Higher salaries and lower prices
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A few days ago, I received a phone call from Yasawardena Rodrigo, a journalist from the Sinhala newspaper “Deshaya”. Once in a while, he used to contact me for comments and interviews on current economic issues of the country. This time too he had an important and interesting question:
“People are burdened with so much of hardships. In response, there are lots of trade union activities and public protests in the town, demanding for higher salaries and lower prices. As elections are also around the corner now, what’s the way forward in meeting these demands?”
There is nothing unusual about “hardship” in a country faced with an economic crisis, because it is the outcome of an economic crisis. A crisis time is the time that everyone wants to have their share that could be justifiable against the crisis impact. However, I can’t see the way forward in meeting this demand overnight or even in the near future without raising taxes further or borrowing more. The government has already done both, however.
I take this same issue today to reiterate the crisis impact on our life in Sri Lanka and, more importantly to talk about how and when we can expect the restoration of our losses. A word of caution is that, it is not possible for us to focus on individual persons or households, but aggregates and averages at national level.
Rising debt
At a time of suffering from an economic crisis, there is no dispute that “higher prices against lower incomes” are detrimental to the average people and households in the country. Although a few may find new opportunities to make a few more bucks by exploiting a crisis, generally crises affect everyone adversely. It is not just a mere problem of the public sector employees but all average people and households.
Public sector salaries should come from taxes so that this demand can be met only if the government can further increase its tax revenue – income and corporate taxes as well as VAT and import duties. Private sector salaries should come from their business operations which may be under-performing in a crisis; this also means that private sector salaries cannot be decided politically, which may be detrimental to business performance eroding the investor confidence and national economic performance.
I think both direct and indirect tax rates have now been raised in Sri Lanka up to the brim, although tax revenue still remains as low as 10 per cent of GDP. If the tax revenue does not permit the payment of higher salaries, an alternative option is to borrow, as we did in the past. In fact, we are in a debt crisis today, as we have borrowed beyond the limits violating the government’s fiscal responsibility norms.
As a “defaulted country” with no credible credit rating at the moment, borrowing is difficult for Sri Lanka. However, we must note that during 2023 Sri Lanka’s domestic debt has increased further by two trillion rupees and foreign debt by five billion dollars. Even as a defaulted country, Sri Lanka’s outstanding debt stock has been rising mainly due to increased borrowings in the case of domestic debt and, due to accumulating interest costs plus borrowings in the case of foreign debt.
Burning issues
As a nation we have a couple of burning issues to deal with: We are hoping to see our taxes reduced, prices slashed, and salaries raised, while comfortably managing our debt repayment during the next few decades. These issues may bear a particular importance at the time of elections; it is quite possible that many idealistic promises may come out of the election campaigns too misguiding the people.
As a result of tax revisions, Government has been able to raise its tax revenue by 55 per cent from Rs. 1,751 billion in 2021 to Rs. 2,721 billion in 2022. The increase in tax revenue reflects the outcome of tax reforms and revenue collection aimed at fiscal consolidation, although there is more to be done.
More than half of the government revenue is still needed for interest payments. With both interest cost and amortisation, total debt service payment in 2023 is still higher than the total government revenue. Debt service is more than 15 per cent of GDP compared with the government revenue, which is the source of funds, only 11 per cent of GDP.
One of the notable changes is the achievement of positive primary balance – the difference between revenue and current spending excluding interest payments, which has been a rare budgetary outcome in Sri Lanka. If the primary balance is large and sustained in the years to come, it shows that the government has an improved ability to meet its debt obligations and to lower debt burden in the future. However, it is noteworthy that Sri Lanka has suspended part of its debt obligations for the past two years until debt-restructuring is concluded.
Prices doubled
While people pay higher taxes now, they have also faced with increased cost of living due to higher prices. The average monthly consumption expenditure of households has doubled during the past two years from 2021-2023. As reflected by the National Consumer Price Index (NCPI), average monthly consumption expenditure has increased from Rs. 50,729 in 2021 to Rs. 103,383.
The issue has also caused a sharp increase in poverty levels. World Bank projections show that, according to lower-middle income poverty line of US$3.65 a day, the number of people living on less than Rs. 1,095 a day in Sri Lanka has increased from 2.5 million to 5.7 million during 2019-2022. This means that more than a quarter of our population has fallen into poverty.
Another survey by LIRNEasia shows that the number of poor, according to the national poverty line, has increased from 3 million in 2019 to 7 million in 2023; this means that, nearly one-third of Sri Lankans are considered to be poor now.
Numerous reports show that the poor struggle to cut down spending even by reducing and skipping meals. Evidence suggests that even part of the “middle-class” people with better living standards has fallen into a category of “hidden poor” that is not captured by poverty statistics.
We have sometimes a wrong perception that the government can reduce the prices and take us back to the past. The government has no political ability to reduce prices other than by removing taxes on food and drinks and import controls. Stronger currency and supply chain efficiency can also influence prices. However, there is no reason for us to anticipate a reduction in general price levels which should be projected with “negative inflation rates”.
Way forward
If the average prices are unlikely to fall, then apparently the way forward is to raise the income levels to compensate for higher inflation. In that sense, the demand for salary hikes is justifiable and the people in general need high incomes. The issue is how does it happen?
It happens only with the increase in production and productivity. After the contraction of the economy pushing us all back to 8-10 years, it was only during the second half of 2023 that the rate of economic growth turned positive. In fact, Sri Lanka’s quick turnaround of economy just within two years after the collapse is exceptional among the world’s crisis-ridden countries.
If the positive economic growth is continued to rise over 5 per cent per annum and is sustained over the years, within next couple of years we may be able to witness rising incomes too. However, it requires three things: reforms, purposive and bold reforms, and reforms covering the depth and its entirety.
(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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