‘Prudent policy to ensure debt repayment vital’ | Sunday Observer

‘Prudent policy to ensure debt repayment vital’

24 March, 2019
Executive Director, Lakshman Kadirgarmar Institute of International  Relations and Strategic Studies, Dr. Ganeshan Wignaraja
Executive Director, Lakshman Kadirgarmar Institute of International Relations and Strategic Studies, Dr. Ganeshan Wignaraja

Sri Lanka needs to have right economic decisions and actions on debt management as the country has a huge debt stock at present. However, it is still manageable and it is necessary to have a prudent policy to ensure repayment of debt is done in an effective manner, Executive Director, Lakshman Kadirgarmar Institute of International Relations and Strategic Studies, Dr. Ganeshan Wignaraja said.

“The country is faced with the challenge of increasing reserves to service debt repayment. It is important to maintain regularity in repayment and raise funds while taking action to increase exports and the number of tourist arrivals. When implementing infrastructure projects it is necessary to seriously look at the return on investment as we could not afford to invest in loss making projects any more,” he said at an interview with Observer Business.

Sri Lanka also needs to consider ways of increasing the employment of women, gradually restructuring state-owned enterprises to release unproductive labour and address issues relating to the quality of education, he said.


Q. With regard to export earnings, we are heavily dependent on a few goods such as apparel, IT and tea. What are the areas we should diversity successfully?

A. The development of exports in Sri Lanka was one of the successes of 1977 reforms. Manufacturing of textile and garments accounts for about 25 per cent of the total exports and the services sector exports are expanding.

Sri Lanka is gradually shifting more towards service-oriented sectors like IT, banking logistics and tourism. Outward professional migration such as managers and supervisors in the garment sector in Bangladesh will be increasingly important. However, we will manufacture certain things domestically, but much of country’s future growth will come from the services sector. Developing human capital will play a key role in service sector led growth.

Q. With regard to Sri Lanka’s debt burden, what initiatives should be taken to tackle the present situation?

A. Sri Lanka’s debt to GDP ratio is about 81 per cent at present. Historically, Sri Lanka has had a high debt to GDP ratio. What is different today is that 50 percent of this debt is in foreign currency and one third is maturing during the next five years. And our foreign exchange reserves are limited.

Prudent management of external debt is one of the critical macroeconomic issues facing Sri Lanka. The good news is that the IMF program back on track. The IMF program acts as a good economic management seal of approval for other foreign lenders. We also need to raise short term money through issuing international bonds, as the country has to settle US$ 4 billion per year in repayments of capital and interest during 2019-2022.

In future, Sri Lanka needs to be very careful of what infrastructure projects are undertaken as we cannot afford to do loss making projects which add to the debt burden and further increase the debt stock.

The country should look to build its reserves through increasing exports, attracting foreign investment and increasingly tourist arrivals. We need to reduce political uncertainty to and streamline red tape to ensure a stable and predictable business climate for private sector development.

The issue of high energy costs needs addressing through new investments in power generation capacity. It is also important to solve the labour market issue. Sri Lanka has reasonably good prospects and can certainly perform better. But we have to make difficult choices in a much more prudent and cautious manner to run Sri Lanka as a prosperous country. The debt problem is still manageable provided we take the right economic decisions.

Q. Can you elaborate on the key labour issues in Sri Lanka. What are the measures that need to be taken to solve this issue?

A. Sri Lanka has a paradoxical combination of a labour starved private sector, a bloated public sector, an ageing population and slow growth. Meanwhile, India like many other developing countries in Asia has surplus labour and a youthful population which contributes to rapid economic growth.

The population dependency ratio in Sri Lanka was 51 percent in 2015 which is set to rise to 53 per cent in 2025 while in India it will reduce from 52 percent in 2015 to 48 percent in 2025.

This means that a smaller number of working people in Sri Lanka will have to support a growing number of non-working people. The scarcity of labour is compounded by the fact that Sri Lanka has over one million tuk-tuk drivers who seem to prefer self-employment on low wages rather than work private sector activities like manufacturing or construction.

This is partly why wages are rising and some foreign labour is being imported particularly for construction projects. Sri Lanka also needs to consider ways of increasing the employment of women, gradually restructuring state-owned enterprises to release unproductive labour and address issues relating to the quality of education.

Sri Lanka appears to be an outlier in a typical Arthur Lewis model story of surplus labour moving from the low productivity rural sector to drive the expansion of a high productivity modern sector.

Sri Lanka has a paradoxical combination of slow growth (an annual average rate of 3.9% during 2016-2017) and labour scarcity (a low annual average unemployment rate of 4.3 % during 2016-2017). The co-existence of a bloated public sector alongside a labour starved private sector defines the modern sector.

While Sri Lanka’s growth is being shackled by adverse weather affecting the rural sector and rising oil prices, the labour market deserves special attention. The time seems ripe for a few, well implemented measures to increase labour market flexibility and boost growth. The private sector has to up its game too.

Four kinds of labour market issues merit serious discussion in Sri Lanka. First, the World Bank report rightly identifies raising female participation rates to increase labour supply amidst Sri Lanka’s transition to an ageing population. Japan is trying to increase female participation rates as a part of the so-called ‘Abenomics’ structural reforms.

A key lesson coming is that providing affordable child care such as subsidised nurseries in large private firms and community-run creches at village-level really encourages mothers to return to work.

