Let’s not look too far ahead

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

In cricket, most great batsmen will tell you that they don’t go out to bat thinking “I will score a century today”. They break their innings down to phases; “let’s score 10 runs”, “let’s score 20 runs”, “let’s survive the next four overs”, etc. Basically, “let’s face the next ball”. While this may be misconstrued as a lack of ambition, the underlying principle is that when you look too far ahead you can lose sight of the here and now. In cricket, this could mean getting out for zero while your mind is on the 100. Covid-19, the virus that found its origins in China, not only has Sri Lanka locked in its megalodon jaws but the entire world as well. While this too shall pass, we have to admit that we are well and truly in an unprecedented crisis. We will not be safe until the world is safe and that is the reality. Having faith that things will be back to normal soon is good but our actions should go beyond simply being optimistic and hopeful. Without beating around the bush, let’s be realistic and pragmatic by being scientific. In the past, we have relied on soothsayers who appear on television, devil dancers, turmeric (good luck finding turmeric, now that there’s a price control), and our love of bashing coconuts. The fact is that until we see the production of a vaccine or an acceptable solution, the entire human race is sailing in the eye of the corona storm. Many corporate dons and government officials in Sri Lanka have been pitching in with their business plans and strategies on what can be done “post-COVID”. Sri Lanka has faced the pandemic reasonably well compared to a few of the other countries, but in a crisis of this magnitude, in a closely connected world, the impact of a neighboring nation’s mishandling of the crisis can serve as a cautionary tale for the rest of the world. There is no point in early celebrations for doing well or having anxiety about those who may have mishandled the crisis, as we all are at square one and need to overcome this together. Sentiments on anti-globalisation and going back to the fallacy of “self-sufficiency” is not the solution as we failed that experiment comprehensively almost five decades ago. In a crisis of this scale, all predictions made will fall apart in a matter of not months but days. Take Sri Lanka as an example. We had all planned to open up the Western Province on 22 April but reported cases increased rapidly just two days before. How do we plan in an unpredictable crisis and what should we do is the question that has to be answered sensibly.

Historical examples may have limited relevance

As with managing any crisis, we generally make our decisions based on historic perspectives we have and connect with learnings from peers. First, we have to realise Covid-19 is an unprecedented scenario and how we managed previous crises will hardly help us to overcome the current battle. The strategies that worked for us in overcoming the Boxing Day Tsunami, fighting the brutal civil war against the LTTE, and overcoming the Easter Sunday bombings last year may not work in this battle against Covid-19. We are in a situation where every contract/agreement signed at every level has been challenged. It starts from a simple violation of a rent agreement, by not being able to pay the house rent on time, to a national-level crisis where we lack adequate foreign currency to pay our foreign debt commitments. Having seen the negative side, the reality is there will be a multitude of opportunities which will open up once the storm dies down. The challenge is the inability to predict the opportunities or the shortfalls. So when managing and strategising for the long term, a “one size fits all solutions” plan is very futile at this juncture. However, it doesn’t mean that we need to take a comfortable seat or take a “do nothing and wait” stance. Our game plan has to be pragmatic and dynamic. A game plan can be pragmatic if we have our basic fundamentals right. Predicting opportunities and developing strategies for a crisis without having the “basics” is similar to trying to solve an integration and differentiation mathematical question without having the basic knowledge of addition, subtraction, and multiplication functions. In a recent conversation with Advocata, Export Development Board Chairperson Prabash Subasinghe said it well: “This is a marathon, not a race.” At this point of time, it is of paramount importance that we have a strategy to float for the next 12-18 months and we have to play it dynamically and sail based on the direction of the wind. For the economy to stay afloat, we have to negotiate with the International Monetary Fund (IMF) for a balance of payment (BOP) bailout programme and request them to provide financial assistance to keep us afloat in the coming months. At the same time, we need to use our foreign office and actively seek bilateral loan facilities to manage the crisis. Import controls, liquidity injections, the Government taking over food distribution, and price controls are not at all advisable actions and they won’t help us to keep the rupee afloat, versus the dollar. Rather we will lose our dynamism and pragmatism and crush even the little credibility we have on markets.

