By DNR Samaranayaka –

DNR Samaranayaka

The government headed by Gotabaya Rajapaksa has been very successful in controlling the Covid-19, also known as, the Corona virus with very few causalities. Although a second wave of the virus cannot be ruled out, the authorities are very confident that they can face any challenge. The focus is now on rebuilding the economy. The economic and financial problems that emerged with the Corona virus are now becoming clear: foreign exchange earnings have dropped, government revenue has fallen, and unemployment has risen.  Like most other countries, Sri Lanka too enforced a lockdown covering many districts of the country. Its aim was to protect the people from getting the virus; it greatly succeeded, but at a heavy cost to the economy. There was very little economic activity anywhere in the country during the lockdown period. After nearly four months, the situation has greatly improved with the removal of curfew and the resumption of economic activities. Now it is important to address the economic down turn after the four months of the lock down in a bid to contain the virus. 

Sources of foreign exchange earnings

The biggest problem caused by the virus is its impact on foreign exchange earnings, which to a greater extent determines the ability of the government to rebuild the economy after the crisis.  This is mainly due to the significant fall of foreign exchange earnings from the three main sources: apparel (garments) exports, tourism, and remittances. According to Export Development Board (EDB), exports of goods and services are expected to decline to USD$ 10.75billion in 2020 from USD$ 16.1 billion in 2019, almost a 40% drop. This category includes apparel exports, tourism, tea, and various other exports and services that earn less than USD$ 1 million. Apparel exports earned US$ 5.2 billion in 2019. However, it is expected that the demand for garments is likely to fall sharply this year and given this uncertainty, some garment factories have already decided to close down until the demand for Sri Lankan garments pick up. Tourism is also badly affected by the corona virus. The arrivals have dropped during the first three months of the year to 507,311 from 740,600 during the same period in 2019. Along with the drop of arrival, the income too has dropped from US$ 1.78 billion to US$ 963 billion. Since March 2020, there have been no tourist arrivals so far this year. Remittances are the foreign exchange receipts derived from money send by those Sri Lankans working abroad to their families in Sri Lanka. It is the main source of income of the middle and low-income families. 

Apparel exports

Apparel (garments) exports are the main source of foreign exchange earnings in the country since 2000. However, its share in the world market is only about 1.2% of the total world supply. Sri Lanka’s apparel industry mainly consists of readymade garments and it contributed to 40% of the total export earnings of US$12 billion or 32.2% of total foreign exchange earnings of US$ 16.1 billion in 2019. The US is the main market for clothing from Sri Lanka and accounts for 35% of total exports. The other countries that import clothing from Sri Lanka are UK, Germany, France and Italy. Among the garments exporting countries in the Asian region, Bangladesh takes the lead earning US$ 32.5 billion in 2018  followed by Vietnam (US$ 31.5 billion), India (US$ 16.6 billion), Hong Kong (US$ 13.9 billion) and Indonesia ($8.2 billion) respectively. China is the world leader in exports of both textile and clothing followed by European Union (EU) with US$ 74 billion in textile and US$143 billion in garments. 

There is potential for Sri Lanka to do well in the supply of clothing to the world market. This is the ideal time to seriously pay attention to this industry since the clothing export is lower and the import demand has not completely picked up even though the impact of the virus is stabilizing in some parts of the world. However, if this opportunity is missed, the entire textile industry can be severely affected due to the strong competition from other markets participants in the region.  Consumer habits are also changing quite a lot after the virus, which means that people are looking for innovative ideas to reflect what they wear at a reasonable cost.  It appears that industry needs to absorb new ideas to make a difference in the clothing that Sri Lanka exports. It is also important to locate clothing industries outside the Western province to help the skilled workers, and particularly, women in relatively poor areas in the country such as the Eastern Province. 

