• Private sector must be provided space to be engine of growth
• SL has started debt restructuring discussions on a good path
• SOE reform a key aspect, but has always been on backburner
• Important to get social safety nets right and assist right people
• Maintain financial sector stability within restructuring and reform
• Governance and State capacity to take forward reforms important
• Four-year IMF programme but 10-year restructuring process

It’s important to not lose the ball on getting growth back on a sustainable track and to ensure policy consistency without shifting the goalposts overnight as Sri Lanka undertakes reforms and sets its sights on recovery, asserted Ceylon Chamber of Commerce (CCC) Chief Economist Shiran Fernando, in an interview with The Sunday Morning.

Commenting on the debt restructuring discussions and targets, Fernando opined that Sri Lanka had started the debt restructuring discussions on a good path and had been transparent in terms of providing information. The tricky part now was managing domestic restructuring without affecting financial stability, he added.

As for reforms, he highlighted the importance of State-Owned Enterprise (SOE) reform, strengthening of social safety nets, maintaining financial sector stability within this restructuring and reform process, and improving governance. 

“We can’t afford to derail the International Monetary Fund (IMF) programme or derail the reforms and then come back to this position 3-4 years later. I would say the most important aspect is governance and the capacity of the State to be able to take forward the reforms,” he added. Fernando also emphasised on the importance of communication, in order to ensure public buy-in for the required reforms.

As for when Sri Lanka and its people will start reaping the benefits, Fernando said it was likely to take another 2-3 years. “The building blocks have to be put in and unlike with past IMF programmes – where we put the building blocks in place and then broke them down – it is important to sustain it so that relief can be provided and can people go on this journey knowing that we are taking the difficult steps now and that it is all for the better and things can improve in a few years,” he explained.

Following are excerpts of the interview:

Speaking at the launch of the CCC annual Outlook Report for 2023 in February, you stated that economic growth would be much better this year compared to 2022. Which areas do you see as key growth areas?

What I meant by ‘better’ was that while the World Bank (WB), Asian Development Bank (ADB), and so many others see it as negative 3%, while I don’t see significant growth, I think it may be between a 0-1% contraction, so from that point of view it’s looking better than what many are expecting. 

I think the growth will be driven by sectors like agriculture as well as tourism. Although tourism doesn’t have a specific GDP component, it adds up to different services and sub sectors, so I think that will really drive forward the momentum. 

In the second half, depending on the global trade outlook and the global economy, I think some of our industrial sectors like manufacturing and value-added agri exports will do much better. 

What steps do you think the Government should take towards enabling this expected growth?

One thing that we forget in this whole economic recovery effort and debt restructuring is of course a key component, a key driver even with the restructuring efforts: the growth assumptions. I think it’s very important to not lose the ball on getting growth back on track and getting growth back on a sustainable track.

You don’t want to artificially reduce interest rates, be very loose on the fiscal side, or artificially stimulate the economy to just get consumption growth because that’s not really a very significant part of the economy. 

One of the key things the private sector always looks for is obviously policy consistency, so we don’t want the goalposts being shifted overnight – like they did for agriculture about two years ago, with the sector still recovering. 

The private sector must be provided that space to be the engine of growth, which governments have provided lip service to in the past but not really provided the space for. I think those are quite important.

Looking at the softer areas that hinder growth, like things to do with the ease of doing business or getting approvals for setting up a hotel or a manufacturing plant or for exports, I think those micro reforms for which we don’t need the IMF are things we need to do on our own. We have delayed them in the past and they should also get focus while we pursue all the things that are under the IMF programme.

We’ve finally received the first tranche of the IMF facility and we’re in debt restructuring discussions, for which the Government has set itself tight or perhaps very ambitious deadlines. How do you view the ongoing discussions and what do you see as the most likely or best possible outcome for Sri Lanka?

I think the targets are also a reflection of how bad things were last year and the kind of path that we needed to adjust towards to get to sustainability and even to get the IMF programme and show seriousness. I think it’s very much a reflection of it. 

I think a lot of the fiscal targets that are led by the tax changes are quite steep because of the expected growth in tax revenue, which relies on greater collection or economic activity doing much better beyond the higher rates. With the higher rates of course we bring in income, but it also requires trade activity to improve.

I think we’ve started the debt restructuring discussions on a good path. We’ve said we are going to give equal treatment to all creditors and I think we’ve been very transparent in terms of providing information and all of that, which has been good. 

I think now is the tricky part of managing what will be the domestic restructuring side to show international creditors, in particular the bondholders, what level Sri Lanka is willing to look at from that side without affecting financial stability. I think that’s the key thing.

In terms of reforms, what would you list as the key reforms Sri Lanka needs to undertake urgently in order to ensure this expected growth?

I think one of the key things is SOE reform. I think we’ve tried to do that in the last 20 years but it’s always been on the backburner.

We did a lot of it in the ’90s and the early 2000s and the results of it are the competitive telecommunication market as well as the ports. The Colombo Port is one of the best ports in the world, so I think that shows the results of doing difficult yet necessary reforms in the ’90s. Now is an opportunity 20 years later to do similar things.

I think SOE reform should not be equal to privatisation but should be thought of in different ways. For example, introducing competition if the Government is the only player in the market, deregulation, etc. to increase players. There you have a lot of opportunities. 

We’ve seen a lot on the petroleum side, with more players coming in. That’s good and it reduces Government exposure. Now we need to see more on the electricity side. That’s a key factor because it fuels export competitiveness.