The status of our basics

The next question is what can we do and what should we do to get beyond the floating stage. We have to evaluate the status of the basics and spend time on getting our basics right at this dark and stormy hour. Our fundamentals for sound economic policy have never been right in the last three to four decades. We should not lose the benefits of bringing hard reforms and getting the fundamentals right while we fight this crisis. For example, when pay cuts and job losses take place post opening up, people will actively look at part-time opportunities and work more to earn an income. At that point, if our business registration takes three months and if getting an online payment platform takes months for an e-commerce business to take off, the million opportunities created due to Covid-19 will be taken away by our neighbouring competitors. A study done by the Advocata Institute has found that registering a sole proprietorship is far more difficult than incorporating a private limited company. If we fail to fix that level of basic reforms (which can be easily fixed) we will not have any space to capitalise on the opportunities even if we get the support from development agencies over the next few months. Convoluted and complicated customs procedures and red tape have been discussed for years. South Asia Gateway Terminals (Pvt.) Ltd. (SAGT) CEO Romesh David, at a recent online forum on Sri Lanka’s exports economy with Advocata, said that even in the context of Covid-19, goods can cross borders and systems can be automated. If we are not ready to fix these basic regulatory barriers at Sri Lanka Customs, even our revised export target will be just an imaginary number. In summary, our strategy from a national level to that of a small business has to encompass the ability to float pragmatically as we are still in the eye of the storm. At the same time, we have to make sure to utilise our energy on getting our basics in economics right if we are to capitalise on the opportunities that will unfold when the storm is over. In difficult times people will be open to hard reforms and governments can spend political capital on getting hard reforms done. The Government should move back to their role as a facilitator rather than trying to become an active player and throw long-term strategies during one of the most serious crises in the history of mankind.

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.

Sacrificing food security for self-sufficiency

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The fallacy of a society that thrives on the myth of “self-sufficiency” after the colossal failure during the mid-70s that left nearly the entire population sans the ruling elite’s belly full is making the rounds again. The very definition of the term “self-sufficiency” has different meanings. One school of thought is going back in time to an era where Sri Lanka never existed on the international map with absolutely zero trade. In this instance, one had no choice as you live off of what you grow. Then there are the alternative arguments – the one that argues that one needs self-sufficiency to ensure food security; to be self-sufficient in food but import fuel, coal, medicine, raw materials, and other “essentials” as prescribed by the state. There are others who believe our trade deficit is beyond our means and we need to be self-sufficient to the extent of our export capacity. Out of all the arguments, the one on food security is the most popular. Hence, let›s take a look at data and definitions on food security and evaluate whether Sri Lanka can truly be “self-sufficient”.

What does food security mean?

The popular belief of “food security” is to have enough food for our consumption during a crisis. The present global COVID-19 crisis we are grappling with is a prime example. Another common myth on food security is having sufficient food stocks to last six months and the ability to produce the required calorie intake within the country’s territorial borders. The Food and Agriculture Organisation of the United Nations (FAO) and the World Food Summit have defined food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences for an active and healthy life.”

Despite popular belief, to achieve food security, the country in concern need not produce the food it needs within its borders. The key is to produce the required food at scale and desired quality economically. Otherwise, we will waste our precious and limited resources. For example, take Singapore which has a land area of just 725.7 km2, compared with Sri Lanka’s 65,610 km². Singapore has topped the global food security index for the second year running, despite lacking commercial agriculture. This is because Singapore has integrated fully into the global food supply chain and constructed adequate storage to feed its citizens during external shocks. This is truly remarkable as Singaporeans can consume food that is, as defined by the FAO, safe, sufficient, and to the preference of the consumer. In comparison, Sri Lanka is ranked 66th in the same index. How can we ensure fellow Sri Lankans have access to food physically and economically at all times? According to the FAO definition, it is evident through the COVID-19 crisis that although we have food physically, our food security as a country has been hit by not having physical access to this food due to delivery concerns, people losing both economic and physical access to food due to the interruption of their daily wages, and the absence of food preferences. The failed socialism experiment adopted by the Bandaranaike Government failed to achieve any of the above. Food was inadequate, to say the least; choice was a dream and quality was never present. If a citizen was apprehended with anything more than that was rationed, it was deemed a heinous crime and he or she was promptly jailed. Flour was infested with bugs and rice with stones, and apparel was perfumed with the stench of kerosene and the risk of setting on fire those who were careless near the wood-fired kitchen stove. We had the longest queues in the world for the poorest quality of bread, and that too for only one loaf irrespective of the size of your family. In summary, for the urban community (where the majority had cash to buy food), food security was challenged by the absence of physical access and preferences, while the rural and estate communities’ food security was challenged by the absence of income and preferences as they consumed whatever that was available in their gardens or that grew in the wild. So it is obvious that food security is not something we can attain just by trying to be self-sufficient as there are so many other components to it such as access, affordability, safety, preferences, and nutritional value. According to FAO, the average daily per capita energy requirement per person is 1,680 kcal and Sri Lanka on average is at about 500 kcal above the limit, but according to census and statistics data, the energy intake in the poor segment across Sri Lanka is below world standards. So if we are serious about food security in the long run, we need to ensure our people can afford safe and nutritional food, maintain access, and ensure choice rather than living in the fallacy of self-sufficiency. To achieve this, we need to create secure access to the global food supply chains so that our people can afford the diverse range of food required to meet their energy intake (balanced diet). Then the next question one may have is whether this means that we are going to import all our food and whether we have enough foreign exchange to import all that we require.

