By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

Given the pivotal role of debt restructuring in the Economic Transformation Bill (ETB), the debt-to-GDP ratio may not remain below 95% by 2032 and reach an optimal level of 60% by 2048. This uncertainty also extends to the gross financing needs, which may not stay below 13%. While a 5% increase by 2027 seems feasible regarding GDP growth, it is uncertain if it will continue to exceed 5% after 2027. The ETB does not clearly outline the necessary economic growth to achieve Advanced Economic Status by 2048. This is a crucial factor in determining investment and welfare and, ultimately, improving the well-being of the people. A clear and comprehensive economic policy framework is necessary, rather than relying on arbitrary targets or a legal framework.  Based on the current US$ 4000 per capita income in Sri Lanka, achieving Advanced Economic Status by 2048 without such a framework seems highly improbable.

Both the government and the opposition are busy with the presidential election. Due to growing differences between the government and SLPP, it is very doubtful that SLPP will support ETB. Except for the president and his state ministers, none is interested in ETB. The president is the brainchild of ETB. What the president believes is good in ETB.  It is his vision. Unfortunately, ETB has no buy-in process, which is a vast vacuum. So, the president is responsible for engaging all stakeholders and obtaining their input in the right direction. The above should also be part and parcel of the president’s vision. The president vehemently advocates for democracy, so this ETB must be subjected to the democratic process apart from submitting the ETB to parliament alone and in a hurry. Everybody agrees that we must avoid another economic/debt crisis and pursue rapid economic development. Reaching a national consensus on ETB or alternatives is essential rather than being confined to ETB. Even if enacted, it will face the same destiny as the 2003 Fiscal Responsibility Act. Laws cannot dictate economic dynamism. This is the lesson learned from the Act mentioned above.

Introduction

The primary purpose of the proposed National Policy on Economic Transformation Bill May 2024 (ETB) is not to allow room for another economic crisis/ debt crisis that started in 2019 and having economic growth above 5% to achieve an Advanced economic Status by 2048. The worst period is under control while the debt crisis or burden is ongoing. ETB expects to fact-trace recovery towards rapid economic growth of the economy on given targets and their sustainability, paving the way for improving the overall welfare and well-being of the people (I,e based on basic needs). Given the above, the ETB expects to establish or invent new vehicles for rapid economic development, namely, (a) the Economic Commission of Sri Lanka, (b) the Investment Zones of Sri Lanka, (c) the Office for International Trade, (d) the National Productivity Commission, and (e) the Sri Lanka Institute Economics and International Trade. There is a need for these institutions to work without political influence or with independence. However, as most members are appointed by the president, political influence will be the reality. The Board of Investment (BOI) will be revoked following the above. (It is essential to present reasons for revocation and establish the above five institutions).  Those mentioned above institutions are corporate bodies that operate with their funds. The role of the government is to control and direct public and private economic activities based on equal treatment for rapid economic development.

It is helpful to indicate the foundation of the above debt crisis to put ETB in the proper context. The foundation involves the government’s Monetary Policy (i.e., controlling the money supply to maintain a lower and stable price level), while the Government’s Fiscal Policy encompasses government revenue and expenditures. When government expenditures exceed revenue, there is a budget deficit and the deficit matters. The government is forced to generate additional income through increased taxes and other means, most importantly borrowing and printing money, leading to a debt burden or crisis. A relationship between budget deficit and debt crisis paves the way for a Balance of Payment (BOP) deficit or crisis amidst the increasing price level or inflation. In short, budget deficit, debt burden, and BOP deficit are interrelated. Given the above Trio (Ref, this in ETB, section 3, achieving macroeconomic balances and sustainable debt), policies and measures are required to put the economy on the right track to recovery and hence for rapid economic development. These policies involve increased taxes and cutting down government expenditures, affecting the welfare and well-being of the people. This is happening now in Sri Lanka’s economy. Regarding recovery, one important aspect is the level of investment by both domestic and foreign sources or Foreign Direct Investment (FDI).

The level of investment significantly contributes to economic recovery and rapid development by influencing economic growth in many ways.  Given the above, foreign investment is the anchor of the proposed Bill on National Policy on Economic Transformation to avoid another economic/debt crisis by earning increasing volumes of foreign exchange, and the proposed five new corporate bodies provide the fuel for investment. In light of the above, targets have been set on (a) debt restructuring, (b) GDP growth, and (c) exports and FDI. Indeed, the three areas mentioned above are crucial for an in-depth National Policy on Economic Transformation if embodied in an economic policy framework or package.

This article aims to investigate all of the above in Two Parts.

The First Part examines Section 3, what the National Policy on Economic Transformation provides for, and Section 4, the duty of Cabinet Ministers to the National Policy on Economic Transformation.

