Whither Sri Lanka’s economy

25 October 2017 11:32 am - 0     - {{hitsCtrl.values.hits}}

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Many articles have been written by economists and other experts analysing Sri Lanka’s economic performance in recent times and drawing comparisons to the performance during the last regime. As a layman, I thought of attempting to make an objective analysis and to suggest some ways forward. 
An economy’s performance is assessed on gross domestic product (GDP) growth, unemployment rate, inflationary tendencies, value of a country’s currency, foreign direct investments (FDI) and the country’s reserves. 


Sri Lanka has a relatively poor record compared to other developing countries in regard to FDI. (See Table 2) This year too I believe there has been no dramatic improvement.  


Foreign investments in the stock market have improved substantially due to a variety of reasons that these are temporary inflows of foreign exchange, which can flow out very easily, depending on the local and global economic trends.


The situation regarding balance of payments has also deteriorated over the period. (See Table 3) However, it is reported that exports have shown a resurgence in the last three to four months and that the balance of trade 
has improved.


The position regarding reserves has also deteriorated as the Central Bank has been utilizing the reserves for supporting the rupee and thereby holding it at artificial levels. (See Table 4) A policy change appears to have been made not to do so and with the leasing out of the Hambantota port to a Chinese company, it is anticipated the reserve position will 
improve this year.

 


General economic performance 
Judging by the given statistics, it is apparent that there has been a gradual deterioration in the country’s performance during the last 
three years. 


This government inherited a debt-ridden economy from the previous administration. Basically the debt had been created by investing in numerous infrastructure projects such as the Hambantota port and Mattala airport, which have been carried out without proper feasibility studies and on the basis of unsolicited projects funded by debt, which has resulted in a serious ‘debt trap’ to the extent that almost the entire income of the country is being utilized to service the debt.  


The total debt inherited by the present government amounted to approximately 7.4 million. The new government, which came into power in January 2015, had to fulfil a commitment given during the election campaign of increasing the salaries of public servants by Rs.10,000 each. With a total of around 1.4 million employees, this resulted in an additional debt burden of Rs.14 billion per month or Rs.168 billion per year, which will be a recurring burden, further exacerbating the total debt burden of the country, resulting in the total debt increasing to around Rs.9.38 billion. The current outstanding debt is estimated to be Rs.9.3 billion.

 


Exports 
The chances of there being a dramatic increase in exports are very small in a global economy, which is perhaps not in a growth phase. Fortunately, the tea prices have rebounded and we are now receiving the highest prices on record to date, making Sri Lanka tea the most expensive in the world and the sustainability of these high prices is questionable. However, due mainly to the increasing tea prices, the export income has increased during the last two months compared to last year. 


Production and productivity in the tea plantations have also reduced due to the drought and the ban on the utilization of glyphosate, which has been banned to be imported to Sri Lanka on the assumption that it is the cause of chronic kidney disease (CKD) of unidentified origin. Though the prices have gone up, the reduction in production has reduced the potential gain in foreign exchange 
on tea exports.


Glyphosate was a popular weedicide used extensively for weed control in the plantations and by banning it for not totally justifiable reasons, the plantations have been badly affected with weeds growing out of control and the cost of manual weeding been prohibitive and also environmentally not sustainable.


There has been no substantial increase in income from garment exports despite the GSP Plus facility being now available and the export income from garments appears to be plateauing. 

 


Tourism 
The only industry that seems to be thriving and growing is the tourist industry. Unfortunately, the government’s management of the industry is in question with very poor leadership at the top. It is noteworthy that arrivals have increased to 2,050,832 (14 percent growth) and foreign exchange earnings have also improved from US $ 2981 million in 2015 to US $ 3518 million.


