28 May, 2024

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Crisis-Hit Sri Lanka Economy

By W.A. Wijewardena –

Dr. W.A Wijewardena

A country in deep crisis

By any indicator, Sri Lanka is going through the worst of the economic crises in its post-independent history. Noting that Sri Lanka Government has defaulted its foreign debt repayments since April 2022, some have branded that the country is financially bankrupt today. If an entity is unable to meet its liabilities to outsiders, that entity is classified as insolvent or bankrupt. By this criterion, Sri Lanka Government is financially bankrupt.

The manifestation of the crisis

The details of the manifestation of the crisis are well-known and documented. Hence, it suffices only to mention them briefly here.

Real economic growth is in the negative range and has been negative for three consecutive quarters, qualifying Sri Lanka to be officially in economic recession. The budget is fragile with a total gross expenditure level of Rs. 11.7 trillion in 2023 as against a gross revenue of Rs. 3.4 trillion. The consequential gross budget balance is about historically high at 28% of the estimated GDP. The external sector is still not out of woods needing short-term funding lines from friendly neighbours to meet day-to-day requirement. As a result, the rupee is still under pressure for depreciation.

A bailout from IMF in the form of an extended fund facility amounting to $ 2.9 billion over a period of four years is still hanging on balance due to the country’s failure to reach a consensus among creditors for debt-restructuring. Faced with the massive gross budget deficit, the Government has been borrowing heavily from the banking sector. From December 2019 to December 2022, the Government’s net borrowings from the banking sector had amounted to Rs. 4.7 trillion, marking an increase of 167% over this period.

The consequential increase in the broad money stock which the public loosely refers to as money printing has amounted to Rs. 4.6 trillion or 60%. Its effect has been to increase the inflation rate to above 60%. Though the Central Bank says that this will fall to a single digit level by the end of the 2023, it is just a statistical development and prices are still high and rising forcing the real welfare of people down. Hence, Sri Lanka has been hit by multiple whammies making it difficult for the country to arrive in a quick recovery.

Trigger point of the crisis

A question that arises is whether this is a recent development or whether it is an ailment that had infected the country since independence. The answer is yes and no. Yes, because the trigger point of moving into the deep crisis took place within the last three years after the Gotabaya Rajapaksa administration took office. His chief economic advisors had stubbornly maintained that Sri Lanka should adopt a domestic economy based economic growth strategy and it had a more advanced internally drawn economic recovery plan than those proposed by IMF and outside agencies.

When this did not work, Gotabaya should have changed the course, but he was also too adamant about modifying his economic policy. His tax policy, fertiliser policy, and anti-IMF policy were responsible for the economic malaise. But the economic malaise had been gradually brewing up within the system since independence.

It is just worth in mentioning that at the time of independence Sri Lanka had inherited from the British a foreign exchange reserve that was sufficient for 17 months of future imports, a vast resource base by any standard. The country’s foreign debt was just 4% of GDP and the domestic debt, 14%. The trade balance was a comfortable surplus, and it was continued to be so during the first four years of independence too. But things began to change since then and the gradual deterioration of the economy has now placed Sri Lanka in the present crisis.

King Parakramabahu policies

The main cause of the growing imbalances has been the anti-trade policy adopted by successive governments. It was basically like a mercantilist policy in which exports were promoted and imports were abhorred. But this was not the case during the times of ancient Sri Lankan kings. If we consider the golden era of the country’s economic history, the reign of Parakramabahu, the First, we find that all systems had been aligned to create vibrant trade flows, both imports and exports. According to Chulavansa, the second part of Mahavansa, when Parakramabahu became the Lord of the Dhakshina Desha, he had wanted to unite the whole country by waging a campaign against the other lords.

He had asked his Treasurer, the equivalent of the Minister of Finance today, whether he had resources to lead this campaign. The reply was that the Treasury was empty. Parakramabahu had set up a special export processing zone called Antharanga Dhura around Kalu River and exported from the zone various merchandise. That enabled him to wage his war without burdening the citizens. His civil servants’ training school had a curriculum consisting of such skills as fencing, archery, fine arts, and foreign languages. The foreign languages were added because the civil servants should have the capability of communicating with foreign traders freely. If the leaders in post-independence Sri Lanka had followed a similar policy, perhaps, the country would have avoided the current malaise.

