Sri Lanka has golden opportunity for a fresh start: Razeen Sally
COLOMBO (EconomyNext) – Sri Lanka’s new administration has a golden opportunity for a fresh start to rebuild international and ethnic relations and draw trade and investment, a top economist has said.
"The opposition’s shock victory presents a golden opportunity for a fresh start. But this is far from assured," Razeen Sally, Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore said writing in East Asia Forum, a regional policy platform.
"The new government is extremely diverse and could fall apart. And Sri Lanka has squandered rare opportunities for regeneration before."
Though Sri Lanka’s new administration wants to improve rule of law and make the judiciary and public service independent, there were structural problems in the economy.
"This seems surprising, given that Sri Lanka has one of the highest growth rates in Asia, much improved infrastructure and booming tourism," Sally wrote.
"But post-war growth is a classic debt-driven bubble. Increased foreign borrowing has financed infrastructure projects and handouts. This leaves Sri Lanka much more exposed to higher interest rates in often volatile international capital markets.
"On the supply side, economic liberalisation has been reversed. The government intervenes much more to favour an expanded, loss-making public sector.
"Trade protectionism has increased. Foreign investment is stagnant, with the exception of real estate and hotel projects. Export competitiveness and overall levels of productivity have declined."
Sally said the new administration push for constitutional reforms was sensible, with changes aimed at re-establishing the independence of institutions such as the police, judiciary and public service.
Under the regime of Mahinda Rajapaksa, public institutions were systematically broken.
But a fast-track 100-day program is set to increase state current spending in particular, with an agency also to be set up for three-wheeler taxis.
"The 100-day program’s economic measures are nakedly populist," Sally observed. "Public-sector salaries, pensions and welfare benefits will be raised and taxes reduced.
"There will be guaranteed purchase prices for some agricultural products. Farmers will have debt relief.
"There will be a new government agency for drivers of three-wheelers. All this continues the interventionism of the Rajapaksa’s and puts further stress on public finances.
"It is vital for the handful of economic liberals in the governing coalition to push for strong market reforms to repair public finances, deregulate the economy, open up to trade and foreign investment and reform the public sector.
"Realistically, these reforms will have to await the outcome of the parliamentary election."
Foreign policy should be re-oriented to make better use of the West, with the US and EU being the biggest buyers of Sri Lanka’s exports, as well as India.
"Thankfully, this seems to be underway already. Better relations with East Asian countries — not only China — should follow," he said.
"Sri Lanka’s immediate priorities are for political, economic and institutional reform. The West, India and East Asian countries can encourage it by putting economics at the centre of engagement. Restructuring foreign debt might be necessary. "
He said other countries should not push too hard on a war crimes probe.
"This is very sensitive in the Sinhala heartland and would weaken the brittle new governing coalition," he said.
"Of course this issue should not be brushed under the carpet. But there must be a sensitive, long-term approach for dealing with the issue: an approach that encourages a credible domestic process of investigation and reconciliation.
"Nothing should be done to undermine Sri Lanka’s unexpected fresh start and its chances of success."