Sri Lanka’s textile industry depends on imported textiles. A project to produce raw materials to the clothing industry has been recently initiated by the BOI (Board of Investments) and it is located in Eravur. This is a long awaited requirement and it could reduce the production cost by about 25%. In 2018, the value of imported textiles was around US$ 2.7 billion, of which around 50% has been used by the clothing industry. However, the raw materials needed to make textiles will have to be imported.

Tourism 

Tourism is the next highest foreign exchange earner of the country. In 2018, it generated US$ 4.2 billion from 2.3 million tourists. In 2019, the earnings from tourism dropped to US$ 3. 6 billion as the industry was affected by the Easter Sunday attack in April 2019. Due to the attack, the arrivals also declined to 1.9 million from 2.3 million in 2018. The Corona Virus, which is having a disastrous impact on the economy, led to a complete shutdown of the industry at the end of April 2020. Between January and March 2020, Sri Lanka received 507, 311 tourists and none thereafter.  In comparison to the 2019 arrivals of 740,600 during the same period in 2019, the arrivals in 2020 so far show a 32% decline.  Tourism earnings during this period also declined by 46.3% to US$ 963, 963,932 from US$ 1.78 billion in 2019. In comparison with other countries in the region, Sri Lanka is not a popular destination for international tourists, especially from the EU and the USA. In 2018, China received 60.7 million tourists, Thailand 35.5 million, Malaysia 25.9 million, Singapore 13.9 million, Vietnam 12.9 million and Cambodia 5.6 million. In comparison with these figures, the Sri Lanka’s total of 2.3 million in 2018 is very insignificant. Italy received the highest number with 95 million tourists in 2018. 

The Sri Lankan Tourist Board (SLTB) had earlier set a target of 4 million tourists for 2020 with a projected income of US$ 6 billion. Given the disruption caused by the virus, it is very unlikely that it will become a reality. Even if the government decides to open the airport to facilitate the arrivals of tourists, the maximum that the country can expect is around 500,000. SLTB has also developed a plan with a target of 6 million tourists and US$ 10 billion foreign exchange earnings by 2025. It has also increased the visa fee to US$ 100 per person; if the new visa fee is implemented it will apply to all visitors to Sri Lanka. The proposed visa fee is more than double the current fee of US$ 30 dollars. However, this is not a move that helps to attract more tourists to the country. This policy goes against the efforts to increase the number of tourists as expected by the authorities. It can, however, help the government to cut down tourists from India and China, the two countries that bring the majority of tourist to Sri Lanka at present. The visa fee may be too high for some from both countries. If this policy is implemented, a family with two children is required to pay USD$ 400 compared with the existing visa fee of USD$ 120. The government also collects an entry fee from tourists when they visit tourist sites and that is much more than the Sri Lankans living in the country pay for the same purpose. 

It is very unlikely that tourism will return to the pre corona virus period soon, despite the efforts made globally to develop a drug or vaccine to control the virus. The treatment is likely to take a much longer period than that is anticipated. Even if it is developed, it will take some time for the vaccine to reach the people throughout the world. Even though the countries like Sri Lanka would like to have tourists as soon as possible, this is not going to happen soon as the virus has serious health implications. 

Setting a target of 6 million tourists by 2025 also requires urgent attention to the facilities available for tourists in Sri Lanka. Most facilities available in the country are much below the expected standards based on other countries where tourism is a major industry. The lack of decent toilet facilities, limited resting places along the popular routes to rest and have a cup of tea are major hurdles for the industry. For example, Sigiriya is a popular tourist destination, however the vehicle park at the bottom of the rock looks like a place prepared by clearing the jungle. There are vehicles everywhere and no place to sit and relax. There are no proper services for those who need at least a drink. The vendors who are there provide services to satisfy the needs of local tourists. Another hurdle is the increased time taken to travel between popular destinations compared with few years ago. For example, I travelled to Kandy by car last year and it took 6 hours to go and 6 hours to return to Colombo on the same day, after spending only about one hour with the friends during the visit.   

