A country at economic crossroads

22 Jan 2022

A country at economic crossroads

22 Jan 2022

By Mano Mudunkotuwa Long lines for commodities in Sri Lanka are currently the norm rather than the exception. As each crisis is followed by another, the country’s economy is going through one of the worst phases in our living memory. Insufficient foreign reserves, the rising cost of fuel, short supply of LP gas and other essential commodities, and overarching high inflation have created a very uncertain and bleak economic situation. Further, unlike during previous economic downturns, this time the impact is felt across the board through all income and social levels. Highlighting the dire situation that the lower level of the society is going through, many are finding it difficult to put a proper plate of food on their tables. One can say that this economic situation is a result of the negative economic impact from the pandemic, but as the dust settles and things become clear, it is evident that the major fault falls on decades of poor economic governance of the country. Economic woes The latest economic issue is the shortage of LP gas created due to a lack of foreign reserves. The gas crisis is further aggravated by explosions leading to injuries and death. The brunt of this is borne by women who are facing life-threatening situations in the mere process of preparing a meal for their family. This is on top of the burden put on consumers with the increase of gas cylinder prices by about 84% in October 2021. In addition, fuel price increases have happened twice in 2021, resulting in hikes of Rs. 20 and Rs. 40 in diesel and petrol respectively. These increases have had a knock-on effect on the economy, leading to price increases in all sorts of goods and services. For example, public transport – although prices of train tickets have remained largely unchanged, the minimum bus fare now stands at Rs. 17. Another example for recent inefficient Government decisions is the shift and reverse on the organic agriculture policy. As a result, prices of food items have increased exponentially over the past few months as the expected harvest has not been gained with the implemented organic agriculture policy. The implications of such poor decision making are such that not only is the whole country experiencing price increases, the threat of food shortages is also looming over us. The Government’s solution is to import essentials, thereby worsening another crisis – the foreign reserves shortage. Inflation rises According to Central Bank data, the last three months of 2021 have seen the highest year-on-year monthly inflation over the last three years, at 7.6%, 9.9%, and 12.1% in October, November, and December respectively. However, the actual impact on the public has been much higher. Since the beginning of the pandemic, most households which do not depend on a fixed income have been struggling to survive. Long curfew periods restricted their ability to earn a daily wage and pushed them to use up whatever savings that they had. Hence, with rising commodity prices, the public is battling to survive – let alone grow. The most recent action by the Government to minimise the impact of high inflation was to increase salaries of Government workers by Rs. 5,000, which, although commendable, is not sufficient to make up for the impact of the rising cost of living. Further, this benefit is not enjoyed by the private sector workers or daily wage workers, leaving the majority facing the full brunt of inflation. At the heart of all these issues lies the lack of foreign reserves. Although impacted due to the pandemic, the root cause of the forex crisis lies with poor economic decision making by successive governments. Items such as LP gas, oil and other commodities are imported and their continuous supply is also impacted by the lack of sufficient foreign reserves. For example, the Ceylon Electricity Board (CEB) is currently struggling to ensure the supply of oil required for electricity generation, which if not ensured could lead to major power cuts soon. No policy, no consistency The lack of a cohesive economic policy by successive governments has led the country to this disastrous situation. One of the major decisions contributing to this situation is the slashing of tax rates by the current President when he came to power in late 2019. This measure greatly reduced Government revenue and narrowed its ability to provide the necessary welfare to the public, which is required to face economic hardships such as those we are currently facing. Sri Lanka’s tax to GDP ratio has steadily dropped from an all-time high of 16.5% in December 2015 to a record low 7.5% in December 2020 as a result of this tax policy as well as inefficient tax collection. Yet, although tax revenue has decreased over time in comparison to GDP, Government expenses have continued to grow, resulting in an ever-increasing budget deficit financed by debt. Sri Lanka now finds itself struggling to find a balance between fulfilling debt obligations and ensuring supply of essential commodities. There is a growing call for the authorities to default on debt and focus on fulfilling the requirement of essential commodities. This would help in managing domestic market prices of commodities, avoid food shortages, and ensure that domestic industries which depend on imports are not hindered, as well as help the economy move forward. The downside would be that the country would end up with a black mark. This would make it extremely difficult for it to borrow from international markets. In addition, several economic impacts may also occur such as an increase in interest rates, leading to the possibility of the economy contracting, depreciation of the rupee – making imports more expensive, high unemployment rate, and potential trade embargos. Another approach would be to restructure the debt. As of December 2021, foreign reserves of the country were around $ 3.1 billion from a low of $ 1.6 billion in November 2021, mainly due to financial assistance provided by the Chinese Government. Another measure that has been taken by the Central Bank is to increase the money supply of the country in line with Modern Monetary Theory. Accordingly, the Government has issued Rs. 1,400 billion (1.4 trillion) during 2021, marking it as the year in which the highest amount of money has been issued to the economy. This action undeniably results in further depreciation of the rupee and creates inflation. In addition, there is further talk on a common taxation policy on goods and services which is to be proposed by the Government soon. Going by the track record of measures proposed by the current Government, this is certain to be another debacle. Stopgap measures All these actions by successive governments are merely stopgap measures taken to overcome whatever issues a government is facing at a given point in time. As a result they lack cohesion, are inconsistent and uncoordinated, and at certain times impractical. Therefore, they have often further worsened rather than improved situations. Refusal to face challenges and instead offering empty assurances that all will be well certainly does not help build confidence in the ability of the Government to manage the current economic crisis. Hence what we require as a country is to agree that we are facing one of the most challenging times economically and acknowledge that revival of tourism or reducing the impact of the pandemic alone will not save the economy. What we require now is a cohesive economic policy, with clear and effective taxation which is properly implemented to ensure that the country’s economy can grow and the people of the country are not forced to prioritise one essential expense over another. Now is the time to stop kicking the can down the road while pinning all the blame on the pandemic. (The writer is a financial analyst and a member of the Progressive Women’s Collective.)

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A country at economic crossroads

A country at economic crossroads

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