It was not too long ago that we in this very space predicted that the fallout of the global economic slowdown would hit home sooner than later. Notwithstanding the euphoria over securing the IMF bailout package, as expected, today our breadwinner and top foreign exchange earner, the apparel trade, has not only become a victim of circumstances in the international context but also of ill-conceived domestic policy.
According to the latest trade data, overall exports declined by 2% in March this year compared to March last year and by 5% compared to March 2021. More specifically, apparel exports have slumped by nearly 14% in the first quarter of this year to $ 1.3 billion as per Central Bank data and according to apparel industry sources, March exports have been the lowest in three years.
While a slowdown in demand for our export staple has been on the cards since the advent of the post pandemic global economic meltdown, little or nothing was done on the domestic front to mitigate the impact of the impending fallout. To make matters worse, at least some of the proposed legislation, and more specifically the Anti-Terrorism Bill, will likely add fuel to the fire by seriously compromising the critically-important GSP Plus facility extended to Sri Lanka’s export sector by the European Union.
Apparel industry sources are now predicting a mammoth $ 1 billion dollar hit this year arising from the slump in global demand, which means the $ 6 billion Sri Lanka earned from apparel exports last year could come down to $ 5 billion this year, offsetting any potential gains from the tourism industry.
However, what is cause for greater concern is the long-term viability of the apparel sector, with many top players burdened by the challenging domestic environment deciding to move shop to more economically-conducive destinations such as India, Bangladesh, and even Africa. The drastic increase in electricity tariffs coupled with higher taxation and inflation-driven operational costs including logistics have created a challenging business environment where only the fittest will be left standing.
Meanwhile, based on research carried out by an academic attached to the University of Peradeniya and highlighted in the local media, the tax burden imposed on the people and business is forecasted to increase by a further 119% over the next five years. In addition, per capita debt which stood at Rs. 691,000 in 2020 has in the intervening three years doubled to Rs. 1.3 million at present and is expected to increase to nearly Rs. 2 million in the next five years. That means every Sri Lankan including those who will be born in the next five years will be indebted to the tune of Rs. 2 million each. Mind you, we are only looking at 2028 – a good two decades short of the 2048 target for developed nation status.
The question that we need to ask is, while per capita debt is expected to triple in the space of a mere eight years from 2020 to 2028, what measures are in place to counter this destructive trend that will most likely keep this nation and its people in a never-ending cycle of debt even by 2048?
To further illustrate the gravity of the current situation, it was reported last week that the Cabinet had approved increasing the Treasury bill borrowing limit to Rs. 6 trillion from the current maximum limit of Rs. 5 trillion. It will be recalled that Parliament approved increasing the Treasury bill ceiling to Rs. 5 trillion only last November, which means the borrowing limit has increased by almost 40% in less than a year. Whether Parliament, which has ultimate control of public finance, will approve this Cabinet decision remains to be seen.
Even a child will understand the concept that when one borrows, the borrower has to earn more than the amount borrowed in order to pay it back. Sri Lanka went bankrupt because we simply could not maintain this basic formula. With access to foreign funds no longer available, the focus appears to have shifted to domestic borrowings in order to tide over urgent monetary requirements. What is cause for concern is that with borrowings continuing unabated, there is no visible corresponding increase in revenue in order to pay for it other than through raised tax revenue, which is akin to taking from one pocket and putting it in another.
Though people seem to be content that normalcy is now on the horizon thanks to some slick media choreography, a deeper dive into the monetary situation appears to show a starkly different picture, with domestic debt restructuring yet to be even placed on the agenda. It is due to this reason that economic pundits have been prophesying that the current interregnum will ultimately have to give way to even more painful measures.
The bottom line is that people deserve to be told the truth at least in consideration of the immense hardship they are being forced to endure in the name of reform. Floating the notion that things are on the mend when the actual situation continues to be dire is no different to what former Central Bank Governor Cabraal kept saying when he paid off a $ 500 million International Sovereign Bond in January 2022 that there was no cause for concern. Three months later the country was declared bankrupt by the very same Central Bank.
While Sri Lanka still has every opportunity to turn things around, ironically enough the only thing standing in the way is its corrupt political establishment which has not only driven the nation to bankruptcy but given it a bad name in the process. Therefore to suggest that it is none other than its leaders past and present that make up the country’s single biggest liability in its quest for redemption is not far from the truth.
If the economy is to be turned around, numero uno on the reform agenda should be rebuilding the battered confidence in the country. Given that the same politicians who brought the country to its knees are the ones still calling the shots, it is hardly likely that any clean foreign investor will be bold enough to park their money here. This possibly explains why investors continue to bypass this country while pumping billions into our neighbours like India and Bangladesh.
At the end of the day, the administration has no choice but to walk the talk on fighting corruption. The manner in which critically-important parliamentary oversight on Government finance is being consistently undermined is hardly inspirational, to say the least. The current appointments to key oversight committees such as the Committee on Public Enterprises (COPE) and the controversy surrounding the Committee on Public Finance (COPF) in blatant violation of parliamentary tradition to appoint members of the Opposition to chair these committees bear testimony to the inherent absence of political will to fight corruption where it matters. When the age-old system of parliamentary checks and balances is compromised to this extent, the result is irreversible erosion of confidence in brand Sri Lanka.
In a backdrop where the regime has thought it fit to do away with the people’s franchise based on flimsy grounds and is now hell-bent on taking away some of the fundamental freedoms of the people through draconian legislation, the optics for investor confidence could not be worse.
Therefore, it is not incorrect to say that the regime is taking one step forward with the IMF reform programme while taking two steps back with everything else it is doing.