While Sri Lanka is going through tough economic reforms, deficits and high debt burdens, the country needs to think differently about the kind of quick fixes that can generate higher growth and satisfaction to the kind of institutional structural changes that needs to be tackled. If not the country will not see an economic turnaround, [...]

Business Times

Economic turnaround or going ‘round and round’ in cycles


While Sri Lanka is going through tough economic reforms, deficits and high debt burdens, the country needs to think differently about the kind of quick fixes that can generate higher growth and satisfaction to the kind of institutional structural changes that needs to be tackled. If not the country will not see an economic turnaround, but a ‘round and round’ in the same cycle.

This was pointed out by Verite Research (Pvt) Ltd, Executive Director, Nishan De Mel at the Chamber of Commerce’s annual economic summit titled ‘On the fast track to a turnaround’ held at the Cinnamon Grand in Colombo on Thursday.

Mr. Mel said that Sri Lanka’s economy has been growing at an average rate of about five per cent since 1977. There has been no steady growth but an oscillating trajectory. “Have we done something to significantly change the trajectory or do we see ourselves moving around in the same cycles that we have moved in the past?.

Politicians and political parties come and go, reform initiatives come and go with the political parties while the International Monetary Fund (IMF) also comes and goes. Sri Lanka seems to be very good at living inside a repeated cycle,” he added.


“We keep saying that we are on the cusp of an economic turnaround and we always will be. The challenge is whether we are on a new trajectory and depends on the kind of change or reform that we attempt. Is it structural or is it superficial? The superficial changes will keep us moving back and forth in cycles because it’s so easy to use the monetary policy to pump up growth, to use fiscal expansion to pump up growth and use the IMF also to fix the problem every now and then when we have it and we can keep going in that cycle or we think we can change our political parties and political leaders and solve the problem. These are the kind of superficial macro instruments we are using. We don’t look at the micro institutional fixes that are structural that this country desperately needs. It’s a simple micro structural change that can make an enormous difference,” he explained.

Talking about an aging population in Sri Lanka, he mentioned that every time a politician wants a competent public servant, they look for someone who is retired and above 70. “We need them because we have replaced a competent public sector with a much less competent one with lower capacity and crippling levels of corruption. This is actually hurting simple reforms.”

Mr. Mel noted, “We want large instruments like trade agreements, trade negotiating problems at other people’s borders, but research tells us that most of the problems exporters have is in our country border, processes, institutional mechanisms. Even when we negotiate those agreements, we don’t have the capacity to negotiate them smart.”

KPMG India CEO and Chairman Arun Kumar in his keynote address said that foreign direct investments (FDIs) needs to be a high-priority area for growth and employment generation. India has become one of the largest destinations of FDI while Sri Lanka’s FDI has remained below 2 per cent of GDP over the past 20 years.

Private sector investment has remained constrained whereas the public sector has played a dominant role in the past. Since the government’s budgetary resources are limited, the private sector is expected to play a larger role in infrastructure development. Policies to improve the investment climate, complemented by upgrades in the quality of infrastructure and human resources, need urgent attention to catalyze domestic investment and attract FDI, he added.

Change BOI role

Sri Lanka could adopt best practices from the various states’ investment promotion boards to restructure Sri Lanka’s Board of Investment, towards purely promoting FDI and away from regulating FDI and managing export processing zones.

On the infrastructure development, he mentioned that Sri Lanka has been successful in developing basic infrastructure. It has the highest road density in South Asia, 98 per cent of the population have access to electricity, 96 per cent to safe water, and 95 per cent to sanitation. But Sri Lanka ranks a relatively low 73 (out of 138 countries) for infrastructure development in the Global Competitive Index from 2016–2017. There is a requirement to further invest in growth oriented infrastructure like energy, transport and urban development.

From 2018–2022, infrastructure investment needs are estimated to be US$ 6 billion per year to attain the government’s economic growth target. The capacity of the government to increase infrastructure investments is currently constrained by a difficult fiscal situation. It is notable that Sri Lanka is focused on this area with support from banks like ADB to improve road, port and railway connectivity, Mr. Kumar stated.

Fiscal reforms to enhance sustainability of government finances and public infrastructure investments need to continue. There is a need to create a governance mechanism to implement projects successfully. Legal frameworks, regulatory policies and strengthening the overall policy environment is imperative. Engagement with the private sector to boost efficiency of infrastructure services can also be explored. These reforms will ultimately enhance Sri Lanka’s ability to address border and behind-the-border barriers to enhance cross-border collaboration infrastructure.

He said the Colombo Port City promises to be a game-changer for Sri Lanka and the government hopes its development will help Colombo become an enhanced trading hub between Europe, Africa, West Asia and Asia. The port will also be a finance centre accessing the Indian subcontinent’s rapidly developing markets attracting overseas investors and increasing employment.

Given the large economies in Asia such as India and Japan which cannot fund Sri Lanka’s large infrastructure funding needs fully, Sri Lanka has looked to cooperate more closely with China. But several times, this easy money which is offered across the table comes with disturbing strings attached, unsustainable debt, decreased transparency, restrictions on market economics and a loss of control over natural resources. Mr. Kumar noted.

Sri Lanka’s export structure has been static for years, reflecting a lack of competitive forces to drive trade dynamism, innovation, and diversification. Reforms to ease the business environment and trade, now at the early stages of implementation, can become catalysts and enablers for accelerated growth. Other countries that have pursued infrastructure scale-up have learned that business environment liberalisation is also required for private sector-led growth.

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