Sri Lanka in a Middle Income Trap; An Economic Vision for the New Generation

A university student at a protest against the South Asian Institute of Technology & Medicine (SAITM)

Sri Lanka is in a near crisis situation and signs are that the situation will take a turn for the worse. Ill-conceived governance and political reforms, mismanagement of oil and commodity prices, unaffordable and front loaded public sector salary increases, reserve management through borrowed funds and assets sales to hide true cost of foreign currency are key characteristics of the past three-year public policy management. The cost is the loss of a unique opportunity to strengthen the country and manage the future with the least cost. It is yet another missed opportunity.

Indifference as regards policy decisions on power generation and transport together with delayed action on economic management is creating an uncertain economic environment against the backdrop of the country entering into election cycles along with debt bunching in 2018-2020, with the likelihood of a shift to an “economic and political crisis”. The immediate challenge is managing the recovery and that requires a new vision and a new deal. 

Historical Perspectives

Sri Lanka is increasingly becoming an “over governed and directionless state” at the same time. Ad-hoc amendments to the Constitution have diluted the thrust of 1978 Constitution, which was designed for a strong and stable government. Consequently, Sri Lanka now has a large cabinet of ministers, a weak legislature, ineffective judiciary and law enforcement, politicised public sector including valuable state enterprises and an overly polarised society. Functioning of Provincial Councils, local authorities as devolved government units and district and divisional secretariats as decentralised administrative units along with so many national and provincial promotional, regulatory, developmental and administrative agencies have expanded the presence of government horizontally and vertically.  The people are subject to this governance structure in their day-to-day life. Irregularities, corruption, injustice and indiscipline are wide spread along with unaffordable public expenditure.

Government’s periodic economic policy shifts – compromise long term vision.

Though several policy statements have been made they lack clarity and consistency in implementation. It has marginalised the domestic private sector through nationalisation and over-governance, and placed the thrust on neo-liberal policies through privatization and ad-hoc liberalization. The role of the IMF and World Bank has intensified too much, undermining local ownership and responsibilities. The absence of cost reflective pricing has weakened market solution and public finance through administratively controlled pricing and unwarranted subsidies for the rich and foreign investors.

State monopolies have been replaced by private monopolies. The Central Bank used foreign reserves to defend the exchange rate instead of allowing market based exchange rate management and building foreign reserves to create a strong currency. Fiscal expansion is accommodated through monetary policy and credit expansion is curtailed through the contraction in domestic private sector, placing the economy on a high real interest rate regime. State enterprises have been increasingly politicized and expanded though unplanned privatization and reforms. Public sector salaries have been raised beyond affordable levels and petroleum prices have been drastically reduced encouraging an import dependent energy sector. Meanwhile, the power generation plan has lagged behind placing the country on a long term power and energy crisis.

While being critical of its predecessor’s debt financed public sector-led infrastructure development and associated debt, every government has increased its reliance on debt finance. Debt has further risen and commercial foreign borrowings are on the rise.  Financial and economic costs of this large public sector and structure of over -governance and a directionless state are huge and unaffordable to the society in terms of taxation, debt and economic security.

Sri Lanka continues to lag behind other nations in development.

The country that was almost on par with Japan in the early 1950s, is today lagging behind many other Asian economies such as Thailand, Malaysia and South Korea. Its gap with poorer South Asian countries like Bangladesh is also narrowing rapidly, reflecting speedy transformation of those economies. In fact, almost all the countries in – neighbouring Asia have made government small, bureaucracy less and institutions strong and helping their economies to perform better along with a clear long term vision and direction.

All those countries have improved law and order and discipline in their societies. They are increasingly globally integrated to allow competition while protecting national   security, economic interest, cultural identity and political independence. Nevertheless these economies are also beginning to see discontent of neo liberal economic policies, environmental cost of development, income disparities and weakening inclusiveness in development along with rising corruption, and political instability which are beginning to threaten progress.

Constitutional reforms have proved unsuccessful:

Sri Lanka, gained Independence from Great Britain in 1948 and went on to adopt the Republic Constitution in 1972, an executive presidency in 1978, devolution of power in 1987 and constitution reforms in 2015 for transparent and accountable government. Despite all of these the country has become increasingly vulnerable, economically unstable and politically fragile.

