Stabilising a turbulent economy

  • Stakeholders chime in on relief measures and economic strategies for 2022

By Sumudu Chamara

As far as the economy is concerned, most predictions for this year do not look very promising. Experts warn of further decline in foreign reserves, a rise in inflation, and even a famine. However, in an unexpected move, the Government started the new year announcing a massive relief package, which, according to Finance Minister Basil Rajapaksa, is worth Rs. 229 billion. Announcing the said package on 3 January, he also said that the Government is mulling further steps to stabilise the economy and ease the economic burden on the people.

As exciting as this new relief package sounds, the proposed reliefs do not address many other burning issues such as declining foreign reserves, the consumer goods shortages, and debt servicing. The political arena was filled with remarks both for and against the Government’s move, and overall, there is still a huge uncertainty regarding what the economy would be like this year.

New Year relief measures

The newest relief package is unlike any relief the country has seen in the recent past due to the amount of funds it requires. One thing that was noticeable was that it did not give the same attention to informal sector employees as it did to those in the formal sector.

Addressing the media, Rajapaksa said: “The public sector which comprises 1,450,450 employees will receive a Rs. 5,000 monthly allowance. This includes those who received a salary increment through the Budget allocations meant to address the teacher-principal salary anomalies. In addition, a total of 666,480 pensioners will also receive a Rs. 5,000 monthly allowance.”

Rajapaksa said that in order to provide this allowance for public sector employees, a sum of Rs. 87 billion will be allocated, adding that Rs. 40 billion will be allocated for the allowance for pensioners. An allowance of Rs. 5,000 will be granted to disabled soldiers as well.

With regard to private sector employees, he revealed: “The Cabinet of Ministers has requested Labour Minister Nimal Siripala de Silva to hold discussions with private sector employers and their trade unions to provide private sector employees also with an additional payment.”

The Government has also decided to provide an additional Rs. 1,000 monthly allowance for Samurdhi beneficiaries who are receiving Rs. 3,500 monthly. Adding that there are 1,793,000 Samurdhi beneficiaries in the country, he said that an additional allowance will be given to those who receive less than Rs. 3,500 as well, depending on the amount they receive through the Samurdhi programme (the amounts the eligible receive under Samurdhi vary).

Speaking of relief measures for farmers and crops, Rajapaksa said: “It has also been decided to increase the purchase price of paddy, which is currently at Rs. 50, by Rs. 25, especially considering the possible decline of harvests which could be in the range of 20-30%. We will ensure that this increased amount will not affect consumers, and the Government will bear that cost. 

“We have also noticed an increase in prices of vegetables and fruits. As a solution, the Cabinet, based on the past experiences and programmes, has decided to grant an allowance to those who farm in their lands. At present, there are around 1,836,266 gardens smaller than 20 perches, and we will grant Rs. 5,000 to those who farm in lands of that size. There are also around 2,238,831 gardens smaller than one acre but are bigger than 20 perches. We will provide Rs. 10,000 for those who farm in lands coming under that category. After a period of six months, if their endeavour is found to have been successful, they will be granted the same allowance again.”

According to Rajapaksa, to grant the allowance for farming in gardens, the Government will allocate Rs. 31 billion.

It was also noted during the said press briefing that the Government has decided to introduce a subsidy for estate sector workers. Under this programme, each estate sector family will receive 15 kilogrammes (kg) of wheat flour a month at Rs. 80 per kg. Rajapaksa noted that this is a relief of around Rs. 40 per kg, and that all those who have registered with the Employees’ Provident Fund will be eligible for this relief.

In addition, Rajapaksa noted that all essential food items and medicines will also be expected from all taxes.

Rajapaksa assured that the Government is not intending to impose new taxes to cover the costs the Government has to bear due to the granting of the said reliefs. In response to questions posed by the media, he said that in order to revive the economy, discussions are underway with the World Bank, the Asian Development Bank, and the International Monetary Fund (IMF), as well as with several friendly nations such as Japan and India.

Speaking to The Morning in this regard, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando raised concerns about how the Government can finance this relief package in a way that does not affect inflation and other activities in the country.