Low agriculture productivity

To answer both aforementioned questions, we need to check why the productivity in our agriculture (sector) is low. The technology not reaching our paddy fields is the common excuse that has been given over the years. But have we thought about the reason why technology hasn’t reached the paddy fields? Out of 6.5 million hectares of land in Sri Lanka, 5.4 million hectares are owned by the government. As a percentage, private lands are just 18% of Sri Lanka’s total land extent. Farmers are required to take a permit from the government office if they are to cultivate a higher-yielding paddy. Access to a bank loan is very limited for most paddy lands as farmers are not given the title to the land they cultivate. No construction can be done on paddy land as it’s forbidden by law. Under the current regulatory regime, no investor would invest in a greenhouse farm or high-tech farm. In addition to the above, most of the paddy lands are fragmented, so the opportunity to scale up for a big operation is very limited, keeping costs of production high. This means that even if we were to go back to self-sufficiency and cultivate in our backyards, we have just a fifth of our entire land to cultivate, build houses, and do all other industrial work. This also means that we have about 25% of our labour force engaged in farming, but contributing only 7-8% to our GDP, which leaves most of our land unproductive.

Importing food and the trade deficit

Extreme self-sufficiency is not at all an option regardless of how resourceful we are, as it is obvious that we can’t produce all that we need – for example, fuel and machinery. The only way to keep our trade deficit narrow and convert it to a surplus is to develop our exports. Exports and imports are two sides of the same coin. We import products we cannot produce or products for which we do not have a competitive advantage. We export commodities and services where we have a competitive advantage. Following is an extract from FAO which summarises why food security can only be achieved by global collaboration: “Global food trade has to be kept going. One of every five calories people eat has crossed at least one international border, up more than 50% from 40 years ago.” Therefore, our inability and traditionally lethargic approach to developing our exports should not be a trade compromise for the real and meaningful food security of our people.

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.

Attracting foreign exchange: Are we on the right track?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

What should be our mandate for the coming Sinhala and Tamil New Year? We have to be psychologically prepared to work harder and develop the ability to drive and lead in the best of times as well as the worst of times that are about to dawn on the horizon. Amidst the COVID-19 battle and a quarantined Sinhala and Tamil New Year, the recent figures by the Department of Census and Statistics indicate that our per capita GDP for the year 2019 (which is a reasonable measure to evaluate the standard of living) is at $ 3,852 per annum, a drop from $ 4,079 in 2018 (In USD terms, this is a 5.5% drop compared to 2018 and a 3.9% increase in LKR terms). In 2015, our GDP per capita was $ 3,842. In USD terms, we have pretty much slipped to where we were five years before.

