The reconstruction of the economy and achieving the country’s potential economic growth is a formidable and challenging task for President Gotabaya Rajapakse.  A number of economic and non-economic conditions have to be fulfilled for a robust economic performance. These include peaceful conditions among the plural ethnic and religious communities, reduction of corruption, enhancing administrative efficiency, [...]


Economic reconstruction and development imperative


The reconstruction of the economy and achieving the country’s potential economic growth is a formidable and challenging task for President Gotabaya Rajapakse.  A number of economic and non-economic conditions have to be fulfilled for a robust economic performance. These include peaceful conditions among the plural ethnic and religious communities, reduction of corruption, enhancing administrative efficiency, pursuing pragmatic economic policies, strengthening macroeconomic fundamentals and boosting investorconfidence.


Achieving the preconditions for economic development are formidable.Foremost among the preconditions for economic development are ethnic and religious harmony leading on to social cohesion. The political,social and economic history of the country is replete with serious setbacks to the economy due to ethnic violence. The most recent such setback was the Easter Sunday bomb blasts and the subsequent communal violence and tensions. Therefore social harmony is imperative for economic development.

Economic prerequisites

The economic prerequisites are no less. There has to be a stabilisation of the economy’s macroeconomic fundamentals. These include the reduction of the fiscal deficit by a two pronged strategy of reducing expenditure and enhancing revenue. This has been made extremely difficult due to expenditure overruns and revenue shortfalls

of the government. However fiscal consolidation is essential for macroeconomic stability and economic development. Reducing the nation’s external vulnerability by reducing the foreign debt is another foremost condition that must be achieved.

Public debt

The containment of the public debt by a reduction of the fiscal deficit is vital to stabilise the economy. The public debt has grown to massive proportions. In 2018 the public debt had risen to Rs.12 trillion or 83 percent of GDP. Debt servicing costs alone absorbed nearly the entirety of government revenue.  Consequently the government has to borrow for its other expenditure. This state of public finances distorts priorities in government spending that affects especially long term economic development.

Fiscal consolidation

Bringing down the fiscal deficit or fiscal consolidation is vital for economic stabilisation and economic growth. Reducing the fiscal deficit is one of the most challenging tasks as government expenditure has exceeded the original estimates. This year’s fiscal deficit is

likely to exceed 5 percent of GDP.

The process of fiscal consolidation that began in 2016 and was progressing reasonably well was derailed by excessive public spending this year owing to political compulsions. If the promises made during the election are fulfilled there would be a surge in public expenditure and a fall in revenue. This means that fiscal consolidation that is fundamental to achieving economic stability and growth would be adversely affected.

The government must find ways and means of curtailing government expenditure and enhancing government revenue as fiscal stability is a fundamental condition for economic development. Stimulating economic growth would require stabilising the macroeconomic fundamentals, especially achieving a manageable fiscal deficit of about 4.5 percent of GDP in 2020 and reducing it to achieve a 3.5 percent by 2025..

The extravagant election promises need to be tapered over time, wasteful expenditure curtailed and revenue enhancing taxes implemented. Immediate fiscal consolidation is impractical and unrealistic owing to political realities. The next budget should however consolidate policies for revenue enhanced fiscal consolidation that could be achieved only in the next five years from 2020 to 2025 due to political compulsions.

Economic growth

Of utmost importance is a framework of economic policies that is certain, realistic and pragmatic. The certainty of economic policies is vital to generate business confidence and attract foreign direct investment (FDI) in export manufactures Investor confidence One of the key reasons for slow economic growth in recent years has been the lack of investor confidence. Uncertainty of economic policies, ineffective implementation of economic programs and corruption impeded local and foreign investment. Due to these reasons, several Sri Lankan industries relocated themselves in other Asiancountries.

Investor confidence

The economy could grow only if investor confidence is restored. This is especially so to attract foreign direct investment (FDI). Foreign direct investment was exceeding low in comparison to other Asiancountries.

It is vital to enhance FDI in export manufactures that are woefully lacking. Strengthening macroeconomic fundamentals too are essential toattract FDI. Closely related to this is the ease to doing business.The World Bank ranking of 99 that is a disincentive to investors must be improved.

Reducing external financial vulnerability

A prime focus of the new regime must be to reduce the country’s external financial vulnerability. The foreign debt has increased to an unsustainable US$ 54 billion at the end of 2018. This is about 64percent of GDP. The servicing costs of this debt in the next few years is estimated to be US$ 3 to 4 billion annually. Since the balance of payments surplus is small, debt repayment and interest costs have to be met through further foreign borrowing that increases the foreign debt. Therefore it is imperative that a higher balance of payments is achieved.

The servicing of the foreign debt and containing it is of foremost importance to reduce the country’s external vulnerability. Therefore an improvement in the balance of payments by reducing the trade deficit by expanding exports is an economic priority.

The external financial vulnerability of the country has arisen due to large scale borrowing to finance massive infrastructure projects that have not increased foreign earnings. Consequently the servicing of the debt required further borrowing that has increased the nation’s external financial vulnerability. The new regime must be mindful of this and be prudent in its foreign borrowing. Foreign direct investments in the country are the best means of obtaining foreign capital and these do not increase foreign debt even when they are a failure.

Trade deficit

The challenge is to reduce the foreign debt by reducing the trade deficit substantially by much higher export growth than achieved recently and curtailment of unessential imports. The balance of payments surplus could increase if this year’s trade deficit is US$ 8billion or less, tourism picks up and workers’ remittances do not fall much.

A higher balance of payments surplus this year would ease the burden of foreign debt servicing. However in the long run a much higher balance of payments surplus needs to be achieved by higher export growth. It is vital that policies are put in place that would enable a spurt in manufactured exports, enhances agricultural export surpluses, expands new export possibilities and enhances information technology services (ICT). Sri Lanka that has been and will continue to be an import-export economy will face severe hardships without a new thrust on exports. This is a priority for the new regime.

Presidential assurance

In his inaugural address President Gotabaya Rajapakse said:”I promise to establish a state administration that ensures the rule of law and social justice. My administration will also be corruption free. As I promised in my manifesto, when tasks are assigned, priority will be given to those with abilities and knowledge. The government must always set an example to the society. Professionalism, and efficiency should be the cornerstones of government administration. Meritocracy and technocracy should be promoted at all times.Corruption will never be tolerated under my administration.”

Final word

These are essential conditions for economic development. President Gotabaya Rajapakse must ensure that these principles and policies are transformed into institutional reality to achieve a higher trajectory of economic growth.


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