Presidential aspirants and voters: Read IPS’s SOE 2019 before you make your next move

Election manifestos versus State of the Economy Report 2019

The four leading presidential aspirants have presented their manifestos to voters in a bid to lure their votes at the forthcoming Presidential Election. These manifestos contain, among others, a brief outline of the economic policy package which they wish to implement should they be elected. Voters are supposed to peruse, analyse and critically review them in the light of the prevailing economic conditions and Sri Lanka’s long-term economic goals before they choose a candidate.  

It seems that the process of choosing the appropriate economic policy by presidential aspirants and reviewing the same by voters would get impeded if they have not mastered the State of the Economy Report for 2019 or SOE-2019 just released by the country’s semi-government think-tank, the Institute of Policy Studies, commonly known as IPS.

This year’s SOE, having presented an impartial and objective review of the present state of the economy and prospects for the next few years should the current policy is continued, has themed itself on how Sri Lanka should get integrated to the ongoing global process of moving into the Fourth Industrial Revolution, code named Industry 4.0 or 4IR.

IPS, the independent think-tank

IPS was established in 1989 as an independent think-tank to review and recommend appropriate economic policies which Sri Lanka should adopt to deliver prosperity to its people. Every year it publishes a special report critically reviewing the state of Sri Lanka’s economy well before the end of the year. This report is current compared to the traditional Annual Report submitted by the Central Bank about four months after the end of the year. 

Since the first SOE published in 1992, it has been a regular annual feature for IPS to release this report. Each report has been prepared focusing on a special theme which is relevant to Sri Lanka in the year under consideration. SOE 2019 has focused on the theme of how Sri Lanka should transform its economy to become an active partner of the ongoing Fourth Industrial Revolution or in short 4IR.

From First Industrial Revolution to Fourth Industrial Revolution 

In the last 400 years, the world had gone through several phases of distinctive economic changes relating to industry, known as industrial revolutions. The first industrial revolution that occurred some 200 years ago was responsible for taking work partly away from humans by using machines that had been powered by steam engines. 

This was followed by the second industrial revolution that took place some 100 years ago when the production was further facilitated by taming electricity for human use. The third industrial revolution occurred some 50 years ago when the world’s production systems began to depend on electronics and information and communication technologies or ICT.  

Though the country has moved up from a lower middle income country to a higher middle income country, its worth has been diminished by the vast income gaps among the people. Unemployment is low – virtually employment is at the full employment level – but the slow growth of the labour force has put impediments for the country to use labour as a resource for growth. If the presidential aspirants are interested in coming up with a viable economic policy program, they should be mindful of the present economic ailments faced by the country

Taking the ICT revolution forward, the Fourth Industrial Revolution is now shocking the world economy with new inventions like artificial intelligence or AI, machine learning, advanced internet usage dubbed as Internet of Things or IoT, nanotechnology, gene coding and editing and algorithmic inventions like the blockchain. 

The credit for the term – the Fourth Industrial Revolution – goes to the convenor of the Davos based World Economic Forum, Claus Schwab who coined the term in a book published in 2015 under the same title. With 4IR, the world is now divided into two groups, one moving along in 4IR and the other lagging behind it. 

Sri Lanka which is still in the Second Industrial Revolution or 2IR has to make a quantum leap in order to join 4IR. SOE 2019 has outlined how it should be done in detail. Those presidential aspirants who have vowed to take Sri Lankans to prosperity should necessarily use it as their guidebook. 

Current pathetic state of the economy 

SOE 2019 has made an objective, impassioned and critical analysis of the state of Sri Lanka’s economy today. Take any macroeconomic standard and look at the economy from its perspective, you will find that the economy is ailing. Economic growth has been slowing and below the economy’s potential growth. The budget is imprudent and unmanageable. Public debt, especially the external debt, has been ballooning. Debt servicing could be done only with further borrowing. Export performance had been below what it should be. 

Foreign Direct Investments or FDIs have been into non-tradables – sectors that would not generate a flow of foreign exchange by exporting their products – so that they would not help the country to overcome its external debt repayment issues. The mounting gap in the foreign exchange receipts and payments leading to balance of payments difficulties has put pressure on the exchange rate to depreciate in the market. The stock of foreign assets which is the cushion of the country to meet its foreign exchange liabilities has been built out of borrowed funds.  Though the country has moved up from a lower middle income country to a higher middle income country, its worth has been diminished by the vast income gaps among the people. Unemployment is low – virtually employment is at the full employment level – but the slow growth of the labour force has put impediments for the country to use labour as a resource for growth. If the presidential aspirants are interested in coming up with a viable economic policy program, they should be mindful of the present economic ailments faced by the country.

The sick economy since 2012

These economic ailments had been present in the country since around 2012. However, in the recent past, the policy authorities had failed to arrest the declining situation and reverse the trend. Three reasons can be adduced to this sad state. 

Bad economic management of the Yahapalana Government

One relates to the failure in the economic management. SOE 2019 has drawn the attention to the two types of conflicting policy management that had been put into practice. In the initial period, it was the Cabinet Committee on Economic Management or CCEM under the chairmanship of the Prime Minister that was responsible for economic policy making. But later, this was abolished by the President and in its place, another body called the National Economic Council or NEC was set up under the chairmanship of the President. 

There has been a general tendency to blame the foreign debt overhang for all the economic ills being faced by Sri Lanka. SOE 2019 has diagnosed that the country’s problems are much more complex than this. The more complex problem faced by the country is the continuous sluggish economic growth which has adversely affected all other areas, including the debt overhang. 

