19 April, 2024

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Economy 2024: More Challenging Than The Two Previous Years

By W A Wijewardena –

Dr. W.A Wijewardena

Moving up from the low-level equilibrium

Sri Lanka has entered 2024 having passed 2022, the year of the severest economic crisis, and 2023, the year of the beginning of economic recovery. Having followed an economic recovery package as agreed with IMF for an extended fund facility or EFF, Sri Lanka should now consolidate its position to retain the hard-earned macroeconomic stability and push the economy to a high growth path needed for delivering permanent prosperity to its people. However, the present stability experienced by Sri Lanka is at a low-level equilibrium as observed by the Presidential economic advisor, Dr. Sharmini Cooray in the 2023 Central Bank Anniversary Oration.

What she meant by a low-level equilibrium was that though high inflation has been brought down to an affordable rate of about 5% and the exchange rate from close to Rs. 400 to about Rs. 320 a dollar, that has been attained at a low level of GDP, that is, $ 77 billion in 2022 compared with $ 85 in 2021. The average income of a Sri Lankan, if distributed equally among them and known as per capita income, has also fallen from $ 3,997 in 2021 to $ 3,474 in 2022. Hence, on average, all Sri Lankans have become poorer.

Resisting the use of the proverbial beggar’s wound

At this level of per capita income, Sri Lanka is categorised by the World Bank as a lower middle-income country because it is a way above the threshold of $ 1,135 attributable to a low income or a poor country. However, the Sri Lanka Government requested the World Bank in late 2022 to treat it as a poor country for the disbursement of concessional funds from the World Bank group. This request has, as a special case, now been granted by the Bank. Hence, Sri Lanka today is like a person who has on paper academic qualifications equivalent to a university degree, but his knowledge is so poor that he is assigned the work that can be handled by a person with only GCE (Advanced level) qualification.

It is just an instance of voluntarily becoming poorer in front of the rest of the world because it helps the country to get low-cost foreign aid. Thus, the GDP numbers released by the authorities do not reflect the true position of Sri Lankans. This is a stigma. Accordingly, the biggest challenge which Sri Lanka faces in 2024 or in later years is to have it removed and show the world that it is not a poor country anymore. But like the proverbial ‘beggar’s wound’, the incentives are to continue to enjoy this stigma.

Foreign debt restructuring plan

Sri Lanka enters the new year with a friendly but significantly serious warning by IMF. According to IMF’s Communications Director Julie Kozack, though the progress of the current EFF program is satisfactory, the country should complete the negotiations with the external commercial creditors and implement the agreements with official creditors for the restructuring of the selected items of the central government external debt. For external debt restructuring purposes, only the commercial borrowings and those borrowed from bilateral sources were included.

The total public sector borrowings as at the end of 2021 amounted to $ 69 billion, made up of $ 45 billion by the central government and $ 24 billion by other public sector entities. Of this, only $ 33 billion or nearly a half was to be restructured. Even if this is successfully restructured, the problem of country’s foreign indebtedness remains unresolved.

It seems that IMF is working with numbers which are pleasing to their ears ignoring the wider external debt problem which the country is faced with. Once Sri Lanka begins to repay the whole debt, it will not be able to maintain the current low-level equilibrium that involves relative stability in the exchange rate, on one side, and the balance in the current account of the balance of payments, on the other.

Can Sri Lanka be complacent about domestic debt optimisation?

She has expressed the IMF’s satisfaction about the restructuring of the domestic debt, tagged as domestic debt optimisation by the Sri Lanka Government, in 2023. The reference here is the decision of the Government to pass the entire burden of the domestic debt relief on to the superannuation and pension funds. Among them, the chief burden-bearers are the largest private sector superannuation fund, Employees’ Provident Fund or EPF managed by the Central Bank, and the Employees’ Trust Fund or ETF, managed by a separate board of trustees.

These two funds as well as other provident and pension funds were told by the Government that if they would not agree to the proposed optimisation, they would be subject to an income tax of 30% instead of the 14% they were paying at that time. The tax of 30% was justified because that was the tax paid by other financial institutions and, therefore, it was an equalisation of the tax rates. I discussed in a previous article how this tax comparison would fall on EPF unfairly because EPF and other funds paid taxes on the gross income while financial institutions paid it on the net incom.

