PLANNING FOR A REBOUND
Chiyo Kanda discusses priorities for Sri Lanka as the country looks to revive the economy and improve its competitiveness on the global stage
The World Bank’s Country Manager for Maldives and Sri Lanka, Chiyo Kanda’s experience with the development bank and other international development institutions spans nearly three decades. Having held various technical and managerial positions during this time, she also possesses experience in multiple regions and corporate environments.
Following her appointment on 1 July last year, Kanda stated that “Sri Lanka has managed to limit the spread of COVID-19 quite effectively so far. It is now critical to kick-start economic recovery and protect people’s jobs and livelihoods.”
She continued: “My priority is to build on the strong partnership with the Sri Lankan government and its people as we work together to prepare the next country partnership framework to support Sri Lanka’s development.”
In November, Kanda pointed out that the development bank was in the process of updating its Systematic Country Diagnostic in a bid to deepen its understanding of countries and inform the World Bank Group’s next Country Partnership Framework, which would define its engagements with Sri Lanka over the next four or five years.
In this exclusive interview with LMD, she discusses Sri Lanka’s response to the COVID-19 pandemic, the challenges facing the country as it looks to rebound from the economic downturn and objectives to focus on as the nation looks to build back better to be more resilient to shocks in the future.
Q: How would you describe Sri Lanka’s COVID-19 response to date – has the country made satisfactory progress?
A: COVID-19 is a global pandemic, and all countries are struggling to save lives and prevent people from contracting the virus. Sri Lanka’s efforts – thanks to its strong public health system – have been commendable.
From the early days of the pandemic, we saw how quickly and effectively the country’s healthcare officials and others responded, to detect and prevent the spread of the disease. But prevention is not possible unless the public also cooperates and follows the guidelines issued by authorities.
Q: In your opinion, what are themain challenges facing the country in the wake of the pandemic?
A: Striking a balance between controlling COVID-19 while supporting the economy is the main challenge.
The pandemic had a serious impact on many people’s jobs and earnings. The tourism industry – which was recovering following the April 2019 attacks – was severely impacted as no arrivals were reported between April and December last year. A longer downturn could push many SMEs from illiquidity to insolvency, and poverty levels could rise.
In addition, financial businesses have seen a deterioration in asset quality andearnings, due to decelerating loan recoveries and shrinking margins. Low growth would strain public finances further. A high deficit and rising debt levels could also pose risks to fiscal and debt sustainability.
Q: The World Bank was one of the first development partners to respond to the Sri Lankan government’s COVID-19 emergency response in April last year. What has been achieved a year later?
A: We were able to quickly mobilise US$ 128.6 million for the Sri Lanka COVID-19 Emergency Response and Health Systems Preparedness Project. It was prepared as an emergency operation in 10 days and approved by our board of directors on 2 April.
The project was designed to support the government’s ‘test, track, isolate and treat’ strategy to control the pandemic by providing a steady supply of essential medical necessities, testing kits and personal protective equipment (PPE).
In addition, it supports contact tracing efforts and maintaining 32 quarantine centres. It is also working to strengthen the healthcare system to better manage health emergencies in the future.
We then topped up the project with an additional 89 million dollars in June – mostly repurposing from other ongoing projects – in the form of cash transfers to high-risk populations including the elderly, disabled and patients with chronic kidney diseases.
Activities were also initiated to strengthen the National Emergency Operational Centre (EOC) and its islandwide network. For better preparedness, the development of medical facilities in selected hospitals was initiated for current and future pandemic situations, and the existing laboratory system is being strengthened.
The project is also helping to develop the country’s infection control and surveillance systems, and supporting epidemiological studies on the patterns of transmission, its management, and community response and behaviour. This research will underpin long-term plans and strategies on pandemic management.
In September, US$ 56 million was reallocated from four existing projects in health, education, agriculture and local development to support the emergency response to the COVID-19 impact, as well as for longer term measures to adapt to the new normal.
It includes initiatives to improve COVID-19 protection measures on public transport, facilitate tele-education for schoolchildren, and provide digital solutions to improve the delivery of public services.
Q: How are growth forecasts for the region impacting the future trajectory of the Sri Lankan economy? And how has the pandemic affected Sri Lanka’s competitiveness?
A: South Asia’s outlook is subject to high uncertainty and downside risks. The pandemic has had a devastating impact on the region, leading to a 6.7 percent contraction in output last year based on estimates from October. COVID-19 is likely to inflict long-term effects on the growth prospects of investments, human capital, productivity and policy buffers.
