What should Sri Lanka do in 2021 and beyond?

The pandemic has posed unprecedented challenges to the world and to Sri Lanka. Further, the country has to repay foreign debt of around $ 4 billion per year until 2025. The repayments thereafter will be determined by new borrowings and rollover of the current debt. 

Sri Lanka has to balance fiscal consolidation with the need to grow faster while at the same time ensuring that the rupee does not depreciate drastically. Can all these objectives be achieved at the same time amidst the challenges posed by COVID-19? 

With regard to fiscal consolidation, the Government will have to concentrate on cutting down wasteful expenditure while taking measures to boost its revenue. The next section deals with cutting down wasteful expenditure. 

Cutting down wasteful expenditure

There are many unnecessary and low quality imports that flow into the country. The Government can take steps to ban such imports while encouraging the domestic producers to come up with better quality alternatives. By doing these things the Government will be able to save valuable foreign exchange while nurturing a domestic entrepreneurial class. 

The Government should seriously review its spending options and cut down wasteful expenditure. Are we going to build more conference halls and theatres or are we going to spend money on developing our human resources? Similarly adding more and more kilometres of roads will be pointless without commensurate efforts aimed at achieving effective and efficient public transport. Cutting down wasteful expenditure is only one side of the coin. The other side of the coin is boosting revenue. The next section explores this aspect. 

Smart ID as an interim solution which will eventually pave the way for electronic ID

The Government should try and boost its revenue by taking steps to broaden its taxable base. There should be a TIN (Taxpayer Identification Number) for all citizens and everyone should pay taxes in a progressive manner, i.e. those earning higher incomes should pay more as tax while those earning lesser incomes should pay less as tax. Smart Identity cards should be issued to all eligible citizens and this ID should incorporate the TIN number and other relevant details pertaining to each individual. 

All relevant information with regard to an individual should be computerised and available at a central location, and the Inland Revenue Department (IRD) and other relevant agencies such as the DCS (Department of Census and Statistics) should have access to such information. This centrally stored information can be classified under each TIN number or Smart ID number. Similar systems are adopted by developed countries to track information about their citizens. By adopting these systems no individual will be able to evade taxes. However, issuing smart IDs is only an interim solution. The ultimate solution would be issuing electronic IDs which will have to be renewed every 10 years or so. 

Tackling COVID-19

The World Health Organisation (WHO) urged the world in March 2020 to test, test, and test. A team of Sri Lankan researches led by Dr. Ravi Rannan-Eliya has conducted a research and they have found out that ‘testing’ is the most important thing to do in controlling the pandemic. In Dr. Rannan Eliya’s own words, “We knew that several countries in our region, such as China, Vietnam and Australia, were doing well (in terms of controlling the pandemic), but the experts never agreed on why—whether it was to do with masks, lockdowns or something else. Our research clearly shows that their better performance was driven by higher levels of PCR testing.” 

He further recommends, “We need to seriously invest in expanding national capacity to do PCR tests and make routine testing the new normal. The global data are clear – this is the best way to avoid lockdowns and school closures, and to protect our economy.” (Global kudos for Lankan researchers – December 4, 2020 – Daily FT). 

The above highlights the importance of testing in order to control the pandemic. We are aware that UK had recently started using the vaccine developed by Pfizer/BioNtech. Subsequently, USA, Canada, Singapore and Switzerland also started using it. Sri Lanka too should make every effort to procure a safe and tested vaccine for use by its citizens. 

Living with the pandemic

The pandemic will be there with us for some time and we need to learn to live with it while protecting ourselves as best as we can by adhering to the advice given to us by medical professionals. We have gone through tough times in this country during various eras and we shall overcome this crisis too. 

Opportunities within the crisis

While the negative aspects of the pandemic have been much-touted we need to bear in mind that any crisis brings with it opportunities too – ‘never let a crisis go waste’, they say. The pandemic has shown the opportunities that are available in the spheres of online activity and e-commerce. According to an article published in ‘The Economist’ magazine “COVID-19 has not just brought about the need for change, it also points to a way forward. That is partly because it has served as an engine of innovation. Under lockdown, e-commerce as a share of American retail sales increased as much in eight weeks as it had in the previous five years. As people worked from home, travel on the New York subway fell by over 90%. Almost overnight businesses…began to be run from spare rooms and kitchen tables – an experiment that would otherwise have taken years to unfold, if ever.” (The Economist, Dec. 19 2020 – Jan 1 2021) 

The pandemic has given us an opportunity to discard old ways of doing things and think of new ways of doing things. Are we giving adequate emphasis to developing our human resources? Are we promoting innovation? Now is the time to seriously think about these things. Improvement in real factors such as research and development (R&D), skill development, educational reforms, land/labour reforms, improving the delivery of services offered by the public sector, efficiency, competitiveness, technology infusion, knowledge inputs and institutions are the ones that will result in sustainable growth in the long-run. These are the factors that will have a greater bearing on GDP growth. Without an improvement in these real factors, we will not be able to realise sustainable growth. Monetary and fiscal stimuli will be meaningless without a commensurate improvement in these real factors. 