Real burden is the unbridled total government expenditure

A criticism levelled against the present Ranil Wickremesinghe administration is that it has increased the tax rates and imposed an unbearable burden on people, especially, the professionals. While it is true that any tax is a burden, the actual burden is not only the tax payments but the total government expenditure. This was the thesis presented by the English economist David Ricardo in the early 19th century. He said that there is no difference between tax financing and debt financing as for the burden of the people. This thesis is now known as Ricardian Equivalence. When the taxes are paid, people bear a burden today by curtailing their consumption. But when the government issues bonds to finance the budget deficit, people should pay more taxes in the future to repay those bonds. Therefore, bonds are a future tax.

Ricardo’s time, there was no money printing for financing the deficit. But today, it is a very popular method of deficit financing among politicians. But if it is done excessively, it leads to an elevation of prices causing inflation in the economy. That inflation reduces the quantum of the real goods and services which people can buy from a given amount of money. That reduction of the real goods and services is like a tax paid by people to the government. Hence, it is known as the inflation tax.

Therefore, according to Ricardian Equivalence, which was further improved by Harvard economist Robert Barro, the true burden is the total gross expenditure of the government and not merely the tax payments made by people. In the budget for 2023, the total gross expenditure is about Rs. 11.7 trillion as against a gross revenue level of Rs. 3.4 trillion. The ensuing gross budget deficit amounts to 28% of GDP which has been estimated at Rs. 30 trillion for the year. The way-out is the shrinking of the Government progressively to an affordable level as dictated by the tax potential of the country. This is the most urgent policy measure which the Government should take today. It requires the Government to prepare a list of priorities for its planned expenditure programs and invest the scarce resources only in the most productive sectors.

What is the way forward for Sri Lanka? That can be analysed in terms of immediate, short-term, medium-term, and long-term actions.

Immediate action to be taken

As mentioned before, the short-term actions include the preparation of a list of priorities for the Government since it cannot continue with the high gross expenditures approved in the budget for 2023. These priorities should be carefully selected in consultation with the opposition in Parliament considering the essential public services which the Government should perform. This is a time where bi-partisan governance is needed. In this bi-partisan system, the executive cannot say that it has no money to ensure the exercise of democratic rights of the people.

The other immediate action is to secure the bailout package from IMF that would provide a certificate of good intention for the Government. Such a certificate is necessary to marshal resources from other bilateral such as friendly governments and multilateral such as ADB and WB sources. It hangs on Sri Lanka’s ability to get China on board with the rest of the creditors to restructure the country’s foreign debt in the form of a reduction in the principal and/or interest involving the debt. China has agreed to offer only a debt moratorium for two years. It will not reduce the debt levels but increase them further. This is a test for the government to prove its diplomatic competence.

Short-term action

After accomplishing these immediate tasks, Sri Lanka should set itself to the short-term tasks it should undertake. That includes the reforming of the state sector – both the central government and state sector corporations – to ensure cost-efficacy, productivity, and efficiency. This requires a comprehensive assessment of the present state, consulting all the stakeholders including customers and officials, preparing a time-bound action plan, and implementing it with periodical progress reviews that involves any modification of the plan if necessary.

For instance, take the digitalisation of the government services. About a decade back, immigration and motor vehicle registration departments were digitalised. But over the years, with no new technology introduced, those systems have now started decaying. This is a pitfall that should be avoided. Some of the local government institutions have computerised the payments to them. But when a citizen logs into their website, a warning immediately pops up that the security certificate attached to them has expired and as a result, they are exposed to hackers. What this means is that it is necessary to continue the updating of the systems as is being done by various computer apps.

Medium to long-term action

President Ranil Wickremesinghe has announced that his goal has been to make Sri Lanka a rich country by 2048 when the country will celebrate its centenary of independence from the British. Previously when he was the Prime Minister, in 2018 he made a similar announcement to make Sri Lanka a rich country by 2025. That was just a promise without any concrete action. The same fate should not befall on the current goal too. For that, Sri Lanka should come up with a comprehensive roadmap with milestones of goals to be achieved over this period. Vietnam in 2019 announced a similar roadmap to make the country compatible with the goals of the Fourth Industrial Revolution by 2030. Its goal has been to increase the share of high-tech exports above 40% of the manufactured exports. The necessary resources have been diverted for achieving this goal.

