The Government needs put the “right people, in the right place, with the right system

“Economies that have high exposure to external debt, that have widening current account and fiscal deficits, that have weak currencies, are most vulnerable to a climate where international money is becoming more expensive. Sri Lanka is affected in many different ways. It will benefit from lower fuel prices but at the same time other commodity prices have also weakened, non-oil commodity prices have fallen by about 17% and that has affected the plantation industry. So the currency is good from the export side but not so when it comes to foreign debt, especially when denominated in dollars,” he told the private sector during a seminar at the Ceylon Chamber of Commerce.

A worsening economic climate is the familiar story for Sri Lanka, he pointed out, given very unbalanced macroeconomic policies and the chances are that this climate is going to get considerably worse in 2016. As interest rates continue to rise in the US and other parts of the world the “debt funded growth spree based on consumption and imports and public investment is no longer tenable,” he said and the argument for the repair of public finances is more urgent than ever.

“I’m repeating a familiar story but it is a story the Government doesn’t seem to have registered as well as the previous Government,” Prof. Sally said. Lead Economist at Frontier Research ShiranFernado and Hayleys Group Senior Economist Deshal de Mel concurred with Prof. Sally with the former pointing out the “boom and bust” cycle of Sri Lanka’s economy would have to move to a sustainable patch if it is to ride out $4b in debt payments maturing in 2018.

“Sri Lanka has had an accursed culture of complacency since independence and it is true of this Government. What we have seen is a disastrous Budget in February, which actually made fiscal and monetary policy worse than it was under the Rajapaksa government. Lack of Government revenue, monetary policy has likely been far too lose, interest rate climate too liberal and creates unrealistic expectations in the economy. The prime minister’s economic policy statement sounded like it was a welcome correction and realism had finally arrived to put public finance on a better footing but the Budget continued that culture of accused complacency on both the revenue and expenditure side and there is clearly a disconnect between the prime minister statement and the Budget. It is not just messy but a missed opportunity and questions the Government’s reform credibility,” Sally stated.

He advised the need for comprehensive tax reforms in a fair and transparent way and concurrently expenditure reform to put Government expenditure on a sustainable footing as the first step to reducing debt. “The pretence continues that Sri Lanka can ride this out with a little bit of luck. That is wantonly dangerous and probably not sustainable during the course of next year. This is a penny that seems not to have dropped with this Government.”

Sally acknowledged IMF funds may become necessary as money flow tightens and get a reform programme underway. But he criticised the Government acting irresponsibly and then expecting to be bailed out by the IMF.

“In other words there is simply too much money in prospect for Sri Lanka from the IMF and other organisations and it prevents the sinner from repenting and it is an excuse to continue sinning. Consider the previous IMF standby agreement, which was clearly political, it was given under easy conditions, the Government pretended it was reforming and the IMF pretended this was so. But it postponed the problem. The main message is that the problem has to be resolved at home. You cannot expect the IMF to come and sort out Sri Lanka’s problems. Given the message sent out by the last Budget it probably makes it more difficult as the Government clearly lacks credibility in the eyes of the IMF, the Ministry of Finance in particular.”

Focusing on the thin silver lining Sally praised the Government for understanding the constraints on exports and investments but said Budget measures are still “too partial, too piecemeal and not enough.”He called for a Competition Bill during the first half of 2016, which would have across the board approach to cutting red tape, improve business climate and improve climate for producers and consumers, not just big business but small entrepreneurs as well.

“Promote private sector, export led growth to insert Sri Lanka to the global value chains. To do that volumes of exports, imports and foreign investment have to increase exponentially. Liberalising the tea industry and rationalising tariffs is included in the Budget but selective liberalisation might look good on paper but can introduce new distortions because the economy is not looked overall and linkages between sectors.”

He pointed out the pushback from local companies that don’t want to deal with the competition and pick part the potential of the Budget. He also called for a Comprehensive Omnibus Trade and Foreign Investment Bill and not selective measures and this should have a negative approach that means liberalising everything except what is specifically exclude.

“That is the better way to go about it and the Prime Minister should spearhead it. It should include a simplified tariff limited to a two band structure, the cesses and export duties need to go as soon possible and Customs has to be reformed.”

The Government should put in place a holistic policy on FDI that moves beyond tax incentives, which also opens up paths to corruption.

“On trade negotiations the Government needs to get more serious and aside from China and India the really big prize is Europe and US so the government should consider trade agreements with both. There should be a serious investigation to see whether Sri Lanka would benefit from joining Trans Pacific Partnership (TPP) because it would bring significant export markets and push the Government towards key reforms that are needed anyway.”  (Daily FT)