Long-awaited economic revival: Will we ‘make it happen’ this year?

Originally appeared on The Morning

By Dhananath Fernando

Every year, as a kid, I used to write down my new year’s resolutions on a piece of paper and place it in a sealed envelope and revisit it on the last day of the year. Some of these resolutions were plans like scoring 85 marks for mathematics, learning to ride a bicycle, and scoring 12 half-centuries when playing cricket with my friends. The idea of revisiting them was to evaluate how far I have realised my goals for the year.

A quote by basketball legend Michael Jordan, which goes as “some people want it to happen, some wish it would happen, others make it happen”, made me realise that my dreams were merely wishful thinking without my conscious effort and action to pursue them.

In my opinion, this same scenario could be applied to realising the dream of a dynamic Sri Lankan economy. Choices spelt out by Michael Jordan are relevant to policymakers and the Sri Lankan people. Are we wanting to make it happen? Are we wishing it would happen? Or are we really making it happen? Only at the end of 2021 will tell what choices we have made as a collective.

In this light, this week’s column will explore possibilities for Sri Lanka’s economic revival for the year 2021, drawing on Michael Jordan’s wisdom, my experience as a common citizen, and the ways in which economic matters have been handled post Independence.

Scenario 1: Want it to happen

A possible scenario that could play out in 2021 is the political and economic leadership wanting to revive the economy but with the wrong tools. This is a classic scenario. Despite a genuine need and effort, things fail to work out in the expected manner due to multiple unintended consequences. Many academics and economic experts over the years have diagnosed Sri Lanka’s economic problem. However, we have spent way too much time on our diagnosis alone.

Even economists with conflicting ideologies would agree that the Sri Lankan economy has a severe productivity problem. This means that we waste large amounts of Sri Lanka’s valuable resources only to receive a very low output in comparison to the substantial input. The island’s structural situation has been deficient, creating sizable distortions in the economy. Sporadically, macroeconomic instability also occurs, arising from fiscal deficits leading to the creation of money and unsustainable current account deficits in the balance of payments. These have been the norm for decades.

The multitude of economic issues springing up in public discourse from time to time is a byproduct of these fundamental problems. Challenges on debt sustainability, poor performance of our exports, and lack of competitiveness are all just symptoms of a severe illness in our economy. If we deal with the symptoms of the problem rather than fix the root cause, 2021 will be yet another year where we “want it to happen but something else happened”.

There is a tendency to sell the same expired policy recipes wrapped in a new glittery package back to policymakers as an effective policy measure for economic revival. This may happen due to misunderstanding the diagnosis or lack of comprehension of the gravity of the problems at hand. If Sri Lanka picks the choice of “wanting it to happen”, our economic destination would be more likely the same or worse, coupled with many other unexpected challenges.

Scenario 2: Wish it would happen

The second possible scenario would be policymakers prioritising other political motives over economic reforms and simply wish the “economy would be revived”. Over the years, all parties have compromised the Sri Lankan economy for political power. Starting from the 1953 Hartal, 1981 riots, 1983 Black July riots, and the formation of the LTTE (Liberation Tigers of Tamil Eelam) up to the recent 2018 constitutional coup and the 2019 Easter Sunday attacks, the political agenda has always been prioritised over the island’s economy.

This sparks a two-way reaction which is a never-ending vicious cycle: When economic conditions are bad, it converts to political instability, and political instability fuels economic downturns. In all cases, we have had the wishful thinking that our economy would do better without the necessary steps to prioritise what needs to be done.

In 2021, all stakeholders and policymakers should leave wishful thinking aside and become more action-oriented to face the mounting debt sustainability challenges. With available foreign reserves and securing few swaps from neighbouring countries, we will be able to float through this year. However, failing to adapt necessary policies will mount up the pressure in the last quarter and in the beginning of 2022, if the environment for growth is not created.

In the back of our heads, we have a positive sentiment and wishful feeling that we can soldier through the debt challenge. The reality is that we should provide serious attention on the matter without taking it lightly. There is a higher possibility that a bilateral relationship with China will come for the island’s rescue; however, if China provides special treatment for Sri Lanka, they will have a long list of countries lined up expecting the same treatment. A recent article on Financial Times has revealed that the funding by China Development Bank and Export-Import Bank of China, which are the main two funding engines for the Belt and Road Initiative (BRI), has cut down the funding for BRI to $ 4 billion in 2019 from $ 75 billion in 2016.

There is a counter-argument that China will provide funds through Chinese SOEs (state-owned enterprises) as a novel strategy of financing the BRI. However, wishful thinking and placing all our eggs in one Chinese basket will not help Sri Lanka to overcome challenges at home. Sri Lanka requires action. It is unfair to have higher expectations from China as they have bigger interests over the entire BRI project, and at the same time, there will be geopolitical tensions. Incorrect prioritisation of reforms is a sure way for deepening the crisis.

So far, the tragedy of our economy is that we didn’t do anything. In a dynamic world, not doing anything is sometimes worse than even attempting to do the wrong thing. Settling in stagnation without moving in any direction and postponing the problem by kicking the can down the road of wishful prosperity is a distant recipe for actual prosperity.

Scenario 3: Make it happen

The third and most favourable scenario would be the policymakers making it happen. It’s easier said than done, but I still believe there is a good opportunity to make it happen if the correct tools are available and correct prioritisation is done. Every crisis brings opportunities and opens up windows for reforms. We have to just get the right reforms done. Very importantly, when the right tools are used, investor confidence will be restored and the market signaling system will work.

To “make it happen”, policymakers have to realise that there are no shortcuts, nor can there be any alternative method to be adapted. It has to be hard economic reforms to improve productivity by allowing markets to operate based on price signals and improve fiscal management and monetary stability. “Making it happen” requires commitment and comprehension of the problem diagnosis.

We need to understand that the solution mix we have at hand is not the most convenient, given our bad economic management over the years. There is a cost for every action, reaction, and choice we make. Since the Government has kept the solution with the International Monetary Fund (IMF) aside, now we have to evaluate the other available solutions. Financing through FDI (foreign direct investment) and bilateral swaps is one way to look at it. How far we can accelerate our growth realistically is another way to estimate where our possible landing would be.

As the Government is unwilling to amend the tax concessions, then we have to evaluate where we can cut the expenditure and if we are willing to let go of at least a few of our loss-making SOEs for private investors to run it. Or else, we can utilise some untapped resources and open it up for investment and take our economy back on track. We have to evaluate the pros and cons of going with the IMF vs. going without the IMF with a cost-benefit analysis and see where we really want to mix and match our solutions.

There are suites of solutions even in the darkest hour, but to make it happen, we have to move to the driving seat and get things done. Using wrong tools, not doing anything, and wishful thinking of an economic revival will surely not help Sri Lanka to move forward. Only time will tell us whether we just wanted things to happen, whether we were a bunch of wishful thinkers waiting for things to just happen, or whether we were a courageous nation which made things happen.

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.