Unveiling the true culprit behind economic woes

By Dhananath Fernando

Originally appeared on the Morning

Sri Lankans have a very negative view of imports, which are often portrayed on TV as the problem behind the economic crisis. Not only politicians, but also those who have opinions on our economy subscribe to the idea that imports are the problem.

Our politicians’ favourite pastime is to blame imports and impose various tariffs or ban imports. Banning imports also makes for a very pro-Sri Lankan image, because a common excuse provided is that high imports are damaging to local industries. Accordingly, the banning of imports has been portrayed as a measure to help develop local industries.

A favourite area when it comes to cutting down imports is food imports. Often, media headlines and politicians comment aggressively, even quoting figures on the value of food imported. The middle class, upper middle class, and wealthiest of society often make the argument of needing to save valuable foreign exchange by cutting down food imports.

However, when we consider the data, it indicates the exact opposite. The middle class, upper middle class, and the wealthiest are the ones who consume the most amount of imports in the form of fuel, mainly through personal vehicles and as energy. About 27% of our imports in January was fuel. Fuel is the largest component of our import basket as a single commodity.

What we have imported as food is less than 11% of our total imports. Non-food consumer goods are just 8% of our total imports. Most pharmaceutical products and medicines for patients fall under the non-food consumer goods category, which are primarily consumed by the most vulnerable people in society.

Imported food items are also consumed by the most vulnerable sections of society. Food items such as canned fish, maize, green gram, lentils, black gram, sprats, b-onions, potatoes, and wheat flour are critical food items for the poorest of the poor.

Firstly, these can be stored without a refrigerator, which saves their energy cost. Secondly, they are easily available and affordable compared to many other items of food they consume. Therefore, the request of politicians and academics to cut back on these food items, which comprise less than 11% of our total imports, is nearly impossible to fulfil, and reducing these imports further is tantamount to asking the poor to live in hunger and their children to suffer from malnutrition.

Thirty-seven percent of our import basket comprises intermediate goods, besides food. These are goods required for exports and to produce many things without interrupting the supply chain. For instance while our main export is apparels, our main import is also apparels. Therefore, asking to reduce apparel sector imports amounts to reducing our valuable exports.

In reality, while there persists a belief that imports have to be reduced, it is not the solution it is touted to be. If we have to cut down on food imports, it will lead to increased malnutrition, hunger levels, or food costs for Sri Lankans.

Ways of reducing imports

If we want to bring down our imports, cutting down on fuel is one way to consider. A World Bank study revealed that 70% of the fuel is consumed by the wealthiest 30% of society. Therefore, it only makes sense to maintain fuel prices at market price.

As indicated in the graphs, there is a correlation between high fuel prices and fuel imports. Our fuel imports have decreased when prices are high as people use it sparingly. Compared to January 2023, our fuel imports had declined by about $ 100 million per month by January this year. With the expansion of the economy, this number is expected to slowly grow. Prices can bring imports down without import bans or tariffs.

Another way to reduce fuel imports is by improving public transport. Most of our fuel is wasted in traffic jams as a result of our poor public transportation infrastructure. If we invest in public transport, not only will it reduce fuel imports, but it will also uplift many Sri Lankans and provide significant relief in terms of their purchasing power. Many middle class Sri Lankans pay a 200% tariff to buy a second-hand vehicle at an interest rate of above 12% because they have no other choice but to commute.

Saving foreign exchange

Sri Lanka has been offered many grants, including for the Light Rail Transit (LRT) project, which we turned down on numerous occasions, leading to geopolitical tensions. When people spend less money on commuting and waste less time in traffic congestion, it will not only improve productivity but also their purchasing power, creating many jobs and generating income.

It is an inalienable truth that we need more food imports with different varieties of protein sources for the benefit of the impoverished. Foreign exchange has to be earned through exports, tourism, and remittances.

Saving foreign exchange is a function of the monetary policy or the supply of the Sri Lankan Rupee to the financial system rather than a function of imports and exports. When the rupee becomes expensive, the US Dollar demand decreases automatically because people buy the latter using rupees that they could have used in an alternative manner.

