Shiran Fernando looks back to leap forward in an effort to tide things over for Sri Lanka

The Central Bank of Sri Lanka (CBSL) has released its annual report for 2021, highlighting some of the developments that occurred during the year while providing an analysis of the outlook.

In terms of economic growth, 2021 saw a 3.7 percent increase – rebounding from a 3.6 percent fall in 2020. This helped per capita GDP to rise to US$ 3,815 from 3,695 dollars in 2020, although it’s still below 2019 levels.

The steep depreciation seen since March last year will lead to a sharp fall in per capita GDP this year.

Let’s discuss some of the findings from the report that relate to the prevailing economic crisis.

CRITICAL ISSUES The Central Bank states in its annual report that before the pandemic, the economy was in a fragile state and required buffers to withstand many shocks.

It also notes that the main vulnerability of the economy was the fiscal space, which was further exposed by a relaxation of the tax structure in late 2019.

Price stability, which is a prime responsibility of the Central Bank, was a major challenge in 2021 and inflation reached 30 percent at the end of this year.

The Central Bank also notes that the balance of payments was under pressure in 2021 with low reserves and a high level of debt servicing obligations in a period where essential imports needed to be financed.

BOLD REFORMS The bank highlights the need to initiate “bold structural reforms” to bring about economic stability in the medium to long terms.

It has initiated some changes by raising interest rates and encouraging more inflows through the formal forex market. However, these moves are yet to stabilise the Sri Lankan Rupee.

In a box that accompanies the 2021 Annual Report, the Central Bank identifies several priority areas that need to be addressed to achieve stability of Sri Lanka’s external sector in the medium to long terms.

Some of the medium-term measures mentioned include a comprehensive macroeconomic reform programme as part of an economically adjusted plan that’s supported by the IMF. It will have to include reforms to state-owned enterprises (SOEs) reform and better designed social safety nets.

An IMF programme will have to be accompanied by external debt restructuring. This will be done by local policy makers along with financial and legal advisors to ensure debt sustainability. The Central Bank has identified the need for gross official reserves to improve to four months of merchandise imports from near zero levels.

The Central Bank is expecting to build reserves through non-borrowed sources. Strengthening regional cooperation has been identified as another medium-term solution with the need to improve external sector stability.

NON-DEBT INFLOWS One solution to improve foreign exchange inflows is to strengthen the export of goods and services. To this effect, the National Export Strategy (NES) 2018-2022 was expected to drive exports with necessary legal and regulatory reforms taking place.

With the end of the five year NES, a new plan will need to be developed for the next five to 10 years based on the progress made in the last term. The Central Bank says that service sectors such as IT-BPO, transportation and port services should be given priority.

Increasing workers’ remittances was identified as another long-term solution by focussing on targeted improvements. These measures will have to focus on upskilling migrant workers and securing opportunities with higher earnings.

The third solution proposed is to attract a higher level of FDIs.

In the current climate of political and economic instability however, it will be difficult to attract investors. Even prior to the current economic situation, there was the need to improve conditions for doing business and streamline the approval processes for investment among other priority areas.

Export led investment growth should be prioritised; and for this to take place, trade policies must be consistent with attractive tariff rates. Further, new investment zones that are ‘plug and play’ in nature could be developed to attract investors who can boost certain export sectors.

CRUCIAL PERIOD The country is heading towards a crucial period socially, economically and politically, and the Central Bank and other state institutions will need to provide leadership to guide economic priorities.

While Sri Lanka looks to secure its 17th IMF bailout, the nation will have to ensure that the economy doesn’t suffer from recurring twin deficits – i.e. fiscal and current account.

And while an IMF programme is being secured, Sri Lanka will need to rely on bridging finance from bilateral and multilateral partners. In the past few months, the island has received immense support from India by way of swaps, credit lines and rolling over import payments.

This has ensured that economic activity hasn’t halted completely. But more will be required to tide the country over the next few months.

Sri Lanka must learn lessons from other countries such as Ecuador, which successfully managed its debt restructuring process.