Aspirations and Challenges for 2023

This article aims to analyse how Sri Lanka can ensure that 2023 is a year that delivers positive long-term economic restructuring to set the nation on a platform that can achieve sustained accelerated economic development.

The presentation of this narrative may seem to be an oversimplification of a complex problem. However, through this technique of oversimplification, the article aims at identifying a few simple strategies for 2023 that could and should be adopted.

Highlights of 2022

The year 2022 will be of significant historic importance in Sri Lanka’s socio-political and economic history. To focus on the economic developments, it is fair to say that decades of fiscal imprudence and negative trade balances finally came to an economic head, resulting in an unprecedented economic crisis where the nation did not have dollars to import fuel, gas and medicines, and had to default on its debtors and seek IMF assistance.

Sri Lanka had not dealt with her twin deficits for decades. The fiscal deficit and trade deficit were managed by positive worker remittances, tourism inflows and foreign and domestic debt. Reduced tourism earnings, drastically reduced remittance income and the inability to borrow internationally (because of deteriorating credit ratings) were the cause of the dollar illiquidity.

India came to our rescue with US$ 4 billion worth of humanitarian assistance, in terms of short-term credit. Sri Lanka’s exchange plummeted, and interest rates skyrocketed. The CBSL adopted typical IMF demand compression strategies.

Sri Lanka has now defaulted on her debt and has applied to the IMF for a bailout and awaits IMF sign-off on a debt restructuring programme.

Vast sums of money had to be ‘printed’ to manage the Government’s local and international payments.

Suffering people and opportunistic politicians

The ‘Aragalaya’ showed the peoples dissent against the Rajapaksa political regime and assisted by extreme political groups, successfully ousted the President and the Prime Minister, leading to the appointment of Ranil Wickremasinghe as the Prime Minister and then the President.

As part of the economic restructuring, a policy of high taxation has been implemented. Fuel and electricity prices are rising rapidly. Inflation is at around 60% and food inflation closer to 100%. The suffering of the people is unprecedented, leading to an exodus of Sri Lankans at all levels.

The suffering of the people and their plight and frustration is fanned by the Opposition, in a quest to topple the existing Government, instead of accepting their invitation to form a Government of National Reconciliation.

Strategies for 2023

From an economic perspective, if we were to say the key drivers of the economic crisis were the twin-deficits, namely the decades of fiscal deficit and trade deficit, then the obvious solution would be to bring these two deficits into the black.

The Government is looking to bring the fiscal deficit under control by an ultra-high direct and indirect taxation regime. In this column, it has been argued that the small percentage of citizens in the tax net, make direct taxation unfair as those who are in the tax net are paying for a host of people who are tax avoiders. I have argued that targeted indirect taxes could be more effective.

Today’s newspapers reported that the CPC and Sri Lankan Airlines had paid bonuses to their staff. These are two loss-making SOE’s. The concept of bonus payments when the entity is funded by the taxpayer is absurd. Military leaders and politicians still travel in motorcades. Each minister has a fleet of Government expensed vehicles under their control. The point is that whilst the citizen is expected to make additional contributions to the Government, the Government should also set an example by tightening their belts. Though President Wickremesinghe has made many calls for this, there is no sign of his request being taken on board.

The Cabinet has approved the creation of a special purpose vehicle, with 100% ownership to the Secretary to the Treasury to fast track the restructuring of SOE’s. This is a positive move, and again, the President clearly articulated that the sales proceeds will be used to boost national reserves. The restructuring of SOE’s will also reduce Government expenditure and descale the Government’s commercial presence, leaving them to concentrate on policy making and implementation of reforms required for our economic recovery.

The two areas that we have really fallen back on are attracting FDI, and growing exports. Our new FDI has been abysmal, growing at a few hundred million dollars a year for the past years (not counting the Port City Investment). Much of this investment, classified as ‘new’ is reinvestment by existing entities. The factor that curtails FDI in Sri Lanka is the ‘Ease of Doing Business’. A mixture of corruption and inefficient processes make it very cumbersome for a foreigner to invest in Sri Lanka and we have lost many potential investors over the past decade.

Even though we are facing the possibility of a global recession and global economic uncertainty there are still opportunities for us to double our exports from around US$ 10 billion per year to around US$ 20 billion within three to five years, if we can attract FDI in areas of industrial manufacturing that will cater to the tomorrow’s world. Areas such as technology, renewable energy and the export thereof, manufacture of energy storage systems, and sustainable mobility products could be concentrated on. These are blue oceans that Sri Lanka could use her geographical positioning to set up regional and global export bases.

To attract investment, we need to restructure our governance. Our legislature and executive need to heed the President’s request and collaborate to get Sri Lanka out of the crisis she is presently in. We could look at the business community to assist the Government by being a catalyst. They can build consensus within the legislature to support strategies that are required to attract FDI that will grow our exports. Concurrently pressure can be exerted on the Government to address fiscal deficit through reduced Government expenditure and SOE reform.