CSF Co-founder Anushka Wijesinha was recently invited by the London School of Economics’ South Asia Centre to speak at a forum on ‘Looking Ahead in Sri Lanka’, alongside four eminent panelists. The following article recaps the key points made in the opening intervention at this event.
We now know quite well the policy missteps that got us to the current conditions, and the audience might be familiar with the features of the current crisis. So, in the spirit of the focus of the event – all of us would focus on ‘looking ahead’ – Nilanjan wanted us to speak about what we think the Government should do to improve and stabilise the economic situation. I will point to four priorities for the near-term.
1. Looking beyond the macro, to real lives
While the shortages of fuel, cooking gas, and electricity had received a lot of media attention, the shortages in food and nutrition less so. Sri Lanka is facing a malnutrition and health crisis that we haven’t had in a generation. With food price inflation now at over 93%, household incomes severely constrained, and wages not keeping up with the rise in inflation, we are seeing the second wave of the economic crisis – this wave will have lasting scarring impacts on households, and especially children. This has been confirmed by the UNICEF and ICRC. Child malnutrition is now at historic recent highs. I should also say that this aspect – the impacts on households and firms – is especially important because the current economic crisis comes on the back of multiple previous shocks – 2016/17 the agriculture collapse due to an adverse weather shock; the 2018 constitutional coup, the 2019 Easter Sunday bombings and the economic fallout of that, and then the Covid-19 pandemic and the debilitating impacts. All of this means that any any efforts at bringing economic stability should necessarily be centred around people – the impacts faced by households. It is quite easy to miss these humanitarian impacts amidst all of us focussing on the discussion about the debt restructure pathway, and the fiscal consolidation measures and so on. This means that the next budget has to find substantial fiscal space to provide the necessary social safety nets and support to the vulnerable, in a meaningful way, across the board.
2. Looking beyond taxation in fixing the fiscal mess
Secondly, the focus of the fiscal adjustment measures cannot just be on taxation. We made this mistake in the 2016-17 IMF programme, where the focus was entirely on revenue-based fiscal consolidation. It ignored the massively inefficient government spending side, state-owned enterprises, misallocated spending, etc., and focussed only on taxation. This built up resentment among consumers and the business community, making it easy for the Gotabaya Rajapakse campaign to tout tax cuts as the panacea to the growth slowdown at the time, and then win the election. There must be an ambitious spending rationalization and realignment that is part of the fiscal consolidation efforts – revenue might have to do much of the heavy lifting, but it cannot be the only lifting. Thirteen years after the end of the war we have a massive military budget – the Ministry of Defence still commands the largest annual budget outlay from all Ministries. The military also runs over two dozen hotels across the country’s coastline – some by the army and some by the navy. Even a golf course, and a hotel in a former prison. There are dozens and dozens of government institutions performing inconsequential activities and functioning in a mediocre fashion, with little development impact, but is a hotbed for politically-linked recruitment – jobs given as favours. Whereas Health and education remains grossly underfunded – especially to meet the new emerging needs of people and the economy. Many state-owned enterprises remain untouched from a reform point of view, and the concern is that they will remain untouched – seen as sacred, and with a government that is on tenuous ground – seems unlikely to be tackled in any meaningful way. The state now runs everything from an abandoned high-rise apartment and hotel buildings, to an islandwide network of entrepreneurship development offices staffed with university graduates with no real world experience.
3. Looking to build public confidence and trust
Thirdly, the government needs to build confidence in its economic reform efforts. On this, there is some progress being made as there is some confidence that some categories of basic essentials have been brought in – fuel under a fuel ration scheme, cooking gas, shorter durations of power cuts, and fertiliser for the next cultivation season. This has largely been done by significant import compression measures, to then release foreign currency for imports of these items. And also some World Bank repurposed money, to finance cooking gas and fertilizer. But progress beyond these basics would really depend on the confidence that people have in the Government. This can get fast eroded. The government’s attempt to curb protests, arrest protestors using draconian laws like the Prevention of Terrorism Act, putting them under surveilance, harassing them and their families – these are all eroding public confidence in the interim regime. Next, there is the disconnect between the public demands and the politicians’ expectations. Even as the public demanded accountability and austerity among politicians, we saw the appointment of 38 state ministers (in addition to the main cabinet of ministers). And nearly all of it being filled with members of the Rajapakse party – the Sri Lanka Podujana Peramuna. A recent sharp electricity tariff hike – which was hotly debated, formulated and approved by the utilities regulator – has gone ahead as planned for households and firms (included a sharp increase for poor households), but has been reversed for places of buddhist worship after buddhist monks waged a media war against the government on it. So this doesn’t bode well for the reform pathway – with some much more contentious elements – like selling stakes in state owned enterprises. Which, and this might be surprising to a non-Sri Lankan audience, usually gets opposed by Buddhist monks, in addition to the usual – nationalist and socialist parties, and government worker trade unions. So my point here is that the confidence in the government’s ability to shepherd the tough reforms seems limited, and it must quickly build that confidence if it has any hope of doing much reform
4. Looking at quick wins in trade and exports
Finally, on a topic that I particularly work on – trade and investment. The government can pick up a whole bunch of reforms on the trade, investment, and business facilitation side of things that can deliver quicker results – reducing costs to domestic businesses – especially exporters. Exports are the only thing keeping the external account afloat, providing about a 1.2Bn US dollar buffer each month. Exports will come under pressure over the coming 12-18 months, as Sri Lanka’s key markets of the UK, US, and EU show signs of slowing down and consumer demand will constrict. We should be doing whatever it takes to ensure exports have an easier time here at home. Everything from the complex tariff and para-tariff structure, to procedural impediments in importing inputs, trade facilitation delays at border agencies, as well as exporter financing. The National Export Strategy, the National Quality Infrastructure Strategy, the National Innovation and Entrepreneurship Strategy – things that were developed with pragmatism, vision, and private sector inputs – must be brought back to the fore and implemented. These are all things the government can pay attention to – since these areas are – unlike some of the more contentious ones mentioned earlier – unlikely to have any opposition. These can deliver early results, and have early impacts on increasing trade and exports.
The full remarks, and the follow-on panel discussion, can be viewed at the LSE South Asia Centre’s Youtube channel