Appreciation of high capital formation, both human and physical, and local private entrepreneurs to create strong modern economy is lacking:

Power generation capacity is below long term demand and the transmission system is aging. Water, sanitation and sewerage sector is worse and railway is far behind that in other countries. Development of expressways and highways and the maintenance of the national road network system require huge investments. While there is an increasing demand for investment, such opportunities for local entrepreneurs have been curtailed with ill-conceived foreign privatization in the wheat flour, plantations, port industries etc. Foreign investments are not integrated with a domestic supply chain and therefore such investments are import-dependant leading to external sector vulnerability of the country.

It has taken nearly 50 years (half a century) to become a middle income country

Within 15 years of becoming a middle income country, despite experiencing a peace dividend during last eight years or, record low global oil prices and good will of the west, Sri Lanka is in a middle income trap with high debt and a stagnant economy requiring IMF bailout. Despite a positive property market development, the growth sectors have lost momentum and a low GDP growth rate continues.

In the meantime, the rich are getting richer; visible disparity is on the rise, agriculture is shrinking and the new generation and educated youth are losing hope. Growth of agriculture, tourism, industries, construction etc. has slowed down; per capita income has remained stagnant for three years, and the relevance of development in terms of sustained improvement in food security, environment, access to quality education, health, employment, housing, essential public services, transport and opportunities for the domestic entrepreneurial community has eroded.

A radical change based on fresh thinking is necessary to make the country attractive to its new generation, besides information technology and innovation that is constantly changing global economy.

Sri Lanka needs to get out of middle income trap soon. The country cannot wait another half a century to graduate to a high performing upper middle income economy.

The country is fast losing its economic security involving food, energy, finance, environment and employment:

Conventional GDP growth centric strategies and investments have propelled Sri Lanka’s economy towards a middle income status in terms of World Bank classification. The cost of food and energy imports was around USD 5 billion in 2016 despite low commodity prices.

Gathering the harvest
Gathering the harvest

Sri Lanka has vast agricultural resources. The cost of imports could rise further in the future as there are no innovative solutions to exploit agricultural resources productively. Long term structural bottlenecks connected with land use, water management, technology application, research and support for domestic entrepreneurs have been postponed. The Paddy Land Act and Land Reform Act and Agrarian Services Act have destroyed domestic agrarian entrepreneurs. Land alienation to foreigners is not the structural reform required to restore food security and production surplus.

Financial security is at stake with the mismanagement of public debt:

The external debt in relation to GDP is nearly 40 per cent although almost 80 percent of it has been borrowed on concessional terms and from multinational and bilateral sources. The country’s biggest debt is owned by the World Bank and Asian Development Bank in USD denominated currencies and by Japan in Yen denominated currencies.

Debt to China and India has increased since 2005, but these are all for commercial infrastructure unlike the debt to the top three creditors.

Continued reliance on Washington based lending agencies for policy advice and funding will not help restore financial security.

Sri Lanka is also confronted with global climate crisis posing new challenges to domestic agriculture, water resources, land and forestry and hydro power generation:

The government must help local farmers and entrepreneurs with technology and capital to adapt to the new environment and overcome climate related production setbacks.

Employment security considerations have also been compromised by overlooking innovative reforms towards providing opportunities for re-skilling and up-skilling the workforce and expanding access to quality education for -youth.

De-politicization of the concept of free education is a priority.

Against this background economic development must go beyond the thinking of a GDP growth centric policy. The GDP growth rate must be weighted by the above mentioned five facets of economic security and -such a growth target should be reflected in the National Development Framework.

Development policy should be based on a weighted average GDP growth for 5 facets of economic security.

A well-integrated national development strategy underscoring the above mentioned economic security consideration should be adopted as a resolution in Parliament and – governments must be required to manage the economy within that framework

Vision for New Generation

The new vision must be one that provides economic security, freedom, opportunities and a modern global setting locally to the new generation with a national identity and a sense of pride.

The country should aim to be among the top five countries in the Asian economic landscape for 10 uniquely distinguished activities:  Cricket, tea, intimate garment production, high end tourism, green environment, HDI, equality, the best national road network, cultural identity and economic stability.

