REBUILDING SRI LANKA

LIVING BEYOND OUR MEANS

Jayantha Rangamuwa assesses the economic challenges of a nation on edge

In the early decades following independence, Sri Lanka was widely regarded as a nation on the cusp of becoming a model of economic success. This period was marked by optimism and the belief that the island would transition smoothly into a developed nation.

“However, Sri Lanka has remained ensnared in the status of a developing nation. Amid the early optimism about the country’s prospects, no one could have foreseen the severe economic crisis of 2022,” says Jayantha Rangamuwa.

He laments the absence of visionary leadership that could understand and transform the economic realities, and elevate Sri Lanka to developed nation status. Given its size and strategic location, the country was well positioned to achieve this transition sooner than its regional counterparts.

Rangamuwa criticises the nation’s welfare model and failure to learn from past mistakes. He remarks: “Our nation remains welfare driven – rather than being driven by vision.”

These shortcomings have accelerated the brain drain and this in turn has exacerbated the economic crisis. “Nearly 30 percent of professionals in banking, finance and IT have migrated in the past two years, and created a large void. At the same time, other fields have seen about 40 percent of their professionals leave our shores for greener pastures overseas,” he notes.

This exodus, according to Rangamuwa, will lead to a shortage of middle management personnel, which is crucial for organisational stability and growth: “Middle management is the backbone of any organisation, and urgent steps need to be taken in terms of training and upskilling to build a middle management pool across sectors.”

Although macroeconomic indicators suggest stabilisation with low interest rates, controlled inflation and a stable exchange rate, sustained economic growth remains elusive.

SENSITIVITIES Rangamuwa cautions against premature optimism and opines that the stability achieved through reforms has come at the cost of increasing poverty levels.

“Although banks and finance companies are seeing incremental gains in their portfolios, and by way of credit expansion, there’s a need for a robust economic strategy that promotes grassroots growth,” he urges.

Rangamuwa continues: “The pandemic and economic crisis have had a major negative impact on most micro businesses as they record weak turnover. This will challenge their return to pre-pandemic levels of profitability. Businesses with financial discipline, vigilance and prudence have survived, but those engaged in the construction and tourism industries have by and large suffered.”

“Tourism is showing rapid improvement but the construction industry is yet to see the resumption of large-scale projects that are funded by the government and foreign donor agencies,” he explains, noting that “sentiment in the construction industry remains weak due to the high cost of materials.”

BANKING SECTOR “Overall, the financial services industry has managed the economic crisis and brain drain effectively, and maintained its core activities. However, public despondency over the economic situation persists – and without intervention, the brain drain is likely to continue,” he asserts.

Rangamuwa also observes a decline in the quality of entrants to the banking sector that once attracted apprentices and trainees.

He credits the regulators for the resilience of the banking sector, which remains stable and well capitalised, and supported by robust risk governance frameworks: “The banking sector has been resilient, and credit for this must go to the regulators. Banking and finance institutions are stable and adequately capitalised – and the necessary regulations and governance are in place.”

And Rangamuwa notes: “Banks were very frugal and careful in their lending, and adequately provided for both international sovereign bonds and local exposure.”

On a positive note, he acknowledges the resilience of the capital markets with substantial turnover and tapering interest rates, although this has yet to be reflected in the broader economy.

“Digitalisation is another area where Sri Lanka has to catch up with the region,” he maintains. Despite a cautious approach to capital expenditure, the financial services industry had made notable progress in digitalisation before the pandemic.

QUICK FIXES Rangamuwa advocates foreign direct investment (FDI) as a quick fix for economic growth but warns that issues such as law and order, corruption, inconsistent policies and bureaucracy need to be addressed first.

“Unless these ground issues are resolved, attracting substantial foreign investments will remain a pipe dream. There are many other investment-friendly markets competing for the same FDIs,” he cautions.

Rangamuwa calls for visionary thinking, clear policies, democratic values and transparency to rectify the situation.

He also regrets the inefficiencies that plague the system and identifies low financial literacy as a major reason for the country’s financial woes: “Poor financial literacy among the public and legislators is a major cause of the country’s financial challenges. As is evident, uncontrolled government expenditure and fiscal indiscipline have contributed to the disaster.”

“There has been no clear-cut export strategy; and few exporters venture beyond conventional exports. We need emerging entrepreneurs with new ideas. Even the leading entrepreneurs in the country aren’t seeing many budding entrepreneurs following them,” Rangamuwa says.

He believes that the lack of direction by successive governments is the main barrier to entrepreneurial growth: “The lack of confidence among entrepreneurs and lack of direction from successive governments are the main factors hindering entrepreneurial growth.”

The heavy burden of government borrowings from state-owned enterprises (SOE) and inefficiencies in tax collection exacerbate the nation’s economic challenges. He laments: “Our revenue and taxation services aren’t streamlined. We haven’t been effective in collecting taxes as there isn’t a proper system in place. And high levels of corruption exist in almost every area.”

“The IMF instigated reform momentum must be maintained. Otherwise, the results will be catastrophic and lead to social unrest. A clear-cut economic growth strategy is urgently needed. The situation we’re in today is due to the collective failure of successive governments. We are a nation that has lived beyond our means and hasn’t been disciplined even though our resources are limited,” he stresses.

Despite these hurdles, Rangamuwa remains optimistic about Sri Lanka’s economic recovery, citing improvements in revenue collection and the gradual accumulation of reserves as fundamental indicators of a positive trend.

The interviewee is the Managing Director of Vallibel Finance.