Marcos must resist going Sri Lanka’s way

Many may not realize the severity of Sri Lanka’s situation. The island republic is bankrupt. The Sri Lankan people face a shortage of food, fuel, medicines and electric power. At least 500,000 Sri Lankans have fallen into severe poverty in the last year alone.

Civil disobedience is rampant as the Sri Lankans call for the resignation of President Gotabaya Rajapaksa for mismanaging the economy. Under pressure, Rajapaksa re-appointed five-time Prime Minister Ranil Wickremesinghe to pull the country out of its economic imbroglio.

Sri Lanka’s problems are in one part due to its flawed economy, another part due to populist policies and another part due to China.

At this juncture, let me say that the Philippines carries the same economic flaws as Sri Lanka. Thus, presumptive president Bongbong Marcos must pay close attention to the Sri Lankan experience to prevent the Philippines from going Sri Lanka’s way.

What are these economic flaws? Like Sri Lanka, the Philippines imports substantially more than it exports. Our trade deficit has grown exponentially under the Duterte administration – it stood at $32 billion last year. Both countries spend more than it earns. The Philippine budget deficit was at $33 billion or 8.6 percent of GDP (red flags!) last year. This is because both countries have weak manufacturing bases and are hopelessly import dependent.

Both economies are heavily in debt. While Sri Lanka is drowning with debts amounting to 111 percent of GDP, the Philippine situation is less acute but already at its maximum tolerable level of 63.5 percent of GDP.

Instead of focusing on manufacturing and creating the right conditions for businesses to flourish, both Sri Lanka and the Philippines relied on consumer spending to propel growth. Both turned to infrastructure spending to pump-prime their economies, largely financed by debts from China. China fanned the flames of debt as they carry steep repossession clauses in the event of default. The debts also include clauses that allow China to interfere with foreign and domestic policies. China led Sri Lanka and many countries to a debt trap.

President Rajapaksa bet on investments from China to drive its economy, just like President Duterte did. The deluge of investments never came and both Rajapaksa and Duterte ended up giving more concessions to China than they received.

Already in dire straits, President Rajapaksa adopted several populist policies that pushed his country over the edge. He announced deep tax cuts. Although popular, it eroded the country’s revenue base. He did so despite having debt obligations that the country could no longer meet. He planned on acquiring more debt to keep the country afloat. But credit rating agencies consequently downgraded Sri Lanka’s debts to default levels so access to new money became scarce. The country quickly ran out of cash to import its necessities, let alone meet its debt payments.

In April 2021, Rajapaksa made another blunder. He banned fertilizer imports to save on foreign exchange. This caused farm outputs to plummet. Months after, he banned the importation of luxury goods and supplies, which effectively killed the tourism industry. In one fell swoop, Rajapaksa killed two of the remaining revenue generators of the country.

Sri Lanka had no choice but to default on its debts and restructure its $50-billion debt load. President Rajapaksa was reduced to begging his neighbors for financial assistance. Bangladesh threw a lifeline with a $200-million loan while India came through with $500 million. Still, it was not enough. Last March, the SL Rupee was devalued by 32 percent, further eroding the spending power of its people. This naturally caused inflation to spike to 30.2 percent. The price of rice increased by 93 percent.

Sri Lanka is going through its worse economic crisis since gaining independence in 1948. Revenues have plummeted, debts are unmanageable, inflation is soaring and foreign reserves are down to barely $2 billion.

Although not as severe, Marcos will be inheriting an economy as flawed as that of Sri Lanka. What should he do? On top of it all is fiscal prudence. Marcos must slash excess spending and corruption leaks, and get savings rates up. He must accrue foreign exchange earnings wherever we can get it.

There is no getting away from it – he must wean the country away from import dependence and pivot from being a consumer-led economy to one that it productionbased. He must narrow our deficits by increasing our tax base and exporting more goods and services.

This can be done through a manufacturing resurgence. This is a must. But we cannot do it alone. We need foreign investment to provide capital and technology. The amendments to the Foreign Investment Act, the Public Service Act and Trade Liberalization Act are a boon; however, much has yet to be done in terms of ease of doing business and building confidence in the new leadership.

I strongly recommend the formation of the Office of Strategic Investment Promotions (OSIP), which is patterned after the highly successful InvestVietnam.

Not to be confused with the Board of Investments, the OSIP is proposed to be under the Office of the President. Its core function will be to undertake non-stop outbound investment missions, provide investor concierge services for ease in entry and liaise between government agencies and foreign investors. The OSIP will co-operate with the DTI in industrial planning and aggressively pursue investors to fill supply chain gaps.

Of course, agriculture must be given due attention. We can circumvent the limitation of CARP, expensive agricultural inputs, the lack of technology and infrastructure by establishing Agri-Hubs in state universities. I will explain this innovative concept another time.

As for debts, Marcos must resist the lure of cheap infrastructure loans from China with strings attached. Public Private Partnerships are a better option. If borrowing is necessary, source domestically whenever possible.

We hope that Marcos will be an enlightened leader willing to shun populism and adopt policies towards strengthening the foundations of the economy. We hope he does not fall into China’s debt trap. The consequence is to go Sri Lanka’s way.