The Government last week presented a bill aimed at transforming Sri Lanka’s economy – the Economic Transformation Bill. The bill has set out targets to be achieved by governments in power so that Sri Lanka will never have to face an economic crisis again.
Accordingly, the bill will provide for the National Policy on Economic Transformation and for the establishment of the Economic Commission of Sri Lanka, Investment Zones, Office for International Trade, National Productivity Commission, and Sri Lanka Institute of Economics and International Trade, and for the repeal of the Board of Investment of Sri Lanka Law No.4 of 1978 and other matters connected.
The bill aims to transform Sri Lanka into a highly competitive and export-oriented digital economy by including diversification and deep structural changes of the national economy to boost competitiveness, achieving net zero by the year 2050, increasing integration with the global economy, achieving stable macroeconomic balances and sustainable debt, modernising agriculture to boost farmer productivity, farmer incomes, and agriculture exports, and promote inclusive economic growth and social progress.
Content of the bill
Achieving the targets set out by the Economic Transformation Bill has been assigned to the Cabinet of Ministers, which is charged with the direction and control of the Government of Sri Lanka.
Targets include Gross Domestic Production (GDP) growth to reach 5% annually by 2027 and above 5% annually thereafter.
Unemployment is to reach below 5% of the labour force from 2025 and female labour force participation is targeted at not less than 40% by 2030 and not less than 50% by 2040.
The bill has also set the current account deficit of the Balance of Payments (BOP) to not exceed 1% of GDP annually.
The exports of goods and services are expected to be not less than 25% of GDP by 2025 and then not less than 40% of GDP by 2030 and 60% by 2040. Net Foreign Direct Investment (FDI) is expected to reach not less than 5% of GDP by 2030 and have at least 40% of the GDP net FDI in exports of goods or exports of services by 2030.
The primary balance of the Government is expected to be at 2.3% of GDP until 2032 and at least 2% of GDP from 2032 onwards.
Government revenue is expected to reach at least 15% of GDP beyond 2027, while the multi-dimensional poverty headcount ratio is expected to be less than 15% by 2027 and less than 10% by 2035.
IMF targets included in legislation
On behalf of the Economic Council of the National People’s Power (NPP), MP Sunil Handunnetti said that no citizen in Sri Lanka had protested during the ‘Aragalaya’ to remove the Board of Investment (BOI) Act or asked for the establishment of an Office for International Trade or an Economic Commission.
He said that Parliament had been convened on short notice to table the bill and the number of days to challenge the bill in the Supreme Court had been shortened due to the Vesak Poya holidays.
Handunnetti asserted that the bill raised questions on whether Invest Sri Lanka, an entity to be established by the Economic Commission incorporated under the Companies Act No.7 of 2007, would be established above the Government of Sri Lanka as the private entity would be given powers to represent Sri Lanka on the global stage.
“What power does President Ranil Wickremesinghe, who does not have a mandate, have to bring an act which will make crucial decisions on the economy when a Presidential Election is in sight?” he questioned.
He also said that the Economic Commission had the power to convene reports or call for answers from any public sector employee working in any public institution or department.
Moreover, he said that the Government was trying to bring its policies into the legislation setting out targets to be achieved, without mentioning the penalties for not achieving those targets.
“Generally any act that is brought in mentions the penalties or the legal process for parties that fail to comply with the provisions in the act, but with this, Cabinet ministers are supposed to implement all the targets. What will happen to the Cabinet ministers if they do not comply?” he queried.
Handunnetti charged that the Government had included the targets it had agreed upon with the IMF in the act: “We want to know whether this is a request by the IMF to implement the conditions as a law or an attempt by the President and clan to do what they want representing the IMF more than the IMF itself?”
Further, he said that the act would put the private sector, businessmen, and industrialists in a huge crisis as the benefits and rights that the private sector employees had under the BOI Act would be completely removed while trying to create more liberalisation than allowed in the BOI Act.
“We are against this act and we are ready to challenge the bill in the Supreme Court,” Handunnetti added.
Bill lacks consultation and stakeholder engagement
NPP Economic Council member Dr. Harshana Suriyapperuma said that the bill had been prepared with a clear lack of consultation and stake stakeholder engagement to understand and identify the need to bring about a bill of this nature.
He said that there were several provisions in this proposed bill that spoke of implementing new structures within a commission that is to be created under the bill and that the commission was empowered to create companies under the Companies Act.
