11 December, 2023


Economy Is Not In Proper Shape In The Paradise Island

By W A Wijewardena

Dr. W.A Wijewardena

Converting hard labour to fruition

The Annual Report of the Central Bank for 2018 analysing in minute detail the state of the country’s economy today and outlining the prospects for the next five years has just been released

It is a report of the Monetary Board, the legal body that manages the Central Bank, presented to the public through the Minister of Finance. But, it is crafted by a technical team working under the bank’s Director of Economic Research incorporating numerous inputs contributed by the other departments of the bank as well. It is customary for this technical team to work day and night, especially during the first three months of the year, to bring this report to fruition.

Use of graphical pictures to illustrate key points

Improving the presentation style significantly, this year’s Annual Report has liberally used graphic pictures to synthesise the main messages presented in different chapters of the report.

An eye-catching graphic presentation has been the snapshot of national output, expenditure and income 2018, appearing on page 48 of the report. Dissecting the national output by sources and causes, this graphic figure presents the whole story about the country’s total output by means of a single picture. Anyone desirous of understanding the structure of the economy and numerous interconnections involved should carefully study this single graphic presentation. Hence, the bank’s technical staff that has laboured to produce this report should deserve commendation by all.

Alarmingly declining growth rates

However, an important line graph which has been obscured by other colourful presentations has depicted the sad story of Sri Lanka’s economic performance during the last four-year period. Showing the annual real economic growth rate during the reign of the present Government, it has drawn a downward spiralling staircase with a growth of 5% in 2015 but falling continuously since then to reach the lowest stair of 3.2% in 2018.

On average, the annual growth during this period has been at 4% and when it is adjusted for an annual population growth of about 1%, the real income per person, known as the Per Capita Income or PCI, has increased only by 3%, a rate much below the planned growth rate of 8% needed to become a rich country within a generation.

Thus, as I have argued previously, it is four wasted years which cannot be recovered by Sri Lanka now.

Need for quick recovery measures

Hence, what the Government, whether it is this government or any other government that would come to power in the future, should do is to plan for a quick economic recovery in the next few years and lay foundation for a firm and consistent high economic growth in the subsequent 20- to 30-year period.

The strategies for economic recovery during the next few years is essential since the Central Bank itself has painted a gloomy economic picture for the country in the years to come. According to its predictions, growth will slightly recover in 2019 to 4% and move upward sluggishly to about 5% during 2021 to 2023. This is a little higher than what the international agencies like the World Bank and the Asian Development Bank have predicted for Sri Lanka which is on average below 4% per annum.

Even that higher prediction of the Central Bank is, still on average, below 5%, a growth rate woefully inadequate to deliver prosperity to Sri Lankans. This is a warning signal that cannot be ignored by the Government.

Synthesis presented in Chapter 1

Chapter 1 of the bank’s Annual Report is a prerogative of its Director of Economic Research, the officer historically known as the brain of the bank. Synthesising the detailed analysis made in the rest of the report, the Director usually presents a summary of the behaviour of the key sectors in the economy.

On top of this, he or she presents a prediction of its performance in the next five-year period in the light of the expected developments in the global economy which has serious bearing on Sri Lanka. This is then followed by an outline of the policy to be followed by the Government if it is desirous of supporting economic recovery on a sustainable basis.

Gloomy forecast and essential economic reforms

Since the predictions made for the next five years are gloomy, this year’s Annual Report has come up with a set of essential economic reforms that have to be implemented by the Government on a priority basis.

In my view, the policy package in the present Annual Report highlighting ‘what the Government should do’ and ‘what it should not to do’ is a comprehensive set dealing with the policy reforms needed in all the areas. If any political party contesting the next election is interested in mapping out its economic strategy for sustained high growth, this section surely provides the base for it.

Economic reforms to address the low-growth conundrum

Economic growth in the last four years has been low by any standard but the Central Bank, apparently not willing to embarrass the Government, has chosen to call it a ‘moderate growth’. According to the bank, the reasons for this so-called moderate growth have been the postponement of the structural economic reforms which the country should have undertaken many years ago.

These reforms had been recommended by international lending organisations such as the International Monetary Fund, World Bank and the Asian Development Bank for some time. At the same time, the domestic private sector chambers too had advocated for them. Yet, all the successive governments, demonstrating their inability to manage economic policy programmes properly, had either abandoned them midway after embarking on them or not tried out at all for fear of antagonising certain quarters in society.

Ignoring the needed reforms in the past

To the top policymakers in the previous Mahinda Rajapaksa Government, ‘reforms’ had been an anathema. The present Government started its career after the general elections in August 2015 with many promises of economic reforms as pronounced by Prime Minister Ranil Wickremesinghe in the first economic policy statement delivered in Parliament in November 2015.

