Christmas wishes

The Season is upon us and people are hoping that the wishes for peace and prosperity will actually come true in the New Year. For Sri Lanka the pandemic came with additional challenges, which has battered its sovereign ratings and made achieving strong growth an absolute essential in 2021.

For the Government there will be three major focus points post-Christmas. The number one responsibility will be keeping COVID-19 numbers down, enforcing social distancing and health guidelines and getting as early as possible access to a vaccine. The second challenge, closely linked to the first, is to ensure that ethnic divisions that have arisen due to Government policies followed over COVID-19 do not spin out of control and deepen inter-community disharmony.

Perhaps the biggest challenge of all will be fostering growth. In this the Government is also most likely to succeed given the pro-business policies outlined in the Budget and repeated pledges to aggressively implement them in 2021. However, the New Year will also bring debt repayment challenges that the Government will have to face as well as implementing long overdue reforms to put the country on a sustainable growth path.

Part of the reform process will also be the need for the Government to not take a bull-in-a-China-shop approach to institutions and understand that once independent institutions are rolled back the damage can last beyond the term of one Government, sometimes even into decades.

For now, the Government has set its sights on achieving 5.5% growth and this will be its major goal once the holiday season is over. 

The achievement of this projected medium-term macroeconomic path is contingent upon implementing the identified reforms in the period ahead. Along with the establishment of a stable Government, the COVID-19 outbreak has created an opportunity to review macroeconomic policies and set appropriate policy priorities and long-term development goals for the country.

The Government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation, according to the Central Bank. However, the maintenance of quality standards of domestically-produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long term. This is imperative to boosting Sri Lanka’s competitiveness because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports.  

Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector. If Sri Lanka is to achieve the high growth predicted in 2021 it has to have improved access to international markets, so trade negotiations with existing and new partner economies must continue.

The current economic challenges before Sri Lanka make the Budget for 2021 of extreme importance. As the major policy document of the Government, it will be a catalyst for achieving the rose-tinted projections of the Central Bank and Sri Lanka’s prospects in weathering the external challenges looming next year. The Government will also have to keep an eye on exchange rates and balance its import restrictions so that Sri Lanka retains the potential to link to international value chains. Taking too strong a blinkered view could have a lasting impact.