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The economy of Sri Lanka: Is there a way out?

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by Prof. Arusha Cooray

Sri Lanka is currently facing an unprecedented set of economic challenges: a large and increasing public debt, rising fiscal and current account deficits, foreign exchange shortages and declining investor confidence. The collapse of tourist revenues and remittances due to the pandemic, have compounded the situation. Sri Lanka’s foreign exchange reserves are at an all-time low, currently sufficient to cover two months of imports. As a rule of thumb, a country’s foreign exchange reserves should be sufficient for at least three months of imports.

The fall in foreign exchange reserves has led to a depreciation of the rupee against the US dollar, making it more difficult to service the debt denominated in foreign currency. Sri Lanka’s debt to GDP ratio currently stands at 101%. Businesses relying on imports are struggling to meet foreign currency payables. Prices of essential food items have risen, leading to hoarding and black markets. The government’s ban on the use of chemical fertilizer for farming and the printing of money by the Central Bank, has aggravated the situation.

Sri Lanka has responded to these challenges hereto, by imposing capital controls, restricting imports, and engaging in currency swaps. Import controls have led to a shortage of essential goods. Currency swaps and capital controls are short terms measures. There is no strong evidence to show that import and capital controls succeed during a foreign exchange crisis.

Is there a way out? It is imperative that the government undertakes a reform plan that addresses key priority areas to salvage the economy.

Fiscal consolidation: One, is fiscal consolidation. Sri Lanka’s government finances are dominated by expenditure on public wages and government transfers, subsidies, and interest payments on rising debt. Greater effort needs to be made in curtailing current expenditure and channelling these expenditures into more productive use. Cutting down on public sector spending will reduce the large and persistent budget deficits. Continuing budget deficits can undermine investor confidence and crowd out private sector investment.

A concerted effort also needs to be made to reduce the size of the public sector. Sri Lanka’s inflated public sector is in serious need of restructuring. Re-assessment and reform of the number of ministries and government agencies will reduce the wasteful and inefficient use of government funds and increase productivity.

On the tax front, Sri Lanka needs to address structural weaknesses in the tax system. Sri Lanka’s tax burden as a percentage of GDP is 12.6%. The low tax revenue to GDP ratio has meant that Sri Lanka has faced difficulties in meeting its expenditures which have consistently exceeded tax revenues. A large proportion of government revenue has been generated through indirect taxes which are regressive. Tax evasion, moreover, is high. Rather than introduce new taxes which will further burden low-income groups and undermine economic growth, tax management and collection can be improved by focusing on reducing loopholes for tax avoidance and evasion.

Monetary policy: The success of monetary policy in achieving goals has been severely constrained by to the government’s policy of deficit financing. To the degree that the government is induced to run debt financed fiscal deficits, the main function of the money market would be to engage in the sale of government securities to finance the servicing requirements of the government debt. Fiscal consolidation would help raise public savings, contain price rises and enhance the effectiveness of monetary policy. There are concerns further about the Central Bank’s lack of independence. Increasing Central Bank autonomy will assist in insulating monetary policy from the pressures created by the government to finance budget deficits.

The banking sector: The continued dependence of the government on the state-owned commercial banks has not only inhibited their efficient functioning, but also constrained the competition and efficiency of the entire banking system. Political pressures to finance unviable projects and limited incentives for screening and monitoring projects has led to a rising volume of non-performing loans by these banks. Therefore, the government should reduce reliance on these two banks for funding.

The External Sector and GDP Growth: Higher GDP growth can be promoted by diversifying export markets and export sectors and encouraging foreign direct investment (FDI), all of which will help relieve Sri Lanka’s foreign exchange position and rising debt levels. Sri Lanka attracts disproportionately very little FDI compared to its South Asian counterparts. Increased FDI inflows and trade will generate new employment opportunities and increase the tax base. Economic policy, therefore, should focus on developing comparative advantage in a broader range of sectors, rather than relying on a few areas. Entering into trade agreements with countries will also help.

Skill Development: Policy aimed at promoting investment in infrastructure, research and development, learning, competencies and skill development through education and on-the job training will encourage FDI in high-skill industries. This would give local firms the capacity to absorb the technologies and skills that come with FDI. A large proportion of jobs created by FDI in Sri Lanka, are in low paid, low skilled areas. Sri Lanka possess a highly literate population. It has however, not succeeded in harnessing this stock of human capital to foster comparative advantages.

