“Serious reform for better economic prospects” | Sunday Observer

“Serious reform for better economic prospects”

9 January, 2022

As the country moves on to a new year with renewed hope for better tomorrows, we are inevitably faced with financial challenges right at the beginning of 2022. However, the picture is not as dire as some make it sound, if stringent measures are in place for economic reform.

Chief Operations Officer of Advocata Institute and Economic Analyst Dhananath Fernando said that reform is the only way out when addressing the economic challenges and that the Budget 2022 shows some positive signs of steering the country’s economy towards the right direction.

Chief Operations Officer of Advocata Institute and Economic Analyst Dhananath Fernando

Speaking to the Sunday Observer, he highlighted key reform areas and opined on ways to minimise the impact of reform on the poorer sections of society. With tourism picking up in December and signs of certain reforms taking place, Fernando said Sri Lanka would feel changes for the better within a few years if all reforms are successfully adopted.

Following are excerpts of the interview

Q: What is the outlook for 2022 with regard to the economic challenges the country is facing?

A: We have to look at the economic challenges of 2022 from multiple aspects. One is that Sri Lanka and many other countries are recovering from Covid-19. Most countries have moved forward from the pandemic with the vaccination drive. Sri Lanka has also done well on the vaccination front. Globally, the economies are picking up.

In this context, there is a higher demand for essential commodities. Sri Lanka will have a challenging situation because most of our essentials, such as fossil fuel, LP gas, some food items and intermediary goods are imported. This is the challenge we see for the next year as we have a dollar shortage in the market.

However, the positive aspect is that Sri Lanka’s tourism is picking up. The numbers have shown some positive indication in December. So, hopefully this will continue.

If the dollar shortage continues, the public will have to experience an uncomfortable situation. The economic processes will slow down. The Trade Minister said there are about 1,500 containers at the port unable to be released due to the dollar shortage. Likewise, when such things get delayed, people will experience some difficulties. At one point, we might have to depreciate the rupee which will increase the prices as most imported items are priced in dollars. So, when our rupee depreciates, the prices will inevitably go up.

Q: How do we address the challenges?

A: Any economic crisis in a country would bring about opportunities for reform. So, Sri Lanka should also capitalise on the opportunities. Our fundamental economic pillars were not properly aligned for the Past 40 – 50 years. We were not adopting the correct strategies but rather tinkering the problem. We were living on borrowed money. Now, we need to restructure our economy and make it more sustainable. This is not complicated. Basically, we have to get a higher output with a lesser input. Our structure was the other way round; higher input with a lower output. We have to change this and now is the time to do it. Of course, for the people, this would be a painful experience in the beginning. But in a situation like this, the people will have to be somewhat open-minded to tolerate it.

Our government is too big. It is unbearable for a country such as ours with 1.5 or 1.6 million public servants. The government service structure mainly comprises the low income earning category mostly filled by politicians. We know that with any bottom-heavy structure, it is difficult for companies to run. With overtime being accumulated, it is a huge cost for the government. Definitely, our public sector needs to restructure. This was indicated in the Budget 2022 too.

We also have to reconsider some of the businesses that the government is engaged in. The airline, Sathosa and transportation need to be rethought. The government may be able to keep a footprint, but I don’t think this is the way to go in the long-run. Some government institutes are making huge losses, eating up the allocations of government welfare institutes. Therefore, the government has to reprioritise their operations. This challenging economic situation is an opportunity for the government to rationalise reforms.

There are many discussions on this; whether to go to the IMF or survive with China, India, or US. Managing the geopolitical side is crucial for the government. But whoever we are going with, economic reforms is a must. We cannot survive without structural changes.

Q: What are the key reform areas to address economic challenges?

A: We have to prioritise reforms. When we start reforms, however, it will be felt across the society. Those with low incomes will have the hardest impact. Therefore, the first reform should be a proper cash transfer system for poor people to survive.

We need a currency that reflects the real value of the market, which means, we have to depreciate the rupee. This will inevitably result in price hikes. As such, the poor people will suffer the most. Therefore, the government needs a cash transfer system for them to be able to have access to essential commodities. Even this should be on a market pricing system.