However, the region’s contraction will only have a limited impact on Sri Lanka as intra-regional trade is restricted with countries other than India. Nevertheless, the pandemic has led to capacity constraints in Sri Lanka’s product and services markets – including key exports such as apparel.
Economic competitiveness is more of a structural issue. Trade, investment, skills, innovation and the business environment are some important areas of focus in improving Sri Lanka’s competitiveness.
Q: In July last year, the World Bank downgraded Sri Lanka from an upper middle income country (UMIC) to one with lower middle income status – what are the structural development challenges facing the nation in this context?
A: Allow me to first explain how countries’ income classifications work. Sri Lanka obtained upper middle income status in fiscal year 2020 with a gross national income (GNI) per capita of 4,040 dollars in 2018. The income thresholds for UMICs at the time were US$ 3,996 and 12,375 dollars.
Each year, these thresholds are updated; and for 2021, they were revised to US$ 4,046 and 12,535 dollars. Sri Lanka’s per capita income in 2019 declined slightly to US$ 4,020 – below the lower bound for UMICs.
It’s important to note that such movements across categories are not a rare phenomenon. Several factors affect income thresholds and the calculation of GNI per capita. There are no operational implications for the World Bank’s programme and engagement in Sri Lanka due to changes in classification.
Over the medium to long term, Sri Lanka faces several structural challenges to revive the economy in the post-COVID era, and take the country to a sustained, inclusive and resilient economic growth path.
Chief among them are optimising revenue sources and rationalising spending for fiscal sustainability, and shifting to a private investment and tradable sector led growth model by improving trade, investment, innovation and the business environment.
An ageing population, low female labour force participation and skills development that meets job market demands are also important challenges for the country. In addressing these issues, it is important to reduce vulnerability and risks in the economy, by enhancing disaster preparedness and mitigating the impact of reforms on the poor and vulnerable with well-targeted spending.
However, these challenges are not new to the government as they are already noted in its plans and priorities.
Q: What steps need to be taken to revive the economy in the medium term – including the extent of import substitution, fiscal policy, further stimulus measures and so on?
A: We are in the middle of an unprecedented crisis. During this period, the objective should be to weather the crisis with limited harm and lay a strong foundation to build back better.
The first area of focus should be saving lives by strengthening health interventions. Second, a strong social response is needed to protect the poor and vulnerable from the economic and social impact of the crisis. Third, the economic response should focus on saving livelihoods, preserving jobs, and ensuring more sustainable business growth and job creation, by helping firms and financial institutions survive the external shock, restructure and recapitalise for a resilient recovery.
Many countries are grappling with important structural challenges over the medium to long term in a post-COVID world and Sri Lanka is not an exception.
Limited fiscal space due to the economic downturn is restricting many governments’ ability and a high debt burden is limiting the ability to drive growth, create jobs and facilitate economic transformation.
But some are taking advantage of the crisis to identify opportunities to pivot their long-term strategies towards a green growth agenda with strong focus on climate resilience. It is the perfect opportunity to address the twin virtues of competitiveness and a welcoming investment climate.
Both feed off each other and in turn drive a country’s recovery by bringing in investments, know-how, and a healthy playing field for firms to compete and to ‘up their game.’
Diversifying exports is an important priority – including expanding products, destinations and Sri Lankan content in the supply chain. Macro and fiscal sustainability is a critical ingredient to enable investment, business and trade. Fiscal consolidation by broadening and simplifying the tax base, and aligning spending with priorities would be critical.
Q: And what is your take of the ease of doing business in Sri Lanka – what are the imperatives as far as improving our rankings is concerned?
A: The World Bank Group’s Doing Business Report provides a measure of the ease of doing business in 190 economies and is among the most cited reports globally. A set of indicators focus on the impact of laws, regulations and their enforcement on domestic firms in 10 areas, from launching a business to operations to insolvency.
While the overall business environment in a country depends on many factors – ranging from market size to macroeconomic conditions – regulations that are transparent and efficiently implemented, and strengthen property rights, are important for growth and job creation.
In the past, successive governments have undertaken efforts to improve the country’s business environment. In 2013, Sri Lanka ranked the highest in South Asia in the Ease of Doing Business. By 2020, it slipped to fourth behind India, Bhutan and Nepal.
It’s important to remember that a country’s position can fall even if it has carried out reforms as rankings depend on the performance of other countries that may have carried out more and deeper reforms. Therefore, a steady pace of creating a robust regulatory and institutional foundation will help Sri Lanka raise its ranking, and firmly assert its position in the region and the world.