Both the prime minister and the minister responsible for tourism promotion are only interested in the foreign exchange that tourists bring; they both are unaware about how to promote tourism. The first thing that the tourist board should do is to undertake a comprehensive survey to find out shortcomings in existing facilities and what needs to be done to improve the conditions of the tourist sites. Another requirement is to develop more tourist sites so that tourists can stay little longer. The focus now is mainly on the few religious sites, which can be covered within two to three days or even less. I was at the beach in Trincomalee in January this year and I was surprised to see the place completely deserted. Only a few Sri Lankans were there. I cannot understand how the country can develop tourism without paying attention to the beautiful sea front around the country. SLTB needs people with new ideas and new destinations (that is cultural, culinary and ecotourism).  

Remittances

Remittances are generated from the money that nearly 300,000 of Sri Lankans expatriates living abroad send to their families in Sri Lanka. In 2019, it brought US$ 6.7 billion to the country. The World Bank estimates that the pandemic is to plunge the remittances by about 19% to US$ 5.4 billion in 2020.The global pandemic means that countries are facing the loss of employment for both foreign and domestic works. Already nearly 15, 000 Sri Lankans have returned home due to the termination of their contracts of employment and a  large number of Sri Lankans are still awaiting to return to the country.  The return of workers not only creating a massive dent in the country’s foreign currency reserves, but also becoming a serious problem for the government as they are very likely to be without a source of income.

 There is very little that Sri Lankan government can do to those who have lost their jobs and those that are expected to lose in the near future. What the government can do, however, is to provide training with additional skills for those who are returning. This will probably help them to find new employment opportunities overseas and in those countries that they have worked before. This is going to be the toughest problem that the government will face and it cannot be ignored. They have been supporting the country with the remittances of money to build the stock of foreign currency reserves for a long time. Unfortunately such remittances have not been used productively given the high level of political corruption in the country. Officials dealing with this issue must also maintain contacts with the authorities in those countries where Sri Lankans had been working earlier.  

Policies and programs of the government

The president considers that an agriculture-based economy should be given priority in the country’s development policy in the future. He has already made a few policy decisions in this direction. A number of agricultural products such as grains and spices have been banned from importing and he has asked the farmers to produce them in the country. Farming practices are however based on availability of land, money, labour and the market price of the product. As such, it is difficult to implement the policy that the President has announced. Farmers generally cultivate most products that are in demand by the people in the country. It gives them the income that they need to purchase other things. Since the yields of agricultural products vary from season to season, there can be shortfalls in one year and a surplus in another year. When there is a shortfall, traders import those products, but when the supply arrives, the situation may have changed. Although reducing imports might help to improve the balance of payment deficit slightly, it cannot, however be the solution to the shortage of foreign exchange that currently prevails. 

If the government is serious about making agriculture as the main instrument for economic development in the future, it must be done in an organized manner. It is also important to organize markets outside Sri Lanka so that agricultural exports can bring foreign exchange as well. Futures market concept could help to organize markets outside Sri Lanka and it helps both the farmer and the buyer. The economies throughout the world, including Sri Lanka, are highly diversified. This is to satisfy the various needs of the people and also to generate more employment opportunities and incomes, which are not possible from focusing just a few products. The country needs a balanced development with both agriculture and industry.

The President has also been promising a number of other projects to be implemented in the future and they involve billions of rupees. However, there is no information about how these projects are going to help the economy or who is going to provide funds for their implementation. So far he has named about five projects including additional universities in every district plus 10 more universities elsewhere in the country. He has also announced a university for 20,000 graduates in advanced technology, assuming that the world is going to face a severe shortage of professionals in this field in the future. The projects he has introduced do not address the current economic problem and its impact on the people. The country is also faced with a serious debt problem exacerbated further by Corona. The government has already paid USD$ 1.3 billion this year and a repayment of another US$ 3.8 billion is due before the end of the year. This includes US$ 1 billion sovereign bonds maturing later this year, which must be settled on the due date. Even if the government finds money for this year through further borrowing, the debt problem not going to end soon since the outstanding foreign borrowings amount to about US$ 50 billion.  

