Sri Lanka must follow Pakistan’s IMF reform model

Wednesday, 2 August 2017 00:00 -     - {{hitsCtrl.values.hits}}

01Research reveals that a country’s image has a positive correlation on inward investment, adding value to exports of a country and attracting quality tourists whilst having a positive impact on skilled migrants. 

Whilst China remains a super power for economic growth, the reality is that the US attracted the best FDIs in 2016 due to the strong imagery that exists in the marketplace. In fact it is the number one and most powerful brand at 20.5 trillion dollars. 

Respected analysts however state that 2017 will be different given the stunting of the imagery by the unpopular decisions that President Trump has taken on climate change, the transpacific trade agreement and tourism. I guess time will tell. 

South Asia – leader globally on growth 

In this backdrop, South Asia continues to be on a stable growth direction, contrary to the economic performance of the rest of the world. The region has remained resilient to the global headwinds such as China’s economic sluggishness and monetary policy uncertainty in advanced economies. In fact as at midyear 2017, South Asia continues to be the fastest growing region in the world, as it has been for eight consecutive quarters. 

This is largely due to growth in public and private consumption, moderate optimism in industry, stable exchange rates, and inflation rates that has allowed the region to grow by 6 to 8% year-on-year led by strengthening economic activity in India, Bangladesh and Pakistan which are the top three economies in the region, with Sri Lanka, Bhutan and Maldives trailing mainly due to internal issues.

Fiscal consolidation across South Asia continues to focus on expenditure cuts rather than revenue generation and Sri Lanka having to go through this pain for survival rather than by choice in spite of low tax-to-GDP ratios. Debt-to-GDP ratios remain relatively high in the region whilst political uncertainty persists and expenditure cuts in Gulf Cooperation Council (GCC) countries have led to a decline in remittances inflows in India and Nepal and Sri Lanka.

Pakistan follow 

IFM reforms

Pakistan is the trailblazing nation given the pain it has gone through to implement IMF reforms. The overall image ratings have 02picked up as per Brand Finance from a brand value which was a mere 93 billion in 2015 to 128 billion dollars in 2016, registering a growth of 38%, which is rooted to the deep cutting-edge reform benefits coming to play. The country continues to implement IMF reforms though it is hurting the people which is a key pick up to Sri Lanka in my view.

If we analyse the details of the Pakistan economy the consolidated fiscal deficit (excluding grants) has declined from 5.3% of GDP in 2015 to 4.6% in 2016—the lowest in nine years which is a lesson for the other countries in the South Asian region. The total revenue of the consolidated Government improved in 2016 due to a strong performance by the Federal Board of Revenue. 

Tax collection grew by 20%, surpassing its target of Pakistani Rs. 3,104 billion by Rs. 8 billion. Progress in reducing tax expenditures by removing concessions granted through Statutory Regulatory Orders (SROs) have contributed to this strong performance. Recent initiatives such as the withholding tax on immovable property transactions based on improved valuations will also contribute to increased revenues. 

Pakistan’s average tariff rates remain very high. These high tariffs are protecting inefficient domestic industries and amplifying the existing anti-export bias (part because it increases the cost of imported inputs for firms hoping to join global value chains). This means further gradual reforms in the medium term will have to be done.

Sales tax continued to dominate tax collections, contributing more than 40% of FBR’s collections in 2016. Interestingly, more than one third of the sales tax collection from imports and domestic sales was from petroleum products. Collection from direct taxes are low and much of it—about 70%—has been gathered through the withholding mechanism. 

While all countries rely on a withholding mechanism to some extent, the unprecedented reliance in Pakistan suggests weaknesses in the direct tax collection mechanism and the need for reforms required in the future. But the good news is that the country as a nation has gone through the pain and now IMF quotes Pakistan as a country that if the reforms take form, will bring in the benefits to the people.

Deep dive – Pakistan 

IMF reforms

If we do a deep dive on the IMF’s Extended Fund Facility program that came to a close in September 2016, significant progress in achieving macroeconomic stability in the three-year program is very clear. Fiscal deficits have significantly reduced, foreign reserves have returned to comfortable levels and inflation is in-check. However, the economic reform agenda must continue if Pakistan is to be a leader in South Asia. 

The energy sector has reduced financial losses and load shedding—particularly for industry—but investments in transmission and distribution is required if the country wants to move though the reform agenda. The Government has also made solid progress on financial sector reforms, but will need to continue to strengthen and diversify the sector and improve its governance and transparency. 

The decision of Prime Minister Nawaz Sheriff will sure support the governance reform drive. Continued improvements in tax collection will also be essential for the Government’s economic agenda, particularly those that widen the tax net and increase provincial revenue collection.

Sri Lanka – reality 

Whilst Sri Lanka is becoming strongly linked to the world post 8 January 2015 like securing GSP plus, it’s also important to understand that unless drastic changes are made to the supply chain we will not be able to get the benefits of such trade facilities. 

The essence of Sri Lanka is that we don’t have a demand generation issue but the challenge is how we can move the supply chain end. For us to improve the supply chain we must do reforms to the basic policies that govern labour and productivity generating infrastructure. If this is not done and communicated to the world, the overall imagery that given FDI and trade partnerships gets affected in a country. 

If we look at the reality on perceptions of Sri Lanka as a Brand Finance, the country is valued at 74 billion dollars and ranked 55 globally up from the 76 ranking way back in 2011. In South Asia it is at number four as against powerful brands like India at $ 2,066 with a rating of A+ which affects our ability to attract top dollar investments into the country.

Even though we have strong aspirations to be an economic giant in the South Asian economy, the problem is that it is very weak on the area of brand equity given the current stories that emanate. Be it the SAITM issue, Uma Oya water project agitation and the numerous protests that we see in the city not forgetting the strikes that paralyse transport and the health sector, all of this is denting the reputation of the country. A country can track this reputation by the brand equity rating that Brand Finance reports annually.