Successful investment climate reforms should ideally be organised by linking them to the national development agenda and country’s long-term strategic vision; fostering inter-agency coordination through high-level leadership of the reform agenda with a clear champion who has ownership of it and the determination to see it implemented; setting a road map with action plans focussing on outputs in a time bound manner with detailed objectives and measurable outcomes, along with periodic monitoring and reporting to foster accountability; and focussing on priorities identified by the private sector as the basis for business regulatory reform as without this, the impact on firms will be limited.
Q: Could you elaborate on the gains made by Sri Lanka in relation to its human capital?
A: Sri Lanka has made considerable gains in human capital development over the years. It is ahead of other South Asian nations and well above the average for lower middle income countries (LMIC), according to the World Bank’s Human Capital Index.
This is the result of the country’s long-term commitment to health and education, as evidenced by its universal network of schools, high rates of primary and secondary enrolment, and almost universal coverage of maternal and child health services.
It is also significant that Sri Lanka has been able to achieve these impressive results even though its spending on healthcare, education and social protection, as a share of GDP is much lower than regional peers and LMICs.
The country can aim even higher if its remaining human development challenges are addressed. For example, children born in Sri Lanka today could be much more productive when they grow up if the country canimprove learning outcomes and promote better nutrition to address childhood stunting (low height for their age).
It is critical that Sri Lanka begins developing its human capital early and invests more on the quality of education. The World Bank supported Early Childhood Development Project is working with the government to improve the quality of early childhood development services and expand equitable access.
The bank is also supporting the government’s efforts to enhance the quality of primary, secondary and tertiary education through the General Education Modernization (GEM) and the Accelerating Higher Education Expansion and Development (AHEAD) projects.
However, COVID-19 poses new pressures on human development, threatening to reverse years of progress.
Recently, the World Bank launched its plan for accelerating human capitaldevelopment in South Asia – i.e. Unleashing South Asian Century through Human Capital for All.
It provides a framework to support countries’ efforts by focussing on four ‘Is’ – viz. invest smarter to ensure quality services for all; include those who are excluded; insure against myriad shocks; and innovate to ensure faster human capital development.
The framework can be tailored to suit Sri Lanka’s specific needs and priorities.
Q: Given the debt vulnerabilities facing nations such as Sri Lanka, what areas must the nation focus on vis-à-vis fiscal policy?
A: Fiscal sustainability is a key precondition for ensuring macroeconomic stability, promoting inclusion and ending poverty. To promote this, increasing revenue collection over the medium term is critical by reforming tax policy and administration.
Given the limited fiscal space for public investment, the government will need to improve the investment climate, support innovation and promote skill development. These measures will facilitate private investment including through foreign direct investment (FDI) bringing in foreign exchange, and creating more and better jobs.
It will be equally important to mitigate fiscal risks by enhancing the performance, efficiency and financial sustainability of state owned enterprises.
Q: What is your outlook for the Sri Lankan economy over the near to mid-term – and what are the main sensitivities?
A: The COVID-19 crisis has markedly clouded the outlook and exacerbated an already challenging macroeconomic situation.
In the near term, the fiscal deficit is projected to remain high, driving an increase in debt levels. The current account deficit is expected to remain low due to strict import restrictions; this should largely offset the reduction in receipts from garment exports and tourism.
With the focus on refinancing, external buffers are expected to remain weak relative to external liabilities. In the medium term, Sri Lanka needs to implement a strong reform plan to revive growth and strengthen fiscal sustainability. This will be critical to improving the economic outlook.
The nation remains vulnerable to financial market conditions and perceptions as its annual foreign exchange debt service requirements are estimated to be 8-10 percent of GDP between 2021 and 2023.
Q: And finally, how do you see the COVID-affected work today and where do your hopes lie? Is it a given that any sense of normalcy will only come about when a majority of populations have access to a vaccine?
A: There is no doubt that the COVID-19 vaccines will play a critical role in protecting the people and revitalising the economy. The government is exerting all efforts to roll out the vaccination programme as fast as possible and to vaccinate 60 percent of the population this year.
However, given the high demand for the vaccines and limited global production capacity, it will take some time for large segments of the global population to be covered. We all know that the vaccine is not a silver bullet. It also remains to be seen how long the immunity will last, given the emergence of new variants.
Even with a high vaccination coverage, we may not be able to return to the pre-COVID era in the foreseeable future. However, I am hopeful that year 2021 will be different and we will begin seeing positive changes.
We all need to embrace and get used to a ‘new normal’ that is safe, acceptable and sustainable, and continue to wear masks, maintain hygiene and be mindful of physical distancing.