Dilemmas of development post COVID-19
The purpose of this article is to raise some issues that face the Government, in an attempt to generate public awareness and discussion of these issues.
The main issues raised, segment into two broad categories. One category is regarding welfare and how the Government will treat the social welfare and the corporate welfare burdens it carries. The next area of concern is with its policy regarding nationalism or globalism. These conflicts face not only Sri Lanka, but all other nations with similar economic constraints, in the face of COVID-19.
This article does not focus on suggesting solutions but instead raising questions.
Government and welfare
The Government was quick to introduce policies to encourage corporates to pay wages to their employees. They were also quick to send out relief foodstuffs to daily wage earners. The Government was supported by private initiatives as well.
Dr. Wasanthi Wickremasinghe of the Gamini Corea Foundation has estimated that the total employed population is around eight million, and around three million could be self-employed. A further 4.7 million are employed in agriculture, industry or service sectors. From this number, there could be a further one million that could lose their livelihood or at least a part of their income. Garments and tourism workers will be challenged in the short and medium term. Dr. Wickeremasinghe also estimates the cost of feeding a family at Rs. 17,600 per month. This data gives some indication of the financial magnitude of the problem.
Three questions arise:
1 In the case of employees, should the Government support them directly, or through the companies they are employed by? 2 Can the Government afford this
expenditure?
3 Is this welfare the responsibility of the Government or should other segments of society also contribute to this burden? Pertinent to the first question, Sri Lankan-born tech-entrepreneur Chamath Palihapitiya, partner of Social Capital Partnership which is a VC (venture capital) fund with an asset base of over US$ 1 billion, in a recent interview with CNBC argued aggressively that governments routing welfare payments direct to the people was more efficient than offering the same support to corporations.
In terms of second and third questions, in an interview with America’s National Public Radio (NPR), Ray Dalio, the founder of the world’s largest hedge fund, states that the world has had a huge ‘wealth gap’ that capitalism has not been able to fill. His theory is that, in the wake of the pandemic at both global and national level, purchasing power will have to be given back to the people. The picture he paints is an unprecedented transfer of wealth, which he argues will both increase the size of the pie and distribute it in a more equitable and sustainable manner.
In India, a group of entrepreneurs led by Amit Chandra of Bain Capital enabled a fund of US$ 100 million to help corporates in India recover from the virus. Since these leaders were administrating an investment fund, they could take entrepreneurial decisions and lend based on cashflows or intuitive probability of entrepreneurial success.
Nationalism and globalisation
The global pandemic disrupted international supply chains. This led to an insecurity that in turn provoked countries entertaining nationalist policies. Many nations are looking at food self-sufficiency. Japan has announced that the
Government will support corporates to invest in alternate supply chains that offset the risk of being dependent on China.
Within this global context, the following three areas warrant discussion in Sri Lanka:
Banning of imports and import substitution initiatives State Owned Enterprises (SOE’s) and international synergies
Foreign grants and bilateral trade
Banning of imports, import substitution initiatives
The President at an interview with his Senior Advisor, articulated his vision to develop the national economy and the national productive base. An analysis of the Sri Lankan import and export statistics reveals that we are importing a large quantum of goods that we can easily omit. Towards this end, a list of goods that may no longer be imported has been legislated.
With regulations come the possibility of circumvention and a lack of transparency. The question of how imports are to be controlled needs careful examination and implementation.
A further question is how the efficiency of the National Production Drive can be ensured. National production and food security are areas that every country is looking at in the aftermath of the COVID- 19 shock. There are some products that Sri Lanka will not be able to produce at global efficiency norms, if we are to supply our local market. Take for example motor vehicles with Internal Combustion Engines (ICE’s). India and China, because of the scale of their local markets will always have a cost benefit in production. Hence, it is more efficient for Sri Lanka to import vehicles and levy an import duty rather than opt for manufacture. This would not be the case if we were contemplating the manufacture (or assembly) of Electric Vehicles, as the components are homogenous and economies of scale are less significant when compared with ICE’s.
National production is a complex problem that would need to be studied by economists that specialise in this field. Nationalism should be balanced with efficiency.
SOE’s and international synergies
SriLankan Airlines and its predicament is an example of the complexity of the issue of SOE’s. The airline is a perennially money-losing business that has resisted reform. Their predictions publicly articulated envisage a loss of Rs.30 billion ($160 million) in the next six months. Given the catastrophic effect of the pandemic on air travel, this estimate may be optimistic. Can the government lose this cash and risk an even greater loss?
Will the Government have the political courage to restructure the airline?
Should we look at making temporary arrangements with other carriers to provide short haul and long haul capacity from Colombo in a post-COVID era whilst arriving at a feasible strategy for the airline?
If this strategy entails the sale of profitable related businesses, like ground handling and catering, how can it ensure that these transactions are carried out transparently at fair market value?
Similar strategies could be adopted to a host of SOE’s some that will ease the Government of funding pressure and others that will realise significant capital inflows.
Foreign grants and bilateral trade
The grant of $488 million by the Millennium Challenge Corporation (MCC) is an example of a foreign grant that has national benefit yet, has been attracting political dissention.
Sri Lanka stands to lose this grant if we don’t sign the MCC agreement within the next few months. No one has raised objection to the benefits of the areas to be covered under the grant. Passionate objections have been raised questioning the motivation of the lenders and the clauses of the agreement. However, Sri Lanka has been signing similar agreements with similar clauses under USAID for decades. Given COVID-19 and the pressure against the LKR, and also given Sri Lanka’s lack of fiscal space, this and all such grants are invaluable at this time. Would the Government look at the MCC and all such grants this afresh, without politically-coloured lenses?
Labour laws, access to finance
Sri Lankan labour laws have been cited as an area of concern and an impediment to attract Foreign Direct Investment ( FDI). This could be an opportune time to address this issue.
The NDB and DFCC have turned into banks, leaving a vacuum in the market for developmental finance. Sri Lankan corporates will need assistance to stay in business. Further, they will need funding to reorient themselves to take advantage of post COVID-19 opportunities. The corporate assistance package announced by the Government entails the banks to take the credit risk in the lending. Will this lead to the banks limiting lending to companies whose balance sheets are not strong enough or don’t have adequate collateral? Will companies with strong cash-flows get left out?
The Government has a significant stake in NDB and DFCC. Would amalgamating them and reconstituting them as development finance institutions provide more funding for Sri Lankan companies to thrive?
The penultimate question is whether the Sri Lankan legal framework relating to commercial law is robust enough to support modern commercial disputes and to pose the question if our legal system is an impediment on increased FDI.
If COVID- 19 could enable Sri Lanka to negotiate significant debt moratoriums this alone would be a significant benefit. Beyond this, the post coronavirus commercial world could present opportunities for Sri Lanka. The final question is will Sri Lanka grab this opportunity? (The writer is a Co-Founder of Innosolve Lanka (Pvt.) Ltd,
a start-up dedicated to introducing sustainable mobility
solutions in Sri Lanka).