Sri Lanka’s debt has increased from Rs.7.3 trillion to Rs.9.4 trillion in the last two years. With domestic rates moving up from 6 percent to 10.74 percent, on a domestic portfolio of Rs.4277.8 billion, there would be an additional cost of around Rs.202.1 billion and for the new borrowings the total cost would be Rs.113.25 billion.
An amount of more than Rs.315 billion would be required to pay back the interest. Repayment of the foreign debt as at January 1, 2015 was Rs.3132 billion. This has now moved up to Rs.4070 billion. Furthermore, the USD to LKR in January 2015 was 131.00 and by March 2017, the USD to LKR was around 152.50. This forex depreciation of around 16 percent is now having huge implications in all sectors.
Furthermore, the downward performances of equity markets with foreigners exiting both equity and debt securities, have negatively impacted the LKR. We cannot allow interest rates to move up and the LKR to depreciate anymore without a clear strategy.
For a start, the Central Bank should ideally come under the purview of the Finance Ministry like in the past 50 years to ensure both the treasury and the Central Bank sing from the same hymn sheet. Secondly, to get out of this forex crisis, it is best that we start focusing on increasing our export income and tourism income using the 60+ embassies oversees.
The government has aggressively looked to sign up free trade agreements (FTAs) with China, India and Singapore to boost our export growth and foreign direct investments (FDIs). In fact, the prime minister speaking at the World Export Development Forum (WEDF) sessions at the BMICH some time back said that the Economic Cooperation and Technical Agreement (ETCA) with India that will be signed soon will enable Sri Lanka to have closer engagement with India, especially the five southern states, which together with India are the fastest growing segment of the Indian subcontinent and at the moment have a combined gross domestic product (GDP) of US $ 500 billion.
He also said Sri Lanka is negotiating another FTA with Singapore and they are very receptive because they believe that Bay of Bengal countries will be fast-growing countries with fast-growing incomes in the next 20-30 years. Under the Chinese One Belt initiative with China, Sri Lanka is also negotiating an FTA and a comprehensive economic partnership dialogue with Japan.
The prime minister’s move to fast-track the FTAs with Singapore and China and the ETCA, with India is with a view to generate new investments and jobs. He knows we cannot protect our economy by stagnating behind tariff walls. The best protection possible is a mutual lowering of tariff barriers among friendly nations so that all may benefit from the free flow of goods.
Increased economic activity resulting from increased trade will provide more job opportunities for our young workers. Our industry, our agriculture, our services will benefit from increased export opportunities as other nations agree to lower their tariffs. Increased exports and imports will benefit our ports, steamship lines and airlines as they handle an increased amount of trade. Lowering our tariffs will provide an increased flow of goods for our consumers.
Our industries will be stimulated by increased export opportunities and by freer competition with the industries of other nations for an even greater effort to develop an efficient, economic and productive system. The results can usher in a dynamic new era of growth unlike in the past, where exports dwindled and Sri Lanka had to rely more on remittances and foreign loans.
Growth in exports
Exports are probably part of the answer of where we will find job growth. However, the issue of exporting our way to job growth is harder than it appears. When a country exports goods, it sells them to a foreign market, that is, to consumers, businesses or governments in another country. Those exports create opportunities and bring foreign money into the country, which increases the exporting nation’s GDP.
So, at a time when good jobs are in short supply, building exports is an imperative. But as we boost our exports, we will have to start producing more goods that are more labour intensive, that way, as exports grow, it will become a more productive engine. Therefore, job growth isn’t just about where jobs are today; this is where jobs for our young Sri Lankans will be tomorrow. They need to be job-ready.
Today the world’s powerful customers and fastest growing markets are beyond our borders. So, if we want to find new growth streams, if we want to find new markets and new opportunity, we’ve got to compete for those new customers—because other nations are competing for those customers day and night.
Trade barriers must go
More compelling for free trade is the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the early 1990s. In both countries, the decision to reverse protectionist policies was not the only reform undertaken but it was an important component. In developed countries trade liberalization, which started earlier in the post-war period, was accompanied by other forms of economic opportunities for example, a return to currency convertibility, resulting in rapid GDP growth.
Moreover, the argument that historical experience supports the case for protectionism is now flawed. The economic historian Douglas Irwin has challenged the argument that the 19th century protectionist policy aided the growth of infant industries in the United States; nor should the promoters of free trade worry that trade openness results in chaos for some developing countries. Trade is only a facilitating device. If a country’s infrastructure is bad or have domestic policies that prevent investors from responding to market opportunities such as licensing restrictions, very little progress can be achieved.
Critics of free trade also argue that trade-driven growth benefits only the rich and not the poor. In India, for example, after the economic and education reforms nearly 200 million people have come out of poverty. In China, which grew faster, it is estimated that more than 300 million people have moved out of the poverty line since the reforms were initiated. Every major trading nation today is actively negotiating bilateral and regional FTAs.
However, for FTAs to work for Sri Lanka we need to work hard to improve our competitiveness and change the way we run our administration. But we need someone with a backbone in the government to give leadership to this effort to get ourselves out of this debt crisis; a cabinet reshuffle is not the answer, good leadership is
(Dinesh Weerakkody is a thought leader)