While it’s easy to destroy, bankrupt or ruin any country’s economy, it’s extremely difficult to re- build the country’s economy. The Sri Lankan economy is almost on the door-step of a recession in the absence of political economic certainty and economic confusion. Both main political parties Kleptocrats have destroyed Sri Lankan economy, gambling with taxpayer’s [...]

Business Times

Sri Lankan economy: On the door-step of a recession


While it’s easy to destroy, bankrupt or ruin any country’s economy, it’s extremely difficult to re- build the country’s economy. The Sri Lankan economy is almost on the door-step of a recession in the absence of political economic certainty and economic confusion. Both main political parties Kleptocrats have destroyed Sri Lankan economy, gambling with taxpayer’s money.

It is a destiny that the majority have chosen a disciplined, right person at the Presidential election who could be the father of economic miracles like Lee Kuan Yew in Singapore, Lai-Ching-China in Taiwan or Kim Dae Jung in South Korea. Sri Lanka needs such Presidential icons. This is an economist’s appeal for the new authority to rescue the economy resolving of “Five Interlocking Economy Traps” (FIETs) to save the people and the country.

Since 2010, the government has followed the public infrastructure-driven development strategy as the engine of growth. Infrastructure -driven development is a theoretically demonstrated and practically verified as a win-win strategy and substantial proportion with resources allocated for long-term public assets building as the flat-forms for undertaking the rest of the economic activities. Fortunately, before 2015 the government had an advantage of managing the whole process under the leadership of a scholarly economist in the Treasury. Unfortunately, since 2015, there was no such professional input while political leaders are clueless about the development strategy that followed, but destroyed the whole development path on the advice of imported, old-fashion administrators.

The ongoing economic crisis is more serious in Sri Lanka than it appears to be. The FIETs are; (a) external debt-trap, (b) production possibility potential trap, (c) colossal public expenditure trap, (d) declining public revenue trap and (e) balance of payments (BOP) trap. The very same situation appeared in the Greek economy – attacked by similar five traps and ultimately ending with disastrous economic recession. However, Sri Lankans won’t be able to tolerate a similar kind of situation.

Potential traps

Since 2000, evidence suggests that the Sri Lankan Production Possibility Potential (PPP) has turned into a trap due to unplanned choices and neglected rational economic principles. Many research studies suggested that Sri Lanka is not using factors of production resources efficiently. Like for example GDP agricultural component; cultivatable land use is wasted; mining spots, solar and hydro-power, fisheries, water etc. On the other hand, a majority of the borrowed fund-based projects are incorrect choices in terms of opportunity cost and comparative advantages.

Public debt trap as the root cause

Today, Sri Lanka is borrowing at a high cost to settle old debts and the country has got caught with “debt-trap” together with debt-trap driven adverse implications. It is the result of ignorance of borrowed funds over and above the capacity; reaching more than 100 per cent of the GDP and long -term fiscal gap financing out of borrowing, spending more than revenue or previously accumulated over- expenditure. Ultimate results are weakening international market power for Sri Lanka.

Remittances from workers abroad are a blessing for setting off trade balance. Irrespective of the public debt trap, authorities have resorted to utilisation of average borrowed fund-based project cost which increased from US$3.2 billion during 2010/14 to $6.1 billion during 2015/19. The debt repayment will be $20.4 billion in 2020. The way out of the debt trap is possible only through firstly, enhancing tradable goods and services for export trade, secondly, import discipline and thirdly, public financial discipline.

Public Revenue Trap and Expenditure Traps (PET)

Since the last 70 years except in 1953/54, the budget deficit and research indicates that the strategy of Keynesian expansionary public budgetary policy and monetory policy are now turned into traps in the absence of countervailing supply-side policies.

Inadequate public revenue and over-expenditure have turned into fundamental economic traps. The revenue is heavily relied on indirect taxes while in the Middle Income Country share, it is more than 20 per cent and direct taxes are in the region of 40-60 per cent. Unfortunately government invested entities are also reluctant to pay dividends and many of those State Owned Enterprises (SOEs) are not even earning enough.

Out of nearly 300 GOBUs and SOEs, at least 80 could have paid dividends to the Treasury, which is estimated at around Rs. 9.5 billion annually while 10 key large utility service-providing SOEs could operate at “no cost no loss”. Every head of SOEs has to be provided with targets and estimated share of dividend to the Treasury.

PET- driven fiscal consolidation is a significant challenge. The biggest trap is the budgetary deficit; expenditure/revenue gap is 65.2 per cent in 2010 and 77.5 per cent in 2019. Authorities historically used to spend more than what was earned. Politically supported jobs without work are revolving into life-time traps. Politicised SOE losses, especially Ceylon Electricity Board, Water Board, Railway, Petroleum, SriLankan Airlines etc are traps. These traps are to be relieved by enhancing revenue and expenditure control, increasing GDP and exports, full scale SOEs reference for “no cost-no loss” basis.

Balance of Payment Trap (BoP)

Sri Lanka is an island small economy with import/export trade dependent and practically interconnectedness which is subject to external shocks. The Balance of Trade (BoT) is the primary trap. Beginning with 2010, the BoP trap has grown bigger and bigger and synchronized with an increasing BoT gap. Day by day the widening debt-trap is the result of a widening balance of trade. Balance of trade of -$8.4 billion in 2015 has grown to -$11.200 billion in 2019 and will be -$12 billion in 2020. However, government debts have a significant influence in the BoP trap. The most effective solution is in enhancing export earnings through goods and services workers abroad, internal tourism and earning foreign exchange.

Gateway Solutions: Compulsory prerequisites

Firstly, establish and sustain political certainty, stability, economic predictability as prerequisites, It is needed to guarantee equality beyond electoral politics, good governance, rule of the law and predictable policy consistency of economic policies.

Secondly, it is noted that the existing political system is highly competitive, expensive, with promises to keep. Ultimately many are Kleptocrats and would-be scoundrels who win the election.

Thirdly, it is essential to establish a “National Planning Commission” (NPC) empowering it with establishing economic certainty, consistency, stability of the socio-economic policies.

The will power of the President is urgently needed to save the economy and thereafter save the people and the country. If everybody honestly wishes to develop the motherland, this is the last chance.

(The writer is an economist with public financial sector, Treasury level experience. He could be reached at palithaeka@yahoo.com).

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