Manil Jayesinghe, Country Managing Partner, EY Sri Lanka & Maldives, reflects on the challenges confronting Sri Lanka and the need to restore credibility and access to global markets, which the forthcoming IMF deal could achieve, enabling Sri Lanka to negotiate with bilateral and international creditors. Jayesinghe also expounds on the need to persist with critical tax reforms.
“For years, society has relied on a limited segment of the population to pay direct taxes, while indirect taxes, such as value-added tax, are paid by all, regardless of wealth. Changing these attitudes and expectations overnight is challenging. However, society must understand that there is nothing free,” Jayesinghe argues in this interview with Echelon. Experts watching the economy agree the IMF programme can place the country on a stronger footing. The IMF alone cannot solve Sri Lanka’s conundrum, however, Jayesinghe warns against deviating from the IMF programme which could derail and delay the economic recovery.
What are the pressing challenges confronting Sri Lanka?
The acute budget deficit and foreign currency crunch are among the most significant problems facing the economy at the moment. Improving cash flow, both in terms of government revenue and balance of payments, is crucial to kickstart the economy and get it moving forward. To achieve this, access to global markets is vital, whether it’s through bilateral creditors or international markets such as the International Sovereign Bond markets.
However, the country’s current credibility is low as its inability to meet our debt obligations, which is why the government seems to be pursuing the strategy of seeking help from the International Monetary Fund (IMF). Although the IMF is not expected to provide a substantial sum of money, the main goal of seeking help from the IMF is to restore the country’s credibility, which will enable it to negotiate with bilateral creditors and other sources.
The other side of the equation is increasing exports, which is a more medium-term strategy as it takes time to achieve. To increase exports, the country needs to find new products, as it is currently relying on traditional products such as tea, coconut, rubber, and garments. The country also needs to expand its product suite to include new products.
Another issue that is not often discussed is the need for the country to focus on import substitution. By doing so, the country can increase its exports and reduce its outflows, which will positively impact the cash flow.
In conclusion, the government needs to focus on two key strategies to improve the cash flow and get the economy moving forward. The first is to restore credibility and access to global markets, and the second is to increase exports. These strategies will help the country overcome its current financial difficulties and pave the way for a quick recovery and sustainable economic growth.
Why are tax reforms so critical now?
As a society and a nation, it is important to understand that everything comes at a cost. There are no free lunches and this concept is not widely accepted by society. For many years, society has been used to receiving free or subsidized services, such as electricity, healthcare, fuel, and education, and these services have been taken for granted. When these services become more expensive, there is often a negative reaction, with people viewing it as an additional burden.
For years, society has relied on a limited segment of the population to pay direct taxes, while indirect taxes, such as value-added tax, are paid by all, regardless of wealth. This has led to the assumption that public goods are being received without costs. However, it is important to understand that everything has a cost and that cost must be paid eventually.
Changing these attitudes and expectations overnight is difficult, but society must understand that there is nothing free and that the cost must be paid. After 50-70 years of taking these services for granted, it is time to acknowledge that there is a cost associated with everything and that these costs must be properly accounted for. Society must be willing to adapt and accept these changes to ensure that the nation’s finances remain healthy and sustainable in the long term.
What policy changes do you anticipate going forward with the IMF deal coming in?
In today’s economic landscape, the preconditions for a country’s growth and development are constantly shifting and evolving. With a new program in place, experts are projecting the country to get on a stronger footing, but it’s important to note that these projections are based on assumptions and there may be some deviations along the way. To achieve these projections, there must be a political will to carry out the necessary actions and decisions. Unfortunately, as history has shown, politicians often prioritize what is best for the people in the short-term, rather than what is best for the long-term stability and growth of the country.
As we have seen in the recent past, the government has made promises to reduce taxes, but no one questioned how the government was going to bridge the gap that would be created by these reduced taxes. This is a prime example of the societal attitude in the country, where people are used to getting things for free or at discounted rates. It also highlights the need for more critical thinking and analysis in the country, as people tend to get carried away with promises without considering the feasibility of the promises being made.