Asking the public to cut down on food imports, which are mainly consumed by the poor, at the expense of allowing the use of more fuel-driven vehicles cannot be justified and borders on cruelty.

What next for Sri Lanka?

Originally appeared on The Morning.

By Dhananath Fernando

New predictions are emerging that debt restructuring and International Monetary Fund (IMF) Board-level agreement may take until the end of this year. Another ongoing discussion is about the Local Government Elections and postponement of elections. Electricity tariffs are to be increased and 10 banks have been downgraded by Fitch Ratings as a recalibration of Sri Lanka’s sovereign rating.

Overall, it appears that economic reforms are being sidelined faster than expected, without realising the consequences of each action. It is true these complicated problems have no easy, straightforward solutions. No solution will be perfect and the validity, impact, and effect of any solution will be weighed against time. To put it simply, a solution that appears valid and reasonable today may not sound reasonable in a few weeks or months.

Each action has its consequences and inaction will also have consequences. It will be a battle between the consequences of action and inaction and the continuation of this for the next few years.

Reforms and restructuring

Let’s take the case of reforming State-Owned Enterprises (SOEs). With the election cycle commencing with Local Government Elections, attempts at restructuring SOEs such as the Ceylon Electricity Board (CEB) may be delayed. This delay means that inefficiencies will continue and tariffs will be increased without any competitive basis. This will in turn impact all businesses as well as macroeconomic indicators given the monopoly and the size of the electricity business. It may also extend the duration of power cuts and pave the way for another wave of protests, worsening the business environment.

Reforms too will be painful. Trade unions and some employees will be affected and an electricity monopoly can interrupt the life of the common man in multiple ways, with political and capital implications.

The cost of not implementing reforms will be much higher politically and economically, as it would be a cyclical result. Therefore, the reasonable decision is to restructure loss-making SOEs. Unfortunately, there is no other way out and delaying this further may invite darker years in the future.

The delays in the debt restructuring process will have its own consequences, both economically and geopolitically. The debt restructuring delay is a repercussion of maintaining bad foreign relations.

Poor international relations

How we treated India over the Economic and Technology Cooperation Agreement (ETCA) and in discussions on the East Container Terminal was extremely unprofessional and irresponsible. There is a significant difference between disagreement, negotiation, and unprofessional treatment.

By suspending the Light Rail Transit (LRT) project, we lost the respect and trust of Japan. We even annoyed China with the fertiliser matter and continuous regulatory delays with the Port City project. Our relations with the Middle East deteriorated with the cremation of dead bodies of the Muslim community during Covid.

We are not even in the good books of the US over the way we dealt with the MCC grant. Simply put, we do not have a friend who will extend a helping hand during troubled times. It is said that countries have longer memories than people. As such, we have limited our options due to our own grave mistakes.

A stalemate in a crisis

Economics and politics often go hand in hand. During an economic crisis, instability in politics is unavoidable. Our President does not have a direct mandate and the composition of the Parliament may not really reflect the people’s voice with the dawn of the completely new sociopolitical environment.

This was one reason the discussion of a common minimum programme was floated by concerned individuals and professionals, but it appears that this too has been discarded, with everyone slowly turning their attention to the election cycle. The calibre of our politicians is too inferior for them to understand the dynamics involved and to come up with responsive and novel policies and political options.

We are now in a stalemate, with a lot of short-term distractions. In such situations, we become distracted and waste our time on non-value adding activities without realising the massive deterioration of the quality of life. A deeper analysis shows that while the absence of economic reforms is a major issue, the fragility of our institutions is a bigger concern, with the institutional capability for the functioning of a basic society being almost nonexistent.

Solutions

Appointing capable and credible human resources for debt negotiations with China is essential to avoid delays. Acceleration of debt restructuring will unblock many other barricades, enabling us to move forward. There is a huge vacuum of capable human resources needed to carry out reforms. Therefore, providing space for already appointed committees to recruit more capable people and working out a time-bound solution matrix is important. The solution now lies in setting up institutions that can execute reforms to get us the required results.

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.