He explained: “According to Rajapaksa, he is going to use the money allocated through Budget 2022 for this relief package. I think that there are two sides we have to look into. First, why do we have to announce another relief package just one month after presenting the Budget? I understand that there are a lot of concerns coming from the people due to the high cost of living, with inflation hitting 22% and headline inflation hitting about 12%. That pressure has also been mounting at the grassroots level, and perhaps that is why Rajapaksa proposed these to provide some relief to the people. However, this can be perceived as a lack of consistency in our policies, and investors may look at this suspiciously. Secondly, we have to look at how we are going to finance this programme. Are we going to increase taxes, the possibility of which Rajapaksa has categorically denied? Rajapaksa said that this will be financed through the allocations from the Budget. However, there has to be some expenditure we have to cut down, which is likely to be from the capital expenditure, not from recurrent expenditure. There is very little room for us to cut down on recurrent expenditure. The worst case scenario, in my view, could be if we decide to finance the relief package through borrowing money from the Central Bank of Sri Lanka (CBSL), which can further worsen inflation.”

Meanwhile, economist and business cycle analyst Dr. Kenneth De Zilwa, during an interview with Ada Derana recently, said that this relief package, introduced to address the rising costs of living, is a result of both external and internal shocks, and that this strategy has been received in the market with some apprehension. 

He added: “I think that this fiscal stimulus should be given to more productive uses in terms of incentivising the production side of the economy, to help overcome mid-term challenges. I think that the overall sentiment behind launching the relief package seems to be somewhat of a mixed one, and I think that can be expected because the country is still in recovery mode. Overall, the policy package seems to address the more important stakeholders of the economy who are also finding it difficult at this point of time.”

Debts, inflation, and imports

With regard to debt servicing in 2022 and inflation, Dr. De Zilwa said that most of the economic activities that involve exporting goods add to the country’s overall external debt burden, and also inflation.

Referring to imports, which have a high impact on inflation and foreign currency exchange rates, he said: “We import about $ 3 billion worth of crude oil on an annual basis, which is a significant factor affecting the overall balance of payments. When global crude oil prices increase, we have to absorb that and pass it on to the consumer. So, all in all, the external shocks are a key component of inflation.”

He also said that as a result of inflation, the Government and/or the private sector, may have to adjust wages to accommodate the overall consumption patterns. 

With regard to Sri Lanka’s debt repayment ability, which many parties have raised doubts about, Dr. De Zilwa noted that in a context where Sri Lanka has maintained an impeccable debt servicing track record, debt servicing in 2022 would not be an unmanageable challenge. He made this statement when asked about a recent statement made by the CBSL that Sri Lanka will not have to face any issue in repaying debts. He also spoke about the link between international financial assistance and Fitch Ratings’ recent downgrading of Sri Lanka’s Long Term Foreign Currency Issuer Default Rating from “CCC” to “CC”.

He explained: “The overall rating downgrades have impacted us in our access to global capital markets, and as a result of those downgrades, our cost of credit or the cost of borrowing has increased. However, that does not mean that there is no global funding out there for CCC or even D-rated entities or countries. There are, but, it is at a cost at which we can borrow. As a result of those high borrowing costs, the Government has stayed away from accessing capital markets, and has shifted the overall structure of the economy from an externally driven funding programme to a more internally manageable funding and financing. That is a good development.”

He noted that Sri Lanka’s debt is far less than what is projected, and that the country’s net debt for 2022 is about $ 2 billion, which he said is manageable. Adding that Sri Lanka has had a much more difficult situation in 2020 and 2021, Dr. De Zilwa said that debt servicing in 2022, including the first tranche due this month, would be relatively easier.

“I do not think that there are any issues in servicing this debt obligation. From a national cash flow point of view, I do not see any stresses coming from servicing this debt. Sri Lanka has kept an impeccable debt servicing track record, and I think that maintaining that is also paramount,” he expressed with confidence.

Coming few months

According to Fernando, the main challenge for Sri Lanka in 2022 would be implementing economic reforms. He stressed that although a multitude of opinions have been conveyed regarding settling mounting debt repayments and improving exports and foreign reserves, he was of the opinion that Sri Lanka focus on achieving all of that, not just one. 

He explained: “There are fundamental flaws in our structure in our economy. We have to do those structural reforms, because, without doing them, none of the outcomes we want would be possible. If I was to prioritise three economic reforms, first of all, I think we have to move to a cash transfer system, because, when we do these reforms, it would be very painful for the poor people due to the high cost of living. 

“Structural reforms have always been painful to the people, and therefore, there has to be a cash transfer system digitally done based on market pricing for the most vulnerable sections of the society, so that we would have established a safety net. Secondly, reforms in state-owned enterprises is a key reform we need to focus on, in a context where we have about 527 such enterprises making colossal losses. We can no longer bear these losses. Thirdly, I think that our monetary policy has to be fixed, as it seems to be inflationary. We have to fix the policy including certain reforms to the CBSL.”

