Economic Growth and Competitiveness

Earlier this year, Sri Lanka’s census and statistics department released a new version of the country’s Gross Domestic Product (GDP) calculation. The existing National Accounts had been ‘rebased’ from the year 2010 to the year 2015. In explaining the re-basing, the department noted that “a number of improvements” to GDP compilation was done, the first item on the list was ‘Inclusion of generated value addition from the reclaimed land of Colombo Port city project’. It further went on to note that, “The GDP levels increased significantly over the period of 2015-2018 as a result of the[…] reclaimed land of Colombo port city project”, and “by the year 2019, the land reclamation had been completed and as a result […] the GDP growth rate was lower when compared to 2018”. The fact that the creation of an 269 hectare artificial land parcel attached to the capital, with sand extracted from nature, materially changed the country’s GDP base was startling. It triggered within us, again, a growing discontent we have felt for a while on how we think about economic growth and an unease with how we assess progress. For some years now, stemming from a love for the natural world, interest in biodiversity, and enthusiasm for photography, we had begun to think about critical issues with our current approach to economic growth. To be sure, neither of us are environmental scientists, ecologists, or experts on nature. But we realised that in our own professional worlds of economics and finance in Sri Lanka, there was little mainstream understanding of the threats faced by the natural world and their knock-on effects for our prosperity, health, and well-being. Particularly, there was little appreciation for the value of nature - for instance the emerging agenda of the valuation of natural capital.

Even though much of the recent foreign media coverage of Sri Lanka’s economic crisis and external commentary or analysis of it has focussed rather narrowly on the policy missteps in the last two years, the country’s economic problems have been at least a decade in the making. The debilitating economic collapse Sri Lanka is experiencing today is in no small part due to the flawed economic model followed in the years after the end of the civil war in 2009. This article serves to provide an international reader with a more useful reference point for the recent origins, evolution, and dimensions of Sri Lanka’s economic crisis, and selected perspectives on the policy issues and path ahead. It is written largely from an economics lens, and would need to be read alongside work by others that focuses more closely on human rights, the environment, and social justice issues.

While steady growth in exports was recorded in the year 2021, Sri Lanka’s deepening economic crisis runs the serious risk of impacting the export recovery achieved to date. In March 2022, merchandise exports, consisting largely of industrial and agricultural exports, recorded a decline of 3.4% in earnings, compared to the previous year, due to a reduction in both volume and prices of exports. In addition to this, industry representatives predict a decline of about 20% - 30% in total exports as a result of the current crisis, with tea exports being among the lowest it has been in 23 years, and the apparel sector expecting a 20% - 25% drop in output by August 2022. Latest figures for June indicate that apparel sector has exceeded expectations and pre-Covid export numbers. In the context of the economic crisis, escalating now to a de facto lockdown across the country, understanding the challenges posed to the country’s external sector performance, one of Sri Lanka’s main sources of foreign exchange, is crucial. At present, exports of goods and services, which account for 17.7% of GDP as of 2021, have been adversely affected by several factors including most significantly, the worsening fuel and energy crisis.

Sri Lanka has let public financial management slip dramatically over the last couple of decades, resulting in weak government finances and the lack of fiscal space to support the economy during times of economic downturns and distress. As the ongoing public protests have also shown, people have lost confidence in the ability of successive governments to effectively manage people's money collected via taxes. As an IMF programme agreement draws closer, tax increases and spending cuts have already been implemented, and ad hoc changes to public sector work (like cutting down the working week by 1 day, with no change in pay) are tried out, more sustained and urgent reforms to public finance remain unfinished. In this discussion, an international public financial management (PFM) expert - who has worked in Sri Lanka and in over 14 other countries around the world - shares some insights on the challenge of PFM reform, the imperatives in doing it, and the need to couple it with meaningful civil service reform.

Sri Lanka is in the throes of its worst economic crisis in post-independence history. While some reform areas have gained more traction than others (for instance, the debt restructuring), the critical state that the education sector is in has received relatively less attention; and this risks Sri Lanka’s future growth prospects. The government must strive to formulate a comprehensive action plan that is student-centric, in order to revive Sri Lanka’s education system and help students and teachers manage the current crisis. If the government does not address the concerns of its students, and provide immediate solutions to their needs, the country will not only see an entire generation of young people affected by lower educational attainment in crucial development years, but also experience a severe brain drain in the years ahead. While the country tackles macroeconomic stabilisation measures, it is vital to tackle the education crisis as well.

CSF Co-Founder Anushka Wijesinha was interviewed by Andrea Sanke of the leading Turkish global news channel TRT World, on their show 'Newsmakers' to talk about the ongoing economic crisis in Sri Lanka, along with history researcher Shamara Wettimuny, and activist Ruki Fernando. During the panel, he recalled one of the turning points for the economy - the irresponsible tax cuts that led to the ratings downgrades and locking out of international capital markets - and the cascading policy errors and the false bravado that followed. He argued that while the structural problems with the economy will take longer to resolve, the immediate macroeconomic stabilisation needs to take centre stage and the IMF programme will be the first baby steps towards that, and avoid a sovereign debt default.

Sri Lanka is facing unprecedented political turmoil, and with the economy in a tailspin it is in its weakest state in decades. The country is staring down the barrel of a sovereign debt default and is exposed to external shocks. As the country embarks on IMF bailout discussions, the main emerging risk facing Sri Lanka is the fallout of the current political instability on macroeconomic stabilisation efforts. Facing the prospect of a disorderly default, Sri Lankan officials have a decision to make — will they kow-tow to narrow political compulsions, or come together to agree on a common programme that steers the economy out of the current crisis and towards macroeconomic stability? Perhaps the current turmoil in parliament and the public’s growing recognition of the cause of the crisis will be what catalyses a political consensus for reform that has eluded Sri Lanka for so long.

For Sri Lankan youth entering the workforce over the next decade, there lies a critical window of opportunity to get equipped for jobs in the digital economy. Rapidly advancing the technical and soft skills training for the technology sector across the country is vital to avoid reinforcing and reproducing existing regional and gender disparities into the emerging digital economy. Sri Lanka needs to focus on enhancing technology access, usage, and literacy across the board, to help workers be better prepared for jobs in the technology sector.

Sri Lanka is on a renewed push to attract foreign direct investment (FDI) following a poor performance in the last decade, post-war. Fiscal incentives regimes have changed from time to time, laws and regulations have been introduced, investment promotions missions have been held in major capitals. Yet, attracting FDI remains a struggle, amidst heightened competition from regional competitor locations. In this interview, former Deloitte consultant Danindu Udalamaththa outlines some key areas for Sri Lanka to focus on and learn from. He draws from his experience advising global clients on the investor side, and argues that to attract good investment, Sri Lanka needs to design good incentives frameworks.

Like many countries in the region, SME development remains prominently on the policy agenda of successive Sri Lankan governments, development projects, and private sector support programmes over the years. Yet, a thriving, dynamic, and internationally-competitive SME sector remains elusive. Various schemes to address SMEs’ access to finance issues is a popular, and often dominant, part of most SME development initiatives. In this interview with finance and investment specialist Sharini Kulasinghe we explore some new perspectives on solving SME development challenges, going beyond the common wisdom.