Part One: Examination Of Section 3 & 4 Of ETB

The fundamental focus in Section 3

a) Restructuring Public Debt

Given the debt crisis, emphasis is placed on the National Policy on Economic Transformation for restructuring the public debt. Regarding the above, it is stated that (i) debt to GDP should be below 95% by 2032, and after that, (ii) government debt financing should be below 13% of GDP by 2032 and after. Regarding annual debt service, (iii) the foreign currency requirement should be below four decimal halves (i.e., 0.045%) of GDP by 2027 and after. In short, the above targets are somewhat arbitrary but useful.

With the current debt to GDP being well over 100%, the above Trio can be inquired about. It is an accepted fact that the optimal debt-to-GDP ratio is 60%. From the current level of well over 100% debt to GDP, it will take seven years to be below 95% by 2032 and after. After that, from 2032, it may be 2048, based on the president’s vision of the status of the Advanced Economy. It is very doubtful that Sri Lanka will reach the optimal level of 60% debt to GDP by 2048 because borrowing continues as of now while the economy is plagued or mounting with (i) fraud, (ii) corruption, (iii) waste, and (iv) inefficiency. Indeed, if the plague mentioned above is eliminated, it will substantially help reach the optimal level. The above concerns apply to 13% and 0.045% as well. Unfortunately, being self-sufficient with laws alone cannot eliminate the above-mentioned plague. It is unquestionable and committed leadership that matters, along with experience in Singapore and Malaysia, that we frequently quoted.  Indeed, a leader needs to lead while managers manage. It is questionable whether the above is true in Sri Lanka.

b) Inclusive Growth

Section 3 includes “promote inclusive economic growth and social progress.” Given the mounting hardships faced by the people, the concept of inclusive growth is essential, and this is also in the UN Agenda 2030 (2016 – Sustainable Economic Development Globally), for which Sri Lanka is a signatory (it may be helpful to have an assessment where Sri Lanka is based on 17 goals including poverty and  169 targets of the UN Sustainable Economic Development in 2016, i.e reference from 2016 to 2024 and 2030, to end poverty and hunger everywhere; to combat inequalities; to build peaceful, just, and inclusive societies; to protect human rights and promote gender equality and the empowerment of women and girls; protection of the environment. Also, resolve to create conditions for sustainable, inclusive, and sustained economic growth, shared prosperity, and decent work for all. An assessment will support and promote inclusive economic growth and social progress. It should be noted that those goals are targets and are not arbitrary.

Inclusive economic growth creates a conducive environment for employing those willing and capable of working and earning income while contributing to economic growth. Indeed, a conducive environment encompasses many, but I will not write about it. But if the government can make it a reality, it will become a big push for economic recovery through forward and backward linkages in the economy. To alleviate the current level of poverty, inclusive economic growth plays a central role. Through inclusive economic growth, cash transfers and subsidies can be confined only to people who need them. This means government expenditure for the above can be reduced substantially, minimizing the budget deficit.

There are many aspects to social progress. Deplorable levels of housing, sanitation, lack of water or clean water, power, problems with road access and transportation, schooling ( i.e., 1000 schools have been closed), and marginalized and isolated communities must be mentioned. We often talk about building highways, airports, ports, technological advancement, Artificial Intelligence, and integration into world economies, while the social problems mentioned above are burning issues. In short, since 1948, it has been too late to include the above-mentioned issues in the National Policy on Economic Transformation in 2024.

Section 4 of ETB is on the duty of Cabinet Ministers

(a) GDP Growth and Employment

Economic growth is to reach 5% by 2027, up from the current 2% and above 5% after 2027. Getting above 5% growth after 2027 is not straightforward. However, ETB states, “The economic growth should be accelerated to above 5% annually after 2030 to achieve an Advanced Economy Status by 2048”. It is excellent, but what is the mechanism of acceleration? At the same time, it is essential to indicate at least an estimated annual economic growth rate after 2030, along with the acceleration up to 2048.

As the president’s vision for the Advanced Economy Status by 2048 is clear, it is vitally essential to indicate the economic growth required to reach it by 2048. Indeed, this is the first time a link can be seen between the rate of economic growth and the Advanced Economy Status by 2048. However, the vital link is missing. The link should be the foundation of the National Policy on Economic Transformation, which is the outcome of the overall welfare improvement of the people. It is good to know whether the authors of ETB focused on and worked for annual estimates of economic growth after 2027 based on sources of economic growth in Sri Lanka. This can be done because the techniques are there to calculate sectoral contributions such as 1%, 5%, or 7% economic growth.

In other words, given the economic growth of 7%, the required investment in various sectors with forward and back work of linkages of the economy can be identified so that it can be invested. It is logical. In short, as the government relies on investment to recover from the debt crisis/economic crisis, the mentioned logical focus is crucial. Alternatively, instead of stating 5% after 2027, it can be aligned with the GDP growth of 7% by 2030 of the agenda 2030. Indeed, the above makes some sense, as Sri Lanka is a signatory to Agenda 2030.