Furthermore, the good sign is that earnings per average room night have also increased from US $ 164.1 in 2015 to US $ 168.2 in 2016, which may be an indication that tourists are spending more and that we are attracting a higher class of tourists. The master plan for the tourist industry has not yet seen the light of day and appears to be not finalized due to differences of opinion within the ministry. 
Recently, a veteran in the tourist industry, who rose from the ranks and acquired years of experience and expertise, has been moved out and replaced by a reputed private sector former CEO, who has no experience of the industry. Ironically, the veteran who has moved out is now in charge of a special unit under the prime minister and operating from Temple Trees and his task is supposed to be to drive the master plan. Such ad hoc changes cannot give much credibility to the activities of a ministry, which appears to have neither the vision nor foresight to drive the only growth area in 
Sri Lanka’s economy. 


Perhaps the dilemma of the industry is whether to attract more cheap tourists or target higher-spending tourists for which purpose the service levels of the industry have to improve to the levels maintained by our competitors like Thailand, Cambodia, Laos and Vietnam. Furthermore, in my mind, there is another question mark as to how many tourists the island can really sustain.  


When you look at the prime tourist attractions like the wildlife sanctuaries, ancient cities, including Sigiriya and Dambulla, one wonders whether the existing infrastructure can cope with a substantial increase without having an adverse impact on the flora and fauna of the wildlife sanctuaries and the wear and tear on the other environmental factors, with the present infrastructure.


The prime minister in the course of an excellent address at the Future of Tourism Summit, projecting the future potential of Sri Lanka’s tourist industry indicated that the target for arrivals would be five million visitors by 2025. I wonder on what basis this target has been fixed because I have my concerns as to whether Sri Lanka can sustain such a high level of tourists.


One other constraint of the tourist industry is the time taken for a visitor to travel to the places of tourist attractions. The airport expressway has reduced the time to travel from the airport but once you exit from the expressway, it can take as much time as 30 minutes to reach the city centre depending on the traffic.


Similarly, it takes only 45 minutes on the southern expressway to reach Galle and another 20 minutes to reach Matara but to get to the expressway from the city centre can take as much as 45 minutes to one hour and so the reduction in time in travelling to the south is almost nullified.


It is my view that instead of spending enormous sums of money (getting further into debt) on building expressways, which take a considerable period to be completed, every tourist area should have a good domestic airport to service domestic flights. For instance, the Katukurunda airport for Bentota, Koggala for Galle, Weeraketiya for the deep south, an airport for the Cultural Triangle and an airport for the Pasikudha-Kalkudha areas, to which access take a disproportionate time. Such airports could be developed by being tendered on a competitive basis to the private sector at little cost to the state.
In addition, if we create a golf course in every tourist area we can attract the high-net-worth golf-playing tourists, who can take a flight directly from Bandaranaike International Airport to the tourist area for playing golf as it is well known that in countries like Japan and Korea golfers sometimes have to travel one to two hours to get to the nearest golf course available. It is also reported that golf enthusiasts charter flights from the developed world to destinations in developing countries to enjoy golf holidays.


There is another category of tourists we can attract and that is the sector which would like to use Sri Lanka as a conference centre. It is referred to MICE (Meetings, Incentives, Conferencing and Exhibitions). This sector requires large conferencing facilities with perhaps a conference hall, which can accommodate 10,000 people, together with smaller units with the same facility for break up groups. This concept has been on the drawing boards for a long time but not implemented. 
A suitable location can be found off the airport express highway, where such a facility could be built together with a luxury hotel to accommodate the participants with relatively easy access to Colombo. A location around the Coconut Triangle may perhaps 
serve the purpose.


Yachting is also a popular hobby of the rich and some of them spend almost their whole life yachting around the world. Presently 100s of yachts call over at the Galle harbour, where they are provided with basic facilities. A yacht marina using part of the Galle harbour would attract thousands of new tourists. Such a yacht marina should be one of the priorities for tourism in the Southern Province. I observe that the new Port City also has provisions for a yacht marina, which will be a further attraction for this unique class of tourists.