To come out of the sluggish growth, Sri Lanka should change its production structure from producing basically for the domestic market – called non-tradables – to a system which would produce for the rest of the world – called tradables. In the past two decades, the production of tradables consisting of the export of goods and services had been below what it should be. Hence, the economic growth had slumped to the lowest level possible. But to produce more tradables, Sri Lanka should adopt science and technology to the maximum

SOE 2019 has made the following comment on this: “That relations between the leaders of the national unity government were strained which came as no surprise to the Sri Lankan public. It was well-known that cracks had begun to deepen following a poor showing at local government polls in February 2018. Three years of economic underachievement was partly to blame”. As a result, CCEM was replaced by NEC to take the country forward. However, as SOE 2019 has remarked: “The change had little or no impact in determining economic performance”. 

This is not surprising because NEC which was supposed to come up with a viable national economic plan was mainly involved in immediate fire-fighting issues of microeconomic type such as whether the fertiliser subsidy should be given in cash or in kind. Thus, economic conditions continued to deteriorate without a central direction. 

The man-made constitutional crisis

The second was the political turmoil created by the President on 26 October 2018 by sacking the serving Prime Minister and appointing the former President in his place. Though it was settled after 53 days, the confusion and uncertainty it created hit the already ailing economy in a number of ways. 

It adversely affected the budgetary consolidation program that had been started by the Ministry of Finance. Foreign investors who had invested in Sri Lanka Government Treasury bonds and bills started pulling out their investments exerting pressure on the exchange rate to further depreciate. The planned foreign direct investment program was halted and investors began a wait and see approach to investments. Without a government at the centre, public service became paralysed. The result was the reversal of the economic recovery program that had been started a year before.

Easter Day bomb explosions

The third occurred in April 2019 when an extremist Islamic group exploded bombs in leading churches and five-star hotels causing a massive destruction on one side and sending panic waves in the minds of almost all the citizens of the country. Though its impact could be seen in almost all sectors in the country, the biggest casualty happened to be the hospitality sector. Many foreign tourists who had earlier signed up for visiting the country had either cancelled the trip or postponed to a future date. 

SOE 2019 makes the following comment on this sad incident: “As expected, the sharp downturn in tourist arrivals has had economy-wide spill-over effects, impacting the livelihoods of those closely engaged in ancillary activities, such as handicrafts, home-stays, etc. These micro and small enterprises operate in the informal economy without adequate safety nets to absorb unanticipated shocks. The economic disruption has also had more unfortunate consequences in fracturing ethnic relations and impacting small Muslim-owned businesses in countless ways. In all this, foreign investors who may have already adopted a cautious wait-and-see stance in the run up to elections are also more likely to firm up decisions to delay investments until security risks are reassessed – i.e., whether it is perceived as an isolated incident or an endemic threat”.

A serious warning by IPS

This is a serious warning given by the country’s independent think-tank – IPS – that the presidential aspirants should in no way arouse or contribute to such ethnic discords in order to win the elections. Though they may be successful in intoxicating gullible voters with ethnic hatred and use it to come to power, that power would be temporary and in the long run they themselves would be the losers along with the citizens of the country. 

This has been the experience of Sri Lanka ever since it gained independence and it is now time to put a stop to it. In other words, Sri Lanka should now move away from ‘think-short’ strategies and go for ‘think-long’ strategies. SOE 2019 is a treatise of such strategies which the presidential aspirants could adopt if they are interested in attaining long-term prosperity for the people.

A debt problem exacerbated by a slow growth in exports

There has been a general tendency to blame the foreign debt overhang for all the economic ills being faced by Sri Lanka. SOE 2019 has diagnosed that the country’s problems are much more complex than this. The more complex problem faced by the country is the continuous sluggish economic growth which has adversely affected all other areas, including the debt overhang. 

To come out of the sluggish growth, Sri Lanka should change its production structure from producing basically for the domestic market – called non-tradables – to a system which would produce for the rest of the world – called tradables. In the past two decades, the production of tradables consisting of the export of goods and services had been below what it should be. Hence, the economic growth had slumped to the lowest level possible. But to produce more tradables, Sri Lanka should adopt science and technology to the maximum.

Export or perish 

This is where Sri Lanka’s future growth strategy lies as opined by SOE 2019. Says SOE 2019: “Tradable sector growth – and the prospect of higher foreign currency earnings – is all the more important for Sri Lanka to comfortably manage its foreign debt repayment obligations. During 2019-2022 alone, an average of US $ 4 billion per annum is already committed for debt repayments. It does not stop there; the repayments keep piling on even afterwards, especially from 2025 onwards once again”. What this means is that the country’s problems are not limited only to a single year or a couple of years. 

It is a lingering issue necessitating long-term solutions by way of ‘think-long strategies’. Such strategies are much more important today since the world had started moving into a new industrial revolution called the Fourth Industrial Revolution or 4IR. Though Sri Lanka is a member of the upper middle income country group, it is still in the phase of the second industrial revolution that uses largely traditional machinery in agriculture, industry and services. Therefore, Sri Lanka has to make a quantum leap onto 4IR bypassing the third industrial revolution or 3IR. Already peer countries like Thailand and Vietnam have prepared roadmaps to elevate their economies from 3IR to 4IR. 

Don’t ignore the call of Industry 4.0

In this context, SOE 2019 makes the following remark: “It can be argued that Sri Lanka is yet to even come to terms with technologies of the third industrial revolution – electronics and information technology – leave alone those of 4IR. The reality though is the pace of change, or the quantum leap of technology from one revolution to another is so swift, that countries can no longer be complacent”. What this means is that the world is waking up every morning with news of ‘next big thing’ hitting the market. A sleeper will find himself being overtaken by all others who are continuously awake and vigilant on the developments in new technologies. 

Thus, the advice to the presidential aspirants is clear: get into a sleep mode, rouse ethnic hatred among citizens to capture power and perish in the process. 

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)