The way forward

Sri Lanka does not have the fiscal space to offer more and more welfare measures to its people. Rather than offering welfare-oriented measures, the Government should focus on job creation in the private sector. Jobs will be created in the private sector if there is a conducive environment for businesses to thrive. Therefore, it is the duty of the Government to create that investor/business friendly environment. Policy consistency too is vital for creating such an environment. In that context it is heartening to note that the Government has expressed its desire to maintain consistent policies. The recently presented budget proposals for 2021 demonstrate the Government’s desire for policy consistency. Further, the budget is comprehensively growth-oriented. 

The budget proposals are aimed at creating an investor-friendly environment. The Budget 2021 focuses on strengthening the 2021-2023 medium term program of poverty alleviation and economic revival as envisaged within the ‘Vistas of Prosperity and Splendour’, which is the policy framework of the Government of President Gotabaya Rajapaksa. The Budget for the year 2021 has been the first step towards achieving this medium-term strategy. Some of the key objectives of this medium-term strategy are as follows: 

Growth rate of 6% over the medium term (5.5% projected for 2021)

An annual inflation rate of around 5%

Reducing the budget deficit to 4% of GDP

Reducing the Government debt to 70% of GDP

The budget has provided incentives spanning many areas. Some of these areas are export industries, dairy, fabric, tourism, agricultural products, processing and information technology. Further there are proposals in relation to capital market development. Another very important proposal is the promotion of the Colombo and Hambantota ports as commodity trading hubs in international trading, and encouraging investments in bonded warehouses and warehouses related to offshore business by exempting such investments from all taxes. Further, a lower corporate income tax rate of 14% will be applicable for Exports, Tourism, Education, Medicare, Construction and Agro Processing. A slightly higher corporate income tax rate of 18% will be applied on manufacturing. Additionally, investments exceeding $ 10 million, in the areas of export industries, dairy, fabric, tourism, agricultural products, processing and information technology are to be provided with concessions up to a maximum of 10 years under the Strategic Development Act.

Switching over from foreign debt to domestic debt

The Government’s strategy is to move away from foreign debt to domestic debt. According to the Governor of the Central Bank of Sri Lanka (CBSL), “Public debt will be managed in such a way that the domestic to foreign component of debt will be changed from the present ratio of 55:45 to 60:40 in 2021. This and the stated policy of not pursuing foreign debt creating public investments will make government debt more manageable. Additionally, the commitment to reduce the budget deficit over the medium term to 4% by 2025 remains.” 

However, as pointed out by Prof. S. Colombage in a recent article, “Continuous increase in borrowings from the domestic market tends to raise interest rates causing difficulties in selling Treasury bills at lower rates”. Prof. Colombage further cautions, “Excessive reliance on the domestic market to finance fiscal deficits exerts considerable pressure on scarce domestic savings, thus pre-empting resources from the private sector.” (Daily FT – December 24, 2020)

Sri Lanka has significantly cut down its reliance on foreign debt to fund budgets, as the Government’s balance sheet showed a net repayment of such debt. According to data available up to September 2020, foreign financing of the budget has recorded a net repayment of Rs. 171.8 billion in rupee equivalent in the first nine months of 2020, compared to a net borrowing of Rs. 174 billion of foreign debt in rupee equivalent in the corresponding period in 2019. 

Moving away from debt financed projects to FDIs

It is important for Sri Lanka to move away from debt financed projects to FDIs. Several FDI projects are in the pipeline. Some of the major FDI projects are Shangdon Tyre – $ 300 million, CHEC/Browns Mixed development – $ 450 million, Chinese government’s commitment to PortCity Colombo – $ 1,000 million. These investments amount to a total of $ 1.75 billion. The Government is targeting an FDI figure of $ 2.5 billion for 2021. 

Conclusion

There are opportunities in any crisis. The present pandemic too offers us opportunities. It is important to make full use of these opportunities. The Government should put its fiscal house in order, i.e., cut down wasteful expenditure while boosting its revenue. The true fountains of growth are the real factors such as R&D, quality education, technology infusion, etc. This is a good time for the Government to work on these areas with a view to putting the country on a path of sustainable development. Attracting FDI will be a crucial aspect of Sri Lanka’s development drive. Therefore, the Government should strive to create a business/investment friendly environment that will attract FDI into the country.