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Thursday February 29th, 2024

Sri Lanka’s IPS 2023 economic report on choices ahead

ECONOMYNEXT – Sri Lanka’s Institute of Policy Studies is to release its annual State of the Economy Report for 2023, as the country recovers from the worst case of macro-economic policy deployment in its history.

Sri Lanka defaulted in 2022 and its currency collapsed to 360 from 184 after two years of tax and rate cuts to close what growth-happy state economic bureaucrats said was a ‘persistent’ output gap.

Instead, the economy was hit by the worst contraction in post-independence history amid a loss of monetary stability and the stabilization policies that usually follow mis-targeted rates.

“Sri Lanka’s journey from economic turmoil to stability is fraught with challenges, but it also offers opportunities for meaningful reform,” the IPS said in a statement.

“While macro-stabilisation measures are laying the foundation, the path to recovery must prioritise quality GDP growth that creates high-quality jobs.

“Achieving this requires addressing structural issues, strengthening social safety nets, and fostering cross-party consensus.

“As Sri Lanka navigates its economic challenges, making the right policy choices, coupled with accountable institutions, will be key to transforming its setback into a sustainable success.”

The report is to be released on October 17

The full statement is reproduced below:

SRI LANKA: STATE OF THE ECONOMY 2023

Economic Policy Choices: From Stabilisation to Growth

Sri Lanka has faced a turbulent economic journey in recent years, with 2022 witnessing an unprecedented crisis marked by a staggering 8.7% GDP contraction. The economy slowly but steadily pulled back from the abyss over the course of 2023. Notably, the Sri Lankan rupee has stabilised and even appreciated by 12%, inflation has dropped to 1.3%, import restrictions are being eased, and interest rates are on the decline.
These positive developments are a result of the implementation of economic stabilisation measures and groundwork for institutional and regulatory reforms to support future growth. These measures have critics concerned about the intense economic pain that falls on those least able to cope with the fallout. As a country that faces years of weak growth, the Institute of Policy Studies of Sri Lanka’s (IPS’) Sri Lanka: State of the Economy 2023 report, explores the complex policy choices Sri Lanka faces as it navigates the path to economic recovery.

The Rocky Road to Recovery

In 2023, Sri Lanka’s economy is expected to contract further, though at a slower pace compared to the previous year. Differing medium term forecasts from the International Monetary Fund (IMF) and the Central Bank of Sri Lanka (CBSL) point to the complexities of accurately predicting the future of an economy that has suffered a sudden and sharp crisis. In 2023, the IMF predicts a contraction of -3%, while the CBSL holds a more optimistic view at -2%. Both anticipate a return to positive growth in 2024, but uncertainties linger due to social and political opposition to austerity policies, ongoing debt negotiations, and volatile global economic conditions driven by geopolitical tensions.

Following the severe 8.7% GDP contraction in 2022, Sri Lanka embarked on immediate and stringent measures to stabilise its economy. These measures included securing the 17th IMF bailout and implementing substantial increases in value-added taxes (VAT), personal income taxes, energy prices, and a freeze on public sector wages. With shortfalls in anticipated revenue collections, further fiscal tightening measures cannot be ruled out.

Addressing Socioeconomic Challenges

Faced with growth-inhibiting tough austerity measures, concerns persist regarding the potential exacerbation of inequality and poverty. Sri Lanka witnessed a doubling of national poverty rates to 25% and a tripling of urban poverty to 15% in 2022. Escalating inflation has eroded household savings and real wages, prompting many skilled professionals to seek opportunities abroad, potentially resulting in a brain drain and the loss of a generation of young workers.

Sri Lanka’s economic challenges are further compounded by disparities in the education and health sectors, which require substantial resources for meaningful reforms. The delicate task of balancing fiscal constraints with the need for improved social protection programmes looms large.

Paving the Way for Sustainable Growth

To achieve sustainable economic growth, Sri Lanka must not only stabilise its economy but also address long-standing structural problems. The country’s overemphasis on infrastructure investment with borrowed funds needs to shift towards enhancing global competitiveness in exports. In a world marked by US-China tensions, forging partnerships and aligning industrial and trade policies is vital. Currently, Sri Lanka lags in global value chain (GVC) activity, posing a challenge to economic diversification.

Over-reliance on low-skilled, informal jobs, where more than half of the workforce is engaged in low-skilled jobs, hampers progress towards a competitive and productivity-driven economy. Comprehensive reforms in education, improved access to higher education, and bridging skills gaps in sectors like Science, Technology, Engineering and Mathematics (STEM) are essential to create well-paying jobs and ensure long-term economic resilience. Additionally, addressing corruption, enhancing accountability, and improving public service delivery are vital for building public trust and support for reforms.

Building Consensus for Transformation

As Sri Lanka grapples with its economic challenges, presidential elections loom on the horizon in 2024. Traditional politics may drive opposition to austerity and reforms in pursuit of votes. However, regardless of the election outcome, the country’s fragile economic situation will likely necessitate continued adherence to fiscal, monetary, and exchange rate policies outlined in the IMF programme. What remains uncertain is the fate of complementary reforms aimed at enhancing economic efficiency and productivity, which might be delayed or abandoned due to political compulsions.

