• Colombo based policy think tank LIRNEasia Chair Prof. Rohan Samarajiva expounds on rebuilding the economy

 Sri Lanka no longer dominates international headlines probably because there seems to be some return to normalcy. But, what is normal? The country still battles high inflation in the 30% range, even amid a rapid decline from the impossible 80% it had risen to towards the latter part of last year (2022). Fuel is still distributed on a quota system while the cost of living, though reduced considerably, remains significantly high for a developing country, with an increasing segment of economically vulnerable people. The country has been through some decisive months. The International Monetary Fund (IMF) bailout package (provided Sri Lanka restructures her debt) has been a salve for the bleeding wounds that Sri Lanka developed due to gross fiscal mismanagement in the past. The confidence by international debtors has been a panacea in the doom and gloom and Sri Lanka has begun tightening her belt with a ‘come what may’ attitude. Or, is that just on the surface? Sri Lanka needs much more than an IMF bailout to survive. Hence, while there is jubilation about the loan (which has to be repaid), the country needs to start rebuilding a sustainable economy. Colombo based policy research think tank LIRNEasia Chairman Prof. Rohan Samarajiva was on Kaleidoscope this week, speaking frankly on the need for focus and the collective will power needed to rebuild Sri Lanka’s economy.

Q: In your opinion, is Sri Lanka back to normal, economy-wise?

A: No. We are not back to normal, but we're better than we used to be. Back to normal in a real sense is when we can open letters of credit (LCs) and enter into long term contracts for fuel. We can’t do that yet. However, if normalcy is measured in terms of being able to get fuel for your car, then you could say things are normal. Even if we have a quota, it doesn’t apply to rich people as the black market has been supplying them. The middle class and the rich have not been suffering, only the poor have been.

Q: Are we on the right track to rebuild the economy?

A: The concentration is off and that’s a pity. However, Central Bank Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardana are concentrating and we should praise them for that, but, the rest of us have lost our focus because life is deemed normal and we think we can live our normal lives. While that is a good stand to take because that’s one way of getting the economy going, we should also understand that in an unprecedented crisis, it would need some radical steps to get us back to normal.

Q: What are these radical steps? 

A: Paying more taxes, for one, which nobody wants to do, and accepting changes including certain forms of privatisation and restructuring, which means we have to get used to some services not being provided by the Government. We have been living beyond our means as a country and as a people. Many professionals baulked at the increase in taxation because they had enormous loan portfolios. Taxes pushed them over the edge. The problem wasn’t the taxes, it was the loans, just like the country.

Q: What would be top priority in rebuilding the economy?

A: Very simply, more exports. Dr. Weerasinghe was absolutely correct when he said that those connected to the United States Dollar economy or the export economy would not suffer in the short term and would survive.

Q: What are the bottlenecks you foresee? 

A: Complacency. The idea that ‘you can make changes everywhere but not in my little corner’ is going to be the biggest problem. I was having a discussion with a group of trade union leaders and each kept defending their own institutions. At this rate, there won’t be anything to privatise or restructure. Everyone has to see the bigger picture and come together.

Q: Taxes cannot be increased anymore because people are finding it very difficult. What other forms of revenue can we look at?

A: Taxes may have to be reconfigured, but I don’t think we can rule out raising taxes. The issue is, the Government really has only one source of revenue – taxes. There is nothing else. There are three types of taxes: taxes on foreign trade, excise taxes (on alcohol and vehicles) and income taxes (corporate and personal). There is nothing beyond that. Now, when people ask about non-tax revenues, those are fees paid for Government services such as, obtaining birth and death certificates, passports, and State run attractions such as, parks and reserves. But, in most cases, the paperwork of collecting those monies far exceeds that of the fee. Tolls have also been increased but that won’t make much of a difference. It is taxes that continue throughout the year that will change the game. The Government needs revenue throughout the year because salaries have to be paid. In 2021, 86% of the tax revenue paid Government sector salaries and pensions. Now, it’s 65%. The Government has only 35% of its main revenue source to run the entire country and fund services such as healthcare.

Q: You have spoken about auctioning non-existent resources. What exactly would this be? 

A: Here is an example. We all love our 1990 ambulance service. Now, that’s an auction of a non-existent resource. It is a service for which a reasonable charge can be levied. My suggestion is that people should at least be given an invoice at the end of a trip, notifying them of the cost of the service and asking them to pay something towards the cost, if they wish to contribute. That is the opposite of a non-existent resource. While 1990 is a service that saves lives, do we have the money to sustain it?

Q: If we are looking at diversifying our exports, where should we be looking? 

A: A total of 64% of all exports are in the baskets of tea, apparel, and rubber, with tea and apparel vulnerable to global changes. Diversification cannot be achieved in the short term as it’s a medium to long term plan. We need to get into global production networks and value chains. We should focus on component production, which we can then send to factories in Malaysia, Thailand, or India. These areas are generally covered by free trade agreements and require the elimination of para-tariffs which have been imposed over the last two decades. We should be focusing on high value, low labour products in the value chain.

Q: Rebuilding the economy is a collective exercise. What would this entail? 

A: Sri Lankans are used to blaming the Government but the Government is doing what it thinks that we want. It is the rich who are driving the Government crazy, not the poor. The tax cuts in 2019 that tipped us into disaster didn’t benefit the poor. It was the rich who wanted it and got it. We need to push back from this ‘Government as a cornucopia, giver of goodies’ mentality to a ‘Government as creating conditions for us to be competitive and productive’. It is painful and not easy, but it has to be done.

Q: It is very difficult to change the mindset of a country that has got used to bribery, corruption, and handouts. Will we ever get out of this mindset? 

A: Back in 2021, I was speaking with people from all political parties and I quoted Samuel Johnson: ‘When one has a few weeks to live, there’s nothing like that to concentrate the mind’. That is the situation that we’re in. It goes back to the issue of complacency. We have to think that we don’t have a long time to live. So, concentrate, think anew, and think different. We can’t keep going on about the IMF agreement, because again, that is not done for three years. Right now, our debt has not been restructured and if at any time conditions are not fulfilled, the IMF funding will be halted. Even with everything working perfectly, only a 3% growth is envisaged. That is just not enough. We must have a complementary growth agenda because we are not out of the woods yet and won’t be for a minimum of three years, maybe 10.

Q: Where do you see Sri Lanka at the end of this year (2023)? 

A: I am an optimist. I think we’ll be able to unload coal and oil based on LCs. That is my test. Also, most don’t understand that we cannot export without imports. A larger part of our import basket goes to the apparel sector, our largest exporter. If imports are constrained, exports are constrained. We must resolve this by the end of the year. Then, we can start our growth agenda. But, don’t forget those in the informal economy, who live day to day lives, got crushed by the Covid-19 pandemic and stomped on by the economic crisis. They have no reserves and nothing left. I am very happy about the campaign to get a social safety net mechanism in place. These people through no fault of theirs were subject to twin tsunamis – the pandemic with its lockdowns and the economic crisis. We cannot forget that they are a part of our population.

(The writer is the Host, Director, and Co-Producer of the weekly digital programme ‘Kaleidoscope with Savithri Rodrigo’, which can be viewed on YouTube, Facebook, Instagram, and LinkedIn. She has over three decades of experience in print, electronic, and social media.)