Accordingly, the amounts of taxes paid by EPF on its gross income would be 70% in 2020, 88% in 2021, and 490% in 2022 when recalculated on the tax base of net income applicable to financial institutions. The other bond holders were freed from this burden and equity in distributing burden required the Government to treat all of them equally.

The unfair distribution of the debt burden

I therefore pointed out in the article under reference as follows: “If the pain is passed on to all the bondholders equally, it would have been a fair and equitable treatment. Though there is a fear that it would lead to instability of the financial system, that could be avoided it the pain is transferred to all equally. Then the people would have felt that they have been treated fairly. Such a trust is a must when a country goes through a painful adjustment to come out of a serious economic crisis”. But the plan of passing the burden on the superannuation fund holders was carried out as planned. However, it involved the reduction of the earnings of EPF members by a significant margin by Rs. 274 billion over the period 2024 to 2038.

It is about this treatment of the domestic debt that IMF’s communications head has expressed her satisfaction. Since EPF earnings are likely to be lower than 9% after paying a tax of 14%, it will be a challenge for the Government to ensure a minimum rate of return of 9% to EPF members as promised in the debt optimisation plan. It is in fact an unnecessary waste of the taxpayers’ money if the Treasury meets this shortfall.

Challenge of becoming a rich country by 2048

Sri Lanka’s avowed goal is to deliver richness to its people by 2048 when the country celebrates the centenary of independence from Britain. This is a challenging task since the country is now going through a low-growth scenario till at least 2027. In 2022, it was a negative growth of 7.8% and in 2023, it is projected to have a negative growth of about 4%. From 2024 to 2026, the growth will be at an annual average rate of about 2% according to the forecasts made by both IMF and the World Bank. According to these forecasts, the country will return to the size of its economy which it had in 2021. That amounts to a GDP of $ 85 billion. It is from this level that the country will have to move up to become a rich country by 2048.

I have discussed the main challenges involved in a previous article in this series. In this article, the main challenge has been identified as follows: “In terms of the World Bank classifications, a country will become a rich country if its gross national income or GNI per head reaches the threshold of $ 12,000 and remain at that level or above thereafter. Over the next 25 years, Sri Lanka’s population also will increase requiring the country to produce more to reach this level. The population of the country has been rising at about 1% per annum in the past. But the future population projections are made based on demographic changes. Accordingly, for Sri Lanka, two population projections were made, one at an average growth of half a percent per annum and the other at an average growth of a little over a fifth of a percent. In the first one, the population will rise to 25.4 million by 2048. In the second one, Sri Lanka’s population will peak in 2035 and begin to fall thereafter.

“By 2048, its population will be 21.9 million, a little more than its population in 2021. In terms of the first projection, to generate a GNI per capita of $ 12,000, the total GNI should rise to $ 305 billion or an increase of 243% over the period. The average growth per annum should be about 12%. In terms of the second projection, the GNI should be $ 263 billion marking an increase of 196% over this period. It marks an annual increase, on average, of 10%. Therefore, the annual economic growth to be maintained from 2028 to 2048 will be between 10 and 12% if Sri Lanka is to become a rich country by that last year of the period. This is again a formidable challenge for future governments”.

Adopting the CID’s growth lab approach

This is a formidable challenge. Unless correct policies are adopted from now onward, becoming a rich country by 2048 will simply be a wish only as it had happened on many occasions in the past. President Ranil Wickremesinghe, addressing the nation in June 2023, announced that he would be following the Growth Lab approach developed by the Center for International Development or CID of Harvard’s Kennedy School of Government. Wickremesinghe has a particular love for CID because he himself had been an alumnus of this prestigious institution.

