Volatile and Grim Economic Prospects for Sri Lanka: Three Voices

Sam Bresnick, in Daily News, 19 June 2017, with title “Economic Endeavour : Uncertain Road to Recovery” … with highlighting being the work of The Editor Thuppahi

It is no secret that Sri Lanka is currently navigating choppy economic waters as it shifts strategies in an uncertain moment in the world economy. The move towards private sector-led growth and away from public sector-sponsored development is, according to several economists, necessary given the government’s debt situation. But that does not mean that the transition has been seamless or easy. On the contrary, Sri Lanka is going through growing pains as it tries to jump start its export industry and attract foreign-direct investment (FDI).

The Rajapaksa regime championed a government-led growth strategy that involved using foreign loans for massive infrastructure projects. This approach, however, delivered fleeting, unsustainable growth and has left the country with a heavy debt burden that, though reportedly under control for 2017 and 2018, appears to get more onerous come 2019.

Governor of the Central Bank Dr. Indrajit Coomaraswamy, as well as myriad economists, have noted that this strategy is no longer feasible, as the government has effectively drained dry the well of foreign credit. The current regime, well aware of the country’s debt issue, has put its faith in the tonics of trade and financial liberalization, the hope of more FDI and increased exports, and the proposed privatization of several state assets. It is also championing the use of public-private-partnerships (PPPs) that aim to tap into private sector investment.

Some economists, however, argue that the government is saying one thing while doing another. They pointed out that despite announcing the aforementioned policy adjustments, the government continues the Rajapaksa regime’s strategies of issuing sovereign bonds and turning to China for financing.

Despite that the supposedly new growth scheme was inaugurated over two years ago, FDI is still scant and exports continue to underperform. Though troubling trends, experts caution that the current government cannot be held completely accountable for these failures, as both, FDI and exports have lagged for over a decade.

Indeed, exports as a percentage of gross domestic product (GDP) have been falling for several years and now account for between 16-17% of GDP, according to Coomaraswamy. For comparison, exports accounted for over 70% of Malaysia’s GDP in 2015. Since the ‘90s, several regional neighbors, such as Vietnam, Thailand, and Malaysia, have whizzed past Sri Lanka on the export front.

The trend of underperforming exports can be traced back through several successive administrations and is closely linked with insufficient investment in the sector. It is crucial, according to Coomaraswamy, to improve exports, as it will increase the country’s coffers of foreign exchange and help ease the debt burden.

But why exactly is Sri Lanka having so much difficulty bolstering its exports?

Trouble in Export Town

Though he disagrees with the narrative that the country’s debt burden is Sri Lanka’s main economic issue, Executive Director of Verité Research Dr. Nishan de Mel argued that many of the problems plaguing the export sector are due to microeconomic and structural and societal issues. In his estimation, the government should focus on making it easier to do business in the country and improve its services for exporters by way of disseminating information about trade policies, updating regulations, and making export procedures more inefficient.

“The fact that exporters are still not succeeding is not a macroeconomic problem. It is that the business conditions in the country are still functioning as constraints to exporters. It is difficult to get things in and out of ports, contract enforcement is lacking, and the legal system is slow and inefficient. I think Sri Lanka is simply not gearing itself to take these problems on,” he said. In other words, the state must dramatically alter its policies and streamline its procedures in order to act as a nurturing force for exporters.

These problems, along with often unclear and vacillating policy directives, have combined to undermine investor confidence in Sri Lanka, which has in turn hurt both exports and FDI. “We have had lot of ad hoc policy decisions which have affected the business environment over the last few years. Many of these policies last for some time and then disappear. Asking investors to get involved in that sort of uncertain climate is largely untenable,” said Professor Sirimal Abeyratne of the University of Colombo.

Another economist who spoke to the Daily News on condition of anonymity mentioned that the government’s strategies to aid exporters are riddled with inconsistencies and often prone to reversal, especially on the tax front. “The administration is looking to the private sector to drive growth, but the private sector is saying that it needs policy clarity and consistency, as well as better policy implementation. The government has been rather weak on clarifying policies and implementing them,” the expert said. These persistent issues and lack of focus on and investment in exports have led to Sri Lanka losing market share to emerging manufacturing powers like Vietnam and Bangladesh.

