Sri Lanka As A Breakout Nation

By W.A Wijewardena -

W.A. Wijewardena

Dr W.A. Wijewardena

Sri Lanka as a Breakout Nation: Much more to be done to make it a reality

Sri Lanka: Breakout nation plus the Wonder of Asia

The latest development tagline added to Sri Lanka is that it can be the next “Breakout Nation”.

The Central Bank Governor Ajith Nivard Cabraal is reported to have first expressed this view when he addressed the best annual reports awards ceremony organised by the Smart Media in Colombo in August 2012. Later this was reconfirmed by him with a slight modification when he presented the Central Bank’s Road Map for 2013 in January 2013. In his first address, the Governor had been emphatic about the fact that Sri Lanka has already been a breakout nation and, therefore, had advised the Sri Lankan companies to expand and showcase themselves to the rest of the world (available here ). However, in the Road Map presentation, the breakout nation concept has been tied with the country’s existing development tagline, “the Wonder of Asia”, subject to a minor qualification. That qualification is that “if Sri Lanka can be successful in the next three years”, it “can surely be the next breakout nation” implying that it has to do a lot more to realise that goal (available here ).

Breakout nation should not be a mere wishful thinking

When a development tagline is announced by a leading official, it is picked up by others and engraved as a permanent phrase in the country’s development policy lexicon of the day. Accordingly, the newly elected President of the National Chamber of Commerce of Sri Lanka, veteran entrepreneur, management expert and quality Guru Sunil Wijesinghe, in his installation address warned that the achievement of breakout nation goal should not lead to economic divide and should not be confined to a mere “wishful thinking”. Having drawn the attention of his audience to previous unsuccessful episodes of seeking to benchmark the country to similar catchy goals like becoming a Newly Industrialised Country or NIC in early 1990s, he went on to emphasise the need for having a coordinated strategic plan to make “the breakout nation goal” a reality (available here ).

Ruchir Sharma: Sri Lanka has the potential of becoming a breakout nation

It is not only the Sri Lankan high officials and well-wishing entrepreneurs who have expressed the view that Sri Lanka could be the next breakout nation. Prior to them, it was Ruchir Sharma of Morgan Stanley Investment Management who first said so in his book “Breakout Nations: In Pursuit of Next Economic Miracles” released in May, 2012. Having visited Sri Lanka in 2011 two years after the end of the war and having compared the improved situation in the country at that time with that prevailed during his previous visit in 1997, Sharma had found all the reasons to believe that “there is every chance that Sri Lanka will again become a breakout nation” (p 193). The reasons for this conviction are many: The integration of the hitherto abandoned Northern and Eastern Provinces to the mainstream of the economy thereby boosting the growth propelled by the “one engine growth machine” of the Western Province, the consolidation of power by the incumbent President so that growth can be pursued unabated, the plans of authorities to make Sri Lanka more business friendly, the highly literate population and the advantage of location along key shipping routes to China and India.

On top of this, Sharma says that Sri Lanka is a big beneficiary of “peace dividend” which is not normally recognised by markets as important for a country to have sustainable growth. These positive forces are being strengthened, according to Sharma, by the discovery of oil in the Mannar Basin and the trade links to be developed with India, thereby connecting Sri Lanka with another fast growing economy in the region. The inclination of the present government to base its economic policy on pragmatism and not on ideology has been another plus point adduced by Sharma. What he actually means is that the present government will continue to follow the free market economy policy and trade liberalisation in contrast to the socialistic type planning based pro-state policy of Indian vintage which Sri Lanka had followed prior to 1977. Hence, what Sharma believes is that if Sri Lanka wants to breakout, it should necessarily rely on the private sector and the markets and not on the expansion of the state.

Breakout nation depends on ‘if’ factor

So, for Ruchir Sharma, Sri Lanka is ripe to become a breakout nation provided it manages to pursue a favourable economic policy regime. Governor Cabraal too in his Road Map presentation qualified the entry of the country into breakout nations’ club if its policies in the next three years are successful. The NCCSL President Sunil Wijesinghe had demanded for the implementation of a coordinated strategic plan to elevate the goal from wishful thinking to harsh reality. Thus, all those who have spoken about Sri Lanka as a breakout nation have spoken one language: That is, there is a lot more to be done in order to realise that goal.

Breakout nations break out from slow moving herd

All countries today are aspiring to attain a high economic growth and deliver prosperity to their people. But many of them in the developing country group have found their legs and hands bound together making any forward march impossible. The types of ropes with which they have been tied are common everywhere. They suffer from a lack of investments, markets, quality and skilled workers, macroeconomic stability, consistent and conducive policies, technology, good business plans for state enterprises, supporting infrastructure, good governance and the rule of law to protect property rights. But a few countries which are successful in breaking those ropes and marching forward could attain the goal of high growth and prosperity. ‘A breakout nation’ is such a country that breaks away from the rest of the crowd which is eternally imprisoned in prisons of their own making. When one says that Sri Lanka could be a breakout nation, what he actually means is that Sri Lanka is in a position and also has intention to break those ropes that have tied it to an eternal state of poverty and slow economic growth.

Past gains not sufficient to be a breakout nation

As explained by Governor Cabraal in the Road Map, Sri Lanka has done a lot since 2005 to break the ropes with which it had been tied in the past. On the macro-front, according to Governor Cabraal, inflation rate has been brought below 10 per cent, the exchange rate has been made flexible, trade and current account deficits in the balance of payments have been tamed and the government budgetary position was improved by reducing the overall deficit while maintaining capital expenditure at close to 6 per cent. While the country went ahead with building infrastructure in the form of roads, ports, airports and buildings, action was taken to ease doing business by the private sector. With respect to sovereign rating, Sri Lanka has managed to maintain the present rating scale preventing any further erosion in rating. While the prosperity of people as measured by Sri Lanka Prosperity Index compiled by the Central Bank has improved, the country’s overall human development as measured by the UN’s Human Development Index has recorded an elevation.

