Sri Lanka is at a crucial stage where we need to find pragmatic solutions to overcome the economic challenges heightened due to the pandemic. Many economic analysts agree that the issues we currently face are not only due to the pandemic, but accumulated problems over the decades which were not properly addressed with strategic economic planning.
To discuss Sri Lanka’s economic trajectory and its focus areas, the World Bank in partnership with NextGenSL recently organised a panel discussion titled ‘Sri Lanka Growth Strategy 2022’ drawing eminent speakers from Sri Lanka and the World Bank.
More potential
World Bank Chief Economist for the South Asia Region Hans Timmer said diverse ideas are crucial under the circumstances so that policymakers can hear them and start using similar language. He highlighted the need for a broad based dialogue and structural changes to navigate economic challenges, adding that he sees more opportunities for Sri Lanka than other countries in the region, to emerge much stronger out of the crisis.
“Right lessons need to be learnt and new potential unleashed in the informal sector and new services. Sri Lanka’s young people are key to future success,” he said.
He added that new developments in digital technology with more access to markets have a huge potential that wasn’t there before. In the new service economy, the role of services are dramatically changing, taking over the key element of manufacturing in the economy. “Services are now tradable all over the world. This is a big opportunity for Sri Lanka,” Timmer said.
He said Sri Lanka already has a comparative advantage in services and its share of GDP is larger than other countries in the region. “Sri Lanka has the highest share of service workers in manufacturing. Female labour participation is very high; twice as high than in the region,” he said. However, the potential needs to be unleashed with better management and strategies, opening up for foreign competition in services.
Long-term
Timmer said while the economy was hard hit with compression in many sectors such as tourism, apparels and manufacturing, it also saw a surge in the IT sector, financial services and telecom.
In navigating the responses to income disparity that emerged as a result, Timmer said he saw a huge increase in social protection and credit supply in Sri Lanka which was difficult to sustain, adding that short term interventions should be firmly grounded in long-term strategies.
Therefore, the guiding principles should be to focus on long term sustainability, equity, and adjusting to new demands.
Hasitha Premaratne, Group Finance Director of Brandix, emphasised the need for an investor-friendly environment in Sri Lanka to attract foreign investments.
Since export-related growth is a priority in 2022, much encouragement is needed in this area and key growth sectors need to be identified.
“Investment arranging mechanisms need to be strengthened and policies conducive for investors need to be brought in,” he said.
Economist Dr. Roshan Perera gave an overview of the current economic situation and conditions that lead to it.
“Most of post-Independence, we have been running into debt. Our crisis has taken place over time. Fiscal dominance has been the root cause for our macro-economic instability,” she said.
Pitfalls
Dr. Perera added that continuous deficit is possible if lenders continue to fund the deficits. This has been possible in other countries, but not suited for Sri Lanka. Continuous deficit will undermine the confidence of lenders overtime, she said, adding that Sri Lanka also lost access to concessional borrowings and moved onto commercial terms at high interest rates with the elevation as a middle income country. Sri Lanka had further pitfalls, according to Dr. Perera, since projects were not revenue generating and Sri Lanka lost access financial markets in 2020. She said Sri Lanka urgently needs to focus on the debt issue and address the root causes.
R. Theagarajah, former Chairman of the Chamber of Commerce, painted a dire picture of Sri Lanka’s debt crisis, pointing out the large foreign debt repayment the country has in the next few years.
“We have US$ 6-7 billion external debt payable this year. In the next four years to 2025, the average annual foreign debt repayment is in the range of US$ 4.5 billion,” he said.
In the midst of this, the key catalyst of national revenue which is remittance from foreign employment showed a consistent decline. Although tourism seems to be picking up and exports show encouraging rebounds, importation is more. The widening gap predicts more difficulties in sourcing the payment, he said.
Low-hanging fruits
Therefore, the need of the hour is for those in key sectors such as tourism, to rise to the occasion, and go beyond price-based value creation to attract tourists while balancing imports and exports.
“Agriculture is also an opportunity. Wherever possible, we need to look at sourcing locally,” he said.
Theagarajah added that even in the ICT sector, in which Sri Lanka is blessed with talent, we need arise beyond the spectrum of ICT value creation and go to advanced value-added ICT solutions such as analytics and Artificial Intelligence (AI). He also highlighted the need to tap into blue-green investor groups, to take advantage of the ocean surrounding our island. “It’s a low hanging fruit we can explore,” he said.
People’s Leasing and Finance CEO Shamindra Marcelline, joining the discussion, said as much as there are challenges, we now need to adapt to the new norm. “I see it as an opportunity for the country to come together and structurally reform. Reduction of wastage is also key to overcoming challenges.”
Trimmer agreed that this should be a collective effort and said increasing exports should be the focus, providing small firms with access to finance and markets.
World Bank Country Director for Maldives, Nepal and Sri Lanka, Faris Hadad-Zervos said it is important to look at the whole eco system that exporters face and study the constraints. However, he emphasised that in so far as Sri Lanka aspires towards export orientation, the name of the game is competitiveness and it should not be feared.
New policies
Brandix Group Finance Director Premaratne also gave an overview of policies that need to be adopted in moving ahead, highlighting the digital revolution that came with Covid-19.
“We all went to the digital mode which is a positive outcome of the pandemic. This has to come as a government priority in policy and continues in a sustainable way. Then the industries will embrace this, especially the SME sector. All sectors need to be connected, thereafter,” he said.
He added that industrial parks in the country need to be expanded with the involvement of the private sector. For this, government-owned lands can be cleared to make way for the private sector.
Premaratne said, “Industrial parks need not only be manufacturing but should involve other things such as tourism and value additions, and end-to-end connectivity to attract investments and provide easy access to them with infrastructure. We lack this in the country at the moment. Strategic involvement of the private sector is crucial and the Government needs to support them with infrastructure.”
Public service
Marcelline gave another perspective to growth in the potential that the public sector possesses, even more than the popular notion that the private sector carries the bigger burden. He elaborated on how it can be an engine of growth by increasing efficiency in key sectors such as aviation, port, education and health.
While it is important to reverse investor sentiment, Economist Dr. Perera touched on the tax regime, explaining that the tax administration should be strengthened. At present, she said, tax exemptions don’t have a good rationale. “We need to build fiscal space by raising taxes and reducing expenditure,” she said.
Regarding the argument that Sri Lanka needs to seek IMF solutions, Dr. Perera disagreed, saying that IMF-designed solutions for economic challenges wouldn’t be too different to that of Sri Lankan-designed solutions. “Sri Lankan economists know what needs to be done, but we need to have an agreed reform program,” she said.
The overall sentiments at the discussion were that Sri Lanka’s potential needs to be unleashed with strategic planning and broad consensus, providing an investor-friendly environment while supporting the private sector with infrastructure to bring in foreign revenue. With the proper policies in place and a smooth implementation mechanism, the panellists agreed that Sri Lanka would overcome the economic challenges heightened by the Covid-19 pandemic.