The country’s economy is not yet in the intensive care unit (ICU), but the economic indicators are alarming more adversity with the government debt trap and ever increasing deficit of balance of payments
The development of a country is undeniably a broader concept and a long-term process underpinned by key strategies in numerous domains in a country. Sri Lanka will be commemorating its 70th Independence Day by February 4, 2018 and it will be imperative to look back at the post-independence era and recall the lessons learnt during the seven decades.
What happened to the country?
It is no exaggeration that the country’s economic and political climate and the social well-being of its people are deteriorating gradually and the public has lost its faith in the executive, legislative and judicial branches of the government. The vast majority apparently suffers great hardship and the current political leaders do not seem to have fully comprehended the current social, economic and political condition and as to where Sri Lanka as a country is heading towards.
What paved the way for what the country experiences today?
Following independence, the country was governed by different political parties and their members, majority of whom had conflicting personal interests over national interest. The power was centred among such a group of individuals, who used it for their own personal benefits and interference in policy changes in their interest.
Use of power for conflicting interests at the top in the governing structure led towards the collapse in law and order, social, economic and political well-being. Politics became a business rather than a process of decision-making for the advancement of the country as a whole.
Active participation in politics and policy setting were seen and perceived as the easiest and fastest route of making money. Slowly it became a haven for uneducated thugs and corrupt people in the country just to use their undue power for their own benefits and to run their illicit businesses under the blessings of the rules and regulations of the country.
On the one hand, the political parties were never worried about the quality of their candidates. The capabilities, education and knowledge of candidates to understand the social and economic realities and drive the country towards economic prosperity were never evaluated by the selecting committees of political parties. Instead, the party leaders were more interested in and gave more weight on one quality in selecting their political candidates – was the candidate good enough in attracting people and their votes?
On the other hand, the vast majority in the country never realized what their expectations of politicians were. The public’s perception and the role model of politicians were completely different and certainly the public used unimportant yardsticks to assess the quality of politicians. The resultant truth was that the country was led by a set of people for almost seven decades, who did not have a clear vision and a detailed roadmap to drive the country towards economic, social and political prosperity.
It is, however, no use of lamenting about the past and stirring up the muddy pit over and over again as it only stinks like a sewer. Nevertheless, what is more important is to learn from the lessons of 70 years and take all the corrective measures to put the country back on the right track.
A quick analysis of key economic indicators will paint us the right picture of the economic condition in the country. The Sri Lankan economy achieved around 4 percent to 5 percent growth in 2016 and the economic outlook for 2017 will witness more or less the same growth rate.
In 2017, the government gross debt will lie between 75 percent and 80 percent of the country’s gross domestic product (GDP) and the inflation will hit more than 5 percent with the increase in demand and the adverse impact over supply. The unemployment rate is estimated to be at 4 percent and the trade deficit will still surpass US $ 800 million. The budget deficit for 2017 will reach 5 percent of GDP or will be more than Rs.700 billion.
The country’s economy is not yet in the intensive care unit (ICU), but the economic indicators are alarming more adversity with the government debt trap and ever increasing deficit of balance of payments. At this important juncture, it is absolutely necessary that the politicians, policymakers, intellectuals, business sector and public participate collectively in setting the political, economic and social direction of this country. If the politicians and policymakers do not proactively involve in this process, the public have to take the biggest responsibility and play their vital role in selecting their political leaders.
The country is already an economically, politically and socially feeble patient, as a result, the prevailing situation warrants some immediate solutions in the short run. However, it should also be borne in mind that the harvest of the short-term strategies can never be reaped without long-term plans to take the short-term achievements to the next level required for fulfilling the long-term economic aspirations.
The list of short-term initiatives and goals will be long, yet it is important to focus on the priorities.
Lowering budget deficit
No growth can be achieved without implementing cost-saving measures. Excessive government expenditure, largely on unproductive domains, has had adverse impacts on the fiscal deficit, government borrowing and trade balance. The current government is a coalition between two major parties in the country, making it more difficult to implement the much-needed economic reforms in the short run.
The excessive number of cabinet ministers, deputy ministers, secretaries and associated running costs has resulted in the ever increasing government expenses. The current portfolio of ministries and allocation of scope have merely been made to ensure the survival of the coalition in the short run, not to achieve the immediate savings required for minimizing the biggest burden on the annual budget.
As the government expenditure is increasing due to the current political climate in the county, along with the government debt trap, the policymakers are left with only one option, which is to increase the government revenue through simply introduction of a number of direct and indirect taxes. Such sudden tax reforms are detrimental and deviate largely from the essential characteristics of a good tax system: fairness, adequacy, simplicity, transparency and administrative ease. As the amount of indirect taxes in place goes up, it will inevitably put the prices of commodities up leading to higher inflation.
As a developing country, Sri Lanka needs to come up with a more stable tax framework and structure, which will form the basis for any tax reform under any government. A clear indirect and direct tax system coupled with robust administrative process will help the government achieve its revenue targets and fiscal stability. No system or law will be successful, if it is not implemented in the right way.
Recruiting talented new blood into the tax administrative process, use of new technology throughout the process and introduction of incentive-based salary structure for staff to achieve their performance goals, will positively address the loopholes in the current system. It is also important that these government bodies act and operate independently without political influence under the right leadership to achieve their organisational goals and objectives.