While we see small countries like Macedonia and Croatia in addition to extensive promotion by Thailand, Malaysia and Indonesia by advertising very effectively on CNN with alluring information regarding their beautiful tourist locations Sri Lanka has no publicity of this nature. I wonder whether the master plan will incorporate such publicity.

 


Foreign direct investment
Sri Lanka receives foreign investment mainly from expatriate workers, many of them women who toil and labour under almost harrowing conditions to send their savings back to their loved ones back home. Due to the oil prices declining, the employment opportunities have reduced and the expatriate remittances have also reduced somewhat and do not appear to show a turnaround unless the oil prices increase.


There has been considerable interest in the Colombo share market as a result of which considerable foreign investments have taken place. It is however well known that such investments can move out very quickly when more attractive destinations are identified.


The actual level of FDI in the Sri Lankan economy has been appalling when comparing with the FDIs flowing into countries like Vietnam, Cambodia, Burma and Laos.  There are many reasons for the shortfall in foreign investments to our country, identified as mainly due to political uncertainty, lack of a definite policy for attracting FDI and no special attraction for FDIs in a country with a population of around 21 million with a per capita income of around US $ 3900. Obviously the internal market is far from attractive and we can only attract FDIs if we can operate as a stepping stone as exports to India and other South Asian and other South East 
Asian economies.

 


Export promotion strategy
Quoting from an article in Daily FT on ‘National strategy towards export promotion’ states, “Revival of exports needs farsighted yet practical strategies with stakeholder consensus. The link between export growth and economic growth is highly debated in economic literature. Although the common notion is that there is a by-directional relationship between the two, this relationship has not been seen in relation to Sri Lanka.  This was experienced between 2000 and 2016, wherein GDP grew by a compound annual growth rate (CAGR) of 10.4 percent while exports grew by only 4 percent (CAGR). Sri Lanka’s economic growth during the recent past has mainly been pushed by the expansion of domestic demand rather than 
increased exports.


The high level of economic growth witnessed during the period 2005-2012, which was mainly due to the expansion in domestic demand, started to stagnate within a 4.5 percent band from 2013 onwards, emphasizing that external demand is paramount for a sustained base of economic growth in a small economy like 
Sri Lanka. 


The widening trade and current account deficits and an increased reliance on unsustainable levels of foreign borrowings were an inevitable consequence of growth, which was dependent on non-tradeables and domestic demand. This provides compelling evidence that comprehensive strategies, which focus on the promotion of high value exports, are essential to achieve a sustainable external current account balance and high growth.

 


Vision 2025
The unity government released its newest economic policy statement titled ‘V2025’, the author of which was Prime Minister Ranil Wickremesinghe. According to well-known economist W.A. Wijewardena, quote, “this was the fourth of such statements which it placed before the people during the last two-year period. The first statement was incorporated in the manifesto of the United National Party (UNP), when it sought power at the general elections in August 2015. 


Then three months after the elections, a comprehensive policy statement was delivered by the prime minister in early November 2015, two weeks before the 2016 budget by his finance minister. Almost all the promises relating to the economy, which were made in the manifesto, were represented in the first policy statement in addition to some new policies supposedly needed for elevating Sri Lanka to reach the middle-income country status over the years.


However, the budget presented two weeks later was out of alignment with the goals set in the statement. A third policy statement was presented in October 2016 by the prime minister, which focused on how Sri Lanka should get itself integrated into the world economy in a bid to expand its export base.  


Now after about 11 months, another policy statement has surfaced two months before the presentation of budget 2018. This policy statement once again appears to be an over-optimistic one with hardly realizable optimistic growth targets.” Unquote.


In an article by Prof. Srimevan Colombage in the Island of September 18, 2017, it is argued that these targets appear to be far too optimistic. Quote “According to him Vision 2025 states that the aim is to raise per capita income per year in three years’ time to US $ 5000 per year, create one million jobs, increase FDI to US $ 5 billion per year and double exports to US $ 20 billion per year. These inter mediate targets are supposed to lay the foundation for Vision 2025; Sri Lanka to become an upper-middle 
income country.  


