As the days tick down for the Presidential Election, there is one aspect of Sri Lanka that will need to be handled with clarity by the next president, irrespective of what his party or hue may be – the economy. Sri Lanka has been struggling with low growth for a number of years, which requires tough reforms that will have to be carried out in the midst of a global slowdown, stronger trade tensions and high debt repayments.
As outlined by the Central Bank Governor Dr. Indrajit Coomaraswamy earlier this month, whichever presidential candidate wins the day on 16 November, the path to economic resurgence for Sri Lanka remains the same. Sri Lanka will have to follow a strategy that will make the economy more competitive to attract investment and increase exports.
It will need to maintain strong macroeconomic fundamentals and avoid deeply shattering political developments, such as the constitutional crisis seen in late 2018 which resulted in a ratings downgrade, because the country will have to return to international capital markets multiple times to raise a minimum of $3 billion each year to repay outstanding debt.
This debt is likely to continue till about 2023 and after a break of a couple of years, Sri Lanka will once again face hefty repayments. Sri Lanka simply cannot afford to have ‘quick fix’ measures by playing with fiscal and monetary policy rates or repeated political crises because then borrowings will become even more expensive.
Another point for the new president will be managing the exchange rate. From the second half of 2011 up to 11 February 2012, the Government spent $ 4.5 billion trying to defend the exchange rate and ended up depreciating by 13% anyway. The same happened when in 2015 when $2 billion reserves were spent to try to defend the currency but the rupee ended up depreciating 10%. Sri Lanka cannot afford to have these lessons repeated.
The World Bank expects Sri Lanka’s economic growth to decelerate to 2.7% by the end of this year from an earlier forecast of 3.5% in June amid security challenges and political uncertainty. During the second quarter of this year, the economy grew by 1.6%, the slowest pace in more than five years.
The medium-term outlook is subject to the country’s ability to ensure political stability and a return to normalcy. The Central Bank has a somewhat rosier prediction of 3% but has admitted that dampened investor sentiment is unlikely to change until about March 2020 when the Presidential and Parliamentary Election cycle is expected to wind down.
The report calls on the Government to remain focused on (a) continuing fiscal consolidation by broadening the tax base and aligning spending with priorities; (b) shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (c) improving governance and SOE performance; (d) addressing the impact of an aging workforce by increasing labour force participation, encouraging longer working lives, and investing in skills to improve productivity; and (e) mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending.
One can argue that this is the only roadmap that matters, and it is this that will provide the biggest challenge to the next president. The public have shown the economy matters, and the success of the next president is indubitably tied to his ability to deliver growth.