It appears that the president is following the same path as Ranil Wickremesinghe. Ranil started with the promise of making this country like Dubai or Singapore. He has also been promising to increase the average per capita income to more than US$ 5,000 by 2025. (Although Ranil brags that the economy under Yahaplanaya greatly improved, the World Bank does not agree with him as indicated by the downgrading of the country’s development status from lower middle-income country to low income country recently.) His biggest project and the biggest failure was his vision 2025. He spent millions on this project and got some foreign help to publish good reviews. However, the fanfare lasted only a few months before the project report found in the garbage bin. The country wasted millions to prepare reports and pay consultants. The President need professional help to direct the economy on the tight path. He certainly cannot depend on the same batch of ministers that Mahinda Rajapaksa had during the period of his administration. 

Two thirds Majority

Mahinda Rajapaksa is pleading with the people to give the SLPP a two thirds majority in parliament in the upcoming general election. Some SLPP candidates are already confident about two thirds, but Mahinda is not. Mahinda Rajapaksa wants a two-thirds majority to have a strong government in Parliament so that the SLPP can implement its development program, which has not been released so far. G.L Peiris has a different reason for the two-thirds majority: that is to eliminate the Drug menace that prevails in the country at present. The drug problem arose just a few weeks ago, but the need for a two thirds majority came up during the presidential election. The difference in purpose of the two is creating confusion and this is leading to the belief in the community that the Rajapaksas are going to adopt the same unpopular policies that they carried out in the past. They must understand that more than 6.9 million voted for Gotabaya at the Presidential election is manly to fix the economy that has remained stagnant under Yahaplanaya, but not to give up their freedom that they secured after defeating the former regime of Mahinda Rajapaksa.  Based on a few events that occurred in the recent past, it appears that the dictatorial behaviour of Rajapaksa’s appears to have not given up and this is not a good sign for the country and for the people.

Poverty alleviation  

Poverty can never be eliminated; it can only be reduced by implementing proper policies to promote development and ensure equal distribution of income. This situation will never arise in any part of the world. Therefore, any project that is going to eliminate poverty is not worthy of any consideration, unless the leaders are really committed to it. The main reason for the poverty to exist is political corruption. Another is the implementation of unproductive investments. If any leader can address these two issues, then poverty can be reduced significantly. 

The President Rajapaksa also established a task force entrusted with the responsibility of finding a solution to address Sri Lanka’s poverty. The task force is made up of administrators and retired army generals. The president can get good advice from Maithripala Sirisena who started a similar project in 2017. He promised to eradicate poverty by the end of 2018 and advised his team of administrators to carry out income generating projects. By the end of 2018, the level of poverty remained the same. The round table discussions at the President’s office also came to an end. It cost millions to pay the consultants and also to provide them with transport, meals, fuel and other facilities without any benefit to the country. Unfortunately, Sirisena did not realize that elimination of poverty is not as simple as that, and if poverty can be eliminated in this manner, it will not exist anywhere in the world.

As reported in the media, a multibillion contract has been approved by the government for the fourth section of the central highway extending from Kurunegala to Dambulla. This project, costing US$ 60 billion, is financed by a British firm Roughton. It is extremely difficult to understand the hurry to borrow money and build the road; it only adds to the rising debt problem without any immediate economic or financial benefit to the country. It should be the last in the priority list. In the meantime, the government cancelled the Japanese funded (JICA) Colombo High rail project claiming it is too costly and returns are very low. This is an absurd excuse since the interest rate on the loan is 0.1% with a repayment period of 40 years. Its Economic Rate of Return (EIRR) is 20%, which means it has the potential of generating an income of 20% to the investment. Furthermore, it would have greatly reduced the traffic congestion in and around the suburbs of Colombo, which costs billions of rupees per annum to the country.  (Data used in this report are from internet sources)