Restarting Sri Lankan Economy

The objective of this article is to explore strategies to kickstart the Sri Lankan economy from its present decline. The rate of economic decline is causing severe hardship to most segments of society. If Sri Lanka is to achieve its economic potential, as have nations like Vietnam, then the economic restructuring that is presently underway must be taken to a conclusion. One fears that the economic hardship that the nation’s people face could lead to a political upheaval that will lead to a disruption of the restructuring process and further set us back.

The Sri Lankan economy is expected to contract by between 7-8% in 2022, and contract by a further 2-3% in 2023. Inflation is around 60% and interest rates are in the range of 30%. These indicators are typical of IMF driven demand compression policy aimed at bringing down imports and the nations fiscal deficit. This situation is bringing severe hardship on most segments of the nation.

Table 1 is presented to show that the economic pain from increased inflation and interest rates will be widespread. All fixed income earning citizens will struggle with inflation. They could also have bank loans and leases, and the increased interest rates would impact them adversely. The non-fixed income earning categories would be impacted from the increase in inflation and the economic contraction leading to less opportunities to earn an income. Everyone in the retail trade will be negatively impacted, as would those in the tourism industry, and similarly in most other service sectors.

How can the economy be kickstarted?

Easing of inflation

We see inflation tailing off. We also see that the Government must keep on printing money. However, the correlation between printing money and inflation is not infallible. It can be argued that the inflation in Sri Lanka was because of the increase in oil prices and the resultant impact on global pricing of goods and services. There were also supply chain challenges in Sri Lanka. I would present the hypothesis that there was rampant ‘greed-pushed-inflation. Traders hiked prices by huge margins, because of the various uncertainties that existed. This situation is slowly normalising, and hence the reduction in inflation.

Reduction of interest rates

Interest rates easing up is a more complex policy decision that the CBSL will need to take. They do seem to be taking the classical economic view that printing money drives inflation and hence to control inflation one must not print money, and this will drive up interest rates as the Government will need to borrow to cover their fiscal deficit.

Bank money from sale of SOE’s

In the immediate term, if the Government can ease their fiscal pressure through implementing the planned sale of SOE’s, this could help ease general interest rates and have a broader economic benefit to the country.

Facilitate FDI

If the Government can solve problems on the Ease of Doing Business (EODB) front, and can work aggressively to bring in FDI, this too can ease fiscal pressure in the short term.

Increase Exports

In the mid-term, we must increase our exports by around US$ 10 billion and create a trade surplus. Achieving this in a global recession is on one hand challenging, but on the other possible.

Indian businessman Adani is interested in making an investment in the energy sector, with a view to export green energy back to India. This investment should be facilitated on mutually beneficial terms. Similar investments in energy, aviation, and the maritime sectors must be harnessed. Sri Lanka could use her geo positioning and geopolitical relationships to be a Battery Energy Storage Systems (BESS) assembler for the region.

The global automotive industry is facing disruption and a host of new manufacturers are entering the industry. They are technology companies, providing mobility solutions, using Autonomous, Connected, Electric, and Shared (ACES) technology. We should aggressively target this niche and attract these companies to use Sri Lanka as a manufacturing hub.

There are niche areas of manufacture and export that we can exploit, which would have a strong market even in a global recession.

Farming and Agriculture

The poorest Sri Lankan’s work in this sector. The farmers and the estate workers’ hardship need to be resolved. For the farmer, strategies to resolve post-harvest waste and resolving logistic challenges could leave more money on their table. These are not difficult problems to solve. They need to be identified and addressed. In the longer term, training could help improve their efficiency. However unpalatable it may seem, for farming to really gain efficiency it needs scale, which will mean amalgamation of farmlands. These are economic realities that will need to be dealt with if we are to really move from an economy of handouts to an economy that is sustainable and growing.

Smaller tea exporters have devised means of ensuring value streams cascade to the smallholder growers in an equitable manner. These strategies could be studied and implemented in the formal plantation sector. The profitability of the tea plantations in Sri Lanka must be addressed and resolved.

Whilst ‘organic’ is a bad word in the Sri Lankan agriculture sector, if organic certification can be obtained on an assisted basis, this would encourage more estates to go organic, and over time earn a premium for their produce.

Vocational Training

Table 2 shows the total of wholesale and retail trade, repair of motor vehicles etc. at 1 million employees. With the disruption of the mobility sector, and the changes in retail from physical to digital, there is an argument to retrain employees from this segment into new areas. Possibly areas of export-oriented manufacture which is needed to improve our trade balance.

The total size of the public sector needs rescaling and downsizing, and again, retraining can facilitate that shift.

MSME Sector Development

The Micro, Small and Medium enterprises in Sri Lanka form 99.8% of the total enterprises in the country, based on a study by D. P. Gunawardena, National Consultant Sri Lanka (UN DESA/DESG) in May 2020. If one were to only consider the Micro organisations in Sri Lanka, defined as those with a turnover of less than Rs. 15 million, this constitutes 92% of the Sri Lankan establishments. This segment employs 44% of the total workforce.

MSME specialists have analysed the sector problems in detail, and these issues need to be resolved. One key issue to highlight is that the micro-organisations must become corporate citizens. Register with the IRD and pay their taxes. This will enable them to access finance to help them scale. The lack of a development bank is another impediment to the scaling of the sector, which is something the Government needs to address.

The Sri Lankan economy needs to be kickstarted. The decline that we are witnessing is causing unprecedented hardship to almost all segments of society, and this situation will only get worse. The IMF is not going to come into Sri Lanka with a magic wand and solve our problems for us. They could help us to achieve ‘sustainable debt’ through restructuring our debt. We must resolve our fiscal balance. In this column I have argued that resolving this through increased direct taxes will not be feasible as we have too few tax files. The data presented on the MSME sector, and the employment in this sector corroborates this argument. Instead, targeted indirect taxes could be a more equitable means of increasing Government revenue. However, the Government must also reduce its expenditure by selling SOE’s. Loss-making entities like SriLankan Airlines could be liquidated if it cannot be sold. Exports must be increased and to do so, EODB must be improved. The judicial system needs to be strengthened, and general law and order needs to be established.

A few simple strategies to kickstart the economy must be identified and implemented. Implementation is the key to uplifting the living standard of a majority of Sri Lankans.