A new path to sustainable inclusive economic growth

Many eminent economists have veered to the view that the global economy cannot be the same as before the COVID- 19 pandemic. They contend that a “New Model” of economic development is needed after the unprecedented economic disaster caused by the COVID-19 pandemic. There is a search for a more sustainable economic growth model.

Pathfinder Foundation

In this context, the Pathfinder Foundation ( PF) appointed a study group chaired by Dr Indrajit Coomaraswamy, the former Central Bank of Sri Lanka Governor, to examine the economic implications of the COVID- 19 pandemic and suggest a way forward for Sri Lanka.

The PF Report, 'Beyond the box: a new economic vision for post- COVID- 19 Sri Lanka', draws on inputs from representatives of academia, research institutions, professionals and the business community in Sri Lanka.

Pragmatic policies

The Pathfinder study underscores the need to adopt realistic and pragmatic economic policies: “The refined strategy should be pragmatic and non-ideological in nature. It should draw lessons from the low growth, muted investment, high unemployment and black-market prices associated with the inward- looking policies of the 1970-77 era….”

Economic liberalization

The Pathfinder Foundation also cautions on the weaknesses of the post 1977 economic liberalisation and “the increased vulnerability to external economic shocks, climate risks, increased inequality, reduced social protection and pandemics of the period since the opening up of the economy in 1977.”

Refined strategy

The PF report says the refined strategy adopted “should also exploit all Sri Lanka’s factor endowments, skills of its people and leverage the advantage of a strategic geographical location and a friendly non-aligned foreign economic policy towards a range of countries and international institutions.”

Role of the state

The PF study points out that “In recent decades, influential voices have argued that the role of the state in managing the economy should be downsized. However, the COVID- 19 pandemic demonstrates that when societies face massive challenges, it is only the state that has the capacity to respond effectively.”

Furthermore, “In a world where climate related natural disasters and health pandemics are becoming more frequent and intense, action needs to be taken at the national, regional and multilateral levels to create the institutional capacity and financing mechanisms to deal with sudden and unforeseen threats.”

Social and economic infrastructure

The Government must improve state health services, institutional care of the elderly, provide income support to the poor, improve the quality of primary secondary and university education, develop agricultural and scientific research and invest in the development of roads, bridges and other economic infrastructure.

Running businesses

In as much as the state has an important role to play in the improvement of social and economic infrastructure-- health, education and social security, among others--its involvement in running loss making enterprises is a drag on the state’s capacity to stimulate economic growth and improve social welfare. The state must shrink in nonessential and loss making enterprises that starve the Government of finances to meet the much needed investment in economic and social infrastructure development.

Clear definition

A clear definition of the role of the state is imperative. The lack of clarity and certainty on the role of the state has hampered foreign and domestic investment.

Foreign investment

There is a consensus across the political divide that a much higher amount of foreign direct investment ( FDI) is needed to spur the country’s economic growth. Nevertheless, the amount of FDI has been small. and much less than those received by other Asian countries such as

Bangladesh or Vietnam recently.

Pipe dream

The expectation that foreign investments would flow in large amounts after COVID-19 is eliminated in the country is a pipe dream. The hard reality is that global FDI flows are likely to slow down until world economic development regains its growth momentum.

Investment climate

The PF report considers the improvement of the investment climate a priority to attract foreign i nv e s t m e n t . The Government should nurture the conditions that would attract foreign direct investment so the private sector can restructure businesses to reap new opportunities and to create jobs.

Fiscal slippage

A significant factors determining economic stability and growth is the containment of the fiscal deficit. Large fiscal deficits are the root cause of huge public debt, high debt servicing costs, distortion of public expenditure, inflation and depreciation of the currency.

The revenue enhancing fiscal consolidation process that commenced in 2016 was derailed and the fiscal deficit reached 7.3 percent of GDP in 2019. It may reach double digit proportions from the current 9.3 percent. This will no doubt constrain future public investment and economic and social development expenditure.

The PF study stresses the need to contain the fiscal deficit: “The lack of fiscal space is constraining the capacity of the government to respond. It is channeling mitigation measures through the CBSL and domestic financial institutions.”

Borrowing

While the PF report recognises the need to borrow to salvage the economy and meet the humanitarian needs, it states that: “At this perilous juncture, the authorities need “to go big” in terms of borrowing domestically ( including from CBSL) and from official development partners to overcome the lack of fiscal space. Such borrowing should be strictly allocated to fund social protection and productive investment.”

External finances

The effects of the global output collapse, PF report points out are being transmitted to Sri Lanka through falling demand for exports, capital outflows, falling remittances, a halt in tourism and a loss of business confidence and the high external debt payments denominated in US$ amidst dwindling reserves complicate the external economic landscape in Sri Lanka.

Reserves

The PF points out that building fiscal and external reserve buffers to increase resilience by de-risking the economy going forward is crucial. As a small relatively open economy with twin deficits, Sri Lanka is being severely affected by this exogenous shock. The lack of fiscal space is constraining the capacity of the government to respond. It is channeling mitigation measures through the CBSL and domestic financial institutions.

Domestic borrowing

The PF suggests that at this perilous juncture, the authorities need “to go big” in terms of borrowing domestically ( including from CBSL) and from official development partners to overcome the lack of fiscal space. Such borrowing should be strictly allocated to fund social protection and productive investment.

Impacts

The PF report says that effects of the global output collapse are being transmitted to Sri Lanka through falling demand for exports, capital outflows, falling remittances, a halt in tourism and a loss of business confidence. High external debt payments denominated in US$ amidst dwindling reserves complicate the external economic landscape in Sri Lanka.

Implementation

One of the reasons for the underperformance of the economy is the lack of effective implementation of policies. Recognising this weakness the Pathfinder Foundation had proposed an institutional mechanism.

The PF report suggests the appointment of a task force of officials under the President’s Office mandated to assess the economic damage caused by the COVID- 19 pandemic and to develop the ideas of the PF report into an actionable national economic strategy. They could be assisted by a multidisciplinary advisory group of experts who could provide technical advice and help with monitoring outcomes. The report also suggests the establishment of a committee of secretaries of development ministries, chaired by the Secretary to the President, to improve consistency and predictability of policy making as well as priority-setting and co-ordination for implementation.

Concluding reflection

Policy makers should study the Pathfinder Foundation report and other policy papers, such as the submissions of the nine deans of agriculture faculties of universities and implement a policy framework that will revive the economy.