As mentioned in these spaces previously, it will not be easy to emerge unscathed from the present economic morass without any collective pain. The International Monetary Fund (IMF) does not extend bailouts willy-nilly – some of the steps outlined by the IMF for socio-economic reform could be excruciatingly painful and hugely unpopular. Yet, we might have to make such a sacrifice to put this economic crisis in the rearview mirror.
The recently announced tax hikes can be categorised as one such step. Our direct tax base in relation to the overall population is still very small and even among the almost nine million employed persons (SMEs and self-employed included), only around 2.5 million pay taxes in one way or another.
It is clear that this has to change. More people should be paying income tax and other direct taxes, as opposed to indirect taxes such as Value Added Tax (VAT), which both the rich and the poor have to pay in equal measure. In this regard, widening the tax net is essential. It was recently reported that a doctor had deposited Rs.750 million with a woman who is currently in custody for alleged financial offences. Clearly, that massive income has not been taxed. There should be no such loopholes in the tax laws henceforth.
Taxes are just one way of increasing Government revenue and do not address the issue of generating foreign exchange. One of the fundamental causes of our economic impasse is the dwindling of foreign reserves in recent times to alarmingly low levels. Thus we need an inflow of dollars to set things right on the financial front. With tourism in the doldrums and worker remittances drastically down, the authorities have to think of other ways to generate foreign exchange in the short to medium term.
There are three key ways in which this can be realised. Loans and grants from donor nations and multilateral lending agencies such as the IMF itself are one component. Accordingly, neighbouring India granted nearly US$ 4 billion in loans to ride over the recent economic storm and several other countries too extended loans and grants, though the latter was provided only in limited quantities. If all goes well, the IMF will grant us an Extended Fund Facility (EFF) of US$ 2.9 billion in several tranches.
One problem that Sri Lanka has experienced is that many outright grants and even loans are not extended to it due to the “Middle Income Country” (MIC) designation. There was even a suggestion to re-designate Sri Lanka as a Lower-Income Country (LIC) or even a Least Developed Country (LDC) to qualify for such grants and loans. Fortunately, saner counsel has prevailed and that “degrading” proposal has been shelved. Thus we have to manage with the resources that we can get as a MIC from the IMF, World Bank and friendly countries.
This brings us to the second of the three pillars – trade and exports. Our exports, like every other sector, suffered during the height of the Covid pandemic, because world trade came to a grinding halt. However, the situation has improved over the past year and exports have netted around US$ 1 billion per month for several months running. But this is far short of our true potential. We must diversify our export product base, seek new markets and also make the maximum use of the Free Trade Agreements (FTAs) signed with several countries. Work on the proposed FTAs with several other countries must be expedited. It has been observed that Sri Lanka’s trade with other SAARC countries (which have a combined population of almost 1.5 billion) is minimal. This should be rectified.
Foreign Direct Investment (FDI) is perhaps the most important aspect of them all, because it has the capacity to boost forex, generate employment for youth, cause a cascading effect on related businesses and generally rejuvenate the economy.
Our track record in attracting FDI is not great, mainly because of red tape – some projects take 10 years to get approved while the investor is driven from pillar to post at the Board of Investment (BOI) and other such entities. No investor is going to wait that long, as there are plenty of other destinations waiting to grab this business.
It is this backdrop that we commend President Ranil Wickremesinghe’s assurance at a recent event in Colombo to streamline the investment approval process by amalgamating the services of the BOI, Export Development Board (EDB) and the Sri Lanka Export Credit Insurance Corporation (SLECIC). This will be a true one-stop service point for investors, with approval times drastically cut down. President Wickremesinghe also noted the possibility of re-enacting the provisions of the Greater Colombo Economic Commission (GCEC), which was the precursor to the BOI. In fact, the Port City Economic Commission (PCEC) was also modelled on the GCEC.
Long before the Port City concept was born, the Katunayake and Biyagama Export Processing Zones (EPZs) had gained a reputation as the best such zones in South Asia. This gave rise to the whole Free Trade Zone concept, whereby investors were given tax holidays, duty free facilities and other incentives to invest in these zones.
Some of these enterprises supplied Personal Protective Equipment (PPE) to the whole world during the Covid crisis, which is indicative of their quality standards. Following this time-tested model, the Government now intends to establish 1000-acre Investment Zones in Bingiriya, Hambantota and Trincomalee. These moves could potentially increase our forex earnings significantly. Trade and Investment, not aid, should be our main pathway for boosting forex reserves and achieving developed status.