Sri Lanka finally reached agreements in principle on the restructuring of approximately $ 14.2 billion of debt with the holders of its International Sovereign Bonds (ISBs) on Thursday (19), completing one phase of its debt restructuring with final agreements remaining to be signed.
Although debt restructuring is almost completed and the country will get a moratorium until 2027, it is still only half done as the country should be prepared to repay its debt from 2027 onwards while repaying new debt taken between 2024 and 2027.
Sri Lanka’s international reserve position improved in 2023 but remains low compared to adequate levels. Gross international reserves grew from about $ 1.9 billion (1.2 months of prospective imports) in December 2022 to $ 4.4 billion at the end of December 2023 (2.4 months of prospective imports), supported by the Central Bank of Sri Lanka’s (CBSL) net foreign exchange purchases of around $ 1.7 billion.
Following the International Monetary Fund (IMF) Executive Board’s discussion of the second review, the fund’s Deputy Managing Director and Acting Chair Kenji Okamura said that Sri Lanka’s performance under the IMF-supported programme remained strong. All quantitative targets have been met, except for the marginal shortfall of indicative targets on social spending. Most structural benchmarks have either been met or implemented with delay, while reforms and policy adjustment are bearing fruit.
Okamura further said that the economy was starting to recover, inflation remained low, revenue collection was improving, and reserves continued to accumulate.
Despite these positive developments, he noted that the economy was still vulnerable and the path to debt sustainability remained on a knife-edge with important vulnerabilities associated with the ongoing debt restructuring.
“Revenue mobilisation, reserve accumulation, and banks’ ability to support the recovery continue to cloud the outlook. Strong reform efforts, adequate safeguards, and contingency planning help mitigate these risks,” he said.
Almost all presidential candidates are opting for an export-oriented economy to generate foreign exchange, keeping in mind the necessity to have dollars in hand after five years to repay the foreign debt of nearly $ 30 billion.
According to the IMF, foreign reserves are expected to reach $ 15.1 billion with six months of import cover by 2028 when Sri Lanka starts repaying external debt, while it has a $ 5.6 billion target for 2024 and a $ 7.1 billion target for 2025.
The CBSL’s net purchases from the banking sector amounted to $ 2.02 billion by the end of August.
Higher growth through exports the main theme
Speaking at a webinar organised by the International Chamber of Commerce (ICC) Sri Lanka last month, former Deputy Governor of the CBSL Dr. W.A. Wijewardena said that the country’s economic growth was estimated to be around a very low 3% per annum for the next five years and because of slow economic growth, Gross Domestic Product (GDP) would also rise very slowly.
“It has been estimated that it will take another three years for Sri Lanka to reach the GDP it had prior to the economic crisis in 2018 and another five years to reach the level of $ 100 billion,” he said.
He said that for Sri Lanka to become a developed country by 2048, the GDP should increase from $ 100 billion in 2029 to $ 425 billion in 2048.
According to him, in order to grow, Sri Lanka should not just focus on the domestic economy but also try to connect with others in the global market, producing what the global market wants and not what it can produce for export purposes.
Sri Lanka still produces goods and services based on simple technology, according to the Harvard University’s Atlas of Economic Complexity for 2021; this technology can simply be copied by other competitors.
SL needs broad-based export growth
Speaking to The Sunday Morning, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe said that when looking at Sri Lanka’s exports in the past, there had only been two instances where exports had grown properly – the first during early colonial times when agricultural and plantation exports commenced, and the second when Sri Lanka commenced apparel exports.
He added that Sri Lanka had not really seen broad-based export growth of this stature apart from these two instances in the past.
Damsinghe further said that in order to have a broad-based export economy, the structure of the economy should be one which incentivised such an approach, where an individual planning to start a business or an existing corporation would consider exports to be a good investment opportunity.
He noted that in Sri Lanka, the local economy or the consumption economy had traditionally been the stronger part of the economy, where incentives had been geared more towards businesses that benefited from imports and local consumption as opposed to exports.
“One example or aspect is that traditionally, Sri Lanka’s currency hasn’t been a very weak one. It has generally been a currency that has only depreciated 3-5% on average annually,” he said, adding that there were several periods where it was artificially sustained at the same level on account of CBSL and Government intervention in order to keep prices low.
However, Damsinghe said that since the economic crisis, the currency had depreciated massively and from that point onward there had been a current account surplus, which had been driven more by the fact that imports had been weak due to imports and consumption being disincentivised.
“Exports didn’t actually fall, in spite of the increase in electricity prices, the cost of production, and the cost of labour, among others. Exports simply remained constant,” he said.
He added that Sri Lanka had been accumulating more dollars over the last two years, which would help the nation repay its debt in the future.
“But there are concerns about whether this accumulation will continue. So far, it has taken place because imports have remained weak and exports are growing,” he said.
Damsinghe noted that governments could create policies and investment zones in order to help individual businesses, sectors, or sub-sectors, but to achieve broad-based export growth, they would have to look at countries that had already achieved such growth.
