Business
Economic policy choices: From stabilisation to growth
Sri Lanka: State of the Economy 2023
Sri Lanka has faced a turbulent economic journey in recent years, with 2022 witnessing an unprecedented crisis marked by a staggering 8.7% GDP contraction. The economy slowly but steadily pulled back from the abyss over the course of 2023. Notably, the Sri Lankan rupee has stabilised and even appreciated by 12%, inflation has dropped to 1.3%, import restrictions are being eased, and interest rates are on the decline.
These positive developments are a result of the implementation of economic stabilisation measures and groundwork for institutional and regulatory reforms to support future growth. These measures have critics concerned about the intense economic pain that falls on those least able to cope with the fallout. As a country that faces years of weak growth, the Institute of Policy Studies of Sri Lanka’s (IPS’) Sri Lanka: State of the Economy 2023 report, explores the complex policy choices Sri Lanka faces as it navigates the path to economic recovery.
The Rocky Road to Recovery
In 2023, Sri Lanka’s economy is expected to contract further, though at a slower pace compared to the previous year. Differing medium term forecasts from the International Monetary Fund (IMF) and the Central Bank of Sri Lanka (CBSL) point to the complexities of accurately predicting the future of an economy that has suffered a sudden and sharp crisis. In 2023, the IMF predicts a contraction of -3%, while the CBSL holds a more optimistic view at -2%. Both anticipate a return to positive growth in 2024, but uncertainties linger due to social and political opposition to austerity policies, ongoing debt negotiations, and volatile global economic conditions driven by geopolitical tensions.
Following the severe 8.7% GDP contraction in 2022, Sri Lanka embarked on immediate and stringent measures to stabilise its economy. These measures included securing the 17th IMF bailout and implementing substantial increases in value-added taxes (VAT), personal income taxes, energy prices, and a freeze on public sector wages. With shortfalls in anticipated revenue collections, further fiscal tightening measures cannot be ruled out.
Addressing Socioeconomic Challenges
Faced with growth-inhibiting tough austerity measures, concerns persist regarding the potential exacerbation of inequality and poverty. Sri Lanka witnessed a doubling of national poverty rates to 25% and a tripling of urban poverty to 15% in 2022. Escalating inflation has eroded household savings and real wages, prompting many skilled professionals to seek opportunities abroad, potentially resulting in a brain drain and the loss of a generation of young workers.
Sri Lanka’s economic challenges are further compounded by disparities in the education and health sectors, which require substantial resources for meaningful reforms. The delicate task of balancing fiscal constraints with the need for improved social protection programmes looms large.
Paving the Way for
Sustainable Growth
To achieve sustainable economic growth, Sri Lanka must not only stabilise its economy but also address long-standing structural problems. The country’s overemphasis on infrastructure investment with borrowed funds needs to shift towards enhancing global competitiveness in exports. In a world marked by US-China tensions, forging partnerships and aligning industrial and trade policies is vital. Currently, Sri Lanka lags in global value chain (GVC) activity, posing a challenge to economic diversification.
Over-reliance on low-skilled, informal jobs, where more than half of the workforce is engaged in low-skilled jobs, hampers progress towards a competitive and productivity-driven economy. Comprehensive reforms in education, improved access to higher education, and bridging skills gaps in sectors like Science, Technology, Engineering and Mathematics (STEM) are essential to create well-paying jobs and ensure long-term economic resilience. Additionally, addressing corruption, enhancing accountability, and improving public service delivery are vital for building public trust and support for reforms.
Building Consensus
for Transformation
As Sri Lanka grapples with its economic challenges, presidential elections loom on the horizon in 2024. Traditional politics may drive opposition to austerity and reforms in pursuit of votes. However, regardless of the election outcome, the country’s fragile economic situation will likely necessitate continued adherence to fiscal, monetary, and exchange rate policies outlined in the IMF programme. What remains uncertain is the fate of complementary reforms aimed at enhancing economic efficiency and productivity, which might be delayed or abandoned due to political compulsions.
The more contentious reforms may slow down or stall altogether between now and the 2024 elections, to be addressed afterward, depending on electoral outcomes. These possibilities introduce significant uncertainty at a time when economic confidence has already been severely undermined. The solution and best hopes are to build cross-party consensus on areas that do need fixing.
Conclusion
Sri Lanka’s journey from economic turmoil to stability is fraught with challenges, but it also offers opportunities for meaningful reform. While macro-stabilisation measures are laying the foundation, the path to recovery must prioritise quality GDP growth that creates high-quality jobs. Achieving this requires addressing structural issues, strengthening social safety nets, and fostering cross-party consensus. As Sri Lanka navigates its economic challenges, making the right policy choices, coupled with accountable institutions, will be key to transforming its setback into a sustainable success.
These and many other issues are discussed in the IPS’ annual flagship publication Sri Lanka: State of the Economy 2023 under the theme ‘Economic Policy Choices: From Stabilisation to Growth’ which focuses on the policy choices and debates in key areas of reform for a country that is emerging from a deep crisis.