Policy Consistency and Domestic Savings: The sustainability of economic policies will reduce not only private sector concerns about policy reversals and the lack of policy consistency, but also that of foreign investors. Incentives can be introduced to stimulate domestic savings and promote greater participation in economic activity by the corporate sector.

Getting the economy out of this state will not be easy. Sri Lanka possesses several underlying strengths such as a well-developed stock of human capital and resources, which can be built upon, but have not been harnessed to their full potential to foster comparative advantage. Unless policymakers make a concerted effort to ensure macroeconomic stability through a sustainable and coherent reform plan that addresses structural shortcomings in the economy, Sri Lanka will be trapped in a vicious cycle out of which it will find difficult to get out.

Arusha Cooray is a Professor of Finance at James Cook University, Australia. She served as Sri Lanka’s Ambassador to Norway, Finland and Iceland.



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Features

The challenge of keeping value-based politics alive

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Anti-migrant protests in Durban, South Africa. BBC

The current outbreak of anti-immigrant protests in Durban, South Africa is bound to have taken many a subscriber to value-based politics or political idealism quite by surprise. After all, this is evidence that despite the historic accomplishments of nation-builders of the stature of the late President Nelson Mandela it cannot be taken for granted that identity politics, including racism in its worst forms, is no more in South Africa.

At the time of this writing details are scarce on the substantive root causes of the protests but it could very well be that economic grievances, particularly on the part of the majority community in South Africa, are contributing considerably to the disaffection. Shrinking employment and material prospects are likely to figure majorly among the factors igniting the unrest.

Fortunately, the local authorities in Durban are losing no time in calling for peaceful co-existence among the relevant communities and are pointing to the vital importance of stepping-up national integration processes. Apparently, immigrants in sizable numbers from neighbouring countries are present in Durban. However, international TV footage of the protests quoted some local authorities as saying that the majority of the immigrants in some centres that housed them were not illegal migrants and had the documents that entitle them to be in Durban.

In the Durban protests the world has fresh proof of the socially divisive consequences of the gathering globe-wide economic disaffection, touched off particularly by the continuing crisis in West Asia. Going ahead, the world would need to brace for increasing identity-based unrest of the kind it is just witnessing in South Africa.

Considering that the material lot of ordinary people everywhere could only aggravate progressively, with the US and Iran showing no signs of negotiating an end to their confrontation any time soon, it will be left to the more democratic and progressive sections of the world community to initiate positive measures collectively to bring a measure of relief to the discontented.

The swiftness with which such relief will be provided would depend crucially on the importance those sections taking up these undertakings attach to value-based politics as opposed to Realpolitik of power politics.

Going by these yardsticks, Italy could be considered to be moving in the right direction. Recently Italy came to the fore in initiating the collective named, ‘Rome Coalition for Food Security and Access to Fertilizer’, which has as one of its aims the swift provision of fertilizer to economically weak African countries.

In a recent statement Italian Minister of Foreign Affairs and International Cooperation, Antonio Tajani, said that a principal aim of the project was to ensure that the farmers of Africa gained easy access to fertilizer, considering that food security is a growing concern among some of Africa’s economically vulnerable countries.

The statement went on to mention that some 30 countries hailing from the Mediterranean region, the Middle East, the Balkans as well as the FAO had been invited to join the coalition. The venture is far-seeing in that food security is main among the reasons for social discontent which in turn could degenerate into endemic political turmoil and bloodshed. Separatist violence and geographical fragmentation of countries wouldn’t be too far behind these developments, as Africa itself has often proved.

It is hoped that more G7 countries would take the cue from Italy and do what they could to ease the hardships of economically distressed countries, particularly of the global South. In these efforts they would need to break rank with the US, which is today brutally indifferent to the consequences of its policy of making ‘America First’, come what may.

Going by current developments, the Trump administration seems to be blithely oblivious to the wider, deleterious effects of its policy course in West Asia. Besides rendering Iran militarily and otherwise impotent nothing else seems to matter to Washington, as regards West Asia. This is policy short-sightedness of an extreme kind. After all, right now West Asia could be said to be sitting on the proverbial powder keg.

On the other hand, Iran is not giving the world the impression that it is doing anything constructive to get out of the policy straitjacket that it wove for itself decades ago. Rather than enter into a policy of ‘live and let live’ in relation to Israel in particular and initiate a process of reconciliation with the latter, it has chosen to operate within policy parameters that continue to damn Israel. This has put Israel always on the ‘defensive’ so to speak and prevented the opening up of space for meaningful dialogue.