According to predictions, the country is facing a negative 3 to 4% GDP growth this year and is expected to break even at 1% growth next year. It is projected to take five years to get back to normalizing GDP growth. This presents a challenge for businesses, who must factor these projections into their strategies and make necessary adjustments to stay afloat during this difficult time.
The reality is that the costs of doing business have gone up, with every single cost doubled or tripled, putting pressure on the margins of businesses. This is compounded by the fact that there is likely to be reduced consumption and demand, which will negatively impact revenue. Businesses must look inward and find ways to bring in efficiencies and maintain their margins. This could mean making changes to their operations, streamlining processes, and finding ways to do things differently.
The economic landscape is constantly changing and businesses need to be nimble and adapt to these changes. The government and politicians play a crucial role in ensuring the stability and growth of the country, but businesses must also do their part in finding ways to weather the storm and maintain their viability. Ultimately, it’s up to each individual to make informed decisions and work towards the betterment of the country as a whole.
How is EY helping its clients navigate uncertainties?
EY, a global professional services firm, provides a wide range of services to its clients. One of the areas of focus is forensics and dispute resolution, where the firm helps clients identify potential gaps in their systems that may result in fraud. Given the current challenging economic environment, the motive for fraud is high and the systems that prevent it from happening may have become lax. This puts companies at risk of losing money, which is why EY provides this service to help prevent fraud.
Another area of focus is the digitization of business processes. With companies moving towards digital channels, they are exposing themselves to cybercrime. EY provides specialized services to address these risks, including SMS services.
Working capital management is also a critical issue for many companies today, particularly small businesses. The current economic conditions have made it more difficult to sell products and collect payments, putting a strain on businesses’ cash flows. EY can help companies identify the issues they are facing and come up with strategies to manage their working capital, such as moving to just-in-time inventory management or improving their collections process. The goal is to help companies avoid cash flow problems, which can be a significant challenge in today’s market.
What is EY’s broader role in resetting the economy?
With its extensive knowledge and expertise, EY Sri Lanka provides tailored solutions that help clients overcome the challenges they face and stay ahead of the curve, offering a range of services such as advisory, assurance, tax, transaction advisory services, and management consulting services, to help them navigate the ever-changing economic landscape. EY’s professionals have extensive experience and a deep understanding of the industry and are well-equipped to help clients address their most pressing challenges. By leveraging its global network, EY helps clients stay connected to the latest developments in their industry and provides them with the necessary tools to succeed in an ever-changing world.
Ultimately, EY is committed to helping its clients succeed, and its professionals work tirelessly to ensure that clients have the support they need to succeed in today’s rapidly changing economic landscape.
As a professional firm, we have expertise in several areas, including financial management and capital raising. The government is currently trying to sell off some of its assets, and we have the expertise to help convert these entities into a salable model and attract investors to invest in them. This is where our transaction support comes into play.
Additionally, our audit practice is crucial in these times, as businesses need credibility to raise capital. Financial reporting is a critical factor in attracting investors, and our audit practice enhances the credibility of the information given to them. The accounting industry is facing uncertainty due to the current global situation, but we have the depth and expertise to handle these challenges and maintain credibility and trust in the market.
As an organization, we are positioned to play a critical role in supporting the recovery of the country, as much of the current economic difficulties stem from poor financial management. We have access to a global network, as we operate in several countries and have firms in each of those locations. This allows us to leverage our clients and investors to support the recovery. We are also working on bringing in expertise from overseas, where other countries have gone through similar difficulties, to support our efforts.
Domestically, we are involved in policy formulation, but we are mindful to stay out of politics and maintain our professional standing. If we are asked to provide professional advice, we are willing to do so, but we do not want to get involved in politics or align with any particular group for their benefit. Historically, we have steered clear of politics and believe that as a professional firm, we should address problems professionally and provide professional solutions.