Dear sir, optimism is not a strategy

Originally appeared on The Morning

By Dhananath Fernando

The Govt. must start pulling the economy in one direction

The former Chief Pilot of Air Lanka and former Boeing 747 instructor Captain Elmo Jayawardena is someone I know well. He has had a long career as a pilot at Singapore Airlines. Out of curiosity I often question him on how flight operations work. He describes vividly the level of detail with which pilots go through pre-flight checklists before they sit in the cockpit; fuel levels, weather patterns, emergency landing at each phase of the journey, and so many technical details get evaluated by them.

He always talks about a “plan B”. As pilots always operate on the basis of something going wrong and having a back-up plan for it, I feel they are very pessimistic – my judgemental thoughts on their level of planning and carefulness. However, one day I asked Captain Elmo: “Can’t you become an optimistic pilot, thinking that everything will be fine? There are so many aircrafts taking off and landing safely and very rarely do we hear about plane crashes. So, do you have to really go into that level of planning?” He answered: “Optimism is not being ignorant or denying the possibility of a potential risk scenario. Optimism must be grounded in reality that all events and decisions have a risk factor.” I then realised that one can be genuinely more optimistic if you have a plan to face the worst-case scenario.

Looking back at Sri Lanka’s economy provides some important lessons on how we have dealt with optimism. We as a people have always lived in an optimistic state. After Independence, we thought it was all over. Then following the end of the youth insurrections and  30-year long civil war, we looked forward with optimism. This period was followed by a window of economic reforms, with the end of the war adding to our economy.

However, we missed that grand opportunity of reform as we only focused on short-term development.  We failed to put our economic fundamentals right! As this column has highlighted previously, since 2015 up to date we have faced five major shocks to our economy – the Central Bank bond fiasco, drought in 2017-2018, a constitutional coup in 2018, Easter attacks in 2019, and Covid-19 in 2020. These events have decided the fate of our current economy and pushed it to where it is today. However, some of these events are due to misfortune and the others are examples of mismanagement. 

In this context, the Government still looks very optimistic about the growth numbers for next year and provides messages of absolute confidence that Sri Lanka can overcome the current situation through medium and long-term growth. In order to walk the talk, the Government did not reverse any tax concessions announced in December 2019, even with two rating downgrades by Moody’s and Fitch. Likewise, the Government has provided an optimistic message to all our creditors, assuring them that we will pay all our debts, taking into account our track record of servicing the debt without any default (with rescue efforts from the IMF [International Monetary Fund], World Bank, and the ADB [Asian Development Bank]).

All the positivity and clear, focused messaging by the Government is commendable. However, the Government should not divert from the real situation on the ground in this Covid-19 world, where external support may not be easily available as in the past. The Government must understand the impact of this on our short, medium, and long-term credibility.  A recent Citi Bank report for their investors highlighted the same concerns again. What is missing in this puzzle for many investors is a credible action plan. Having a credible action plan is similar to the planning that a responsible pilot carries out. It illustrates accountability for creating a safe and pleasant flying experience. This helps build trust and confidence about the pilot among passengers and also provides them the peace of mind that they will reach the destination safely.

This is done by having a plan on how to achieve the goal and what needs to be done in case of an emergency.  When we provide a positive message without a strategy or action plan to back these arguments, then this affects our credibility and our partners may not take us seriously. Even if we have a strategy and if we fail to disclose it with objectivity, then this raises concerns about our sincerity and commitment to overcoming the looming economic crisis.

The Government’s growth is expected through Foreign Direct Investments (FDIs) and exports according to the Budget 2021. Both these inflow sources are very sentiment-driven and an optimistic psychology without an action plan may not build the image we want to project – an image that attracts top investors, companies, and gives the edge to reach export markets. Tourism, which we expect to open in the first quarter of 2021, is even more sentiment-driven than the above two. Over the years, none of the necessary and serious reforms have taken place to signal the markets to attract more investments or encourage exports to take off.  We should explain our logic of how Sri Lanka is going to pay on average $ 4 billion every year for the next five years. It must be noted that we have $ 5 billion in reserves at hand and with two credit rating downgrades, interest rates will increase on further borrowing. If we can explain the logic of how we are going to manage the numbers with a credible plan, then the key stakeholders can work towards materialising the plan and achieving results.

On the other hand, we should not forget that our strategies are comparative to the strategies of the rest of the world. The rest of the world competes with us for the same export markets, for the same investors, with their own advantages and disadvantages. So reaching new export markets and attracting new investment is a competitive process which we can’t ignore. It is credibility and reasoning that matters when attracting these inflows.  Looking at the past, we cannot ignore the possibility of new shocks that might occur during our recovery period. So we have to be prepared!  

As his Excellency the President mentioned in his meeting with the Central Bank a few months ago, we can’t let the health crisis lead to an economic crisis. Likewise, we cannot let the economic crisis lead to a social crisis. Our optimism cannot lead to denial or a blindness to the ground reality – that there is a significant challenge right at our doorstep. I am all for optimism and positive thinking, but as my mentor, Captain Jayawardena said: “We can be genuinely optimistic only if we have a plan to manage the worst-case scenario.”

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.