He noted that East Asian countries and some European countries such as Germany were good examples of how the economy had been structured in order to incentivise business in such a manner that anyone who made a business decision would rather opt for an export business and people would rather gain employment in export businesses on account of the higher salaries.
Damsinghe added that the overall economy in such countries had been structured so that exports benefited, while Sri Lanka had traditionally not been in such a position. He also said that the cost of having an export-based economy was that the import and consumption sides of the economy would become weaker.
However, he added that since the local economy, which was the driver of economic growth in the past, would be neglected when moving ahead with an export-based economy, growth in the early stages tended to be rather slow, which was a phenomenon that countries such as China and Germany were dealing with at present.
Export diversification can happen at any development level
Damsinghe further said that diversification of exports could happen at any level of economic development, where broad-based diversification took place from the bottom up, similar to what had taken place over the last two years.
He noted that export diversification had taken place among local manufacturers of electronics and food over the last two years, whereby they had decided to move out of the local market in order to reach other markets.
Remittances cannot remain a major forex source
Addressing remittances, Damsinghe said that from about 2016 until the pandemic, remittances had been slowing down in Sri Lanka; although people were still leaving, they had not been sending as much money back to the country.
Therefore, he said that remittances, which had been approximately $ 7 billion per annum, had gradually decreased to about $ 6 billion per annum and changed completely with the inception of the pandemic.
“We can probably expect, once again, a return to a somewhat gradual increase in remittances – not an increase to $ 10 billion but a reversal of the long-term trend of reduction,” he added.
However, he noted that the issue with remittance was that unlike exports, which were driven mostly by corporations which had investment decisions among others, remittances came directly to households, making it more likely to be spent on consumption.
“Remittances won’t necessarily help create a foreign exchange surplus because the moment funds come from remittances, you are more likely to buy something, directly controlling consumption,” Damsinghe said.
According to him, people can consume with remittances without creating additional depreciation, helping domestic growth. However, he added: “I’m not sure if remittances can be considered a factor that creates a foreign exchange surplus.”
The CBSL has said that a wider war in the Middle East – the largest labour migration destination and largest source of workers’ remittances to Sri Lanka, accounting for 53.7% of total remittances in 2023 – can lead to a disruption in remittances coming into the country.
Tourism potential for forex still untapped
Speaking to The Sunday Morning, Dr. Malraj B. Kiriella, an experienced tourism and multi-disciplinary professional, said that although Sri Lanka had immense untapped tourism potential, the sector was highly vulnerable to both natural and manmade calamities due to its human-centric nature.
He said that historically, both types of events had occurred in Sri Lanka, hindering the sector’s growth. The country began its planned tourism development as far back as 1966. If the momentum witnessed between 1966 and 1982 had continued, the country would likely have achieved over eight million tourists and generated $ 12 billion in income per annum by now.
However, thus far, the highest number of annual tourist arrivals has been 2.3 million, with a revenue of $ 4.3 billion in 2018. This demonstrates the scale of lost opportunities.
Furthermore, Dr. Kiriella said that other key elements were essential for the development of any tourism destination, including sound and consistent policies and plans, requisite infrastructure, effective destination marketing, and promotional campaigns, among others.
He further said that the tourism sector could undoubtedly be a major contributor to Sri Lanka’s economy by generating income, creating employment, fostering regional development, and benefiting the country in many other ways, given the multifaceted nature of its benefits.
“However, achieving these goals requires proper planning and development based on sustainable principles, along with a deep understanding of the industry’s risks and strategies to mitigate them,” he added.
SL tourism standards far behind competitors
Dr. Kiriella also noted that travellers placed safety and security as top priorities when choosing a destination. Additionally, easy access from entry points needs to be facilitated.
He said that many competing destinations had already upgraded their facilities using new technologies and had simplified entry formalities, observing that Sri Lanka, blessed with natural beauty, must protect its core products through sustainable development policies.
He further noted that although the country boasted a rich heritage, multi-ethnic and multicultural diversity, unique cuisine, traditional wellness practices, adventure tourism opportunities, arts and crafts, and skilled human resources, “many of these elements require improvements in terms of standards, quality, product development, innovation, and marketing to effectively compete with other destinations”.
Additionally, he said that visitor facilities such as information centres, sanitary facilities, internal public transportation, and other services needed significant upgrades.
According to Dr. Kiriella, this process should start at entry points – airports in particular – by eliminating long queues, touting, and other forms of harassment.
“First impressions are critical and travellers should be able to transfer to their internal destinations conveniently and without hassle,” he said, adding that similar upgrades were needed at all tourism touchpoints. More experiences should be developed through product innovation, as there are many untapped products waiting to be explored.
Furthermore, Dr. Kiriella said that achieving effective governance, product and supply chain development, fair trade practices, regulatory frameworks, skills development, and international relations management as well as addressing macroeconomic and investment challenges were important to take Sri Lanka’s tourism sector to the next level, noting that it required the right direction, planning, and implementation.