Originally appeared on The Morning
By K D Vimanga
The Sri Lankan economy’s crossroads
The great South African Statesman Nelson Mandela once said: “It always seems impossible until it is done.” Well, in our case, the time to get things done is already here. If we keep calling the act of reforming our economy impossible, then this country for sure will continue on a very dangerous path. So the longer we postpone the possibility of reforms, the more painful the process is going to be. So, we all, both policy makers and citizens alike, need to realise that the only way we can get out of this crisis is by implementing immediate and hard reforms, which this column has over and over again expounded on.
Implementing reforms remains impossible for the sole reason that there remains very little political will to do so. However, what history teaches us is that the only way for nations to emerge from a crisis is by implementing bold reforms, even if they are politically unpopular. Such bold policy decisions, taken for the greater good of the nation, have been instrumental in releasing millions out of poverty. The best example is the economic reforms in India, which commenced from the 1991 economic crisis. The bold decisions taken by Prime Minister Narasimha Rao and Finance Minister Manmohan Singh were taken during compelling times. India was facing a similar situation, where the country was finding it hard to meet external debt obligations along with a serious balance of payment crisis. India was almost bankrupt as a result of the post-independence command and control-driven economy that brought the nation to the brink. However, amidst all odds, at the height of the crisis, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh opened its economy to be driven by market forces, while dismantling the license quota raj. This also involved the devaluation of the rupee at the height of the crisis. It were these hard reforms that laid the foundation of India emerging out from the depths of bankruptcy. As a result of these reforms from 1992 to 2005, foreign investment increased by 316.9%, and India’s gross domestic product (GDP) grew from $266 billion in 1991 to $2.3 trillion in 2018 (1).
Sri Lanka is facing a similar or far worse crisis. It is public knowledge that the economy has reached a boiling point, with the country’s reserves falling to $ 1.57 billion, while Sri Lanka has debt payment commitments of $ 4.5 billion (2) for 2022. Inflation has been rising to 9.9% (3). Advocata’s Bath Curry Indicator, which tracks the price of essential food items, records that since 2019, prices have increased by 44%. This means that an average family who spent Rs. 960 weekly on the BCI basket of food items in November 2019 now has to pay Rs. 1,390 for the same basket of goods just two years later. Continued printing of money, along with the implementation of policies without foresight – such as the overnight move to organic fertiliser – have all significantly added to this present rise in food prices. Therefore one cannot deny the existence of the crisis anymore.
So what needs to be done?
The answer is simply, implement a comprehensive programme of reforms now. For this week’s column, I would like to discuss the role of privatisation in the most immediate and short term. Implementing such a programme of privatisation which releases commercial activities carried out by the state can bring in significant cost savings for the Government while also bringing in short term liquidity. More importantly, such a programme can become a much needed productivity boost to the economy while opening up for private sector participation. Closing down non-viable state-owned entities is another key requirement of such a programme.
The country is also currently in desperate need for Foreign Direct Investment (FDI). The Finance Minister admitted in Parliament that Sri Lanka is not getting FDIs as fast as expected. Therefore privatisation can be the fastest route to capture foreign direct investment. FDIs jumped in the 1990s mainly due to their ambitious privatisation programme. Out of the total privatisation proceeds realised during 1989-2005, 59% was financed by foreign investors as illustrated by the Central Bank (4). Privatisation served as a significant channel for FDI entry. Privatisation-related FDI accounted for at least one-third of FDI in the 1990s. The largest 20 foreign investors in Sri Lanka all arrived in the 1990s and made significant contributions in telecommunications, power, ports, and other areas of services and manufacturing. However, to be effective, it is critical that privatisations are carried out through open and transparent processes.
One way to maintain this transparency is maintaining oversight. The Public Enterprises Reform Commission (PERC) was established under an Act of Parliament in 1996 to be solely responsible for ensuring that the privatisation process occurred in a transparent and structured manner. Although not entirely free of controversy, PERC increased transparency and public information about the privatisation process. The PERC was shut down, and it is now necessary to revive PERC and put in place measures to ensure transparent and competitive processes.
Successful privatisation, if done right, can reduce the drain of government resources, especially at a time when government expenditure and mismanagement of state-owned enterprises are a serious burden on the fast draining government coffers. A second benefit is the generation of new sources of government revenue through receipt of proceeds, at a time where the Government is in desperate need for government revenue. The improvement of infrastructure and delivery of public services by the involvement of private capital and expertise is another important benefit. Other merits of privatisation include the improvement of the efficiency of the economy by making it more responsive to market forces, the broadening of the base of ownership in the economy; and the enhancement of the capital markets.
A programme of privatisation can be the center point of the reform programme. However, macro-economic stabilisation, which we have discussed over and over again, must be carried in tandem. What is crystal clear is that time to implement these is running out if we continue to be blindly critical of these painful reforms and be complacent of its merits. Unlike at any other point in time, policy makers also need to be ready to make bold reforms and this will be the ultimate test of the resilience of our economy. The tipping point has been reached, we have no choice but to get these reforms done. Bold policy making is the need of the hour!
References
Dutta, M. K. and Sarma, Gopal Kumar, Foreign Direct Investment in India Since 1991: Trends, Challenges and Prospects (1 January 2008).
Ministry of Finance Annual Report 2020
https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20211130_inflation_in_november_2021_ccpi_e.pdf
https://www.cbsl.gov.lk/sites/default/files/cbslweb_docu-ments/publications/annual_report/archives/en/2007_17_Appendix.pdf
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.