The more contentious reforms may slow down or stall altogether between now and the 2024 elections, to be addressed afterward, depending on electoral outcomes. These possibilities introduce significant uncertainty at a time when economic confidence has already been severely undermined. The solution and best hopes are to build cross-party consensus on areas that do need fixing.

Conclusion

Sri Lanka’s journey from economic turmoil to stability is fraught with challenges, but it also offers opportunities for meaningful reform. While macro-stabilisation measures are laying the foundation, the path to recovery must prioritise quality GDP growth that creates high-quality jobs. Achieving this requires addressing structural issues, strengthening social safety nets, and fostering cross-party consensus. As Sri Lanka navigates its economic challenges, making the right policy choices, coupled with accountable institutions, will be key to transforming its setback into a sustainable success.

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Sri Lanka’s RAMIS online tax collection system “not operatable”: IT Minister

ECONOMYNEXT – Sri Lanka’s online tax collection system RAMIS is “not operatable”, and the Ministry of Information Technology is ready to do for an independent audit to find the shortcomings, State IT Minister Kanaka Herath said.

The Revenue Administration Management Information System (RAMIS) was introduced to the Inland Revenue Department (IRD) when the island nation signed for its 16th International Monetary Fund (IMF) programme in 2016.

However, trade unions at the IRD protested the move, claiming that the system was malfunctioning despite billions being spent for it amid allegations that the new system was reducing the direct contacts between taxpayers and the IRD to reduce corruption.

The RAMIS had to be stopped after taxpayers faced massive penalties because of blunders made by heads of the IT division, computer operators and system errors at the IRD, government officials have said.

“The whole of Sri Lanka admits RAMIS is a failure. The annual fee is very high for that. This should be told in public,” Herath told reporters at a media briefing in Colombo on Thursday (29)

“In future, we want all the ministries to get the guidelines from our ministry when they go for ERP (Enterprise resource planning).”

President Ranil Wickremesinghe’s government said the RAMIS system will be operational from December last year.

However, the failure has delayed some tax collection which could have been paid via online.

“It is not under our ministry. It is under the finance ministry. We have no involvement with it, but still, it is not operatable,” Herath said.

“So, there are so many issues going on and I have no idea what the technical part of it. We can carry out an independent audit to find out the shortcomings of the software.”

Finance Ministry officials say IRD employees and trade unions had been resisting the RAMIS because it prevents direct interactions with taxpayers and possible bribes for defaulting or under paying taxes.

The crisis-hit island nation is struggling to boost its revenue in line with the target it has committed to the IMF in return for a 3 billion-dollar extended fund facility. (Colombo/Feb 29/2024) 

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Sri Lanka aims to boost SME with Sancharaka Udawa tourism expo

ECONOMYNEXT – Sri Lanka is hosting Sancharaka Udawa, a tourism industry exhibition which will bring together businesses ranging from hotels to travel agents and airlines, and will allow the small and medium sector build links with the rest of the industry, officials said.

There will be over 250 exhibitors, with the annual event held for the 11th time expected to draw around 10,000 visitors, the organizers said.

“SMEs play a big role, from homestays to under three-star categories,” Sri Lanka Tourism Promotion Bureau Chairman, Chalaka Gajabahu told reporters.

“It is very important that we develop those markets as well.”

The Sancharaka Udawa fair comes as the Indian Ocean island is experiencing a tourism revival.

Sri Lanka had welcomed 191,000 tourists up to February 25, compared to 107,639 in February 2023.

“We have been hitting back-to-back double centuries,” Gajabahu said. “January was over 200,000.”

The exhibition to be held on May 17-18, is organized by the Sri Lanka Association of Inbound Tour Operators.

It aims to establish a networking platform for small and medium sized service providers within the industry including the smallest sector.

“Homestays have been increasingly popular in areas such as Ella, Down South, Knuckles and Kandy,” SLAITO President, Nishad Wijethunga, said.

In the northern Jaffna peninsula, both domestic and international tourism was helping hotels.

A representative of the Northern Province Tourism Sector said that the Northern Province has 170 hotels, all of which have 60-70 percent occupancy.

Further, domestic airlines from Colombo to Palali and the inter-city train have been popular with local and international visitors, especially Indian tourists. (Colombo/Feb29/2024)

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Sri Lanka rupee closes at 309.50/70 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 309.50/70 to the US dollar Thursday, from 310.00/15 on Wednesday, dealers said.

Bond yields were slightly higher.

A bond maturing on 01.02.2026 closed at 10.50/70 percent down from 10.60/80 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.10 percent from 11.90/12.00 percent.

A bond maturing on 01.07.2028 closed at 12.20/25 percent.

A bond maturing on 15.07.2029 closed at 12.30/45 percent up from 12.20/50 percent.

A bond maturing on 15.05.2030 closed at 12.35/50 percent up from 12.25/40 percent.

A bond maturing on 01.07.2032 closed at 12.55/13.00 percent up from 12.50/90 percent. (Colombo/Feb29/2024)

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