There were promises about tax reforms, making the Central Bank independent, integrating Sri Lanka seamlessly to global trade, trade facilitating bilateral agreements with almost all the countries in the world and converting Sri Lanka’s low-tech production base to a high-tech base. To plan out these reforms, an Economic Summit was held in Colombo in January 2016 with the support from the George Soros Foundation and Harvard University’s Centre for International Development. Yet, the achievements on economic reforms during the four-year period have been less than expected.

It is ironic that now the Central Bank has to remind the Government of the need for moving into action on the country’s reform agenda if the country is to accelerate its economic growth to required levels.

Key reforms needed

The bank has identified in its Annual Report for 2018 the key areas of failure by the Government on this count. Incidentally, they had all been promised in the Government’s first economic policy statement. According to the Central Bank, these failures have been in the areas such as measures for export promotion, attraction of Foreign Direct Investments or FDIs, reduction of budget deficits and debt levels, reform of factor markets to make them more conducive for growth, strengthening of the Government’s administrative machinery, and observation of the rule of law.

The failure to undertake these structural reforms has not only contributed to the country’s low economic growth, but also made it a laggard among its peer countries. This is observable when one compares Sri Lanka with Bangladesh. While Sri Lanka’s average economic growth during 2014-18 has been at around 4%, Bangladesh had managed to maintain on average a growth rate of about 6.5% during this period despite many natural calamities, political disputes and terrorist attacks.

No more cheap labour

The bank has also noted that Sri Lanka no longer has cheap labour and a young labour force. According to estimates made by the World Bank in its Sri Lanka Development Update 2019, the country’s working age population has peaked in 2005 and begun to decline since then.

Thus, the country can no longer enjoy the luxury of moving toward labour intensive industries such as apparel industry. Hence, improvements in productivity and efficiency are a must for the country to move up from a middle income country to a rich country – a feat known as beating the middle income trap. The failure will result in trapping the country in the middle-income category forever.

Enhance value addition of exportable raw-materials via advanced technology

Sri Lanka has been exporting natural resources in raw material form and the bank in its recommendations has advocated for enhancing their value added so that the country could get not only better prices for same but also increase the overall export earnings. But, this requires the adoption of high technology to process these raw materials into value added products. High technology in the very short run had to be acquired from countries that have developed it.

Though the bank has not spelt it out, one way to acquire high technology immediately has been the attraction of global companies to the country either as joint ventures or FDIs. When the country does so, it has to choose products which have huge market potential in the future. In an era where electrical vehicles are being promoted across the globe, better and more efficient batteries will be demanded by users. If Sri Lanka goes into partnership with an international company like Tesla or Panasonic, it is possible for the country to tap this market easily.

In the medium to long run, technology can be developed within the country by engaging its universities and research institutions. In this connection, Sri Lanka can learn a lesson or two from Thailand which is presently on a move to increase its high-tech production base. To support this move, its universities are competitively getting connected to high-tech firms in China, Taiwan, Japan and South Korea, in addition to providing support services to local high-tech companies.

Wide reforms to promote trade competitiveness

The increase in the earnings from the export of merchandise goods and services will enable the country, according to the Central Bank, to meet foreign exchange liabilities more confidently in the future. For that purpose, the bank has recommended that barriers to trade have to be removed.

In this respect, the new trade policy announced by the Government has called for wide reforms in the trade sector to promote the country’s competitiveness. This includes bringing the country to a uniform tariff regime by eliminating numerous tariff measures in force and para-tariff that has been enforced. A single simple tariff system will always help exporters to sell their goods and services to foreigners.

FDIs to bring in new technology

The bank has also recommended that FDIs should be routed to more productive sectors in the economy. Sri Lanka or for that matter any emerging economy in the world cannot have the luxury of attracting every type of FDIs today.

This was the policy adopted by Sri Lanka in the initial phase of opening its economy to foreign investors. It helped Sri Lanka to establish a world class apparel industry that provided an imitation effect to local entrepreneurs. Over the years, it therefore contributed to the transmission of the export structure from predominantly agriculture-based exports to manufacturing based exports.

Now apparels are ‘on-shored’ or ‘near-shored’

However, today, it faces several challenges due to loss of cheap labour, on the one hand, and the presence of new competitor countries such as Bangladesh and Myanmar, on the other. The worst scenario has arisen due to new production systems adopted by apparel consuming Western nations. Taking advantage of robotisation and automation, both North America and Western Europe have begun to establish apparel factories on their own lands, a system known as on-shoring or re-shoring as against off-shoring that had ruled the world a few decades ago.