For example, when the global fuel prices fluctuate, we have to accommodate to it. People need to adjust their lifestyles based on this. We need to change consumption patterns based on the prices. This applies to both the rich and poor. So far, this has not happened as the government has kept the prices as flat as possible, which does not reflect the resource allocation.

The other reform is to cut down on government expenditure. Restructuring the government sector is crucial. They also need to carry out a deregulation program. For example, Port City Colombo is set up as an independent administrative zone for economic activities for ease of doing business and investment. This is not the same in other parts of the country. People have to go from pillar to post to get a small thing done. With economic difficulties, people will start looking for more income options. Therefore, deregulation is vital to ease the processes and remove barriers for the people to export.

The Central Bank too needs to undergo serious reform. They need to rethink monetary policies to maintain the value of the money or the purchasing power. The inflation is about 11 percent now. They need to rethink the money printing cycle while some independence needs to be brought back to the Central Bank for strict revisions. Without a proper monetary policy, the crisis would explode. The poor people will suffer the most due to inflation, cutting down even their food consumption, education and healthcare.

We need to have a serious plan for debt repayment. We might have to think of a debt restructuring option similar to Greece, Argentina and Ecuador, which would be a painful process. We need to pay about USD 7.2 billion next year. The government has announced that we have USD 3.1 billion dollars. The debt we have is not only the sovereign bond. We have to settle bilateral loans. Even the private sector and some state-owned enterprises have taken dollar loans. But they are unable to pay because the Central Bank do not have enough dollars.

The private sector which conducts a lot of business will face challenges resulting in winding up operations or downscaling, which in turn will impact on unemployment. Therefore, we need strict guidelines to ensure that the value of our money is secured.

It will be a painful period, to be honest, but we need to get the reforms done. The worst case scenario would be the continuation of the crisis without getting the reforms done. The situation is inevitable as we have been in the crisis for the past 30-40 years. Sri Lanka had to face many events that took a toll on the economy, such as the riots in the 70s, the 30-year battle against terrorism, the Central Bank bond scam, droughts, constitutional crisis, Easter attacks and Covid-19. Our economic growth was better soon after the battle against terrorism but the situation worsened after 2013-2014 hitting negative lines. Now it has come to a boiling point. So, now’s the time for stringent measures.

Q: Assuming that all reforms were adopted and economic policies were steered towards the right path, how long would it take for Sri Lanka to come out of the financial challenges?

A: The general economic norm is that it takes about 10 years to bounce back from an economic crisis if we do well. But the people will start realising that we are moving in the right direction after 3-4 years. Once reforms are in place, there will be more opportunities for people to grow their businesses and become employable. Generally, with an economic crisis, social issues can erupt due to unemployment and frustration. This is where we have to be careful and pay attention to.

Although 10 years is a long time, at least in a few years we will feel the changes, like Bangladesh. Even though it is not a developed nation, Bangladesh is catching up quite fast. Surviving the first 2-3 years would be the difficult part, but in life, there are periods we need to navigate through to come out of the tunnel.

Q: Do you think Budget 2022 has addressed the challenges and the economy is steering in the right direction?

A: There certainly were positives in the Budget. The Finance Minister clearly said the government will not spend on any recurrent expenditure for state-owned enterprises and only approving the capital expenditure and that they will have to find their own sources. This is a positive sign. He also said they will divert from some state entities and will consider the private sector.

The private sector will need to play a bigger role even with regard to land. Eighty percent of Sri Lanka’s land is owned by the government. But I believe that when you give land to the people, they will develop for economic benefits, which will boost the economy. The Finance Minister indicated this which is a positive development.

On the other hand, I see negatives with plans to recruit a large number for the government sector this year. I understand that the government can’t always give the bad news. But theywill have to manage this properly. I also see they have taken steps to extend the retirement age to sustain the pension funds, for example, which is a positive measure.

The Finance Minister has correctly identified the challenges but now it’s time to get the act together.