These achievements are surely mention-worthy but not sufficient to make Sri Lanka a breakout nation.

Macroeconomic house needs to be put in order

The reduction of inflation to a single digit is a misnomer since it is still close to 10 per cent per annum. What it means is that prices on average rise at the rate of close to 10 per cent and incomes of people are reduced in real terms by 10 per cent every year. For instance, if a person has Rs 100 at the beginning of the year, its value comes down to Rs 90 at the end of the year. To restore him to the prosperity which he had at the beginning of the year, his income has to be raised to Rs 110 and to improve his position, it has to go up above Rs 110. When inflation is at this level and inflation in Sri Lanka’s trading partners is below that, the products of Sri Lanka becomes more costly compared to those of the trading partners. There is continuous agitation for increases in wages and if the government or employers suppress those wage demands, workers would find that their prosperity level too is falling day by day. The result is worker unrest and a continuous decline in both worker productivity and output. If the exchange rate is not permitted to depreciate as demanded by the increases in the local costs, the country will have to sacrifice the attainments on taming the trade deficit and the current account deficit. This is because appreciated exchange rates encourage imports, discourage exports and reduce the net income to be received by the country on account of services. The result is the low growth and failing to break the ropes and make a breakout.

Present macroeconomic policy not suitable

The present macroeconomic policy of the government does not appear to have addressed this issue properly. With inflation close to 10 per cent and the trading partner country inflation at around 3 per cent, Sri Lanka’s competitiveness has fallen compared to competitor countries. Though the authorities are happy about the contraction in imports in 2012, Sri Lanka’s exports too have declined leading to a trade deficit in the magnitude of around $ 9 billion – a deficit just marginally lower than the one it had in 2011.Hence, further depreciation of the rupee is on the card. Yet, driven by short term foreign exchange flows, the country has experienced an appreciation of the rupee confusing the businessmen and investors. This appreciation, for all practical purposes, is short-lived but the authorities appear to have taken immense relish out of it.

The budget needs comprehensive reforms

On the budget side, the government’s current expenditure has become uncontrollable and it has generated a sizeable deficit in the revenue account of the budget. When there is a deficit in the revenue account, the government is consuming more than it earns and therefore, there is no gain by reducing the overall budget deficit as a ratio of the Gross Domestic Product or GDP. It in fact leads to a gradual shrinking of the government capital expenditure which has a direct negative impact on the country’s future growth prospects. Yet, the authorities appear to have been relished by a very marginal reduction in the overall deficit to GDP ratio ignoring the big hole appearing in its revenue account. Hence, though the government claims that its borrowings are for development purposes, they in fact part-finance its consumption and therefore that claim is misconstrued. To tame the current account, the government has to cut its consumption expenditure drastically. But the signals it provides to the economy by expanding the Cabinet, recruiting more public servants, continuing with loss making public enterprises and encouraging directly unproductive tamashas are all in the opposite direction.

Infrastructure projects should be financially viable

The investment in infrastructure is necessary for a country to facilitate economic growth. However, almost all the infrastructure projects of the present government are funded out of borrowings made on commercial terms. Such an investment strategy makes it necessary to satisfy two requirements. One is that before undertaking the investment, it is necessary to screen the projects very carefully to assess that they would bring sufficient social benefits to the country. In the name of transparency and disclosure, such project reports should be made public documents so that the concerned public too could make comments on same. This is essential because those loans are to be repaid by the public by sacrificing their future welfare. The other is that after completing such investment projects, there should be a proper business plan to make them really viable and profitable projects. If a public investment project funded out of borrowings made on commercial terms does not generate a sufficient cash flow, its loan repayment has to be made by the government by sacrificing one or more other public expenditure programmes. In the case of the recent public expenditure programmes, there is no evidence that these two requirements have been duly considered by the authorities. One example is the Hambantota Port Project. As disclosed in Parliament, the annual loan repayment and interest payments amount to about $ 47 million or Rs 6100 million; however, the annual income of the Port has been only Rs 150 million. It is demonstrative of a lack of a proper business plan to run the Port as a profitable venture. Ruchir Sharma in his book Breakout Nations has criticised the Vietnamese authorities for building a large number of ports to nowhere (pp 198-204); but his criticism well fits Sri Lanka’s Hambantota Port Project as well.

FDIs demand assurance from forced takeovers

To become a breakout nation, Sri Lanka needs technology and technology has to be acquired by attracting foreign direct investments or FDIs of high calibre. One of the most important conditions of FDIs is the assurance given to foreign investors that their investments are safe and guaranteed from forcible take over by the government or any other government sponsored groups. This assurance has been duly given to investors by the Singaporean authorities since 1960s when they managed to attract high calibre investments with technology. However, many of the recently passed legislations by the government, especially the law nicknamed the Expropriation Act, by using its overwhelming majority in Parliament have frightened the high calibre investors away from the country. Their perception that the country does not have the Rule of Law and an independent judiciary to protect their investments is most damaging for an enhanced FDI flow to Sri Lanka. Without FDIs, it is not possible to gain market access for the sophisticated goods to be produced by Sri Lanka and provide employment to youth who join the country’s labour force every year in increasing numbers.

Hence, for Sri Lanka to become a breakout nation, a lot more has to be done.

*W.A Wijewardena can be reached at waw1949@gmail.com