This has been strengthened by the need for having garments within a short delivery time like three to four days. In this context, garments produced by Sri Lanka will take about 30 days to be delivered to the market.

But the factories located close to the market in countries – now known as near-shoring – such as Turkey, Morocco in Europe and Mexico and Honduras in North America will deliver them to the markets within a short time span. Thus, Sri Lanka has no choice but to change from the present low-tech production system to high tech production systems. This has been cogently recommended by the Central Bank in its Annual Report for 2018.

Tear-free understanding of CB reports

One of the weaknesses in the Central Bank Annual Reports has been that they are presented in technical language not easily comprehensible by ordinary readers. Hence, it is necessary to write commentaries on the Annual Report to facilitate tear-free understanding.

Despite these weaknesses, they contain a wealth of information. Hence, it will not be a waste of time if the top leaders of the Government spend some time in perusing and understanding the messages that have been delivered in the report for 2018.

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

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Latest comments

  • 0

    Did Coomarasamy include the impact of Kochchikade, Zion Church,, St Sebastians plus Shangrila, Kinsbury and Cinnamom Grand in his predictions for the next 5 years.
    If he didn’t ,I won’t be spending my valuable time reading it…

    I thought Dr Ranil brought FDI from day one ,with that USD 4 Billion from Surendran,
    Wonder what happened?..

    With the normally placid Dr Ranil’s Minister for Development , Christian Eran pissed off, after Dr Ranil kept the Cardinal in the Dark even after visiting Methodist Church in Anuradahapura, Dr Ranil is facing even a bigger threat now than before when only Keselwatta Kid wanted to Roll Dr Ranil..

    In light of that, will Dr Ranil have time to read the ” Report”?.

    Latest goss is that Galleon Ravi the new Power Ranger has stitched up such a big “cut” from the Floating Power House run by the Turkmen , even the UNP Economics Whizz Kid is running back and forth to the Yahapalana President to stop it anchoring in Colombo.

    So obviously even Harsha wouldn’t have the time to look at those beautiful graphics even, let alone read and interpret them.
    Then again if it is all pre Easter , it won’t be worth even the paper which it is written….

    BTW, wonder why Coomarasamy didn’t put the last 10 years performance in that declining graph on Economic Development.
    When I look at Investments , I always check the last 10 year performance.

    It is even more important here,t Because this Yahapalanya came with Dr Ranil, Mallik, Managala, and Suren Surendran in London, all wrapped in Money and Expertise flags to take us to the richest Club in South Asia with the help of the West.

    One thing though, I am glad to hear that our bare bodied Youth who Shovel Concrete to build Condo for the Rich in Colombo are in the High Income group.
    Along with the House Maids who work in them..
    If that is true…

  • 2

    I still can remember the economic maestro of this Government Harsha de Silva bragging in a TV discussion that they know how to fix the economy. He talked about introducing new systems from Singapore to improve the performances of State Enterprises. When asked about the financial resources required, he said once we stop corruption there will be enough money to carry out their plans. I wonder what happened to those ‘BIG TALKS’? People in this country deserve some explanation. They cast their votes based on these promises. Did they stop corruption or multiplied corruption.?

  • 3

    Dr. W.A Wijewardena, just a few months younger than me, is one man who must be listened to. He is far more distinguished than guys like me, but he comes from a much humbler background, but, boy, hasn’t he achieved so much owing to his having been a workaholic all his life.
    And that work ethic is not selfishly puritanical. He tirelessly seeks out persons who hold out promise of furthering the common weal. Many times, I’m sure that he’s been disappointed, but he keeps going. For instance, I keep making comments calling for moderation and the sinking of communal differences, and so he actually looked up poor me. I hope that I still write common sense, but Iknow that I don’t, unfortunately, go beyond talk!
    Thanks, Dr Wijewardena for persisting to look for ways to overcome the many setbacks that we suffer. Setbacks which would not have been there, but for our people who have rarely digested what he has said, and written, for so long in both English and Sinhala. I don’t know whether he has written in Tamil (myself being ignorant of the language), but I do know that he has always actively fought against the fissiparous tendencies that we Sri Lankans so often display.

    • 1

      Sinhala Man..

      I don’t think UNP Supporters want to even see him, let alone Listen to him.
      Others in the Yahapalana Cabal have their own Goals to kick, while grinding the axe.
      And not interested in Development.

      When I say something good about the Post Nanthikadal and pre Yahapalana Period. I get plenty of Ticks in the Red Box….
      Poor Dr Wijewardena doesn’t even get that..let alone thumbs Up.

