Reforming Sri Lanka

The strong call for implementing long delayed reforms by the Finance Ministry and the Central Bank last week is welcome even though it is not the first time these two institutions have done so. However the timing of the fresh push needs to be taken note of.

For years irrespective of which government was in power, there has been a rallying call to implement growth-enhancing structure reforms. The International Monetary Fund (IMF) in its most recent report post-Article 4 Consultation on Sri Lanka listed them as increasing female labour force participation, reducing youth unemployment, liberalising trade, developing a wide-reaching and coherent investment promotion strategy, and reforming price controls and state-owned enterprises (SOEs). Since its founding 13 years ago, the Daily FT alone directly and via columnists have published the rationale for such reforms and others.

Unfortunately despite the merit and urgency, successive governments have failed to deliver when it came to reforms. Being populist ensured their political survival at the expense of future socio-economic interest of the nation. Essentially reforms are key to ensure macroeconomic stability, a necessary condition for long-term higher inclusive growth.

The Finance Ministry last week warned that failure to implement required policy reforms at this critical juncture will be extremely costly. “In recent months, Sri Lanka has already experienced the adverse outcomes of failing to implement these reforms in the past.  Hence, it is vital that Sri Lanka uses this turbulent situation as an opportunity to undertake difficult but much needed reforms to address the long-standing macroeconomic issues and lay a strong foundation to create a modern and robust economy for future generations to come,” it added.

The Rajapaksa regimes have a notorious track record and openly ruled out privatisation as well as reforming the SOEs. In fact their regimes and top policy makers were responsible for a bloated public sector and creating more institutions and enterprises.

The fresh chorus for reforms however comes from the newbies - Finance Minister Ali Sabry, Treasury Secretary Mahinda Siriwardena and Central Bank Governor Dr. Nandalal Weerasinghe. The call resonates with the IMF’s recommendations and amidst talks with the Bretton Wood institution for a bailout for Sri Lanka reeling from the foreign currency and reserves crisis.

In that context, the sudden cry for reforms apart from being a yet another reversal on the part of President Gotabaya Rajapaksa, begs the question whether the regime is sincere.

As the CBSL Governor Dr. Weerasinghe aptly puts it “crisis is an opportunity” to undertake difficult reforms, the onus on the new team at the Finance Ministry and the CBSL is greater. It is also more challenging given the political instability, the economic turmoil and resultant social unrest.

Notwithstanding the crises and the mounting challenges, reforms must be persisted with. If the current regime is to succeed in this regard it must start with implementing some of the easier measures recommended by local think tanks and the private sector.

For example a token listing of 5 or 10% stake of select SOEs on the Colombo Stock Exchange. Potential candidates are the two state banks – Bank of Ceylon and People’s Bank, the National Savings Bank, Sri Lanka Insurance Corporation etc. Such listings will also improve good governance and greater accountability in these SOEs. There is a growing school of thought that if State banks are immediately brought under the reform process it could help discipline other SOEs. Proper unbundling the Ceylon Electricity Board is another and LECO is a case study. Another is the automatic pricing formula for energy and utilities. Some of these suggestions are old or previously attempted but the country lacked political will to fully implement.

As Finance Secretary Siriwardena noted that the Government’s decision to seek the assistance of the IMF will be a starting point and a catalyst to implement critical reforms. Underscored by him and other proponents of reforms, the exercise needs support of the people and other stakeholders such as trade unions. For this there must be clear and consistent messaging apart from a strong yet transparent social protection system to safeguard the poor and the vulnerable.

In a critical analysis, if politicians had the vision and the resolve to implement reforms recommended in past 16 IMF programs as well as locals, Sri Lanka would have been a robust nation economically. A fresh opportunity awaits and yet another false start and eventual failure must be avoided at any cost.