Diversification and Improvements

Along with streamlining its policies, the government should make efforts to encourage the diversification of the country’s exports. Tea, rubber, precious stones, and garments have long been Sri Lanka’s staple exports, and additional products have been slow in coming. East and Southeast Asian countries have been increasing the number and variety of their exports since the turn of the century. Between 2000 and 2015, China added 76 products to its export basket that accounted for $245 per capita. Thailand, moreover, added 70 products that were good for $326 per capita. Sri Lanka, conversely, added just five products over the same period that accounted for $7 per capita.

The secrets to China and Thailand’s respective productivity upsurges were their expanding into the more lucrative fields of electronics and machinery and massively increasing investment in these areas.

The government is in the process of negotiating various free trade agreements (FTAs) with other Asian nations, but it is unclear if these will increase exports if Sri Lanka cannot come up with new products. De Mel pointed out that the island is not producing goods that many neighboring countries want or need. “We think that signing FTAs will boost exports, but it doesn’t really matter whether or not you sign a trade agreement if you don’t have something to export. Sri Lanka does not have products that are competitive in markets like India, China, and Singapore, three countries with which the government is negotiating FTAs.”

“The lack of diversity in products is the problem, not the lack of expansion markets,” he said. Though diversification of exports is an easily laudable goal, it is easier said than done and remains largely aspirational at this point.

An easier route to improving export numbers lies in investing in fisheries and agriculture and working to add value to products that are already made or produced in the country. Despite that around a third of Sri Lankans work in these sectors, they account for astonishingly little economic output. The agricultural sector, for instance, generates only around 8% of GDP.

“Agriculture and fisheries have suffered due to consistent decreases in budgetary allocations over the past three decades. There needs to be investment in technology, small industries, and cooperatives to shore up the backbones of local economies,” said Dr. Ahilan Kadirgamar.

Multiple experts pointed out that farmers’ lack of knowledge about rules and regulations, as well as the spoiling of large quantities of agricultural products while they are in transit are issues that need to be solved as soon as possible.

Both, Kadirgamar and de Mel, however, highlighted the importance of engaging small and medium-scale enterprises (SMEs) in bids to improve exports. It is not, after all, the large tea exporters and garment manufacturers who need help parsing the export process, but smaller-scale businesses. “The SME sector is not exporting very much at all. They are one of the most constrained groups. We have to give them a fairer chance at bidding on government contracts,” said de Mel.

He added that the use of e-procurement systems, such as those India has recently started using would help facilitate SME and government communication and cooperation, thereby helping raise the profile and reach of SMEs throughout the island. The bottom line is that, in many cases, the current policies and laws act as constraints on exporters, especially on small and medium-sized ones. Clear policy adjustments, as well as consistent implementation of any such alterations, are crucial to jumpstarting this portion of the economy.

Rocky Road Ahead?

Despite the government’s stated desire to improve exports, the global trade market is shrouded in uncertainty. The import numbers of several large regional powers, such as India and China, have steadily declined as percentages of GDP over the past few years. Furthermore, Chinese gross expenditure on imports fell between 2014 and 2015.

Kadirgamar noted that there might not be enough demand in the global economy to foster a massive jump in exports, no matter how diverse they might become. “In Western economies, especially with Brexit and Trump, there is an ongoing protectionist turn, which makes exporting more difficult. Then both India and China have decreased their imports considerably in the last few years. It is very difficult to export if there is not enough global demand,” he said.

It is unclear, obviously, how much damage a decrease in global import demand would do to the Sri Lankan economy. The recent restoration of the GSP+ trade concessions do appear to extend a lifeline to exporters, however, as Sri Lanka produces many products, such as foodstuffs, garments, and tea, for which there is significant demand in European markets.

While global demand is an issue, the very growth model that the government is touting might not be ironclad.

The economist who spoke on condition of anonymity noted that the government’s stated preference for private sector-led economic growth and increases in exports and FDI are simply the only paths currently available to them. “This strategy is sort of the only thing they can say they are pursuing now, because there really is no space available for the government to take on additional foreign debt over the next two years, quite frankly.” Yet the economist was quick to point out that these strategies will be difficult to fully implement in the coming years due to domestic policy issues and the global trade arena.

Sri Lanka’s path forward remains murky and strewn with both, local and global uncertainties. It appears as though the government is pursuing one of the only viable paths for economic growth, but it is unclear whether that path will lead to increased national wealth and development.

 

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