A million-dollar answer!
View(s):As Sri Lanka is getting heated with election preparations, it is not unusual that any informal chats among peer groups turn to be more political than anything else. A typical question that demands everyone’s responses in our peer group too was that “who would win the Presidential Elections this time?”
Politics over economics
I was amazed by someone’s response to that question with a million-dollar answer: “Even if we face change, the country’s problems will be the same”.
The President might change and the people around him might change too. Irrespective of all that, the economic problems and challenges that they must face will remain the same even after the elections.
Checking a gemstone. Export revenue should be increased like from gems for example.
However, the gravity of the current issue seems to have got dried up in the election heat. When we see how politics supersedes economics and people’s hardship, it looks as if the country is back to its normal days. As we all know, it however, is not. Underneath the election heat, there is an economic reality which must be dealt with after the elections.
This is my focus today, too. I will try reminding us of the depth and width of the economic problems and the challenges that we are entangled with. There is no option that the new President must handle them all in the best possible manner in the coming years. It should be the priority in the post-election agenda at least to avoid the next economic collapse, leave aside economic progress.
Economy on “knife-edge”
Only 15 months out of the 48‑month Extended Fund Facility (EFF) agreement that Sri Lanka entered with the IMF in March 2022 has passed now. The reforms under the EFF agreement are bearing fruit with the economy starting to recover from the crisis.
In terms of the IMF’s own assessment in June 2024, “nevertheless, the economy is still vulnerable and the path to debt sustainability remains knife-edge”. The IMF has admitted the potential cost of the elections in terms of considerable uncertainties that it has created. Given the current political and policy environment, there is a critical need for sustaining the reform momentum, safeguarding the hard-earned gains and ensuring that Sri Lanka can emerge from its severe economic crisis.
The people’s sacrifice bearing the burden of “austerity measures” during the past two years has been unprecedented. They must be allowed to lessen the burden in the medium term with economic progress which should not be sabotaged shifting the policy focus or diluting the policy effort.
There are concerns about “re-negotiating” the programme. Technically, it is possible for the
Sri Lankan government to abandon the current EFF agreement or to abandon it and renegotiate a new one. Either way, it would undo the debt restructuring agreements too so that the outcome would be disastrous. One of the remarkable developments is that unlike in the past, no major political parties talk about any options as such.
Although re-negotiation is possible, such attempts cannot be aimed at changing the agreed EFF framework of reforms and the set macroeconomic targets. However, within the same framework alterations may be re-negotiable in order to achieve the same targets, as it has been done in some other countries as well.
Fiscal consolidation
Fiscal consolidation is a key issue within the EFF framework which still has a long way to go. With tax hikes and the cost-reflective price adjustments, in 2023 the government has been able to raise revenue to 11.1 per cent of GDP, to narrow down fiscal deficit to 8.3 per cent of GDP, and to achieve a primary account surplus of 0.6 per cent of GDP.
Within two years’ time by 2025, the revenue target should exceed 15 per cent of GDP, fiscal deficit should come down to 5.2 per cent of GDP, and primary account surplus should rise to 2.3 per cent of GDP.
These fiscal targets require swift policy measures aimed at new revenue-raising measures and expenditure-reducing measures, which are not politically popular actions for the new President.
One of the important strategies without further burdening the public is to expand the tax base, in bringing all working people to a digitalised tax net. This is, however, a more challenging task as the government is not yet prepared for implementing such technology-based efficient tax system in Sri Lanka.
Preparing for debt repayment
Once the grace period is over by 2028, Sri Lanka must prepare for repaying foreign debt, which now amounts to US$53 billion, or over 60 per cent of GDP. By that time, the country should have achieved a sound external finance position with over $15 billion foreign reserve target, which now stands at $5.5 billion.
How do we generate foreign exchange inflows in the medium term (three years), enabling the Central Bank to purchase them in the market and build reserves? Tourism expansion or foreign remittance growth may add a little, but they are not sustainable sources of foreign exchange inflows.
Sustainable and stable source of foreign exchange earnings is the export growth. This is an area where Sri Lanka continues to lag far behind its peers in the region, in spite of being one of the early beginners to establish an open economy” in Asia.
Sri Lanka’s current export earnings amount to $12 billion in 2023, compared to $352 billion in Malaysia, $287 billion in Thailand, $371 billion in Vietnam, $340 billion in India, and $515 billion in Singapore. Accordingly, Sri Lanka should transform itself to be a competitive exporter in the region. But the key challenge is how to do it, and how to expedite its process.
Investor confidence
Export growth is inseparably connected with the level of “investor confidence” with respect to both local and foreign investors.
Sri Lanka has poorly performed during the past years and decades in terms of foreign direct investment (FDI) inflows. Therefore, one of the key issues of the new President is “how to make
Sri Lanka an attractive investment enclave for FDI flows” that have so far been bypassing the country.
When Sri Lanka was achieving less than one-billion-dollar FDI flows in most of the years in the past, in its own backyard the largest FDI-recipient countries in the world were succeeding. Among them, the top five in the region are China with $180 billion in 2022, Singapore with $140 billion, Hong Kong with $120 billion, India with $50 billion, and UAE with $28 billion (2022).
Emerging economies aspiring to be the higher growth performers should facilitate and attract FDI flows for several reasons: They can overcome their inadequate domestic savings for investment, and thereby to expedite investment promotion.
FDI flows come with not only the foreign exchange but also their own management practices, state-of-the-art technology, connectivity to global supply chains, and competitive access to international markets. They all may entail widespread “spillover effects” on the local economy as well.
Restoring the open economy
Making Sri Lanka an attractive investment centre in a fast-performing competitive region is a challenging task for any government. In the first place, it requires far-reaching policy and regulatory reforms, perhaps, undoing the ideological strongholds in the past.
It must establish an enabling business environment free from corruption that has been nurtured with political blessings in the past. The dilapidated “open economy” of Sri Lanka must be restored and the consistent policy directions must be clearly demonstrated by actions.
Finally, people’s “battle for living” that has been challenged by the crisis as well as the policy response to the crisis must be calmed down with income generation and job creation. It all depends on the long-term growth prospects that the new President and his team would bring about after the elections. If it is not the case, elections would be just like a “wedding which has no guarantee on the marriage”.
(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).
Hitad.lk has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on Hitad.lk before deciding on what will work best for you!