article was “[there will be] nobody to save us, when we fall”. I was referring to the debt crisis of Greece and the fact that Sri Lanka which was also on the verge of collapse like Greece is unlikely to receive the support that Greece received.
The international bailout programme of Greece designed for its recovery from the crisis was constantly supported and monitored by three institutions, called “troika” – European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF). Similar to the situation in Greece at that time, Sri Lanka too had an unsustainable public debt running at over 700 per cent of tax revenue.
Having faced with the global financial crisis in 2008/2009 which exposed the weak fiscal operations and soaring public debt in Greece, its economy collapsed. Prior to that, Greece was a US$ 356 billion economy among the rich countries with over $32,000 per capita GDP.
Due to the crisis, the Greece economy contracted. More than half of its GDP got wiped out in eight years, falling down to $193 billion in 2016. People became poorer as per capita GDP too declined by more than half reaching $17,924 in the same year. Today, about 15 years later Greece is on the recovery path, but its economic status has not yet returned to its pre-crisis level. Simply, the Greece economy is still smaller than it was, and the people were poorer than they were before the crisis.
Economic Review 2023
I recalled the case today of Greece again to draw some parallels to Sri Lanka. The Central Bank launched its Annual Economic Review 2023 last week, providing details on the latest state of the economy. By reading the numbers therein, it is not difficult for someone to understand that among many crisis-ridden countries in the world, the Sri Lankan economy has made a quick turnaround.
The fast turnaround of the economy is a result of the painful policy changes and reforms that Sri Lanka adopted during the past two years. However, it is too quick to conclude that we are now on a recovery and progressive path, because there are critical challenges ahead. It is not at all unrealistic to be cautious about the feeble state of the economy which is still vulnerable to external shocks.
By reading some of the latest numbers from the Annual Economic Review 2023, today I am focusing on some aspects of the country’s recovery path and to point out to the challenges that are ahead on us along our pathway.
The Sri Lankan economy contracted during 2018-2022 and, even slipped back from its middle-income status to low-income status. But it is now progressing. As of 2023, it is an $84 billion economy – bigger than $77 billion in 2022. The crisis has, however, wiped out about $10 billion of it during the past five years after 2018.
Per capita GDP has increased to $3830 from its $3464 in 2022. Nevertheless, it is not much different from what the country had in 2015, indicating that our per capita GDP is still as same as we had eight years ago. However, the rate of economic growth has turned to be positive since the second half of 2023 and expected to be higher in the coming years.
Poverty and vulnerability
The crisis has made people poorer not only due to the economic contraction and falling incomes, but also due to price hikes that have caused them to buy fewer things than before. The inflation rate that was running within the Central Bank’s target boundary of 4 – 6 per cent prior to the crisis suddenly skyrocketed to over 46 per cent annual average in 2022.
Higher inflation has wiped out people’s real incomes so that people can afford to buy only a fraction of basic needs that they bought earlier. The average monthly consumption expenditure, which reflects the living standards of people, has nearly doubled in just three years – it increased from Rs. 91,880 to Rs. 176,253 during 2021-2023. It has to be reversed with an increase in incomes which would never happen overnight.
The number of poor has more than doubled. As per Sri Lanka’s Development Update by the World Bank, in 2019 Sri Lanka had 2.5 million poor who earn less than $3.65 a day (equivalent to about Rs. 1000 at the current exchange rate). By 2022, the number of poor has increased to 5.7 million, which is more than a quarter of the country’s entire population. The crisis has pushed even the non-poor people closer to the $3.65 poverty line, indicating increased vulnerability. They could be easily knocked down by any external shock affecting their incomes.
The increase in poverty and vulnerability has to be dealt with medium-term growth strategies that would generate incomes and create jobs, while short-term cash transfers only provide a temporary relief. Therefore, unlocking the country’s growth potential through reforms is as important as achieving stability and debt sustainability. And the stability and debt sustainability cannot be sustained without economic growth.
Current account surplus
It is a famous statement that “trade is the engine of growth”. But it is strange to find out that even after 45 years of experience with trade liberalisation and export promotion, Sri Lanka could generate no more than $13 billion worth exports with constantly growing trade deficits!
It could be good news to hear that, the current account has turned to a surplus in 2023 with a decline in trade deficit. The surplus has been contributed by increased tourist incomes and private remittances. The bad news is that, usually the post-crisis improvements in the current account balance and trade balance could be a result of import controls, subdued demand, and weaker currencies. This means that such positive achievements in trade and current account balances may reverse under normal circumstances, unless they are sustained with greater trade performance.
According to the current growth forecasts, Sri Lanka is on the track of maintaining its positive economic growth. However, growth must be based on export expansion, as we have now learnt a bitter lesson from our own past. Prior to the crisis, Sri Lanka’s economic growth was contributed more by domestic market-oriented economic activities such as construction, telecom, financial services, and government services than by export-oriented tradable activities.
The problem is that such domestic market-oriented economic activities will come to their limits unless they support tradable sector growth for exports. If such domestic market-oriented investment has been financed by foreign borrowings, then it gives rise to another problem – repaying foreign loans in dollars by earning with rupee incomes. Sri Lanka already had enough with both problems.
No other way
Although Sri Lanka is “on the track” of recovery, it is not yet out of the woods. The reform agenda should be accelerated in order to remain on the right track, while there is no other way without carrying out the reforms. In undertaking reforms, the challenge is that Sri Lanka has spent too long without reforms so that their sudden arrival may bring about high adjustment costs. As these costs are painful, there is political resistance and instability, creating room for reversals.
The more important challenge for Sri Lanka is the diversion of focus towards elections. It appears that many have already forgotten the crisis, while in that sense even the signs of fast recovery could be counterproductive. As we are approaching the elections, the more we hear now are the “political slogans” and not the critical matters pertaining to the economic recovery and progress of a crisis-ridden nation.
(The writer is Emeritus 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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