Tea is a major foreign exchange earner
Tea is a major foreign exchange earner

Economic governance and management model:

A fundamental requirement  to make this vision a reality is the need to re-engineer governance and the government,  placing trust on a Small, Effective and Accountable government (SEA Government).

The SEA government needs to be supported with strong institutions at the national level and devolved powers at the local authority level. Costly provincial council systems should be done away with while strengthening and empowering local government authorities. However, the number of members of the Pradeshiya Sabas should be reduced to the pre-2017 level as devolution should not be a burden to public financial management.

Considering the widespread connectivity in rural and urban areas, many Pradeshiya Sabas can be upgraded to municipal or urban councils with greater fiscal devolution and operational freedom. However, this has to be subjected to the overall policy planning framework and governance structure and be consistent and complementary with the National development vision.

The powers of the President must be restricted to well-defined nationally and strategically important subjects with cabinet and parliamentary oversights:

The President who will be the head of state should not hold any cabinet portfolios or chair cabinet meetings.  Number of cabinet ministers must be 18 and the ministries should be listed through an Act of Parliament (Cabinet Responsibility Management Act). Functions responsibilities and objectives of each ministry must be outlined in that legislation. The role of cabinet ministers must be limited to policy making and operationalisation of the policies and management should be the responsibility of secretaries.

Head of government and cabinet should be the Prime Minister and he or she should be the minister responsible for the National Policy Development, coordination and monitoring.

 A principal responsibility of the Prime Minister will be to head the agency to drive entrepreneurship, innovation and competitiveness. This new agency will have wide ranging powers to ensure the rapid implementation of policies designed to modernise the economy, create economic security and to integrate Sri Lankan entrepreneurs and business into the global marketplace.

The Cabinet Secretary should be – a cabinet rank civil servant, responsible for effective coordination and monitoring of all cabinet decisions along with line ministry secretaries. All cabinet papers should be vetted by a committee of retired senior ranking secretaries chaired by the secretary to the cabinet before submitting them to the cabinet to ensure all relevant materials are given to the cabinet. Every minister will be required to give his observations on each cabinet paper and once decisions are made, the cabinet will be collectively responsible for such decisions.

Stability of the Parliamentary system of Government has to be reflected by a constitutional provision. The Prime Minister shall be the leader of the majority party in Parliament. Upon the appointment of the Prime Minister and the cabinet, the Prime Minister shall seek a confidence vote in parliament. Once the Prime Minister secures this vote, he cannot be removed for a period of three years.

Legislative process needs to be strengthened to ensure that sufficient public discussion and debate takes place at the three levels of government.

All draft legislations should be sent to the Supreme Court to examine its conformity with the Constitution and underlying constitutional principles prior to being submitted to parliament. The Cabinet memorandum for each draft bill should be well articulated and supported with a detailed discussion paper.

As a forum for experienced politicians, civil society activists, corporate leaders and professionals to enter legislative process, a second house of Parliament should be set up:

A 35-member (25 representing each district and 10 members representing professionals) senate should be established. Members of the Senate will be selected from a list submitted along with the nominations list for Parliamentary Elections. No member of the Senate should hold a cabinet post. All legislations including the Annual budget statement once approved by the parliament should go through the same process at the Senate. In the event Senate approval is subject to amendments, such bills must be taken up again in Parliament.

Effectiveness of the independent commissions to ensure an independent and accountable public service after a needs based assessment and reformed in line with the best performing governance models in other countries. Operations of a number of independent commissions can be rationalised in order to make them more effective. The role and functions of commissions other than Human Rights, Elections, Bribery and Corruption should be re-examined to eliminate multiplicity and redundancy in working arrangements. The following commission falls into that category: The Police Commission, Public Service Commission, Procurement Commission and the Audit commission. Accordingly, the existing institutions such as the Police Department, Audit Department etc. shall be strengthened in line with international standards.

District level development is executed by the district secretary as the CEO of the district development council. He will be provided with political leadership by a council of members of Parliament representing the district, heads of Local authorities and district private sector representatives:

This bipartisan council should be chaired by the most senior Parliamentarian in the district irrespective of his political party. No Cabinet Minister should be a member of Council. CEO should get the district development plan approved by the cabinet and National Development Policy secretariat.