Presently the country’s per capita income is around US $ 4,000.  In order to reach the projected per capita income of US $ 5,000 as envisaged in V2025, the GDP growth rate should be at least 8 percent a year in the next three years, compared with the growth rate of 4.4 percent realized last year and 4.7 percent estimated for this year.  In other words the GDP growth rate should almost double from the present low growth trajectory. 


The country will reach the upper-middle income category by 2025, according to this document. This means that per capita income should be over US $ 12,000 by that year implying a fourfold increase from the present level. In order to attain that target, GDP should grow by at least 15 percent annually during the next eight years. This is more than a threefold increase of the present GDP growth rate, which is running at around 4.5 percent.  


It is miraculous to expect such swift growth within a short time span of three to eight years. The average GDP growth rate achieved throughout the last four decades following the liberalization of the economy in 1977 is only 5.1 percent a year. The country’s potential growth remains only around 4 to 5 percent. The reason is that Sri Lanka has failed to move from its traditional factor-driven growth model to technology-driven growth model unlike the fast-growing East Asian economies. Hence, raising the GDP growth to 8 percent as envisaged in the new document does not seem to be feasible.


More importantly, the DGP growth predictions implied in the Vision document are far above those that can be found in the staff report of the IMF for the second review of the Extended Fund Facility concluded in June 2017.  The annual growth projection presented in that report (compiled in consultation with local authorities) for the period 2018 to 2021 is only 5.0 percent which appears to be more realistic. If we use these figures the maximum per capita income that could be reached in 2020 will be around US $ 4600, which is lower than the level envisaged in the Vision.”


Prof. Colombage goes on to state, quote, “that export projections are over ambitious. Doubling of annual export earnings from the present level to US $ 20 million as expected in V2025, will require an annual export growth rate of at least 25 percent. Again it contradicts with the official projections given in the IMF report, which forecasts an annual export growth of only about 5 percent for the next four years.


It is illusive to expect doubling of export earnings, considering the dismal performance of the export sector in recent decades.


Although industrial exports account for nearly 80 percent of export earnings, Sri Lanka still depends on low value added, low-tech and labour-intensive basic industries, mainly garments, which account for almost one half of total export earnings. Other industrial exports consisting of food and beverages, rubber and leather products, machinery and transport equipment and petroleum products too are primary level industries.


The East Asian countries by contrast, phased out such primary industries decades ago and diversified their industrial structure towards high-tech products such as electronic and electric equipment, vehicles, computers, ships, medical apparatus and optical and 
scientific equipment.


Given our traditional and static industrial structure, a miraculous growth in exports cannot be expected in the next few years. The much-talked about achievements such as GSP Plus or the planned free trade agreements like the Economic and Technical Corporations Agreement (ETCA) with India, can do very little to boost the export sector. The reason is that export constraints arise mainly from domestic factors rather than from limited marketing opportunities abroad.


FDI is expected to rise to US $ 5 billion per year during the next three years, according to the intermediate targets of V2025. This seems to be a gross exaggeration as the official projections given in the IMF report indicates FDI inflows of only around US $ 1 billion per year over the period 2018-2021. 


A fivefold increase in FDIs cannot be expected, given the unfavourable domestic conditions and the global capital market developments. 


Domestic factors such as macroeconomic disarrays political instability, poor business confidence and corruption have made severe dents in the country’s image in front of foreign investors. Meanwhile, inward remittances from migrant workers have been declining in recent months worsening the balance of payment situation.


In the circumstances, the government will be compelled to depend on foreign borrowings on commercial terms to carry out the huge infrastructure projects such as the Central Highway. In the circumstances the reduction in the debt burden as envisaged in V2025 is doubtful.” Unquote. 