      Now the Country is in ruins not only in Economics but Safety and Security of the Inhabitants
      The latter is the most depressing development of this Dr Ranil & Moda Sira’s Yahapalanaya..
      Instead of the VW factories which he promised his loyal followers , Dr Ranil has given us Bomb Factories all over..

      I always read Dr Wijewaradana’s work
      All that hard work on the Bond Scam is now in the Archives.
      Bond Looters are going from strength to strength along side the Minsters whom the fellow MPs in Kotte , and even some UNP for that matter have accused of helping with the the Mother of All Suicide Attacks in our Motherland…

  • 3

    When we have monkeys to judge as legislators, what else can you expect. Legislators would do anything for money. That is why they have come to the parliament. Not different from prostitutes.

  • 3

    Sri Lanka needs to seek DEBT CANCELLATION, and debt write off, rather than debt restructuring after the attacks on Easter Sunday.
    These attacks were by the same powers that have put Lanka in a debt trap and the IMF -ABD- Eurobond sovereign bond debt trap. But the financially illiterate finance minister of Sri lanka is doing his usual begging bowl number again.
    Time to get rid of Bondscam Ranil and his corrupt and clueless butterflies who have let the country’s economy and security be destroyed by their puppet masters in Trumpland and MCC fake experts, deep divers, and fake research diagnostics whose endgame is to build logistics hubs aka military bases and oil refineries to fuel the US war machine in Sri Lanka.

    • 0

      Declare bankrupt. then they may want assets of For a dollar
      I think my previous comment is correct, So it doe snot appear here.

  • 1

    It is sad that the smartest economists in Sri Lanka can see that the ethnic conflict is a major contributor to Sri Lanka’s economic problems.
    a) It undermines law and order – the lack of an independent judiciary spills over into all areas of commerce. Issues like land rights are trivial to solve, and they are the basis of any modern economy, but Sri Lanka is recalcitrant due to ethno-religious concerns;
    b) To suppress Tamils, Christians and Muslims, Sri Lanka needs a bloated military, which costs money, but worse those serving in it are not serving a productive role in the economy – it is a huge drag on GDP;
    c) The hostile environment prevents the massive intellectual resources of the Tamil Diaspora from being deployed in Sri Lanka. There is vast tech knowledge outside of Sri Lanka;

    Good report by the CB. Off-shoring is over – robotisation is here. Now the only game left is tourism – so Sri Lanka wants to compete with Seychelles, Maldives and Mauritius – even Mauritius is building a serious tech hub. Why play for the scraps that is the tourism industry.

    Deal with the political problem and prosper.

  • 0

    {“Economy Is Not In Proper Shape In The Paradise Island”}
    Anyone with commonsense will not only say this but suffers it too.
    PS: “The Paradise Island”? Should be ‘The Former Paradise….”.
    How many present and past top brass Central Bank of SL will it take to have vigorous brain-storming sessions to conclude that we are down the economic gurgler?

  • 0

    Since 1/8/15 the Nation allround failure is not worry about that by UNP leadership of because Wickramasinghe clan knows that USA+UK stand for Neoliberal economy link up to Western Old world Order that blessing behind by USA, UK, EU and Japan. Therefor UNP need not to be fears that subject to pardon any type of major errors occur in an Island of politics, economic, terrorism & socially by US hegemony are behind RW. That is what has happen 21/4 Muslim attack in Sri lanka.!

    Indeed UNP leadership is concern lost of lives of 380 citizens and foreigners, hence 500 of casualties the people an accountabilities of UNP ‘governance’ not be caution, which have practically disappeared ; in fact USA+UK coordinating ways to expornorated UNP leadership of RW lost of lives of people by US big-power politics.

    Moribund big-power of USA led forces wanted that remain UNP in power of center of the STATE by hook or crook. As long as its( UNP) save the US hegemony ,that USA supposes to in return of that interpreted reamined unwell to democracy an Island on their favorable terms of UNP head of chair of govt.oversee by USA forces.
    An origin of range of policies which that practices by UNP political- economy structure is back by vital interest of USA, safeguarded that Economic strategies of IMF and World Bank .
    Until we have decided own sustainability of development that model and path suited ours land and people we have no other way overcome Economics crisis.
    We having one of those rare situation in globelly, have has some historical friction can now rebuild nation economy in that very fruitful and promising of emerging nations to be cooperate on a very pragmatic basis in Asia.
    We as nation to make it a platform for growth economic to reinvigorate of Sri lanka development by the help of new investors.

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