A Step in the Right Direction: Important to Stay the Course

It is commendable that this budget has not succumbed to the temptation of providing large-scale hand-outs that are unaffordable. The government has sought to stick to its medium-term fiscal consolidation program that reduces the budget deficit to expectable level of GDP this year and has projected to continue the trend next year.

Leadership in a county like Sri Lanka is not just about managing crises but also using them to generate constructive destruction of the status quo and introduce reforms for a creative paradigm shift. The recent strikes by University students and their teachers, agitations for change by other trade unions and Parliamentarians from both sides of the aisle have raised a number of important issues regarding education. Funding for the sector, raising standards and the remuneration of teachers have been some of the key issues that have emerged. This raises the question whether the Sri Lankan education system is geared to produce human resources of the caliber required to serve the ever changing, dynamic landscape of modern Sri Lanka. There is a consensus that the introduction of pro-active reforms in Education is what is required for Sri Lanka today. In realizing the gravity of the situation, the government has declared its intention of appointing a Presidential Commission on Education to study the issues and challenges and make recommendations for necessary reforms.

Permit Raj Sri Lankan Style

Rise and Fall and Rise Again of Permit Raj?

Sri Lankans have seen the rise of the “Permit Raj” during 60s and 70s. From the late 70s, there has been a steady removal of permits, licenses and other bureaucratic approvals. This has made Sri Lanka one of the most liberal regimes in the region, though there has been some reversal in recent years.

Countries have achieved sustained growth and development by adopting a range of approaches. Successful outcomes have come from policies varying from state capitalism to those based on market-driven private sector-oriented models. A high premium needs to be attached to the pursuit of pragmatic policies that are appropriate for country-specific conditions at a given point in history. It is in such a context that one needs to consider carefully the options available to Sri Lanka at this point in time.

The question that needs to be posed is: What is the right model for a country like Sri Lanka, which has had an endemic structural budget deficit for over three decades; and public debt which currently amounts to about 80% of GDP, with a rapid build up in foreign commercial debt, including short term foreign borrowing?

In the past two years, rarely has a week passed without a news item which highlighted the losses, poor quality of products and services, inefficiencies and possibly corruption in the electricity and petroleum sectors. This was not a new phenomenon. A decade ago, a current Senior Minister was moved to call four of the State – Owned Enterprises (SOEs) including the Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC), “Monsters” that swallow up large amounts of scarce resources and yield very disappointing returns.

The worst drought in the US in at least five decades has resulted in the loss of one-sixth of the expected corn crop.. The UD Department of Agriculture (USDA) has estimated that corn farmers have been compelled to abandon fields greater in area than Belgium and Luxembourg combined, following the hottest July ever recorded in US history. In addition, the soya bean harvest this year is expected to be the worst in five years.

Achievements So Far

The authorities have achieved significant success in reducing the budget deficit from 9.8% of GDP in 2009 to 6.8% in 2011. The bold measures introduced in February/March 2012 to increase fuel and electricity prices, passing on higher global costs, have gone a long way towards reducing the off-balance sheet losses of 2% of GDP incurred by state-owned enterprises, especially CPC and CEB.

The Pathfinder Foundation (PF) welcomes Dr Koshy Mathai’s  (IMF Country Director) call for increased exports to India and China. Dr. Mathai, in his keynote address at the Annual General Meeting of the Exporters’ Association, stressed two interlinked themes that have been the subjects of several previous Economic Flashes and Economic Alerts: the decline in Sri Lanka’s export performance needs to be arrested and reversed; and export markets need to be diversified.

The forthcoming visit to Sri Lanka by Hon Anand Sharma, Minister of Commerce, Industry and Textiles, with a delegation of leading Indian businessmen, offers an opportunity to explore how Sri Lanka can take greater advantage of its proximity to the large and growing Indian economy. The first Indo-Sri Lanka CEO’s forum is an ideal platform for building a substantive agenda for this purpose. The agenda for this Forum could, inter alia, address the following.

The keynote address delivered by Dr. Kalpana Kochar, the World Bank’s Chief Economist for South Asia, at the recently concluded CCC Economic Summit highlighted three fundamental flaws in Sri Lanka’s growth model. It will not be possible to achieve sustained growth of 8% without addressing these effectively.