In 2017, the government must deliver on Reforms

By Ravi Ratanasabapathy

First published on the Daily News

Sri Lanka’s coalition Government has now been in office for two years; the new president was elected two years ago and the new coalition in Parliament was formed some eight months later. How has it fared, particularly in the sphere of economics?

To put things in proper perspective we must appreciate the unique political moment in which the new administration operates. The change of regime was a shock and expectations soared; perhaps to levels that were unrealistic. The disappointment has now set in as the coalition Government, made up of disparate parties with different agendas unexpectedly propelled to power has grappled with a Gordian knot of issues.

Economic liberalism, good governance, ethnic reconciliation and a sensible foreign policy were expected to materialise overnight. While significant strides have been made they have fallen short of public expectations.

Careful handling

On the economic front in particular expectations have proved to be far too high. The Government has treaded very cautiously, shying away from tackling unpopular reforms and unravelling the web of protectionist regulation that grew up around many sectors of the economy under the ‘import substitution’ label.

Part of the problem has been in the communication, the public were not aware of the precarious state of the finances that the new Government inherited.

The IMF, in its review in September 2014, noted that “public debt and debt service remain high by international comparison, reserves are limited, tax revenues are low, and medium-term sustainability depends heavily on continued growth and a positive external environment.” In 2014 the debt/GDP ratio stood at 75% and debt service costs accounted for 90% of Government revenue. Interest cost alone amounted to 37% of Government revenue.

Despite the bleak economic situation, prompted by forthcoming parliamentary elections in August 2015, the new Government announced a wave of populist measures -increases in salaries, subsidies and reduced fuel costs, amongst others.

These were probably necessary to win the election. Flush from electoral victory the new regime may not even have realised the full depth of the problem they were dealing with: there were periodic news reports announcing various apparently unrecorded liabilities being unearthed during their first few months in office. Unfortunately having won the election, the Government was unable to roll back any of the giveaways or make any headway in reducing the size of the state. Politically expedient but economically unsustainable the resulting fiscal, balance of payments crisis and IMF bailout were inevitable.

Tough measures followed in the budget of November 2016. Personal and corporate income taxes were increased along with VAT and taxes on alcohol and tobacco. Though unpopular these should provide the macro-economic stability within which the Government can embark on a serious programme of reforms. The time for proper reform is now upon us. Eminent economist, Professor Razeen Sally warned that Sri Lanka is in a period of dangerous policy drift and that the window of opportunity for economic was narrowing and that Sri Lanka should not ‘miss the bus’.

What needs to be done?

Now that the tax rates have been raised to a level where the fiscal deficit is under control for the moment, it must be secured for the medium term. This means that the State must keep its expenditure under control; no more populist unfunded giveaways, a freeze on recruitment and a general economy drive eschewing extravagance, the elimination corruption and waste through increased transparency and open processes.

This must be followed by measures to start trimming the state. There is some public support for privatisation in a few sectors at least. The government should push ahead with these and list the entities on the stock exchange. The formula used in privatisation during the1980’s: sale of a majority stake, a public listing for 20% of the shares with 10% of the equity given free to employees proved to be both popular and successful. It will also give a boost to the flagging stock market and send an important signal to investors that Sri Lanka is ready for business.

Improving the business climate

Some measures have already been announced, which is welcome, but more needs to be done. There is still a need to cut red tape: business regulations must be simplified, the number of approvals for investment minimised and these should be processed by a genuine one-stop-shop rather than a multitude of ministries, and despatched in a matter of days and weeks rather than months. Digitisation and reducing bureaucratic discretion are the way to go.

This in turn will lay the foundation for the big reform which is to reorient policy towards FDI and exports. The trade and FDI regime needs to be liberalised: import tariffs minimised, customs procedures simplified, non- tariff barriers to imports such as quotas/licensing arrangements should be abolished as far as practicable.

If implemented properly, the reforms should take Sri Lanka back on a path of sustainable growth resulting in improved livelihoods for its citizens.

The overall conclusion on the economy over the past two years is similar to contemplating a glass; half full or half empty, depending on perspective. The government has the opportunity to change this perspective to one of near full, provided the moment is seized and a reform programme moves ahead without delay.