A large chunk of the cost structure for a lot of private companies is energy cost. A majority of the private sector views our energy costs as being too high to be able to compete with peer companies; this is in addition to the fact that we import a lot of raw materials as well.

This SOE aspect is really important and I think with the restructuring agency and its work, it is important to set out the process and do it well so that we don’t have what we had about 10-15 years ago, where some of these divestments were re-changed and changed by the courts as well. 

The second part of it is the social safety nets. In the last 2-3 years, there have been successive impacts on the people and the social safety nets have broken down. Given the targeting errors, the right people are not able to get that financial support. 

While the matter of social safety nets is a key part of both the IMF and WB assistance, we need to do it right as well. It’s also another aspect of depoliticising something; the process should ensure the assistance gets to the right people, which is very important.

Another is maintaining financial sector stability within this restructuring and reform process, because the banks and the finance sector have absorbed a lot of difficulties during the pandemic and the economic crisis. In the next leg of restructuring, it’s important that the crisis is not prolonged and that we have stability in the financial sector. That aspect also needs to be carefully managed.

The fourth would be the governance aspect, which is very interesting because this IMF programme is quite different, given the focus on anti-corruption, improving governance, and all of that. It’s a reflection of the social sentiment we saw last year and it is now reflected in our reform programme.

It’s also very important in the medium to long term, because good governance leads to the efficient functioning of institutions and bureaucrats. At the end of the day, you need bureaucrats to be able to implement these reforms, stick with them, and sustain them. We can’t afford to derail the IMF programme or derail the reforms and then come back to this position 3-4 years later.

I would say the most important aspect is governance and the capacity of the State to be able to take forward the reforms. That’s a bit of an IMF thing, but also beyond an IMF thing, where we need to do it. The public and the private sector accept that the public sector can perform better or needs to perform better to support this recovery process.

While the receipt of the IMF facility is being hailed, economists have been continually warning that Sri Lanka needs to take tough decisions and implement long-overdue reforms if it is to ensure the success of this 17th IMF programme. What is your advice to the Government and to the people as Sri Lanka embarks on this journey?

I think that for the Government, the main thing is communication. People need to know in simple terms why we need to pursue SOE reforms, why the Government is thinking of divesting stakes in profitable entities, and the rationale behind it.

Communication through action is also important, because while the belts of the public and maybe those of the private sector and a lot of the taxpayers are being tightened, the Government also, while it has announced it is cutting expenditure by 5-10%, needs to show in practice that some of these things are happening, in order to get buy-in.

Do you see the Government having the political will to push through the required and recommended reforms?

I think the will is there to do it. This is a four-year programme and every six months the Government has a KPI to meet in order to get the next tranche. In that sense, the will is influenced and driven by the fact that we need to meet these targets, which is important. 

If the programme stops, then that will have implications for the restructuring talks and whatever funding we are getting from other multilaterals and bilaterals will also stall. We’ve seen that in countries like Pakistan right now, where when a programme stalls, everything else derails as well.

If we do all the right things, how long will recovery take, in the sense where the people will feel some relief?

I think it will probably be another 2-3 years where we can perhaps get back to a pre-2019 situation, maybe taking 2017-2018 as a base of the peak of the economy, when tourism and all other sectors were performing. Of course after that we had the Easter attacks and the pandemic and all of that.

It will probably be a 2-3-year period and in that period, if we are able to not only increase taxes but also widen the base, then there is an opportunity to reduce the tax slabs and things like that so that the burden is not as heavy. However, to get there, we need to improve things like tax administration and so on.

The building blocks have to be put in and unlike with past IMF programmes – where we put the building blocks in place and then broke them down – it is important to sustain it so that relief can be provided and people can go on this journey knowing that we are taking the difficult steps now and that it is all for the better and things can improve in a few years. 

Beyond IMF recommendations, it doesn’t seem like Sri Lanka has its own plan for economic recovery. The $ 3 billion IMF facility is nowhere near enough to resolve Sri Lanka’s problems. Do you see the Government looking at this? Is there any intention of formulating our own plan? Do we have the capability and the expertise?

I think one area which is developing is on green financing and climate financing. This is not something the IMF and others are talking about directly, but of course there are other development partners involved as well. That is an area where you can replace traditional financing with SDGs or green financing-related instruments. 

There the Government has done a lot of work. I think the Central Bank has developed a green taxonomy and you have the Sustainable Development Council and other agencies which are developing the green bond framework and things like that. 

There are also opportunities for the private sector to come in. Looking at infrastructure or things like that, we don’t have to go through the traditional path of the Government financing them; it can be these new types of blended financing instruments or climate financing instruments that the private sector can also use. That’s a growing area which the Government is also probably looking at.

Beyond that, going back to your first question on growth enablers, if you look at agriculture, the biggest issue is productivity and yields being quite low compared to the region. I think that’s where we need to be able to do our own micro reforms to see how we can get productivity and yields up. 

Even with things like dairy, the yields are quite low compared to other countries and we are reliant on imports. Those are things that the Government and the institutions with the private sector can work on at a micro reform level, because productivity is one part of this whole growth momentum. 

I think focusing on that is also important because if we do show signs of faster growth, then a lot of the numbers and things that go into the debt sustainability analysis and all of that improves and we can get out of this quicker.

It’s a four-year IMF programme but it’s almost a 10-year restructuring process. It’s 10 years of discipline and staying on track, which will require not only complying with the IMF programme but also doing some of these sectoral reforms which the private sector and a lot of stakeholders have been asking for but not seeing implementation.