Just to bring our performance into perspective, Japan’s GDP per capita is around $40,000. The standard of living in Japan is 10x as Sri Lanka. Our GDP growth rate is estimated to be at 2.3%, another 0.3% drop from the initial estimation of 2.6%. What this means is Sri Lanka will take 30 years to double our living standard if we are to move at this pace. And even then, we will be falling 5x behind Japan’s present standard of living. We are heading towards a difficult and challenging time period with a bad start. We can overcome this only by working together locally and forging partnerships globally. We have to find opportunities in this crisis and navigate by adding more value to our goods and services which the global market seeks. Our mandate in this New Year should be to be competitive, serve market opportunities, and capitalise on the limited opportunities before us. However, this is easier said than done. In this context, the decisions we make and the messages we push will determine where we are heading towards and the fate that awaits us in the not-so-distant future.

Measures by the Central Bank

It is no secret that Sri Lanka requires foreign exchange to pay back our import bills and the loans that we have taken. We import almost double what we export, hence the balance in the current account – or in common man’s term, imports exceed our exports. This trade deficit has to be narrowed, and this is the challenge. Over the years, instead of implementing the required reforms to make our exports more competitive and to close the gap, our constant strategy has been curbing imports to narrow the trade deficit. Today, we have arrived at the point of no return. With little growth in exports and debt beyond our means, the Sri Lankan taxpayer has racked up debt of about $ 16 billion payable by 2023. The Government took to implementing a futile policy of banning the importation of non-essentials including vehicles. Our rupee has depreciated nearly 70% over the past decade. On 8 April 2020, the Sri Lankan rupee passed 200 against the dollar. Given the ongoing crisis, we are left with few options to save precious foreign reserves as raising money from the market at the present risk premium is almost impossible. However, data indicates that the Central Bank continues with quantitative easing – printing money or adding more money into our financial system – which is the main reason for our currency to depreciate. On 24 February 2020, the Central Bank of Sri Lanka made a Rs. 24 billion profit transfer; on 13 March, the Central Bank injected Rs. 50 billion by buying government securities; and on 17 March, the Statutory Reserve Ratio (SRR) was brought down to 4% from 5%, which injected a further Rs. 50 billion to the Sri Lankan economy. The meaning of the statutory rate cut is that all licensed commercial banks earlier had to maintain a mandatory reserve of 5% of their total deposits with the regulator (deposit liabilities), but now have to maintain only 4%. This money will most likely be utilised towards relief measures provided by the Government. As we continuously highlighted in this column, the Yahapanala Government made the same mistake of imposing import controls and providing cash injections to the system, which resulted in the rapid depreciation of the rupee. The value of the rupee is a market function and trying to distort (it) by intervention is not advisable. In this case, with the devaluation of our rupee, the prices of food and medicine will go up, thereby increasing poverty levels.

Appealing for foreign currency deposits

On 2 April 2020, the Governor of the Central Bank appealed to domestic and international well-wishers on behalf of the Government of the Democratic Socialist Republic of Sri Lanka to deposit foreign exchange into Sri Lankan banks with an assurance that no questions would be asked on the financial trail of the funds. In the appeal, the Governor of the Central Bank mentioned that the money would be accepted without any hindrance from the Central Bank and the banking system and will be exempted from exchange control regulations and taxes for three months from 2 April 2020 onwards. At the point of writing this article, the Central Bank has not published further guidelines; only the statement by the Governor is available. However, it is of paramount importance that these measures do not impact Sri Lanka’s ratings by rating agencies as this would further erode our capacity to work with international donor agencies and financial markets. We have to be cautious not to open space for money laundering while we take decisions at this serious moment to attract more foreign currency. As a result of the serious efforts by the Central Bank of Sri Lanka, we were delisted in the grey list of the Financial Action Task Force (FATF) in October 2019. The FATF is the global policy setter on anti-money laundering and countering the financing of terrorism. A delisting from the FATF grey list is a positive indication to the market to attract quality investments which look for a credible financial system. At the same time, we have to be vigilant not to breach the code of conduct and ethical guidelines of international donor agencies, as there is a high possibility of Sri Lanka knocking on their door as a fallback option. In 2001/2002, a similar tax amnesty scheme was brought by then Minister of Finance K.N. Choksy and the proposal was reversed soon after the new Government was elected in 2004. There are no short-term solutions to mitigating long-term macro issues. Time and time again, it has been proven that curbing imports is not the solution and monetary prudence is the way to stabilise the rupee. The motivation behind these measures is understandable as our foreign exchange income is very tight, but in this new Sinhala and Tamil New Year, we must ensure the cure is not worse than the illness.

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.