He explained the Growth Lab approach as follows: “Under the Lab approach, we will bring together Government Ministers, government officials, subject matter experts, and key representatives from the private sector to collaboratively engage in detailed discussions over a period of six weeks. The aim is to collaboratively resolve any roadblocks hindering the roll-out of investments and projects by listening carefully to the private sector. During these discussions, comprehensive implementation plans will be developed, and the necessary facilities to support the implementation of these projects will be organised. Government stakeholders involved in the Labs will dedicate their full-time efforts to ensure the successful execution of these projects. As President, I, along with the Cabinet Ministers, will actively participate in this event to demonstrate the government’s commitment to ensuring success of the Lab process”.

The missed milestones in the timeline

The timeline announced was that the lab will be convened in the third quarter of 2023, its report ready by September 2023, and it will be presented to people for their review, suggestions, and approval before the end of 2023. That will be unveiled for implementation as a ‘national transformation plan’. This plan will be based on four important pillars: reforming both the fiscal and financial sectors, driving investments for accelerated economic growth, introducing social protection to the vulnerable and the implementing a strong good governance program, and transforming the state-owned enterprises or SOEs to function as profit centres.

While these are important goals, they do not cover all the required strategies that should be adopted. For instance, they do not include a human resource development plan to upgrade the country’s human capital to a creative capital stock, encouraging the professionals who are leaving the country to contribute to the country’s development through a system of reverse migration, and introducing high technology to the country’s production structure to help it to compete successfully in the global markets.

Even with the limited scope announced, the Government has missed all these milestones in the timeline. Hence, they will have to be redated for 2024. But 2024 will be an election year, and it is unlikely that the energy and the talent pool of the Government could be diverted to this type of long-term planning. But with every passing moment, the country will lose valuable time which cannot be regained. But there is no choice in my view. The Central Bank with the support from IMF has stabilised the economy at a low-level equilibrium. If no proper policies are adopted to upgrade the real economic activities that will deliver richness and prosperity to people, it will be difficult for the country to maintain even this low-level equilibrium.

This is a formidable challenge, and the Government should not take this challenge lightly.

*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

  • 5
    3

    “Economy 2024: More Challenging Than The Two Previous Years”

    What a prediction! …….. The economy has been getting progressively more challenging since 1948 ……. to put it mildly.

    First Ranil was going to develop the economy. Then Ranil was going to resurrect the economy. Now Ranil is going to breathe life into dead/bankrupt economy!

    When will people realize Ranil is not going to do it? …….. Does Native have to stand on his head and whistle it from his behind for people to get it?

    Ranil is the dumbest politician Lanka was ever cursed with ……. and mentally lazy to boot. But to Sinhala_Man he comes out looking and sounding like Einstein cause he wears a tie and a coat and mouths some mumbo jumbo in his beloved English: typical of Lankan English speakers: they just love him.

    All he has is a few dirty tricks learned from Uncle Dicky how to cling on to power by hook or by crook. He is now scheming to scuttle the elections ……. unlike before the people who would’ve protested the loudest are with him now …….. and equally terrified of elections.

    Do your 2-week memories ……. still remember that Ranil was once called Mr Clean? …….. What a laugh ……. how wrong can some Lankans be?

  • 1
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    Becoming a rich nation by the year 2048 seems like an arbitrary goal, set without taking into consideration the ground realities or the processes by which such growth could be achieved.
    .
    Attempts will therefore be made to implement equally arbitrary or superficial measures to accomplish this goal.
    .
    It is already reflected in the named four pillars, on which this economic feat is believed to be possible. They again neglect the ground issues that may have prevented the country from economically progressing all this time, and focus mostly on financialization.
    .
    Two such neglected key aspects author has already highlighted.
    .
    There I believe are many more; like reducing corruption, improving the ease of doing business, improving the institutional quality like that of the judiciary, reducing the cost of energy, all of which may be necessary for the effective attraction of potential investors, without which may attract the wrong kind of investors for wrong reasons for the detriment of the country and its people.
    .
    The devil I believe therefore is in the details and the success or the failure of accomplishing the goal will be at the mercy of this devil.
    .
    Whether a leader and a party that has failed to address such details in the history could successfully do it in the future all of a sudden is the question that lingers in the voters mind.

    • 1
      0

      Ruchira, If they have already failed, how can they be successful suddenly. They are called failures and not to be trusted with the future

      • 0
        0

        dtg – that’s what I said. May be you should reread?