Public servants must be given leave without interruption to their service period for 3 years at 10 year intervals to work in the private sector or overseas.

The government will stay out of all commercial activities:

Government owned Enterprises involved in tourism, hotels, rest houses, trade, construction etc. should be transferred to domestic private ownerships that are able to commit specified investments and service standards. Promotional agencies such as Tea Board, EDB, IDB, Tourism promotion etc. should be handed over to those successful local entrepreneurs to manage in their business interest. Sector Specific levies should only be allowed – for the promotional and development interest of those sectors. BOI and Tourism Authority should be merged and trimmed in size and scale. BOI zones, economic zones, industrial zones, parks etc. currently owned and managed by government and semi government agencies should be given to the private sector – on a long term basis.

Tourism in a major industry
Tourism in a major industry

Enterprises that are strategically important (national security, monopoly in scale of operation etc.) such as SriLankan, Electricity (national grid and transmission), Petroleum, three large State Banks, Ports and Airports (Landlord concept), water supply   should be brought under a Strategic State Enterprise Management Law.

Up to 40 percent of such enterprises should be listed in the Colombo Stock Exchange (Telecom model). Every client and every employee including past employees of such enterprise should be made shareholders. The Debt equity ratio of all such enterprises should be made 50:50 by law.  Board of Directors must include representatives of employees and clients, who command subject knowledge.

Strategic state enterprise should not come under ministers or ministries. They should be recognised as special agencies similar to independent commissions. The appointment of Chairmen and Board of Directors representing the state equity will be made by a five-member commission appointed in terms of Strategic Enterprise management law. Standing orders of Parliament should be amended to work out Parliamentary oversight arrangements regarding the state enterprises coming under this Law. These enterprises as well as large private enterprises must allocate no less than 5 percent of profits after taxes for social responsibility programs (elder care, disabled, educational scholarships etc.). These programmes must be gazetted by the president on the recommendation of a council comprising private and public sector representatives.

The government must commit to balance budgets and all parties contesting elections must outline how balance budgets are maintained:

Fiscal Responsibility Act should be amended to ensure that government operates a balanced budget at all times. Annual Appropriation system of budget should be replaced by three year budgets supported with a review process in parliament based on annual budget statement by the Minister of Finance giving detail accounts of the state of finance and the economy.  Once a budget is passed by Parliament, proposals for any new government expenditure must be accompanied by offsetting expenditure cuts except in the case of national emergencies. Except where zero budget balance turned to a deficit/surplus beyond 2 percent of GDP no annual revision should be made through discretionary measures. Secretary to the Treasury should be examined annually by the Finance Committee of Parliament upon the submission of fiscal Responsibility Act to the parliament by the Minister of Finance.

A modern Public Finance Management Law should be outlined and adopted by parliament that can be amended only by 2/3 majority in Parliament:

All Finance Acts including Finance Act and Public property law should be consolidated with the introduction of a Public Financial Management Act. No public servant should be charged in a court of law before-any allegations examined by an Administrative Tribunal which should be headed by a retired Secretary who have served as secretary cabinet, finance or public administration. Other members could include retired superior court judges, retired auditor general and retired reputed private sector corporate leaders.

Taxation should be broad based, simple and an electronic payment system must be introduced:

A VAT rate not exceeding 7 per cent should be applied on all goods and services. A uniformed customs duty of 7 per cent should be maintained on  all imports other than those imported for domestic production or exports or those items specified under Special Commodity levy on account of food, health, environment and energy security.  All other taxes should be removed. Local authorities should not be given taxation or borrowing powers to ensure that only one fiscal regime prevails in the country. A block provision (based on electoral basis and population) from government revenue should be given to local authorities. Such allocation guidelines could be specified in the Fiscal Responsibility Management Law. A sliding scale Income and Profit tax structure subject to a minimum of 7 per cent and maximum of 21 per cent (3 times the VAT rate) must be specified for those earning (consolidated income) over annual average per capita income. Tax free threshold should be equivalent to three year average per capita income. Earnings from primary agriculture – farming, including livestock and fisheries- should be tax free.  Preferential taxes will be accorded for both foreign and domestic investments recognised under Strategic Investment laws. No tax holiday status should be given for any investments.