The IPS report will be released on Tuesday, 17th October 2020 and will be available for sale at IPS, No. 100/20, Independence Avenue, Colombo 07, and at leading bookshops island-wide.
Sri Lanka: State of the Economy 2023 Economic Policy Choices: From Stabilisation to Growth
But SL receives wake-up call on implementation of prior actions
Completion of financing assurances
Reaching a staff-level agreement on the third review under Sri Lanka’s extended fund facility arrangement, the IMF said on Saturday that Sri Lanka has met most structural benchmarks stipulated by it to continue receiving its financing support.
“Programme performance was strong, with all quantitative performance criteria and indicative targets (IT) for end-June 2024 met, as well as the ITs for end-September 2024, except for the IT on social spending. Most structural benchmarks due before October-2024 were either met or implemented with delay,” IMF said.
“The new government’s commitment to the program objectives has enhanced confidence and ensures policy continuity. Sustaining the reform momentum is critical to safeguarding the hard-won gains under the program thus far and putting the economy on a path towards durable recovery and stable and inclusive growth,” the international lender noted.
The visiting delegation said that the IMF’s Executive Board will consider completion of the review based on (i) the implementation by the authorities of prior actions; and (ii) the completion of financing assurances review, confirming multilateral partners’ financing contributions and assessing adequate progress with debt restructuring.
“Upon completion of the Executive Board review, Sri Lanka would have access to SDR 254 million (about US$333 million), bringing the total IMF financial support disbursed under the arrangement to SDR 1,016 million (about US$1,333 million).
“Sri Lanka’s ambitious reform agenda supported by the EFF is delivering commendable outcomes. The economy expanded on average by 4 percent y-o-y in the four quarters ending in June 2024. High-frequency indicators point to continued expansion across all sectors. Average headline and core inflation remained contained at 0.8 and 3.8 percent during the third quarter. Gross official reserves increased to US$6.4 billion at end-October 2024 with sizeable foreign exchange purchases by the Central Bank. Public finances have strengthened following substantial fiscal reforms,” IMF said.
Offers visiting Sri Lankans an interchange for business connections
By Sanath Nanayakkare
Sri Lanka’s Thambapanni leisure chain has four hotels in Unawatuna with more than 100 star-class rooms. When the economic crisis hit Sri Lanka in 2022, the company ventured out to Australia seeking more stable business operations there.
With their restaurant business in Brisbane Australia thriving by dint of their hard work, they have now set up an Italian restaurant in Hanoi, Vietnam. And they say Sri Lankans visiting these two countries can expect to make proactive business connections with top-end natives at their two well-patronized restaurants.
“Whichever of the two countries you go seeking to meet people of good business repute to do business with, the chances are high that you could link up with the right people you are searching for at our seafood restaurant in Brisbane, Australia and our Italian restaurant in Hanoi, Vietnam, “they said.
The Island Financial Review found the two business partners – Preshan Dissanayake and Isuru Yapa were bold enough to take their restaurant business from the pearl of the Indian ocean to the southern hemisphere of Australia to Vietnam in Southeast Asia, at a time the Indian ocean’s pearl had become its tear drop.
“We had no other option. We were looking for survival. we took that initiative, putting a significant upfront investment at risk, and today we are seeing the rewards of that difficult decision,” they said.
“We started the restaurant ‘Coco Gabba’ next to Gabba Stadium in Brisbane, Australia where 2032 Olympics is going to happen. Coco Gabba is a well-patronized seafood restaurant today and on the back of its success, we are now preparing to start a Thai restaurant in the same place,” they said.
“We want to especially mention that about three months ago, we set up a new Italian restaurant named Mano Italian in Hanoi, Vietnam where the Director Operations is Manju Priyankara who is a master chef in Italian cuisine with 15-years of authentic experience. Top-end individuals patronize this restaurant and so is our seafood restaurant in Brisbane. Literally speaking, we have built bridges in these two countries for Sri Lankan entrepreneurs to benefit from; particularly for those who don’t have a base in these two countries to foster their business ties. Our restaurants in these countries will prove to be very useful for you if you are looking to do business in these markets,” they said.
They told the Island that they would be opening their second restaurant in Brisbane and the second in Vietnam in the near future.
‘We are also planning to diversify into the property business in Australia. Our reputation in the restaurant business will pave the way for it,” they opined.
Melwa, Sri Lanka’s leading steel wire manufacturer, organised a workshop on the construction industry for Technical Officers (TOs) in the Anuradhapura District. This workshop took place on 7 November at the Mango Hotel in Anuradhapura, with nearly 100 TOs in attendance.
Additionally, Melwa held a special training programme for welders on 9 November at Muthu Villa Hotel in Walasmulla. The programme aimed to enhance the professional skills of welders in the construction industry and provide them the nationally recognised National Vocational Qualification (NVQ) Level 03 certification. Nearly 200 welders participated in this programme, organised with full support from Melwa Company.
At the end of the programme, all participants received a valuable certificate from Melwa, and the company provided additional training and financial support for a select group of welders to obtain the NVQ Level 03 certificate awarded by the National Vocational Training Authority (NVTA). Melwa had also arranged for each participant to receive a valuable set of equipment.
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