 


Conclusion
1.Reduction of unnecessary wasteful expenditure by the state by:
a) Pressurizing the agriculture minister, who is a powerful personality in the Sri Lanka Freedom Party and in the ‘Yahapalana’ government, to occupy forthwith the large building on Parliament Road constructed by D P Jayasinghe & Company, which I believe he has leased out around two years ago at an enormous lease rent but not yet occupied the building.


b) According to newspaper reports, the budget of the president has been increased by 50 percent and the budget of the prime minister by 30 percent compared to last year. In my opinion, such increases in expenditure cannot be justified in a debt-ridden economy, which is showing hardly any signs of progress.


c) While top brands of cars and vehicles such as Mercedes Benz, BMW, Range Rover, Volvo, etc. are idling in government yards supposedly due to lack of repairs, the state is spending valuable resources in importing luxury vehicles for the cabinet ministers and other members of parliament. Instead, a proper survey should be made of the vehicles in the government yards by requesting the agents and distributors to inspect the vehicles and provide estimates for repairing and making them road worthy. As finance minister, you can even make a request for these vehicle agents to repair and make these discarded vehicles road worthy to be used for state purposes without cost to the state.


d) Take strong measures to reduce losses in state-owned enterprises where uncontrolled expenditure is further increasing the monumental losses incurred by many of them.


2.The World Bank’s latest prediction states that Sri Lanka is to grow slowest among the key South Asian nations and the projections are stated in Table 5.


3.The latest Central Bank data showed remittances from Sri Lankan expatriates particularly falling by about a record 10 percent to US $ 556.6 million compared to 2016. Further remittances declined by 6.3 percent cumulatively for the first eight months to US $ 4.5 million year-on-year.Unfortunately, this is an indication of the potential for inward remittances from the Middle East showing a declining trend.
4.A ministerial spokesman very close to the prime minister has given a statement to say that “things are happening”. He has claimed that the revamped Board of Investment was tasked to raise FDIs to US $ 1.6 million in 2016 and has been tasked to raise over US $ 2 billion in 2019. The tourism sector has been challenged to have earning of US $ 7 billion by 2020. These are indeed bullish projections, which if achieved, will be very beneficial to our economy. However, it is necessary “to walk the talk”.


5.This government criticized the previous one for carrying out infrastructure projects like the Hambantota port and Mattala airport on borrowed money with hardly any return. However, they are going ahead with another huge infrastructure project, the Central Expressway, once again borrowing perhaps on commercial terms. This will only further exacerbate the monumental debt burden without providing returns to service such debts, especially in the context of the total government revenue being hardly sufficient to service the debt burden.


6.The government has claimed recently that they have increased revenue by increases in indirect taxation. This has unfortunately burdened the poor masses who have to pay the price in their daily living, which is unbearable. The government strategy to widen the tax base is timely as there are many individuals like doctors, lawyers, tuition masters, traders and many entrepreneurs who are not declaring their correct accessible income and evading taxes. The strategy to register the national identification number on every invoice and transaction will hopefully bring into the tax net these high-earning non-taxpaying wealthy individuals.


7.Although a top government spokesman recently claimed that the government has overcome the debt trap and is on the way to ushering an era of growth, this I believe is an unproven and dangerous fallacy, unless the government is trying to reduce the debt burden by selling the ‘family silver’.


8.Unless the government focuses on the immediate future to increase production and productivity, bring down the cost of living, reduce the luxurious lifestyle of the huge cabinet and get down to working at grass root levels, there can be no salvation from increasing the debt trap further. 


(Mahendra Amarasuriya is former Chairman of Commercial Bank PLC and United Motors PLC, former Deputy Chairman of Hayleys, former Chairman of Employers’ Federation of Ceylon, former Chairman of Planters’ Association of Ceylon, former Chairman of International Chamber of Commerce of Sri Lanka and former Chairman of National Agro Business Council and Joint Business Forum of Chambers of Commerce and Industry (JBIZ))

 

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