That said, Israel is obliged to explore the possibilities of entering into a negotiatory process with the Arab-Islamic world that could lead to a de-escalation of tensions and bloodshed. It cannot continue to look at its neighbours through lenses that distort them as archetypal enemies who should be ‘wiped off completely from the face of the earth.’

In other words, the need is urgent for Realpolitik to give way to value-based politicks. Italy is beginning to prove that the latter approach could be pursued with some success. May be the EU and the UK could throw their weight behind these initiatives as well and establish that international politics could be refashioned on the basis of humane, civilized norms. The UN would need to be fully supportive of these moves and prove an organizational nucleus of the operations that follow.

In fact the time is ripe for people of conscience to collectively stand up on the side of peace and say ‘No’ to war and violence. Organizations such as the ICRC, the WHO and Medicines Sans Frontiers have already taken up this call. Referring to the widespread destruction of health facilities and their dehumanizing results these organizations have said, among other things, that ‘This is not a failure of the law. It is a failure of political will.’

True, ‘failure of political will’ among those powers that matter accounts for the runaway, uncontrollable nature of war and destruction in contemporary times, but more fundamentally it is a failure of the human conscience. It could very well be that the phenomenal levels to which violence and war have been unleashed today have had the effect of deadening consciences. This is a matter for urgent study and wide discussion.

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Features

Vesak celebrations … with Cuteefly

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Perfect for celebrations, gifts, and meaningful occasions // Gift pack

I would describe Indunil Kaushalya Dissanayaka as innovative and creative, and she operates under the name of Cuteefly.

Indunil always comes up with something novel to celebrate special occasions, and she does it with candles … and that’s her profession.

She was in the spotlight when she created a happening scene, with candles, for Christmas, Sinhala and Tamil New Year, and Valentine’s Day.

As lanterns light up Sri Lanka for Vesak, the Colombo-based candle maker is quietly turning wax and wick into little pieces of the festival.

Candles reflecting Vesak themes

Her candles reflect Vesak themes – light, peace, remembrance, giving, etc., to enable you to fill your Vesak celebration with devotion and beauty.

Among her Vesak creations is a lotus-shaped soy candle, scented with sandalwood, lavender, etc., meant to burn during this Vesak Poya Day.

Indunil Kaushalya Dissanayaka: Customers
praise her for her creativity

These handcrafted Vesak candles are perfect for offering at the temple, she says.

What makes her creations so novel is that they come in different shapes, scents, themes, and all are handmade.

What’s more, her customers have heaped praise on her for her creativity.

According to Indunil, her creations are perfect as a thoughtful gift … to bring beauty, unity, and light into every moment.

Says Indunil: “Our beautifully handcrafted Unity candles are designed with premium detail and love, making them perfect for celebrations, gifts, and meaningful occasions.”

Cuteefly, says Indunil, is available online.

Readers could contact Indunil on 0778506066 for more details.

He Facebook Page is: Cuteefly.

Handmade with love

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Features

Dark Spots …

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Yes, dark spots do crop up on the skin, especially with sun exposure and, of course, as the skin ages.

However, these tips should be of immense benefit to those who are faced with dark spots.

Lemon and Honey Glow Mask:

You will need 01 teaspoon lemon juice and 01 teaspoon honey.

Mix the lemon juice and honey well and then apply this mixture, only on the dark spots.

Leave for 10–15 minutes and then rinse with cool water.

Benefits:

Lemon helps brighten pigmentation.

Honey moisturises and heals skin.

Gives a natural glow.

* Aloe Vera Gel Treatment:

All you need is fresh aloe vera gel.

Apply the gel apply on dark spots, before going to bed.

Leave overnight and wash in the morning.

Benefits:

Reduces acne marks and pigmentation.

Soothes irritated skin.

Helps skin repair naturally.

Turmeric and Yoghurt Paste:

You will need 01 teaspoon yoghurt and a pinch of turmeric

Mix the yoghurt and turmeric into a smooth paste and apply on affected areas.

Leave for 15 minutes and then wash gently with lukewarm water.

Benefits:

Turmeric brightens skin naturally.

Yoghurt removes dead skin cells.

Helps fade dark spots gradually.

Use these packs 02-03 times a week as results are generally seen over time.

You can also try this out: Mix a ripe papaya into a smooth paste and apply to the face, or directly on to the dark spots. Leave for 15-20 minutes and then wash with lukewarm water.

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