New Year, old challenges

Sri Lankans have been making the most of the New Year celebrations, but wishes for fresh beginnings, which traditionally accompany a New Year, may fall short when it comes to the economy because Sri Lanka will continue to face similar challenges as to what has transpired before April. The most significant challenge remains the economy, for which there are no easy solutions.     

As the days tick down to May, the Government will be breathing a sigh of relief after the China Development Bank (CDB) gave the green light for $ 500 million to prop up reserves that had dwindled to a precarious $ 4.1 billion at the end of March. The much indeed forex injection will ensure that Sri Lanka will meet a $ 720 million debt repayment that is due in the first week of May and had the welcome side-effect of pulling Government bonds out of the doldrums.  

Sri Lankan bonds due to mature on 22 July climbed two cents to above 82 cents on the dollar having been as low as 65 cents early last month on worries that the island’s deteriorating finances could lead to a default. Government bonds are now some of the best performers in the world this year. They have an average total return of 16.1% year-to-date versus -3.6% for the widely followed EMBI-Global Diversified emerging market index.  

However, there are still concerns over how the Government will meet the $ 1 billion debt repayment in July. Moreover, the country will have to repay at average of $ 4 billion annually over the next four years. There is also the larger challenge of fostering economic growth to drag Sri Lanka out of the debt cycle it has been trapped in and position it to be globally competitive. Such reinvention requires serious reforms and so far there is little signs that those will be rolled out. 

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. 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 boost 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 must have improved access to international markets, so trade negotiations with existing and new partner economies must continue. 

Public revenue needs to grow to about 15% of GDP for Sri Lanka to sustainably fund education, healthcare, housing and other welfare support needed for as much as 40% of the population. Without taxes, there is simply no other revenue source to achieve this. 

Another tough but crucial step will be reforming State-Owned Enterprises (SOEs). The Government cannot keep funding its losses, but trimming the public sector will be deeply unpopular. Slashing defence allocations, which have remained the highest component of the budget despite the war ending over a decade ago, and rationalising other expenditure, is also important. 

These and other reforms need to be seriously championed by the Government for economic realities to change in the New Year.