Domestic business needs a boost.
Domestic business needs a boost.

Public sector salaries and remuneration shall be guided by predetermined economic and financial considerations specified in the Fiscal Management Responsibility Act:

Public service salaries will be reformulated to have 5 service specific (Human resources development, revenue administration and regulatory, administration and management, judicial and legal services, Technical and engineering and research, national security ) salary systems. Public sector salary revisions will be made every three years based on fiscal and economic performance. Salary revisions will be frozen in election years. Any political party promising salary increases during an election campaign must obtain approval from the National Pay Commission and the Elections Commission.

A list of redundant government agencies will be announced each year based on performance assessments by the National Audit Commission and employees will be redeployed to agencies requiring additional strength or will be encouraged to find employment in the private sector or self- employment while drawing salaries until retirement. No new agencies to be created for a period of five years unless the closure of agencies are twice the number proposed to create in terms of employments and establishments.

Reliance on external borrowings shall be reduced:

External borrowings from bilateral and multilateral agencies will be suspended and a comprehensive impact assessment of the past debt financed projects and programmes shall be undertaken.  Commercial foreign borrowings shall be limited to the refinancing of maturing debt and to maintain a stable long term debt profile. A 5 year National Strategy for External Resource mobilization  including  the management of external debt service bunching of  USD 2,819 million in 2018, USD 4,217 million in 2019, USD 3,699 million in 2020, USD 3,344 million in 2021 and USD 3,744 million in 2022 should be formulated and approved by parliament.

The Central Bank shall be made fully independent with an empowered and accountable Monetary Board:

The responsibility of the Central Bank will be to ensure a low single-digit-inflation rate and a market based exchange rate regime. The stability of the financial system, too, would be the responsibility of the independent Central Bank. The bank will ensure financial inclusiveness of the society through promoting sound financial institutions and instruments. The Governor of the Central Bank should be examined by Parliament Finance Committee annually on monetary policy and foreign reserve management.

Banking and financial institutions shall be encouraged to consolidate and go beyond local market scale. Private and State development banks and financial institutions will be brought under a National Enterprise Development Bank Corporation  (NEDBC) as subsidiary institutions and assisted to raise foreign finance for local private enterprise development in growth sectors prioritising food, energy, environment, exports, tourism, innovation and human resource development.  The majority share holdings of NEDBC shall be jointly owned by the Government and Domestic private Sector and listed in the stock Exchange to encourage public, domestic and international institutional investor participation.

Foreign investment shall be facilitated:

Foreign Direct Investment is allowed only for those investments having minimum of 30 percent of domestic equity with 40 per cent domestic value addition or those made exclusively for exports. Investments in financial instruments and equity market are well recognized. Holding companies of investments or corporate establishments should be registered under Sri Lanka’s company laws.

Real economy shall be driven by production and supply chain value creating manufacturing sector targeting beyond domestic market:

Sri Lanka’s strategic location, human resource base, scenic beauty, cultural and natural resources presents it with unique opportunities in many economic sectors such as food, raw material agriculture, aquaculture, livestock, tourism, niche manufacturing, information and communications technology, logistics, etc. What is required is a relentless drive and a national focus to realise the country’s potential.

The Real economy shall be strengthened with competitive labour skills, land use, infrastructure, technology, entrepreneurship and access to both domestic and international finance:

A permanent National Pay Commission comprising employees and employer representatives must be appointed to formulate a national wage policy framework for both private and public sector. The prevailing wage boards will also be brought under this commission.  Wild cat strike actions will be made illegal and strike action will require a resolution passed with 60 percent of all employees in the organization and 14 working day notice. Collective agreements are encouraged in organizations havening employment over 50.

Existing land policies need to be re-formulated and must include well thought out land use planning, where ownership limits for Sri Lankan citizens and laws and regulations connected with agrarian development are radically modernized. Simultaneously, the government needs to guarantee a block of land for residential purposes for every citizen living outside the urban areas. Leasehold rights of Plantation Lands managed well by Sri Lankan companies will be extended on a long term basis. The plantation economy which has been stagnating since Independence should be modernised. Scope for diversified export crops and import substitution (livestock, palm oil, fruits and vegetables) should be explored and a special focus placed on value added agricultural exports.