      • 1
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        I am now questioning why on earth, despite all the mandates, Rajapaksa could not eliminate the drug menace.

        https://www.youtube.com/watch?v=g0hpVWuES1I

        That is because the drug traffickers were part of Rajapaksa’s politics. However, the entire nation was deceived by its proximity to the “Sangha force”. If people are smart, Mara’s direction can go in a different direction. Anyway, with the mandate of the people, if Mara really loved this nation, he could have done a lot for the nation and to make it economically self-sufficient. The decline of that man brought this nation to the edge of the precipice.

  • 1
    0

    If the government has missed all the milestones in the time line as stated by the author, what on earth were they doing for the people. Is Ranil going to Uganda to partake of the dollars carried there earlier by the Moulana rogues in several plane loads. With such leaders what can the people expect. Jail them legally.

  • 8
    1

    RW who will end his failed career this year has gone to Davos !

    Is he utterly foolish or raving mad ?

    • 0
      4

      Prof. Deepthi Silva,

      . To our best of knowledge, it is not a private trip.
      https://www.newswire.lk/2024/01/17/president-shares-sri-lankas-positive-economic-outlook-reforms-in-switzerland/

      https://www.swissinfo.ch/eng/wickremesinghe-delivers-imf-deal-for-sri-lanka-despite-public-mistrust/48377860

      He has never abused his office for his jollyful trips, however, he is being targeted by mlechcha people.
      I wish him a good retirement. This nation should be blessed with another similar to Gota. I have lost my empathy ot this nation. I have no doubt, srilankens would fall on their nose if they would stop ongoing IMF recommendations.

      • 5
        0

        Ah Leela the nut ! You are still worshipping this rascal ranil while OC and his band have distanced themselves from this embarrassment from Colombo 7 !

        What a deluded person you are ! Ranil has gone to Davos so many times before to be in the same room as all the white millionaires ! Look at the list of those who accompanied the conman on his previous pilgrimages there-all the sleaze bags of Colombo !

        I see ranil met Al Gore there. Lucky Al Gore ! May be the first time Al Gore met a person who has answers to every problem on earth !

        Retirement ! The world is not so lucky ! Don’t you know he wants to be the worlds advocate for renewable energy and travel around the world first class on that basis ! May be the first time you have heard of renewable energy- it is a concept invented by Ranil ! ha ha ha

        • 1
          0

          Dear deepthi silva,
          .
          A great comment by you! I don’t know who you are, but I now approve of almost everything that you say!
          .
          For about four years I didn’t strongly disagree with “leelagemalli”. For two years thousands of emails flew between him, and me in Bandarawela. He did not then display either love of Ranil or hatred of the JVP. As you say, deluded individual, suffering from an Oedipus complex.
          .
          He accuses me of all sorts of things; imagines that I will kill him in cold blood, although I have not once said such things should be done to him. But he hates all brown and black people; one exception: his mother!
          .
          Pity the poor fellow, but he does a lot of harm to me, and the world. He knows next to nothing of European culture, but most Europeans are decent people, and since he knows bits of science they tolerate him as a useful slave. As such he’s made some money, but his white neighbours would hate him if they knew the harm he’s doing here.

  • 0
    1

    NPP has to clearly explain to the people that if they want a promise like “Wonder of Asia”, “Rich Country as on 2048” or even “Rice from Moon” they can have all those and few more, but the must know that within last few days, about 50 people died or committed suicide because of hunger related problems. Those who want to make Langkang rich on 204 are not caring about somebody committing suicide by hunger today. What a fraudulent talk by Evil and Central Bank employees. The NPP should let the masses choose any one or many desired promises like the past ones and have them noted in their diary. But None these are ever going to become true. All that NPP can do is, if they start with a bottom-up path, then within a few years they will provide some kind of employment and three-time meals. The Volkswagen factory will not entertain Anura in their premises. China will not build a Magampura Harbor for Anura. That’s all because Anura is unlikely to take all the loans they want to deposit in foreign bank accounts and pay them interest or sell them a property of Langkang. Evil who asked Ambassador Athul Keshap to leave the office because America had moved the Israeli embassy from Tel-Aviv to Jerusalem, now stationing navy ships in the Red Sea to fight in support of Israel