The best Sri Lankan firms should unilaterally set the example and others are likely to follow. Another is ending harassment of women at the workplace and transport through a ‘#MeToo’ social media movement and compulsory workplace training in both the private and public sectors.

These measures are crucial outside the labour force. Colombo and in post-conflict areas where women headed households dominate the labour force.

Second, a missing issue in the World Bank report is the poor English language skills of workers which hampers labour productivity and the export of IT services. This meant that when wages rose in Bangalore global IT hub a decade ago, Indian firms did not come to neighboring Sri Lanka partly due to a scarcity of English speaking graduates and political uncertainty.

Instead, Indian IT firms went to the Philippines to set up shop. The language problem is compounded by a lack of competent English teachers in Sri Lanka. A radical solution from China is to import low cost competent English teachers from the Philippines on short-term work visas under a technical cooperation arrangement.

A similar scheme may be developed for bring in Chinese teachers given a growing Chinese investor presence in Sri Lanka and a dearth of Chinese speaking local workers and managers.

Q. What policy decisions need to be taken to enable the education system to match future needs, especially in the area of science and technology?

A. There is severe competition to enter the local universities but many of these graduates find it difficult to get jobs in the private sector. Unemployed graduates with the wrong skills means poor returns to expensive tertiary-level investment.

University curricula in science and technology areas should be updated to the needs of private sector.

We also need to make internships in the private sector a compulsory part of degree courses and improve university careers offices to international levels.

A system to charge a modest fee from the university students should be in place to encourage them to focus their minds more on studies than engaging in protests and holding placards on the roadsides. Shameless anti-social behaviour like ragging should be stopped through new laws and proper enforcement.

The skill mismatch of ample art graduates and employability in the private sector is discussed in the World Bank report. The default for graduates is low productivity public sector jobs. This is a poor return on costly tertiary-level educational investment and a source of social distress including youth insurrections in Southern Sri Lanka. South Korea and Singapore offer valuable insights.

As a part of recruitment efforts on university campuses, business in Sri Lanka should offer paid internships to provide a taste of a competitive work environment. Making holiday internships compulsory in degree courses and properly resourcing university careers services can help too.

Charging even modest fees for university education sharpens young minds on job market prospects. And it might reduce incentives for anti-social behaviour such as raging and unjustified student protests. One such example being the recent politically motivated protests in Colombo against the opening up of the state education sector to the entry of private medical providers.

Q. What would you suggest to ensure a future with less jobless graduates?

A. Sadly, the public sector has become the avenue to provide graduates with jobs through the chit system. The private sector is starved of labour. There should be a scheme to encourage unemployed youth to acquire skills that are needed and demanded by the labour market.

It is important to set up job centres and provide training to youth and encourage them to go for vocational training to enable them to secure jobs.

For instance, the country has a shortage of crane operators which hampers the development of sea ports and construction projects generally and good chefs which hinders high-end tourism. These are well paid jobs.

Proficiency in English and Chinese can help in finding jobs. China and Korea, for instance import low cost teachers from Philippines to educate their youth in language skills. We could hire English and Chinese speaking people on short term visas to teach our youth language skills. Encouragement is also necessary for our youth to go for vocational jobs. We have to get the labour market going.

The cost of a bloated public sector - accounting for some 17% of employment gets scant mention in the World Bank report. This has contributed to an unsustainable fiscal burden amidst a historically high debt to GDP ratio of about 77%.

The recent human resource reform to make heads of government entities responsible for paying salaries of excess employees is a useful step. A radical end game is more efficient public sector in Sri Lanka. The New Zealand example of creating the public sector offers insights.

The reforms included a national public-sector employment audit, a redundancy/retraining scheme, lateral entry from outside and introducing new technologies. Salaries were also raised for remaining civil servants providing incentives for improved productivity.

Decades of providing free education and health along with food subsidies gave Sri Lanka a reputation among developing countries for being a basic needs success story with ample supplies of cheap and literate labour.

This helped to attract export oriented foreign investment into the clothing industry and created around 900 000 jobs when Sri Lanka opened up in 1977. But the reputation of Sri Lankan labour may be at risk following a thirty-year civil conflict, alternative spending priorities and growing institutional imperfections. Combing labour market reforms with private sector action can help Sri Lanka to escape from the paradox of slow growth and labour scarcity.

Q. How do we create a STEM conscious generation?

A. We do not have enough science, technology, engineering and mathematics (STEM) graduates in Sri Lanka. We have few institutions that provide good quality STEM education such as the Moratuwa University.

We could increase STEM education numbers by considering joint education ventures. We need to scale up the supply side by allowing one or two private institutions to be set up to provide STEM education. We need to try to get the best domestic private model and tie-up with a foreign education institution.

This should be done carefully in consultation with stakeholders. It is also necessary to educate the youth on why STEM subjects are important. We need good STEM subject graduates to meet the demands of a growing financial sector and an IT sector which is expected to be set up at the Port City.

There is room for a good technical institution on this model as we need to produce sufficient numbers to meet the demand created by the Port City. Sri Lanka’s workforce needs to be geared to meet this labour challenge.

STEM subject graduates will be in high demand as many of the people working in large financial centres such as Singapore, Dubai and Mumbai are STEM graduates. There are also jobs for STEM graduates in export processing zones in Sri Lanka and the new Hambantota industrial zone.