The target of reducing unemployment to below 5% from 2025 is commendable if integrated with the concept of inclusive economic growth indicated above. Along with paper qualifications, the education system should produce people with skills and capabilities—skills and capacities sold to obtain employment. With fast technological advancement, labor markets have become more dynamic. Along with the increasing brain drain or exodus of qualified and experienced professionals, Sri Lanka may face labor shortages, affecting investment and economic growth, as ETB envisages. Given the above, it is helpful to formulate and implement a National Human Resources (NHRP) Plan along with the National Policy on Economic Transformation.

The current level of female labor force participation is about 31%. It is to reach at least 40% by 2030 and 50% by 2040, which is arbitrary.  Given the economic hardships, the figures are highly encouraging because developed countries have achieved similar targets. However, the conclusion that “measures to increase Female Labour Force Participation can significantly increase the labor productivity and hence the economic growth in the economy” is unclear. Labor productivity refers to the output per worker or hour worked. It is determined by the skills, technology use or change, organization and management practices, types of input and capital, etc. The above is a universal phenomenon irrespective of male or female.

b) Export, Foreign Direct Investment, and Balance of Payment (BOP) are interrelated subjects of ETB

Given the high emphasis on shifting from import substitution or an inward-oriented economy to an outward-oriented economy, exports of goods and services in GDP will reach at least 25% by 2025, up from 22% and not less than 40% by 2030 and 60% by 2040. The targets are arbitrary. It would be excellent if they were achievable because all developed countries have achieved them.   

Along with the liberal economic policies introduced in 1977, the Export Development Board (EDB) was established in 1979 to spearhead exports to integrate the global economy. Sri Lanka Export Credit and Insurance Corporation (SLECIC) was established in 1978 to provide trade-related insurance solutions. By this time, exports were about 7 percent of GDP. Compared to the above, the level of export to GDP of 22% in 2024 is disappointing because, nearly 50 years since 1978, the growth of exports has been stagnant. Given the above scenario, export targets of 25%, 40%, and 60% are good if achievable. Behind the above targets, the role and contribution of (a) the Office for International Trade and (b) the Sri Lanka Institute of Economics and International Trade of ETB must be convinced instead of having BOI.  It is worth mentioning the role of the “Ambassador of International Trade”. This office will spearhead all trade negotiations, including bilateral and multilateral ones (e.g., the WTO and UNCTAD). Similar institutional frameworks exist in India and Bangladesh so that the government may have followed them as examples.

Over the last few years, FDI in Sri Lanka has been around US$900 million yearly, compared to Malaysia’s (UD$11 billion), Vietnam’s (US$12 billion), India’s (US$40 billion), and Bangladesh’s (US$2 billion). Given the above, ETB heavily relies on foreign investment; net foreign direct investment (FDI) will reach not less than 5% of GDP in 2030, and at least 40% of net FDI will be in exports or services by 2030. These targets are too arbitrary. It would be excellent if these targets were achievable because developed countries have achieved similar targets. In other words, the above targets show high reliance on exports by 2030 and vindicate the government’s expectation of increasing foreign exchange volume to avoid borrowing from overseas, jeopardizing recovery from the debt burden.  Indeed, if the above expectations can be realized, the current account deficit of the BOP will not exceed 1% of GDP. On the other hand, if the current account is in surplus, debt service can be undertaken sustainably. The above all means there is a long way to go, but organizing and managing the economy around the set targets to transform the economy.

Regarding increasing foreign exchange earnings, the economy will be tested when import limitations are removed and debt service is started. Given the above, the UD dollar will appreciate if the demand for foreign exchange is higher than the supply.

The prices of imports will increase, and the book value (Sri Lanka rupee) of foreign debt will also increase. This may affect the foreign debt service and the budget deficit. If the budget deficit exceeds the set targets, the government may be forced to raise taxes and borrow, leading to enhanced debt crises. External shocks emanating from a hike of oil price increases cannot be undervalued simultaneously.

Regarding investment, as far as possible, joint ventures with local investors must be promoted along with FDI instead of resulting in 100% owned by foreign investors. This means FDI must not be a creature like an octopus. FDI may come due to cheap labor and attractive incentives in footloose industries such as garments with no or little backward linkages. Instead, local or foreign investors must use local input of high backward linkages that benefit the economy. Examples are minerals, cooking oil, and spices.  Regarding the Employees of Free Trade Zones, they have other financial benefits other than wages. Along with the expected economic transformation, it is not beneficial if the workers are affected based on different financial benefits like attendance allowances. Also, project approval should be subject to all procedures and processes to minimize or eliminate environmental impact in depth. Any political influence on project approval is not desirable for the given reasons.

*To be continued..

*The writer worked as the Special Advisor to the Office of the President of Namibia and was a Senior Consultant with UNDP. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand. The writer can be contacted at asoka.seneviratne@gmail.com