With regard to the current approach of the Government towards addressing economic challenges, he said that many changes need to be done, and that priority should be given to the three points he highlighted. 

Speaking of the ongoing discourse about whether Sri Lanka should seek the IMF’s support, Fernando said that a plan as to how the economy should be revived should come from within the country, although the IMF’s involvement and support could certainly be advantageous.

“The starting point has to be the Sri Lankan policymakers coming forward with a reform agenda. Whether we go to the IMF or not, we have to do reforms. Without having a reform agenda for ourselves, there is no point discussing whether we should seek the IMF’s assistance. Even if we approached the IMF, they will basically ask as to what are the reforms we are planning to do as a country to increase the efficiency and productivity of the economy.

“Therefore, first, we must have an agenda, whether we go to the IMF or not. The IMF’s support will be an added advantage, because they will bring a certain credibility for Sri Lanka’s financial status, as they are basically monitoring the books when we are on an IMF programme. The starting point really has to be us agreeing on what we need to do,” he stressed.

Meanwhile, speaking of the economic situation and the government policies, economist and Sri Lanka Podujana Peramuna (SLPP) Parliamentarian Prof. Ranjith Bandara said that the economic challenges Sri Lanka is facing are not limited to Sri Lanka, and that most of these issues are common to other countries as well. He also expressed confidence about the country’s ability to repay loans. 

He told The Morning: “The challenges Sri Lanka might face in 2022 could be common to many developing countries, because regardless of the size and nature of the economic activities, the global pandemic has worsened issues to the next level. We could see that many countries are facing immense challenges relating to managing their internal issues due to Covid-19. If we look at what the main challenges are, many of us talked about foreign reserves declining. The lack of foreign reserves is not just a problem – it is an outcome of many problems. It is a result of Sri Lanka losing its most promising foreign earnings sources, such as tourism-related income and certain vital service exports.” 

He added that due to this situation, Sri Lanka is becoming a trading economy and is focusing on production. 

Speaking of opinions expressed by various parties that Sri Lanka may have to deal with a famine soon, Prof. Bandara opined that a famine will never occur in Sri Lanka.

However, Prof. Bandara also said that giving subsidies, even though sometimes necessary, is not a long-term option, and explained: “Sri Lanka’s economy is still a welfare kind of economy and at least 25% of the population depends on some form of government support such as the Samurdhi programme. There are many such programmes. Retail prices are rising because we are dependent on so many imports such as for essentials such as food items, oil, and gas, and about 75% of our consumption basket consists of imported commodities. 

“As a result, when the prices of those commodities in the global market increase, naturally, the local market prices also increase. The Government cannot subsidise every single commodity that we import and the price tends to increase because we do not earn enough to support such subsidy schemes.”

He stressed that the dependency on the State is also on the rise, and that in a context where the Government is also suffering massive losses due to loss-making state institutions, this could be a bigger problem in 2022.

He added: “State institutions are set up for a purpose, and they must be able to sustain themselves. But, unfortunately, they do not. There are five major state-run institutions that make losses, and state-run businesses are also quite challenging if we take into consideration the productivity level.” 

In addition, Prof. Bandara explained that in 2022, the Government might have to increase the tax revenue: “Our gross domestic product-to-tax ratio is quite low, and it is about 9%. We need to increase the government revenue as it is not enough even to meet the recurrent expenditure. We need to pump more money as capital expenditure to expand production.”

However, the main Opposition Party, the Samagi Jana Balawegaya (SJB), is of the opinion that the Government’s approach to addressing the economic decline needs to be changed. 

Addressing a press briefing on 5 January, SJB MP Eran Wickramaratne said that in order to revive the economy, the Government must take four measures immediately; namely, building trust between Sri Lanka and the international community including financial entities to get more international support, bringing the value of the rupee to the actual market value to encourage foreign currency inflows, negotiating with lenders seeking debt restructuring while presenting Sri Lanka’s own conditions, and making the CBSL independent in order to enable it to perform its main duties.

While the economic situation remains uncertain, the people have to go about their daily lives. While immediate reliefs can really ease the economic burden on the people, as those who spoke with The Morning underscored, there should be more clarity regarding the source of funds for these relief packages, and such programmes must not increase the cost of living later.

At the same time, equal attention needs to be paid to other pressing issues in the economy. The failure to do so will worsen certain issues when certain issues get addressed, because all major economic issues Sri Lanka is facing currently, according to experts, are connected.