Low-hanging fruit from a disastrous harvest

Originally appeared on The Morning.

By Dhananath Fernando

We all want quick fixes to reset the economy. Difficult times like these make quick fixes a vital necessity as patience amongst the public runs thin. However, when an economy grows to a level of high dysfunctionality – as ours unfortunately has – the availability of quick fixes is extremely limited. 

The first step towards economic recovery is for individuals to understand that given the nature of the current crisis, quick fixes simply do not exist. The process of economic recovery can be likened to the growth of a plant. A mere need for a quick harvest does not mean that what is sown can be reaped in just a few days – it takes its own time. All that we can do is to sow the right policy strategy. We will eventually reap what we sow; if we sow the wrong ideas and wrong policies we will have to reap painful outcomes in future, similarly to how we are currently reaping the pain of what we sowed many years ago. 

However, a few quick fixes can still be attempted. One such attempt can be made in the tourism sector. We all know that there is a shortage of fuel for transportation and hotels don’t have reliable electricity. It’s true that tourists consider the situation of the country before they visit, and we are far from presenting an ideal situation. That said, in economic terms what we can do is to provide incentives on the regulatory side for people to visit Sri Lanka. 

One possible measure is to provide an on-arrival short stay visa for selected countries, which will encourage and increase tourist arrivals. Merely maintaining existing regulations will not help in economic recovery as it does not attract tourism. At the same time, Sri Lanka’s aviation authorities charge very high prices for landing and other aviation related services. For example, an economy class flight from Singapore to Colombo costs Rs. 155,000, of which Rs. 35,000 (23%) is incurred in airport and Government taxes. If we reduce those charges, prices of air tickets to Colombo will come down. 

One business leader recently informed me that the price of a flight from Chennai to Colombo was significantly higher than a flight of the same distance and duration from Chennai to other airports in India. Despite the same travel class on the flight, the same quality of staff, and the same distance, the price is mainly driven up by levies and taxes charged when the border is crossed. Given this, bringing down our rates may mean that some audiences may consider visiting Sri Lanka. 

In my humble opinion, when foreign media questioned the Prime Minister on tourism, his answer should have been: “It is a difficult time for all of us, but even with all those difficulties we have the best beaches and the most amazing sunsets and Sri Lanka is still ranked very high on all travel magazines.” 

Nonetheless, we have to keep in mind that tourism alone will not be sufficient to turn our economy around. We made this mistake earlier and attempted to settle our sovereign debt through tourism receipts. Generally, about 80% of tourism income will go back as a USD outflow due to the consumption of imported items required to sustain tourism. At the moment, we have little going for us and this is just a suggestion that is scraping the bottom of the barrel. 

Moreover, we have to establish a unified bankruptcy law. It will take time, but it is needed urgently, and it’s important to start now. With the economic downturn, many organisations have had to downsize or wrap up their operations. This is the same sequence of events that has taken place in other countries that were facing similar crisis situations. 

In Sri Lanka, private limited companies have some cover on bankruptcy, but about 80% of the business establishments in Sri Lanka are Micro, Small, and Medium Enterprises (MSMEs). Most of these businesses are registered as proprietorships or as partnerships. When these enterprises are impacted, closing down the company is often the easiest and least painful option, as it helps the entrepreneurs move forward and get to the next phase of their lives quickly. If they have to spend a lot of time wrapping up their existing businesses that are not sustainable, it will slow down the economic recovery process, as a lot of valuable time, energy, money, and effort of capable people will be wasted on shutting down a company which is no longer viable. Therefore, an easy exit for businesses is as important as easy entry. Unfortunately, Sri Lanka’s labour laws do not support such an exit process and therefore, the process of exit is slowed. 

Finally, while accepting that there are no quick fixes to overcome the current crisis, we have to steel ourselves to go through the tough process of bridging reforms for markets to work. Markets work with credibility, a sound legal framework, and the rule of law. Given that the current situation has more to do with a question of credibility, legal reforms often go hand in hand with political reforms. Therefore, policymakers have to look at the reforms from a holistic point of view rather than just seeking out a quick fix. We are at the stage of sowing seeds for future reaping – if we don’t manage this situation well, we will reap a bad harvest once again.

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.