THE LONG VIEW

Shiran Fernando reports on what needs to be done to maintain Sri Lanka’s economic recovery

The immediate focus for Sri Lanka’s economy to recover from the debt crisis is ensuring continuity of the IMF programme and completion of external debt restructuring.

With elections looming in the last quarter of this year, the focus will need to be on a strong five year programme that ensures policy continuity, an improvement in people’s standard of living through productive employment and the private sector to be the true engine of growth.

In past election cycles, we saw consumption fuelled economic growth that wasn’t sustained due to the country soon falling into a balance of payments crisis.

So how can Sri Lanka avoid repeating policy missteps of the past?

This is the first article in a series that will assess the long-term policies the country will need to implement to sustain the economic recovery.

COMPETITIVENESS In the past, policy makers have failed to create a conducive environment for exports to flourish.

For example, in the case of merchandise goods (which comprise non-service exports such as tea and apparel), Sri Lanka’s exports stood at around US$ 2.9 billion in 1995 while Vietnam raked in 4.8 billion dollars.

By 2023, Vietnam’s exports exceeded US$ 355 billion while Sri Lanka recorded a mere 11.9 billion dollars. On average over the past 28 years, Vietnam has been able to grow its exports by 17 percent each year while Sri Lanka achieved only five percent export growth.

This comparison illustrates how Sri Lanka has fallen behind while the Asian region has plugged into global value chains, and traded more with each other as well as the rest of the world.

Vietnam’s success can be attributed to many factors.

In the 2000s, it implemented market reforms to improve the ease of doing business in terms of labour, land and capital. And the following decade saw strategic measures being taken with the signing of multiple free trade agreements (FTAs) to accelerate market access for its exports.

As such, it has become a focal point with China, the US and the EU.

INVESTMENTS The sharp rise in Vietnam’s exports was assisted by an increase in foreign direct investment (FDI) – particularly investments in the electronics sector.

A key investor in Vietnam has been the Republic of Korea, which accounted for 30 percent of the country’s FDI by 2017.

Firms such as LG and Samsung began investing in 2007 and 2008, leading to a net FDI of 9.7 percent of GDP in 2008.

Since then, further investments have enabled Vietnam to maintain a net FDI of between four and five percent of GDP each year. Other multinationals such as Intel also invested in the electronics sector during the decade under review and laid the foundation for electronic exports to rise above US$ 100 billion.

Meanwhile, Sri Lanka has failed to attract anchor investors who could use the island as a base to export to South Asia.

EXPORT POLICY Sri Lanka’s top exports over the last few decades have been apparel and tea. The lack of new exports and markets is the reason for its limited growth compared to countries such as Vietnam.

Those countries latched on to the growth in exports of electronics, and stepped up from simply focussing only on value added manufacturing and agriculture. In the 1990s and 2000s, government policy focussed on guiding companies towards industries that would be relevant in the forthcoming decades.

So should Sri Lanka focus on industries that presently export under one billion dollars but can potentially export US$ 2.5-3 billion by 2030?

The National Export Strategy (NES) that was launched in 2018 provided a framework, and identified sectors such as processed food and beverages, spices and concentrates, electrical and electronic components, wellness tourism, boat building, and IT and business process management (IT-BPM).

But the lack of implementation of this policy has barred these sectors – except IT-BPM –from reaching their growth potential or trajectory. There is potential for sectors in agriculture such as the export of spices (US$ 330 million last year) and seafood (262 million dollars). For industrial exports, there’s potential for rubber (US$ 902 million) and petroleum products (539 million dollars) as ports such as Hambantota are becoming more active in bunkering.

Additionally, there is potential in sectors that include processed food and electronics. Mineral processing is another sector with untapped potential.

Resolving export barriers – such as registering trademarks through accession to the Madrid Protocol – must be achieved soon. To this end, SMEs need support to gain the requisite certifications to enter markets like the European Union.

Improvement in cold chain storage for agricultural exports is another requirement for enhancing value addition for products.

These examples illustrate a few constraints that can be resolved at the border and work in parallel with market access initiatives through FTAs.