Originally appeared on The Morning.
By Dhananath Fernando
As this column has highlighted many times, Sri Lanka is presently at a crossroads. Either we will excel and emerge as one of the dynamic tiger economies of Asia, or we will become a failed state, going from one crisis to another. There is simply no middle path between the two outcomes.
So far in our history, we have missed the bus of economic reforms repeatedly. Our reforms of the late 1970s were half-hearted and necessary labour market reforms; other economic reforms haven’t been completed. Following this, we had a 30-year war and a short period of high growth post war.
Recently, Prof. Premachandra Athukorala devised an interesting metaphor about Sri Lanka’s economy at Advocata’s #ReformNow conference on ‘Let’s Reset Sri Lanka’. He compared a sumo wrestler to a normal wrestler.
Sumo wrestlers are big and heavy, whereas the normal wrestler is skinny and small-made in comparison. To the casual observer, it may look like the sumo wrestler is stronger than the normal wrestler, but in reality, the life expectancy of a sumo wrestler is about 20 years less than an average Japanese man.
Prof. Athukorala compared the Sri Lankan economy’s high growth years to a sumo wrestler. Although the growth numbers were high, our economy has always been vulnerable – just one trigger can cause so many problems.
As he very correctly mentioned, due to a few triggers such as the Easter attacks and Covid, we are going through a lot and will have to shoulder a great burden in the future. What we need to be, with regard to our economy, is a normal wrestler; one who is flexible, agile, and dynamic, with a high life expectancy and who can adjust easily to global trends and to challenging times.
As we all know, change is difficult and resistance to reforms is inevitable. In many cases, it is untrue myths about reforms that drive this resistance.
Myth 1 – Privatisation would mean selling the family silver and our sovereignty
A common myth against State-Owned Enterprise (SOE) reform is the rhetoric that it amounts to selling the family silver or selling off national assets. This is a popular argument in the vernacular.
We have to first identify most of our SOEs as loss-making; they are more of a liability than an asset. Secondly, being owned by the State doesn’t mean that they are owned by the people. If they are owned by the private sector, that is what you might call being owned by the people.
Let’s take the Ceylon Petroleum Corporation (CPC) or SriLankan Airlines as examples. Both are owned by the Government of Sri Lanka. So where are the benefits for the people? There are none.
We can’t pump all the fuel we want despite being able to pay for it. Most of us can’t apply for a job at the CPC or at SriLankan, since many of these opportunities are given to supporters of political elites. As both institutes are loss-making and taxpayers are paying for something they don’t consume, what is left for the people to own or obtain benefits from?
But if the same institutes were owned by the private sector, then that company would have to pay taxes, which is a source of revenue for the Government that can be spent on the people and on public goods. People can buy shares, will be entitled to a dividend, and can apply for job opportunities on a competitive basis.
Sri Lankan businesses and foreigners can invest money and create jobs for our people while improving productivity and efficiency. So in reality, ownership of assets by private companies is a situation where they are in reality owned by the public.
Consider the main telecom companies and conglomerates as an example. They are the main tax payers to the Government and are often victimised by one-off surcharge taxes when Government revenue drops significantly. This definitely does not mean that all participants in the private sector are clean, but we all know that they are usually better than the Government sector and Government-owned businesses.
On the argument of sovereignty, it has been said that “the business of business is business”. Businesses enter a market to make profits and they become sustainable when they generate profit. Many Sri Lankans have successfully expanded globally, but have we ever heard the people of those countries complain that Sri Lankans have come to take the sovereignty of their country?
Myth 2 – The IMF is the solution to all problems
Another common myth is that the International Monetary Fund (IMF) is the solution to all our economic problems. This is simply not the case. The IMF can only give us some money and credibility. Both will bring some stability, but our economy needs to grow organically and continuously like an agile, flexible wrestler for us to overcome the crisis and to become a tiger economy.
The IMF cannot implement reforms for us – we have to buckle down and implement economic reforms and reset Sri Lanka for our own progress. The IMF is just a stepping stone on a long journey; it cannot solve all our problems.
We have to welcome a full package of reforms to grow the economy. We have gone to the IMF about 16 times previously and only six programmes have been completed. Out of the Extended Fund Facility (EFF) programmes, which require structural reforms, we have completed only two programmes. Our track record indicates that we are a nation that expects the IMF to solve our problems rather than solving them on our own.
Myth 3 – IMF is the problem
On the flip side of the coin are those who think the IMF is the problem. They are of the view that the IMF is some sort of secret agent who will engineer all privatisations in the interest of Western oligarchs and they believe that the IMF operates like a gangster with a gun ready to shoot us if we don’t do what they say.
This is simply untrue; the IMF in this case is the International Monetary Fund and not the Impossible Missions Force from Tom Cruise’s action film franchise.
The IMF is like a bank’s credit officer who will evaluate a business proposal and then approve the granting of money. We all know bank officers don’t initiate business proposals, but the customers do.
Similarly, the Government has to go to the IMF with a plan and the IMF will evaluate whether the plan is adequate to achieve the desired results. If we fail to adhere to what we promise, as we have done 10 times out of 16 in the past, they won’t release the balance money, and nothing will happen except the continued deterioration of our economy.
Given this context, a side effect will be that no one else will come forward to give us assistance if we don’t move forward with the IMF programme. They are like a gym instructor and they can recommend a good diet and exercise, while our policymakers have to do the work to ensure an outcome.
Myth 4 – Imports are the problem; imports are bad, exports are good
Since we have a USD/forex shortage, some are of the view that imports are the reason for the crisis. We first need to understand that before we import goods or services, we buy USD by paying in LKR for imports.
If we really wish to do so, the best way to discourage imports is to increase the price of USD before we ban any imports. This is where the stability of the monetary system becomes of paramount importance in overcoming the crisis.
If we need to encourage exports, the best way to do it is to pay the market rate for USD to exporters so they can be more competitive. This is why it is said that “stability is not everything and without stability everything is nothing”.
The truth is that imports and exports are both good because they are two sides of the same coin. We need exports for imports and imports for exports. We need to look at overall trade reforms and facilitate further trade rather than thinking that imports are the problem. The problem is the monetary system which determines the price of USD, not imports or exports.
The above are just four myths out of many. Those perceptions are like a virus, but we need to implement reforms and reset Sri Lanka if we are interested in forming a dynamic and healthy economy like a natural wrestler who can absorb shocks and perform in good times as well as in bad times.
The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.