Integration with the global economy

Sri Lanka’s future prosperity depends on its integration with the global economy seamlessly. The global economy is now ruled by technological advancements taking place almost every day. Twenty years ago, those advancements were concentrated on a few new developments in nanotechnology, artificial intelligence, genetic research, and digitalisation of services such as entertainments. But that number has increased by tens and hundreds today as pronounced by the Davos based World Economic Forum every year. If Sri Lanka is to become a rich country by 2048, it is necessary to jump onto the bandwagon of technology and ride on it. This is difficult but not impossible.

Importance of technology

Sri Lanka cannot be technologically driven nation overnight. Its research facilities at present are not adequate to meet this challenge. But given the necessary inducements and facilities, Sri Lanka can over the years overcome this deficiency. A plan should be devised to help Sri Lankan universities and research institutions to align themselves with foreign universities and research institutions in the interim period. In this context, the abandoned tech city at Pitipana, Homagama, should be immediately restarted. It was expected to serve as an incubator of research and new inventions through collaboration of private businesses and state universities. It should now perform this role with a new vigour.

Stakeholder consensus

Sri Lanka cannot be a rich country by 2048 unless it implements a comprehensive plan to reach that goal. It is a long date and during that period there will be many governments in power. If any of these governments abandon this goal, it will be a failure. It is necessary to consult all the stakeholders to reach a consensus about this goal. It requires collaboration and not confrontation that we observe in the political arena in the country. If the President is successful in getting all the stakeholders on board, Sri Lanka can expect to become a rich country within the next generation.

*Excerpts Of A Presentation Before Economics Society Of Kelaniya University

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 9
    0

    WAW knows and is right that Sri Lanka is in deep shit and the present governing senile lot should be sent to pasture if anything positive has to happen and make the country livable for the starving population. I’ve suggested a new constitution with age and term limits and equal proportion of both sexes for elected office to change the present political culture and bring in younger brighter people which the country fortunately has in spite of the recent significant exodus.
    As in the past political maneuvering to stay in power continues to the detriment of the poor people.

    It’s time for fresh general elections with a new constitution. If there is a will there is always a way.

    • 4
      1

      I was very sad to hear that one of the protestors has died.

      Ranil is carrying on the Rajapakse tradition of killing one protestor to dissuade others. Like the protestor killed in Katunayake and the protestor killed in Chilaw.

      Sinhala_Man without wasting your time trying to prove/impress how important you are to the JVP/NNP and how many higher-ups of them are in daily contact with you. …….. Get AKD to put out the word in uncertain terms that the days of killing protestors with impunity to dissuade protest are over. That the commanding officer will be held accountable and prosecuted to the highest degree of the law. And would have to spend years in jail.

      Remind them that Ranil is not going to protect them: Ranil has betrayed everyone who has ever helped him. With his record of betrayal and the guaranteed shortness of tenure …… the day of reckoning for his thugs in the forces are much closer than they might think.


      Sorry Native, it’s the welfare of the 22 million citizens vs welfare of your boy Ranil. …… Have you got hair to pull or are you completely bald? ……… Not to worry, either way new hair will grow.

      • 2
        0

        nimal fernando

        “Sorry Native”

        You don’t have to apologetic every time you blame Ranil or anyone else.

        Do you think AKD or JVP would prosecute any of the members of armed forces? JVP/NPP needs to show their patriotism and prove their loyalty to the public and the Tri forces. In late 1980s and early 1990s members of JVP/DJV enrolled themselves in the armed forces in order to avoid capture and eventual execution. Some of them swam the Palk strait and sought asylum in India (including Anti-Hindian Somawansa.) is another story. By now some of the those JVP members who joined armed forces would have risen up in their ranks.

        So nothing will happen.
        You can go to sleep peacefully.

        About 2 weeks ago AKD categorically said he supported 13A. About a week ago old guard Sunil Handunnetti said “JVP is against 13A because people oppose it. This is not the first time JVP old guards publicly opposed to AKD’s position.

      • 0
        0

        Dear nimal,
        .
        The problem that I have is not one of boosting my image (I can’t effectively delve into my subconscious mind to know if that is a factor!).
        .
        I gave AKD my contact details, but I haven’t got his. Besides, although I can report certain observations, I’m sure that others also have relevant things to say. Some people on this site may have realised that almost all that I say is true and valid. AKD is doing fine; I mustn’t harass him or anybody really important in the NPP. I’m not really known.
        .
        Why an “almost” there? How many of us are able to really overcome our unconscious desire to prove (to ourselves, not least) that we are decent fellows. Clearly, I ought not to be so tortuously analysing myself.
        .
        I’m doing my best! Mustn’t over-reach, though. I hope that this makes sense.

