Shiran Fernando highlights the economic

priorities for the newly elected regime

The next five years will be a crucial period for Sri Lanka as it emerges from the COVID-19 crisis and puts forward an economic agenda that brings prosperity to its people. Sri Lanka is now a US$ 84 billion economy but was recently reclassified as a lower middle income nation by the World Bank.

There are numerous challenges to regaining upper middle income status and taking the economy beyond 100 billion dollars while ensuring that poverty indicators are not widened further. We can identify three macro priorities that the new government may focus on as outlined below.

GROWTH MOMENTUM The discussion at present is regarding the shape of the economic recovery – i.e. would it be V, U or W shaped? While it’s fine to predict and analyse at both the macro and sector levels, it is only with hindsight that we can piece together the shape of the recovery. For Sri Lanka, economic growth – from a contraction of approximately two to four percent in 2020 back to positive territory – is achievable given the low base of GDP growth recorded in 2018 and 2019 (of 3.3% and 2.3% respectively).

Therefore, growth can recover to pre-COVID levels but what will be of greater importance is for it to surpass the three to four percent level and sustain such an uptick over a three to five year period.

To attain such a sustainable growth trajectory, policy makers must not focus on short-term measures that will increase consumption artificially. This has occurred in the past in election years with fiscal and monetary easing that spurred consumption and imports.

Consumption accounts for close to 70 percent of GDP. With prevailing policy rates being at all-time lows, we have witnessed adequate monetary easing unless further action is needed should a second or third wave of the coronavirus materialise.

The source of growth will also matter. With more focus on agriculture and domestic production due to COVID-19, these economic sectors will need to be able to demonstrate greater efficiency and value addition.

MITIGATING DEBT RISKS Amid the recent downgrades by international sovereign credit agencies and unfavourable international capital markets, it is increasingly difficult for Sri Lanka to enter capital markets to raise more debt.

This has been the strategy over the last five to six years where there was at least one or two sovereign bond issues to enhance dollar reserves and also repay maturing debt.

Last year, Sri Lanka raised US$ 4.4 billion in two sovereign bond issuances in March and May. These two proactive steps taken by the Central Bank of Sri Lanka – leveraging on the Active Liability Management Act – have provided a reserves buffer for the country to face COVID-19 successfully so far.

The immediate refinancing would be for the 1 billion dollar sovereign bond that matures on 1 October. Given the reserves position (US$ 6.7 billion at the end of June), there is likely to be adequate space to repay it through reserves if Sri Lanka isn’t able to access capital markets, or gain further debt inflows from bilateral partners such as China or India and/or international lenders such as the IMF.

At the end of July, Sri Lanka received a swap facility of US$ 400 million from India, which could be in reserves for a period of six months.

POLICY REFORM OUTLOOK To drive the growth and debt risk mitigation agenda, the government has to articulate, implement and monitor key policy reforms. These reforms range from policies related to e-governance and trade, to tax, labour, infrastructure and foreign direct investment (FDI).

Local and global investors would be awaiting news of policies to be implemented by the new government, and this will be vital for Sri Lanka’s entry into capital markets to raise debt when the conditions are right.

There’s also low-hanging fruit such as investing in more cold chain storage units to boost agriculture, and implementing digital IDs to improve efficiency in government delivery and public services.

Swift and successful implementation of some of these measures will provide quick wins for policy makers, and build momentum to take on some of the more challenging reforms that are needed to drive the economy forward.

LEVERAGING PROSPECTS While COVID-19 has had a severe impact across sectors, there are opportunities arising from it too. One such area is the growing need to diversify global supply chains to avoid over-reliance on a single country.

Therefore, geographical diversification is much more in play with countries such as Japan offering incentives for its businesses to relocate out of China. It is some of these opportunities that Sri Lanka should position itself to attract by reorienting its growth story, mitigating the nation’s debt risk and executing bold reforms.

There are numerous challenges to regaining upper middle income status and taking the economy beyond 100 billion dollars