The perceived collapse of Sri Lanka’s economy prompted, in large part, the groundswell of opinion which caused a change of government on October 26.
While the administration of Ranil Wickremesinghe could not solely be blamed for the crisis which caused the Sri Lanka Rupee to slide, the lack of resilience shown by the economy in the face of external factors should be attributed to the lack of effective economic direction and the general air of incompetence displayed by that government.
Unfortunately, the political stand-off, which began almost immediately after the change of government, resulted in an exacerbation of the crisis. The lack of certainty about the future made the business community anxious and edgy. While initial optimism caused a rise in the share market, the subsequent political developments gave rise to a generally pessimistic trend. Foreign investors also appear to have taken a rather gloomy view.
Hence, the first order of business for the government’s economic pundits will be restoring confidence in the economy, the essential prerequisite for which, the restoration of a modicum of stability to the uncertain political situation, lies in the hands of the politicians.
Speedy economic recovery
The Government is very much focused on a speedy economic recovery. For this reason, the Prime Minister appointed a special committee to develop a plan for the revival of the economy, made up of former Central Bank of Sri Lanka Governor Ajith Nivard Cabraal, former Secretary to the Prime Minister S. Amarasekera and former Securities and Exchange Commission Chair Nalaka Godahewa.
The economy confronts a great many issues which the Government needs to address quickly, and it intends to implement speedily measures aimed at counteracting destabilising factors. It recognises that the biggest among these is the lack of business confidence.
The ‘Program for Economic Revival’, which the Government introduced, on November 1, must be seen as an interim, short-term measure aimed at boosting confidence, as well as granting relief to disadvantaged consumers and producers.
At the same time, it does provide an indication of the direction in which it is heading economically – whereas it reduced taxes and prices on a range of essential consumer goods, fuel and services, increased subsidies for fertiliser and crop purchases and wrote off loans to farmers; at the same time, mentioned the possibility of carrying out further fiscal consolidation.
Economic reforms
These interim relief measures are indicative of a more welfare-oriented budgetary outlook on the new Government’s part. The mass of the population’s abhorrence for the former Ranil Wickremesinghe Administration began when it started to heap the burden of a massive cost-of-living on them.
This resulted because Ranil Wickremesinghe and much of his Cabinet were isolated from the people and took their cue from foreign governments and the Colombo elite.
The new government will most likely introduce economic reforms to benefit the poor, seeing the improvement of their living standards as a boon, rather than as a hindrance to development — as the previous Government seemed to do.
It is a question of differing definitions of economic development: on the one hand, there is a reliance on high growth and increasing profits, to the detriment of the popular standard of living; and on the other, depending on a widespread distribution of the benefits of economic growth, providing an inclusiveness to that growth, making it belong to all sectors of society and not just the privileged few.
The new Government relies on an inclusive development model, which recognises the strengths of the economy. It plans to build a society that is more sustainable and more inclusive as it grows, drawing in the marginalised elements of society.
At the same time, it is likely to act with restraint, balancing its expenditure with the resources available to it. The mention of fiscal consolidation must be seen in this light and in the light of what the Ranil Wickremesinghe Administration did in its massively-populist interim budget in January-February 2015.
While these populist measures led to relief for sectors such as government workers and motorists, they were not counteracted by measures to balance expenditure and income, leading inevitability to economy overheating.
The new Government is obviously keeping in mind the fact that measures such as those led to a massive surge in imports, the inability to finance which caused the Ranil Wickremesinghe Administration to seek considerable foreign loans, boosting the foreign debt/gross domestic product ratio to about 87% by the middle of this year.
In its previous incarnation, the Mahinda Rajapaksa administration showed prudence along with its relief measures, the resulting growth reducing foreign debt from 91% of GDP in 2005 to 71% in 2014.
However, the only real solution to the biggest problem, of a lack of confidence, is likely to be an early consolidation of the new Government and a settlement to the turmoil facing the country, preferably through a general election.
In the longer-term, the Government has set in motion the processes by which it seeks to establish high growth. It plans to ensure that existing potential in the lucrative banking, insurance, logistics and tourism sectors will be exploited to the fullest to enable extremely high growth.
As far as industries are concerned, it will try and ensure faster growth in the sectors which have been successful in the past, for example in garments. It will also seek to expand into areas hitherto largely untapped, such as the mineral sector. There is likely to be an extra effort put into exploiting the undersea petroleum and natural gas resources of the Gulf of Mannar.
Eliminating hindrances
The Government has to look at eliminating hindrances which have prevented the economy from developing in a balanced manner. These include the decline in the productive part of the economy, especially agriculture.
The lack of investment in long-term agricultural and industrial growth, which earlier funded the country’s import bill, has led the country into chronic debt.
One of the reasons for the lack of investment was the privatisation of development banks, which led to them becoming commercial banks, and diverted savings from investment, to financing imports. What investments there were tended to go into projects depending on imports from overseas, rather than local products and services.
Upgrading the workforce
Another major challenge facing the new Government is the need to upgrade the workforce. While well-educated by Asian standards, it does not have the features required for a modern economy, being mainly arts- and humanities-based.
The need is for more science and technology graduates and central school students. This will require considerable investment in both hardware and teaching staff. A concomitant requirement is investment in research and development – which only accounts for 0.1% of GDP, as compared to about 3% for countries such as Japan and South Korea.
The new Government plans at eliminating these hindrances, at developing production, particularly in the agricultural sector. The newly-appointed Secretary to the Ministry of Finance and Economic Affairs, economist S R Attygalle laid out the new direction of the new Government, on taking up duties on October 31, saying that the Finance Ministry has now to think of empowering local agriculture, businesses and entrepreneurs, by providing them with a market, suggesting that this would be done through short-term as well as long-term measures.
This touches on a key issue: the lack of a large and developed internal market. The agricultural sector employs 26% of the workforce (excluding a large component of unpaid family workers), but contributes only 7% of the GDP, due to very low agricultural productivity.
The mass of farmers, fishers and agricultural employees live at below-subsistence levels, so their purchasing power is limited to the most basic of essentials. It is vital that heavy investment should go into the hinterland, to raise productivity and to grow the small internal market. Therefore, the Ranil Wickremesinghe administration’s Colombo-centric policies, relying on the rapid development of the Western province to drag the rest of the country behind it, must be discarded.
Sri Lanka has a unique position to attract investment into production, due to its strategic position on the new Maritime Silk Road and its proximity to the vast markets of South Asia. However, a fatal lack of direction, combined with excessive corruption, has turned away possible investors, particularly in the past four years. Probably the best way to attract foreign investment is to establish a positive climate for local investment.
The stock market plays a vital role in attracting investment. The best means of attracting investors to the stock market is by making Sri Lanka more productive.
No artificial inducement can match the positive attraction of a booming economy. The Government must make sure that it does the best it can do with its limited resources.
Overseas remittances
Sri Lanka has a huge source of potential investment in remittances from workers overseas, at present amounting to around USD 7 billion annually going through the banking system, with a further amount being transferred illegally through undiyal methods. Apart from keeping the economy afloat by funding the trade deficit, remittance transfer has contributed immensely to the growth of the finance sector, forming the basis for financial instruments introduced to facilitate loans.
Since they earn much more than they would have had they stayed at home, the overseas workers make considerable savings, which contribute to enhancing the country’s national savings. It has even contributed to capital formation by way of self-employment. The challenge facing the Government is to channel these savings away from consumption towards investment.
The writer is the Editor of OSL - The Investment Magazine