  • 9
    2

    Mr W.A. Wijewardena,

    I don’t know Economics …….. so my mind is not as confused as yours.

    “King Parakramabahu policies”

    Simply put, for all I know, Parakramabahu would’ve been more Tamil than Sinhalese: hence the intelligence.

    Progressively his successors – up to the present – got more and more Sinhalese-fied and Mahavansa-fied until the unique blend of Einsteins were churned out.

    • 7
      0

      “His (Parakrama’s) civil servants’ training school had a curriculum consisting of such skills as fencing, archery, fine arts, and foreign languages. ……. If the leaders in post-independence Sri Lanka had followed a similar policy, perhaps, the country would have avoided the current malaise.
      Well, maybe not. Didn’t we have an Admiral Professori, plus a clutch of Generals, all presumably well-versed in fencing and archery.
      Didn’t do us much good, did it?

    • 3
      0

      nimal fernando

      “I don’t know Economics …….. so my mind is not as confused as yours.”

      Then you must be an expert Economist, congratulations.

  • 5
    2

    A country in deep crisis.

    One man show playing superiority game making law abridging the freedom of production and trade
    Standing Orders, the selection committee should accept the name of the parliamentarian proposed by the opposition as the COPF chair. Hon. (Dr.) Harsha de Silva was selected and someone else was selected from committees RW is aware indicator if such things happen and the world is aware Ranilsm is still taking place unreasoned and unfair distortion of judgment in favor of against person is still happening this why they are not integrating comprehensive plan has no energy as he is not from the people

  • 3
    1

    Dr. Waw,

    In the midst of economic crisis, can’t believe that you are talking about long-term, two-generational intense investment, to keep up with the global Joneses (via taxation of the suffering professionals) , over utilizing country money to feed, cloth, and educate the Masses.

    Believe me : The country will do much better when country money is first distributed equally. Then, and only then, should we seek the IMF and other loans to join in with the global bandwagon. For IMF and other financial bodies know they are going to be in an even greater rut if they lend their hard-earned money to a starving country. They want to see a natural, organic, homegrown economic prosperity among its people first, before trusting us with their global money.

    • 0
      2

      “For IMF and other financial bodies know they are going to be in an even greater rut if they lend their hard-earned money to a starving country.”
      Hard-earned money? Really?

      • 3
        0

        SJ,

        They have worked to the bone in places like the Middle East. That’s the money that has sustained the country. Other money that was borrowed by the rulers put us into a huge debt trap. And I am not merely talking about the white elephant projects. Lot of the money has been stashed away in offshore accounts. Now the long-suffering common man has to pay for it after all their hard work.

        • 1
          0

          rtf, The world never can have all men equal as long as the robber crooks are still living free and those who toil in the middle east continue their struggle to support their families. Surely there are governing ones here who can bring to justice these robbers of national wealth being put in hidden offshore accounts. They must be jailed and put out of action for the sake of our nation. The tourist income is confined to Hambantota and the hotels established by them.

  • 4
    1

    Will WAW accept the fact last 75 years of Sinhala Buddhist colonialism had been very destructive to the minority Tamil speaking SL citizens. I haven’t heard any Singhalese apologise to the TSC of SL. They should know that their politicians were pseudo Patriots as well as economic terrorists.
    Hope NPP will do the RIGHT things from now on.

  • 2
    0

    SJ,

    They have worked to the bone in places like the Middle East. That’s the money that has sustained the country. Other money that was borrowed by the rulers put us into a huge debt trap. And I am not merely talking about the white elephant projects. Lot of the money has been stashed away in offshore accounts. Now the long-suffering common man has to pay for it after all their hard work.

  • 0
    0

    Crisis-Hit Sri Lanka Economy

    Crisis-Hit only people of Sri Lanka Economy raising taxes and to recover not from the one who robbed the country

  • 1
    0

    WAW
    Why not agitate to get a new Constitution passed by people’s consent (REFERENDUM).
    A constitution that would make
    1) all citizens equal in the eyes of Judiciary
    2) anyone who contests the Parliamentary Election has declared his and his family’s assets & has no criminal cases pending & is of some stature
    3) Does not belong to any religious clergy
    4) Specify their qualifications
    5) Doesn’t spend money that has been illegally obtained
    6) Parliamentarians aren’t eligible for pension and for any perks after they lose their positions

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