Whilst the country is pursuing the IMF reforms recommended, the pace that it is moving at is creating a negative perception on the community that was expecting drastic economic growth post the 8 January adding to the challenges faced in reality. The series of governance issues that keep emerging stemming from the bond scam to top politicians purchasing condominiums as reported in the media as a fallout of the bond scam investigation is denting further the reputation of brand Sri Lanka. 

This coming in the backdrop of the 3.2 billion discovery of cocaine in a Government retail chain and the political dimensions linked to it does not help the global challenge that Sri Lanka is up against on this front. Going further, when reports emerge of political uncertainty, it has a detrimental effect on a country’s brand. Whilst Sri Lanka has had a strong performance so far, it will be interesting to see if we can cross the 100 billion dollar mark on brand value in 2017.

Bangladesh beats Sri Lanka on brand value

A point to note is that whilst Sri Lanka has grown 221% on brand value since 2011, if we benchmark against Bangladesh which was considered a lower performance country 10 years back, it has beaten us to register a 261% growth and a commanding 170 billion dollar economy. 

Its exports have surged due to the reforms implemented whilst it continues to outperform Sri Lanka on the FDI front, mainly due to the cutting-edge decision making done similar to Pakistan even though the country is not on an IMF agenda.

We as Sri Lankans must take responsibility for this performance given that we were the blue-eyed country to the great Lee Kuan Yew way back in 1960. The reforms done by Bangladesh particularly on the export front is a lesson for Sri Lanka that we are yet grappling to take control of whilst Bangladesh has set the pace and beaten Sri Lanka. If one does a root cause analysis what we see is that the issue in Sri Lanka is more a supply chain issue than a demand generation drive which requires strong policy decisions rather than just analysis by Harvard, BCG or other elite consultancy companies.


UN issues must 

be addressed

Separately on the UN front one can argue that in a country that is on a development drive after a 30-year war with one of the most ruthless terrorist organisations globally, there can be a drag on the reputation of the country on the aspect of ‘governance’. 

When the US Secretary General has equated Sri Lanka to countries that have allegedly committed serious war crimes and wanting the UN recommendations to be fully implemented, in my view it was a bit harsh but the reality is that if we do not address this challenge there can be a fallout from the countries that are pushing for this cause that stems from the diaspora that is driving this agenda in their home country.

Tourism and export reforms

Research reveals that tourism can support the cause for a new identity to be instilled on nation brand but supported by how the country behaves on the global stage with real reforms at the ground end. But sadly even after two-and-a-half years, Sri Lanka has failed to position the country on the tourism front given that the industry is challenged with severe financial challenges where large operators are being forced to restructure. 

With the policy approvals granted so far, in the next three years 25,000 odd hotels rooms will come into the Sri Lankan portfolio which are essentially below the three-star category which will further affect the financial health of the tourism industry. Moreover it will have an impact on the brand imagery of the country on the nature of travellers that we attract. In contrast countries like Philippines and Indonesia having corrected the global image are attracting the $250+ tourists from the global market while Sri Lanka is yet at below 160.

One of the recommendations from Brand Finance is that a country must identify the weaknesses and correct them with focused brand strategies. On the tourism front which is one of the pillars of building a strong nation brand, the platform like the ‘Wonder of Asia’ can be linked to the ground reality of ‘8 wonderful experiences in 8 wonderful days’ promotion or from an export front (once again a nation brand building pillar) the positioning of the ‘ethically right’ manufacturing destination as claimed by the apparel industry or the ‘1st Ozone Friendly’ proposition by the tea industry can be used in this journey.

On the other hand nation brand policy expert and advisor to many governments globally, Simon Anholt advocates from his experience that manipulating the imagery with strong marketing techniques does not help build a strong nation brand. Reputation must be earned over time by the actions that governments implement and people inside the country emanate to the world, which is the exact problem in Sri Lanka.

Building image?

Whilst advocating strong campaigns on tourism and tea, Anholt goes on to say that building brand imagery with diplomacy and marketing campaigns are a waste of taxpayers’ money and must not be done. His logic is that a product sells a promise and hence advertising will help communicate this promise and make the consumer surrender some money to purchase the product (brand).

But, in the case of a country, it is different as with the advertising you are asking someone to ‘change the way they think towards a country’. This cannot be done via sexy advertising. You have to get people to experience the change with actions. On this front the continuous demonstrations we see in Colombo do not augur well for the country. In fact a typical demonstration costs the country Rs. 100 million is the latest research from the think tanks.

Country image can 

be reformed

Countries like Singapore and Malaysia have shown the world that image can be corrected if reforms set in channelled from the Central Government, not by way of brand marketing but by actions that have earned the respect of the people in the country which has garnered a positive image globally. As at now the stories that emanate out of Sri Lanka will not help this agenda sadly.

Next steps 

We must understand that countries are judged by what their citizens say about their governments. Pakistan is slowly but surely making this change. It has realised that it is an unbroken stream of dramatic actions that make the reputation of a country. Pakistan is slowly but surely building its country imagery without flimsy media releases and loose marketing campaigns. A lesson for Sri Lanka. Pakistan is focusing on getting the basics in place with reforms.

Let’s accept that as a nation we are responsible for the image we create for the country. Correction of the image of the country has to be earned with actions so that a reputation can be attributed to the country. We will have to manage democracy as the weekly protest demonstrations are denting the nation’s brand imagery.

(The author is a President/Group CEO of an international diversified conglomerate whilst sitting on many private and public sector boards as director. The thoughts are strictly his personal views and not the views of the organisations he serves in Sri Lanka or internationally.)

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