Sri Lanka’s communication sector needs to be made competitive to attract IT industry and enabling services, improve investment climate in service delivery and product development and promote the country as knowledge based business economy:

Prevailing taxation system shall be simplified and required infrastructure development shall be supported. The Sri Lanka Postal Department will be unbundled and transformed into a corporate structure for the domestic private sector to operate. State television and media should be privatised with a regulatory framework for the industry to promote a competitive media industry.

Students received Computer Tablets from the government. This photo shows, students in a school in suburban Colombo, examining the Tablets.
Students received Computer Tablets from the government. This photo shows, students in a school in suburban Colombo, examining the Tablets.

The domestic construction sector is an equally important facet of new economic vision. The construction sector including manufacturing and processing activities as well as skills and professional education and logistic service development needs to be revitalised and made a globally competitive sector to promote export of a wide range of services.

Sri Lanka’s food security can be assured through an enlightened export and domestic market oriented strategy for agriculture (Fruits, vegetables, grains), aquaculture (fisheries, fish farming) and animal husbandry (poultry, diary):

Land including badly underutilized agricultural and livestock farms will be leased out to domestic private sector for the development of state of the art Aquaculture, Poultry and dairy production zones in order to strengthen food security and exports.  These policies should ensure that the rural, agro based, micro enterprise economy is seamlessly integrated into the established processing and distribution sector on fair and just terms. Considering the locational advantage in all three ports (Colombo, Hambantota and Trincomalee) local food processing industries will be supported with facilities to export and for the procurement of all grain varieties for processing and exports.

A nationwide human resource base that is productivity driven and internationally competitive needs to be developed:

To this end Sri Lanka’s labour laws and regulations should be benchmarked to match that of the most competitive economies in the world. Based on such advanced regulatory system, university and postgraduate education will be opened to local private sector that will attract reputed global educational establishments to add global recognition. The established locally owned private hospitals will be given strategic investment status to upgrade to Colombo based facilities and expand to outer cities.  Indigenous health care system will developed with funding for research.

Every National school and every hospital should be affiliated to provincial schools and hospitals. The national schools and hospitals should be managed by a board of directors with CEOs in each institution. National universities should also be managed by a board of directors and a CEO and provincial universities should be upgraded with medical, engineering and other priority faculties. The country’s research institutions should be managed under private public partnership arrangements.

Placements for foreign employment  will be regulated to ensure those leaving to work as housemaids is phased out and people taking up overseas employment will have employable  skills in high earning categories:

Private sector will be encouraged to set up dedicated vocational educational institutions for such skills creation. Public servants in redundant categories will be given paid leave for overseas employment.

An accelerated time bound programme will be put into place to convert Sri Lanka’s energy sector into a clean and alternative energy driven network:

All large land space used in national schools, hospitals, public offices, housing schemes, factories, highways, water reservations will be used to generate solar power.

Sri Lanka’s public transport system shall be radically reformed and modernised to meet the need and expectations of a middle income society:

International best practices have convincingly demonstrated that this can be successfully achieved through well-regulated Public Private Business models while taking care of public interests. Public transport needs to be modern, efficient and cheaper than private transport.

Railway infrastructure must be allowed to be used by private operators (both for passenger and goods transport) on payment of royalties to the railways department, similar to passenger bus and truck services working in competition with the CTB and state actors. Sri Lanka Railways needs to be made a strategic enterprise managed under Strategic Enterprise Management Law. Urban based Railways and Bus stations as well as their engineering workshops should be operated on the Public Private Partnership (PPP). Excess and underutilised land of the railways department must be released for property development.