  • 0
    1

    So, the masses must forget about the World Bank rating Langkang as the richest country in the world by 2048. Evil is not just a crook-y fox, but a coward too. He three times quit his premiership during Yahapalanaya, envisaging Managing Langkang was difficult. When the Joint Comedy Club leader, his current PM, the Communist Dinesh brought a NCM, Evil did not have confidence in him to fight against Communist Dinesh, It was Old Rowdy who asked him to continue on the post. When Old Rowdy launched the Unconstitutional Coup, it was Sumanthiran PC, who fought it in the COA and SC. Evil said to Old Rowdy to prove the majority and take it constitutionally. Old Rowdy did not try that fearing for UNHRC. The last one was as soon as Hitler King won the election, Evil dissolved the parliament one year early and offered to Hitler to take over the parliament by conducting the election. It is in that election Evil lost even without one single seat for UNP. He did not run for presidential election in 2010, 2015 and 2019. This time he is challenging himself to run because, as per the media reports, Ambassador Juli Sung is pushing him to go for it. If Evil climbs on a Papaya Tree, he will surely fall and break his limbs.

  • 0
    1

    Last shameful act of Evil is is when Old Rowdy wanted to have wine party in the ship to decide with Slap Party members not to place a candidate in election in favor of Evil, Evil was standing outside the country to make people believe that he had nothing to do with Old Rowdy’s decision of not to place any candidates on behalf of Slap Party. This is what the White Flag Murderer also did when the Yahapalanaya was launching the jihad war on Tamils’ churches on Easter Sunday 2019 (4/21). White flag Murder went to Singapore and slept in a hotel but claimed he was in hospital. We don’t know if people believed his drama of 4/21 or not, but the Justices he appointed to supreme court did not believe him, so they convicted him for 4/21.

  • 0
    1

    Anything the UNP-SLFP union did say for the last 75 years is utter lies. So far inflation did not come below the 2022 level. People are not able to buy any goods cheaper than in 2022. Exchange is, estimably, more than 600 Rs. It all is fake numbers given to people after tying their stomachs very tight with the rulers’ belts. In this situation, we will not believe the actual loan amount the Langkang’s Appe Aanduwa indebted is only $85B. It is another blatant lie.

    Now the Evil administration is rushing to quickly hand over the record keeping of loans from the Central bank to an independent organization. It can’t be anything other than a trial to protect Central Bank Employees who cooperated with the Royal Rowdy in his thefts.

  • 0
    1

    It appears they are fearing when the NPP government finds out the Central bank fraudulently had hidden the correct loan amount, NPP would put the Central Bank in trouble, like the White Flag Murderer fell into the trap he spread on 4/21. Even in extremely capitalist countries like the US, the loans are managed by the Department of Treasury. Why are they inventing an independent organization to manage the loans, when they are not allowing the Central Bank to function independently? That is simply because they do not want to take responsibility for the frauds committed in the browning of the past! They don’t want to pay money back like White Flag Murderer is now forced to pay back. That is smart theft.

  • 0
    2

    NPP should not honor restructuring made by Evil’s Administration based on the Central Bank’s fraudulent numbers (Even if they bring it down to 25%). NPP should officially inform creditors that all restructuring must be done in their time if they expect NPP to implement them. Otherwise NPP should tell them to sue the signatories and their bosses for the money or they can request their national government to confiscate the properties of the signatories, in their own countries. There is another way too, recently America blocked a Chinese Banker to sue Langkang for loan payment claiming Evil’s Administration is their friendly government so no one can sue Evil’s administration. Like that, all other creditors’ governments can stop the creditors from collecting any money from Langkang. Otherwise, the four countries who told Mangala the secret of Old Rowdy having had invested $20B in foreign account can give the same information to NPP finance mister so then he/she, unlike Mangala who protected the Old Rowdy’s investment, can recover the deposits and pay back all foreign loans. While they were cutting the water connection and electricity connection to the poor saying they did not pay the bills, they went on ships (to evade cellphone spying) , had secret parties and were freely swimming in foreign label bottles.

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