Five steps to save the economy

Sri Lanka’s misery has deepened by unimaginable proportions over the last few weeks. The country was hit hard in 2020 by the COVID19 pandemic, and then by its subsequent global shock waves (the war in the Ukraine, world oil prices, and supply chain issues, etc.), thus pummelling the struggling economy into further crisis. With hyper-inflation, the rupee’s record devaluation, and the Central Bank short on dollars, Sri Lanka is facing renewed economic and social pressures. To overcome this financial predicament and to ensure a healthy economy, Sri Lanka’s administrators must take swift and very drastic action.

1. Sovereign debt restructure and bailout

The need of the hour is successful negotiation of a restructure and bailout. Sri Lanka's foreign debt of approximately US$ 51 billion is unsustainable. A debt restructure will provide a path for the reduction of the fiscal deficit including a new repayment schedule of debts. Furthermore, a bailout will provide much needed dollar liquidity to ensure the provision of basic needs flowing through the country. This will gradually remove key operating constraints on businesses, and liberate the rupee against the dollar.

2. Privatisation

The government should privatise government- managed commercial institutions, such as the Ceylon Petroleum Corporation, the Ceylon Electricity Board, SriLankan Airlines, Sathosa, Mattala Airport, Jaya Container Terminal, and so on. These institutions are a burden to the country either financially, administratively, or both. Privatisation would incentivise these organisations to operate efficiently and become profitable. This would enable the government to raise precious foreign currency through their sale, saving precious dollars on loss-making entities, while increasing future tax revenue, once the privatised entities become profitable.

3. Curtail government spending

Government spending on frivolous non-income generating capital projects ( the likes of Mattala Airport, Nelum Kuluna, etc.) and recurrent spending, such as defence expenditure (on average $1.6 billion annually for the last 10 years), subsidised fertiliser, fuel, electricity, and so on should be severely curtailed. A regulated and free market pricing of critical commodities, such as fertiliser, fuel, and electricity should be promoted, as opposed to subsidies. Government institutions plagued with excess staff (including abysmal political appointments) and lack of efficiency should be pruned and monitored, and key indicators should be reported free of political interference.

4. Overhauling the tax system

Tax is the primary revenue source of any government. Numbering only 300,000, Sri Lanka has one of the world’s lowest number of registered personal income taxpayers with over 45 per cent of tax collected on indirect taxes levied on goods and services. The social consequence of such a tax is that the poorest 10 per cent pay 23 per cent of their income. The tax system should be overhauled in a manner where it is fair and equitable, meaning that the rich and wealthy pay a fair (and higher) share of taxes.

5. Reforming the regulatory and judiciary system

The regulation of markets including essential commodities and privatised institutions should be reinforced. For example, fuel prices should be regulated through an appropriate independent regulatory body, using a transparent formula to reflect world prices. This would ensure the sustainability of private companies while maintaining a fair price in the market. Furthermore, financial and national statistics and reporting should be consistent, unbiased, and transparent to boost the confidence not only of the general public, but also of the international community. Law enforcement, which has sunk to new depths, should also be effective in swiftly upholding the rule of law, including bringing to justice perpetrators of fraud and corruption.

If any of these elements are not met, all attempts of the revival initiatives will be short- lived. However, the biggest obstacle in the path to recovery and a sustainable economy is not policy driven—it is political, and always has been. With the president, prime minister, and government’s approval levels steadily plummeting, and the social mood souring, it is hard to think that they would make the right decisions. If the administration fails to take note of the real lessons of the past, it will prevent the kind of recovery it hopes to emulate, deepening a crisis that has already been provoked by them.