Most people travel quite a distance, often on the train's foot-board to get to work
Most people travel quite a distance, often on the train’s foot-board to get to work

The development of a well- connected service stations that link railways, domestic air ports, omnibus transport and private taxi services needs to be an integral component of urban and town planning to improve commuter transportation. An accelerated time bound investment programme shall be devised to develop high speed electrically powered national train and mass transit system. A date for the phasing out of diesel and petrol powered vehicles should also be announced and the infrastructure necessary for electrically powered and driverless vehicles shall be prepared. The operation of three wheelers will be phased out in cities altogether. Three wheeler operators will be assisted financially to run taxis and other form of transport and logistic service vehicles. The Political decisions in this regard should be taken swiftly and decisively to overcome emerging challenges  in environmental pollution, traffic congestion and business development.

Small and Medium Enterprises (SMEs) must be strengthened as the backbone of Sri Lanka’s economy:

They should be protected from the fears of globalisation and promoted to supply goods and services to both local and foreign markets. An integrated National SME strategy linking all sectors including agriculture, IT, BPO, tourism, trade, transport etc. needs to be formulated and placed before Parliament for approval.  Larger enterprises tying up with SMEs shall be given tax rebates for their transactions. NEDBC together with private sector managed development agencies will provide long term funding arrangements (debt, equity, venture capital, leasing, hedging, insurance etc.), technology financing, managerial supports, restructuring etc.

Micro business and household economy is the bottom layer of an inclusive development strategy that will guarantee that every household will enjoy the five facets of economic security:

Each household will be assisted to ensure they have basic needs defined for a middle income economy. These are: Access to electricity, water, housing and sanitation, transport, education, health and finance is guaranteed. Creating culturally proud, value based family centric society is the thrust of micro enterprise and household economy.

Paying obeisance to the Gods
Paying obeisance to the Gods

Conclusion:

Sri Lanka is at a critical juncture. Rising political uncertainty is likely to weaken economic management and public service delivery in the next two years. It will be a period of a series of elections—provincial council, presidential and parliamentary. The rising oil and commodity prices, erratic climate changes, erosion of public confidence etc. will raise challenges to implement IMF supported economic and financial reform. The cost of adjustments to the emerging economic scenario is huge and probably very few understand and appreciate this. This may lead to a suspension of the IMF programme and force rating agencies to raise country risks at a time the country is also compelled to manage debt refinancing. Seemingly improved fiscal performance and external reserve build-up is somewhat artificial and unsustainable. True economic status may demand tough and painful “V shape transition” from near crisis to crisis to recovery to an ultimate stable path. Transition could also be W shapes or L shapes. This reality also must be discussed instead of believing in IMF style technical economic performance improvement.

Managing Sri Lanka from crisis to recovery will require bold leadership by leaders who can sell a new vision to take people on board till “hopeless status” is replaced with “hopeful status”.

It’s similar to the situation faced by the country from 2006 -2009 when the country shifted from war to peace. Lessons should be drawn from that comprehensive management model which had a well-integrated planning and sequencing of activities, communication, international relations and economic management etc. under an uncompromising leadership and team play at work,

The development should be inclusive on the principle that state supports and private sector initiates, owns and operates. The scale of the government should be small, but play a strong role, effective and complementary to private enterprise development led by domestic entrepreneurs and ensure growth consolidates economic security. Private property rights of citizen shall be well recognised and protected to make certain that equal opportunities are available to citizens. Domestic private investments shall be recognised as first priority and FDI shall be complementary to fill gaps of domestic entrepreneurs, technology, finance and external market access. Government shall stay out of business and political leadership sets governance. Promoting a politicised economy where the citizens take the lead and benefit is the thrust.

Pottery is usually a home-based industry
Pottery is usually a home-based industry

If radical thinking does not happen, Sri Lanka could get into a middle income trap and travel back to poverty with painful costs to the society. It can end up as the poorest South Asian country with the most politically turmoil in the region.

Advantages that Hong Kong, Singapore, Thailand etc. enjoyed 50 years ago are no longer available and Sri Lanka is one among many. Country risk profile is too complex and carries high downside risks. The IMF, World Bank, and external involvement in policy making increase this risk further.  This should be avoided.

The country’s strategic locational advantage is fast eroding as Sri Lanka is not the only nation enjoying this benefit  in the changing Asian Economic and political landscape. Therefore, time is running out unless a new vision is given its long overdue place and implemented as a national priority.

Edited by
Luxman Siriwardena
Executive Director, Pathfinder Foundation.
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