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Thursday June 30th, 2022

Sri Lanka can come out of economic crisis if ‘right policies’ are in place: opposition legislator

ECONOMYNEXT – Sri Lanka can come out of the current economic crisis through right policies targeting long term instead of ad hoc policy measures, opposition legislator Mayantha Dissanayake has said.

Sri Lanka’s precarious economic situation has created high uncertainty to entrepreneurs and businesses in the country.

Loss of government revenue and steep increase in government spending have resulted in higher budget deficit amid the central bank’s excess money printing.

Finance Minister Basil Rajapaksa was outspoken about the current crisis situation including a risky external debt repayment in the country in his maiden speech in the parliament in August after being appointed to the portfolio two months ago.

Right Policies?

“In terms of a budget, in terms of fiscal policy, in terms of where we want to go as a country, certainly the Covid pandemic has hit us very hard,” Dissanayake told a forum organized by NextGenSL, a cross party political grouping and Germany’s Friedrich Naumann Foundation for Freedom.

“But we in opposition believe that we can get out of this if the right policies are put in place.

And that right policy mix includes attracting higher direct foreign investment, setting up industries, and long-lasting long-term policies instead of ad hoc policy measures, he said.

Successive Sri Lankan government has always looked into short term policies that will help them to win the next parliamentary or presidential elections.

There has been no cohesiveness in economic policies and they are changed every time a government is elected or a new finance minister takes charge.

That have resulted in an inconsistent policy regime, making it difficult for investors and business.

“We need to fix this country first because the way that we are going in terms of inflation, in terms of loss of FDI, people not wanting to invest in this country,” Dissanayake said.

“We need to create that confidence in investors coming in and saying look, Sri Lanka is good, trust us, invest in us. That’s the kind of message we need to be sending out.”

“But unfortunately sometimes ad hoc policies do not help us in our medium to long term goals.”

An over-bloated state-owned enterprise sector, inefficient public sector, government intervention in businesses, and priority for crony rent-seeking businesses (non-capitalists or Mercantilists) are some of the key concerns highlighted by analysts as barriers for rapid economic revival.

As a result, the government is forced to spend more while lower tax efficiency has resulted in record low revenue as a percentage of GDP in 2020.

“So government expenditure is something that we need to really look at and looking at state-owned enterprises we may want to look at something like the Singaporean model of Temasek and how to regulate,” Dissanayake said, referring to an agency that own stock in state enterprises in Singapore.

“And also in terms of restructuring our economy we also have put it out in parliament as well in looking at organizations like the IMF because we have to find a balance between that welfare state and you know providing for the people those who really need the financial assistance.”

Policy Fright

The administration claimed privatization was ‘selling state assets’ and managed to impose its ideology on the then opposition, who puttered around and got kicked out of office.

Sri Lanka’s last so-called Yahapalana administration had severe policy fright unlike earlier United National Party linked administrations which boldly privatized firms and knuckled under the pro-state ideology of the earlier Rajapaksa administration, critics say.

The administration also gave de facto ‘central bank independence’, allowing the agency to print money, destroy the rupee from 131 to 182 to the US dollar through discretionary or ‘flexible’ policy, bring import controls and making its free trade led economic strategy a laughingstock, critics say.

However it has printed even more money over the past two years and is driving the country towards external default.

Sri Lanka now is not only unable to generate dollars to repay debt, but is using reserves for current imports as printed money drives credit and the central bank has ended up with negative reserves.

President Gotabaya Rajapaksa’s government has been against seeking a bailout from the International Monetary Fund (IMF), given the past experience has shown the global lender’s conditions are seen as unpalatable for the government in power.

Due to a Latin America style central bank which prints money Sri Lanka runs into currency crises every so often and the agency takes the country to the IMF. This time however the country is also facing sovereign default.

Top bureaucrats have told EconomyNext that the worst repercussions of an IMF loan including heavy depreciation of the rupee, downsizing state owned enterprises, and untargeted subsidies which are used to win votes, could be felt only when the government goes for the next presidential poll in 2024.

Dissanayake, who is coming from a center-right party which has somewhat pro-market economic policies said the country need to go for out of box thinking

“Some state-owned enterprises will have to be retrenched; we will have to get the public private partnerships going,” he said.

“I’m not saying or advocating selling off our assets here but I’m simply saying that we need to think a new and may be thinking out of the box in terms of economic strategies and reforms that we need to make.” (Colombo/Oct.24/2021)

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