The lockdown kept people shuttered for weeks and months in their homes. It made them realise how difficult it is to stay locked up in homes for too long, no matter how comfortable the home is. The problem still exists, and uncertainty has not yet disappeared, but the relaxation of lockdown a few weeks ago [...]

Business Times

SL’s economy is sliding


The lockdown kept people shuttered for weeks and months in their homes. It made them realise how difficult it is to stay locked up in homes for too long, no matter how comfortable the home is. The problem still exists, and uncertainty has not yet disappeared, but the relaxation of lockdown a few weeks ago was a welcome move for people who were longing to get out of their homes.

While we were also out during a weekend, my attention was drawn to some little children playing with a playground slide. The older children, probably the elder brothers and sisters of the little ones, were also beside them with the elders who appeared to be their parents. The little children continued to play sliding down one by one along the slope of the playground slide. Their faces were full of joy as they speeded up the sliding. The elder children who were watching them also expressed their joy by giggling and clapping. When the parents heard them, they also joined in the fun, pausing their conversation for a while. The little children had to make some effort to climb up the playground slide using a ladder fixed at the back. Climbing up was not fun. When the little ones climb up, nobody giggled or clapped and not even bothered to notice it. All the fun and joy were attached to sliding down.

Economy sliding down

How about the sliding down of the economy? Does it bring about fun and joy to the nation? Absolutely not, but some may think or pretend to think and justify otherwise.

The World Bank downgraded the Sri Lankan economy from upper-middle income category to lower-middle income category, according to its latest “country classifications by income levels: 2020-2021”. It was a result of the decline in Sri Lanka’s per capita income from 2019 to 2020, as of July 1. Together with Sri Lanka, the World Bank has downgraded two more countries in the world – Algeria and Sudan, both from Africa. Algeria’s downgrading which was also from upper-middle income to lower-middle income category was similar to that of Sri Lanka. In fact, it has one of the poorest GDP growth rates in the African region, where there are many fast-growing countries in the past decade. After all, the annual rate of real GDP growth in Algeria has consistently declined over the past few years since 2014, reaching 0.8 per cent in 2019.

Sudan’s case is a different one. Its downgrading was from lower-middle income category to low-income category. Sudan has been one of the poorer- growing countries in the African region, while it had reported negative growth rates during the past two years. In addition to this, an adjustment of the country’s pegged exchange rate last January has made a significant contribution to the calculation of the per capita income in US dollar terms. As a result of exchange rate adjustment, the Sudanese pound per US dollar had depreciated from SDG45 to SDG55 in two months (January-March 2020).

Enhanced “recipient” status

However, according to the view of some opinion makers, “sliding down is a good thing”. When I first heard about it, I thought that we shouldn’t reveal this “new theory” to the rest of the world – specially to the Americans, the Europeans, the Japanese and the Chinese, as they might think of changing their course of direction to follow us.

Anyway, there is a point here. Rather than trying to be competitive in the global economy, when we become poorer again, we are eligible to depend more on the mercy of others. We can get back to the position where we can receive loans on concessionary terms. We should remember that after we left behind our “low-income” status, we lost part of our eligibility to receive foreign loans on concessionary terms forcing us  to start borrowing on commercial terms.

We started commercial borrowings after 2007 and continue to borrow to-date. Another area that can “improve” Sri Lanka’s claim is concessions over foreign trade. In this case, one of the notable changes is the regained ability of the country to retain GSP + from European countries. Under the GSP concessions, exports from low-income and lower-middle income countries are granted partial or full removal of customs duties. Sri Lanka had lost this concession for seven years, before it received it again in 2017. For many development assistance programmes of the donor countries and the donor agencies, we will not lose the “recipient” status, when we are downgraded.

Though we thought that last year was the last chance to be the recipient for foreign aid like the Millennium Challenge Corporation (MCC) grant, now we are back to being eligible for such grants. By the way, when I was recently invited to comment on its recent developments, I said that as a nation, what we receive today is a result of the choices we made in the past. In the same way, what we deserve in the future will be a result of the choices we make today, whether it is an MCC grant or anything else.

A farmland in the north. Sri Lanka's economy has been downgraded by the World Bank.

People’s lives

The biggest issue of a sliding-down economy is not the country’s enhanced qualification to be at the mercy of others, but its critical implications on the economic development of the nation and people’s lives. A country’s development depends not on endless borrowings on concessionary terms, but on private investment growth. A country which cannot win the confidence of private investment has to depend more on borrowings, in the first stage for investment, in the second stage for consumption, and in the final stage for repaying previous borrowings. On the part of export growth, a country is not expected to depend endlessly on market concessions to keep the export competitiveness without losing against more efficient competitors. Market concessions are for “poor” countries for a limited period of time and for a limited volume of exports. If exports are competitive enough and export growth is fast enough, then the country will find that its exports cannot grow beyond the boundaries of concessions unless they enter free competition. Investment is the originating point of growth, while the export market is the destination point of growth so that the strength of the two sides determines the speed of economic growth of a country. After all, slower growth limits income generation and job creation, which is the fundamental requirement of poverty reduction. When an economy is sliding, it is the poor and vulnerable groups who would suffer loss more than anyone else.

Beyond economic revival

As I have discussed in this column on June 21 under the title “Sri Lanka has become a poorer nation”, the slide in the Sri Lankan economy was not an accidental incidence. Inadequate investment growth and sluggish export growth have been long-term critical issues, while the slowdown in economic growth was visible for many years. And the decline in the economy from the upper-middle income category to lower-middle income category was the final outcome of that episode.

All these happenings were before the outbreak of the COVID-19 pandemic issue and its resulting economic fallout and emerging global recession. Although it turns a new chapter of the same episode, the harsh reality is that unlike many other countries, we had to face the issue with already exhausted economic strength. When there is a turnaround, what Sri Lanka needs is economic progress beyond economic revival. I believe that harsh realities have brought about good opportunities as well. By then, we need to make up our minds to ensure we don’t remain at the mercy of others.

(The writer is a Professor of Economics at the University of Colombo and can be reached at
and follow on  Twitter @SirimalAshoka).

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