Policies to revive growth a priority

The Sri Lankan economy is making a painfully slow recovery after a series of setbacks, posting GDP growth of around 3 per cent in the first half of 2019, down from just under 4 per cent recorded over the same period in 2018.

Successive blows from the October 2018 constitutional crisis and April 2019 terror attacks put pressure on an already struggling economy, prompting the growth rate for 2019 to be revised further down, according to an excerpt from Chapter 1 of the newly released ‘ Sri Lanka: State of the Economy 2019’ report, the annual flagship publication of the Institute of Policy Studies of Sri Lanka (IPS).

The report said: Thus, the overall positioning of the Sri Lankan economy in 2019 is weak. This is despite significant gains from macro reform measures in fiscal, monetary and exchange rate policy management from mid- 2016. Fiscal reforms in particular have had some success in restoring stronger macroeconomic fundamentals through a period of often painful adjustments. The most notable success is arriving at a primary account surplus after decades of being in the red – a surplus in the primary account is the first tentative step towards stabilising the country’s large debt stock, estimated in 2018 to be 83 per cent of GDP.

But, worries about the economy are not just confined to the heavy overhang of government debt. The sluggish pace of economic growth is a major concern. That growth has slumped is not surprising; for countries with large debt, a moderation in consumption as taxes are increased to deal with heavy debt repayments can lead to a low growth outlook. For Sri Lanka, a recovery is also proving to be more difficult given that its domestic production structure is skewed towards non-tradables – i.e. goods that can only be consumed in the economy in which they are produced, and cannot be exported nor imported. In contrast, the adjustment would have been easier if the economy was more export- dependent – as domestic absorption of output falls, the excess can be exported.

IPS said that under such circumstances, to keep growth buoyant through a phase of macro policy reforms require supportive micro reform measures – the so-called ‘structural reforms’ to lift constraints on growth. These include policies to improve the efficiency of resources used by the public sector (such as public investment, SOEs), policies to improve economic incentives (such as trade), and policies to improve institutional efficiency ( such as customs, tax administration).

Delayed reforms

Some delayed reforms have been implemented, but these have gained little economy-wide traction. Concerns that a transformation process to ‘economic efficiency’ does not come at the cost of equity must also be recognised. Despite Sri Lanka’s transition to a ‘high’ income economy, persistent inequities are to be found; the richest 20 per cent enjoy more than a half of total household income, while the poorest 20 per cent get only 5 per cent.

But, Sri Lanka must work to bring about a long-term restructuring of the economy. Tradable sector growth – and the prospect of higher foreign currency earnings – is critical to comfortably manage its large foreign debt repayment obligations.

In the midst of these economic challenges for a new government, policymakers must understand and analyse the potential economy-wide impacts of the extraordinary technological progress confronting the world.

Fourth Industrial Revolution (IR4.0)

The fourth industrial revolution (IR4.0) – artificial intelligence ( AI), robotics, the Internet of Things (IoT), 5G, 3D printing, etc. – presages rapid changes to the way people work, live and interact with each other. It will determine who forges ahead and who falls behind.

For Sri Lanka, the demographics suggest that an assessment of the technological advancements of the IR4.0, and what it means for the country’s productivity growth, cannot be put off. Fewer numbers are entering the labour force each year, with Sri Lanka’s current rate of 4 per cent unemployment considered to be almost full employment. There is clearly some slack – demonstrated by low levels of female labour force participation for instance – but, overall signals are of growing labour force shortages. Indeed, Sri Lanka’s first ever ‘Labour Demand Survey’ carried out by the Department of Census and Statistics (DCS) in 2017, points to already high levels of labour mismatch.

Sri Lanka’s readiness for the IR4.0 – in digital, human capital, and economic agility – is low. Internet usage is still 34 per cent of the population, national computer literacy rate is 23 per cent, with a gender gap in Internet usage of 40 per cent and significant regional disparities in information technology (IT) literacy – urban (37 per cent), rural (22 per cent), and estate (9 per cent). On the plus side, 70 per cent of the population owns a mobile phone, with a 95 per cent mobile cellular networks cover across the country.

Human capital

In human capital, there are significant deficiencies despite high literacy rates. School census data show that that less than a quarter (23 per cent) of A-Level students is in the science stream, and a further 10 per cent is in the technology stream. The majority (66 per cent) are in the arts and commerce streams.

The share of workers with tertiary level education in Sri Lanka is very low; of the country’s 15+ aged population, only around 3.5 per cent hold a degree or above qualification. At the university level, only a limited few are following science (12.1 per cent), computer science (4.4 per cent), engineering (6.6 per cent) and other technology related subjects.

Not surprisingly, and as a result of the above trends, the production structure of the Sri Lankan economy has changed very little over the decades; only around 7 per cent of manufacturing value addition is estimated to take place through medium hi-tech and hi-tech industries. The application of rapidly evolving 4IR technologies can hasten or slowdown this process of an already overdue structural transformation of the economy.