Managing state-owned enterprises
The government owns a number of key entities in the country and these entities fall into different categories: fully commercial, semi-commercial and not-for-profit entities. As witnessed by the history, the simple solution to reduce the fiscal burden arising from state-owned entities was to privatize them and make money in the short run.
Any state-owned commercial entity can be profitable if it operates independent of political interference. While the recruitment process of government entities must be independent to select the right candidates with the right set of skills to perform their duties, the entities must have the autonomy to operate as a competitive commercial entity with the other rivals in the market.
It is also important to restructure semi-commercial and non-commercial state-owned entities. The essential reforms will be to minimize bureaucracy in the entities and use of technology to expedite the processes. Empowering senior and junior staffs, creating an accountable culture, removing overlapping responsibilities, introduction of simple processes, curbing non-value operations and introduction of automated processes will boost the day-to-day operation and create a set of motivated government staff for excellent customer service.
As per the Census and Statistics Department, the total public servants in the public sector was around 875,000 and the total employees in the semi-government sector approximated to 250,300 at end-2016. While one would be able to draw conclusions on the amount of salaries to be allocated from the annual budget for these employees, it is also imperative to assess the financial impact of the government pension scheme.
The retirement benefit schemes are an essential part of the social security system of a country. Nonetheless, it must be restructured in a manner that the scheme becomes a retirement contribution plan, wherein both the employer and employee contribute to the plan on a monthly basis.
Most of the aforementioned reforms are required at institutional level but on a large scale, certain public entities can be combined together to bring efficiencies into operational processes and curb the unnecessary cost of maintenance of a non-commercial entity. This requires a careful analysis of scope of work of each government entity and simplification of processes to enhance productivity.
Achieving price stability
Volatility in production and supply along with increased demand for essential commodities have put greater pressure on prices leading to steady inflation throughout the year; further, increased indirect taxes on essential commodities as short-sighted fiscal policy has diminished the purchasing power of the people and led to create chaos among the low and fixed-income generating population.
Identification of essential commodities, preservation of cultivation lands, restrictions on clearance of cultivated lands for residential purpose, adoption of new technology replacing manual processes in cultivation, introduction and provision of fertile seeds, providing training to farmers on increasing crop production, educating people on food preservation, safe packaging and efficient: transportation of crops and introduction of financial mechanism in coordination with financial institutions to guarantee uniform flow of income to farmers throughout the year are some of the actionable points in order to cope with a number of key issues related to the volatility in the commodity prices. This will also be instrumental in addressing the scarcity issue of essential food items in the country.
Imports and exports
One reason for the higher amount of imports was purchase of military weapons and equipment during the war time in Sri Lanka. The country is still spending large amounts of money on petroleum oil and related products, machinery, vehicles and transport equipment, textile fabrics, cements and construction materials.
While curbing imports will be difficult in the short run, it will be more feasible to explore the opportunities for boosting exports. The United States remains as the country’s biggest export destination followed by the United Kingdom. Restoration of GSP Plus under the new government will be a big push towards achieving an export-led economy in the long run but it will be vital to address the key issues faced by the exporters.
Disseminating knowledge on the export process among the public and addressing the grass roots issues of exporters will be the key priorities in order to encourage exports. Further, training and technical advice must be provided for the diversification of products, packaging, marketing, value addition, being competitive, bringing efficiencies, cost management, adoption of technology and use of information technology.
Pushing the exporting industry forward will enormously help the country reduce the current trade deficit of around US $ 800 million, which will in turn have a positive impact over the exchange rate and inflation in the country.
Restoration of law and order
Achieving economic goals can never be materialized if the vast majority of population in a country does not respect the rule of law and law enforcement authorities do not enforce the existing rules and regulations. Such a situation will diminish the public’s faith in government, governing bodies and overall system in the country and will demotivate the public to participate in the overall economic transformation process.
The existence of law and order is the strongest foundation for building pillars for economic success. It will enhance public faith in government, encourage the public to participate in policymaking, empower them to make decisions and inspire them to fight for injustice.
Long-term and way forward
As mentioned, short-term initiatives must be underpinned by long-term strategies to harness the benefits of the short-term achievements in an economy. The key measures in the short run will help the government reduce its debt burden and invest money on productive domains such as education and human capital, infrastructure, health, research and development and technology.
Even though it is not intended to discuss long-term plans and strategies in details in this article, it is worth mentioning some areas where the government needs to pay its urgent attention. As far as long-term strategies for pursuing sustainable economic development are concerned, the government must focus on reinstating political stability, restoring law and order, investing in quality education, adopting good governance and best practices, investing in health and nutrition, preserving forests and biodiversity, investing in technology and clean energy, expanding infrastructure and promoting small and medium enterprises.
The country has witnessed enough political swings during the post-independence history of the country, which has led to continuous changes in policies and procedures. Changes in the policies and making systematic changes to achieve the required goals must go beyond popular party manifestos. Most importantly, a shift in political power at each general election should not result in change in the master plan in place for achieving sustainable development goals in the long run.
(A.A. Indika Nishar is Finance Manager at Bank of Ceylon and can be contacted through firstname.lastname@example.org)