“Taking away the level playing field available for investors out there can have serious repercussions,” he said, adding that the commission was supposed to regulate and monitor on the one hand while also becoming the operator on the other hand.
“This clearly leads to one direction: the Government’s motive of engaging in privatisation,” Suriyapperuma said.
Economic Transformation Bill a concept of President, not IMF
Meanwhile, State Minister of Finance Shehan Semasinghe said that the Economic Transformation Bill was neither something that the IMF had guided the Government to implement, nor had it been presented based on the needs within the IMF programme.
He said that the bill had been presented based on President Ranil Wickremesinghe’s concept to ensure that Sri Lanka did not face an economic breakdown or crisis in the future.
“This will create and build up confidence in the country’s economy, both internationally and domestically, as a country that moves towards one goal without changing policies,” he said.
He added that through the Economic Transformation Act the Government expected to maintain the economic growth of the country, which had continuously contracted from 2022 to mid-2023.
Sri Lanka’s economy contracted by 7.8% in 2022 and by 2.3% in 2023 even though economic growth was recorded in the third and fourth quarters of 2023.
Semasinghe said that the legislation would look to improve market competition, convert the economy to withstand external shocks, and maintain and grow international cooperation. He added that it would look into international trade through a separate office, to promote trade and create new trade agreements.
The State Minister said that a new Economic Commission would be established under the legislation, which would look to create an investment-friendly environment to attract investment to the country.
He said that the bill included some of the targets the Government had already approved in Parliament to achieve debt sustainability, such as maintaining debt to GDP below 95% by 2032 from 128% in 2022, keeping the Central Government Gross Financing Needs (GFN) below 13.5% of GDP by 2032 from 34.6% in 2022, and maintaining the Central Government Annual Debt Service in foreign currency below 4.5% of GDP by 2027 from 9.4% in 2022.
Further, the Minister said that the act would require the Government or Cabinet to inform Parliament of remedies for identified future challenges in achieving the targets set out.
He said that the legislation would look to maintain sustainable economic growth, maintain debt sustainability, modernise the agricultural sector, and boost farmer productivity.
Meanwhile, Semasinghe said that the Public Financial Management Bill had been brought in to maintain the Government fiscal at a high standard and focus more on accountability.
“This legislation was brought according to the requirements set out by the IMF programme. This will be a law that allows the Government to manage its finances so that the country will not face a crisis again,” he added.
Getting unpopular things done before elections
Speaking to The Sunday Morning, Softlogic Stockbrokers Co-Head of Research Raynal Wickremeratne said that the Government would want to get as much done as possible from now until elections, in the event of it no longer being in office post polls.
“If a Samagi Jana Balawegaya (SJB) government or someone with a similar mentality comes into power, there is a possibility that there might not be a complete 180-degree change in the reforms that are being done, but there could be adjustments and amendments to the bill. The only significant deviation we might foresee is if a socialist faction comes in,” he said.
He said if a socialist government came to power, then the question would arise whether any of the reforms planned for the next 3-4 months were worth anything.
“Getting some of these unpopular acts passed now is a major advantage for the country because, if we take it from a different perspective, when looking at some of the unpopular policies such as taxation having cost-reflective pricing for utilities, when all of these are done by a previous government, whoever comes into power doesn’t have to do those unpopular things if they, in general, agree with the economic policies,” he added.
For example, he said that if the SJB’s economic team was in power, it would most likely continue with the IMF, carrying out most of these reforms, although there would be some changes and renegotiations.
Wickremeratne said that when looking at recovery and continuity with the IMF programme and the creditors, bringing in such legislation could be viewed as being positive.
Who will hold Cabinet accountable for targets?
Speaking to The Sunday Morning, Frontier Research Senior Macroeconomic Analysis Research Lead Anjali Hewapathage said that although there were certain targets set out in the bill, the focus was more on targets, with the powers given to the Cabinet to implement them but that it was able to turn to Parliament in case the targets were not achieved.
“The question being raised is whether all the targets set out in the bill will be achieved and who will actually hold the Cabinet accountable for not achieving these targets. Based on the bill, the Cabinet will have to answer to Parliament in case of non-achievement and give remedial measures, which is as far as it goes.”
Moreover, she said that the Economic Transformation Bill was being presented in conjunction with two other bills – namely, the Public Debt Management Bill and the Public Financial Management Bill – while the Economic Transformation Bill was looking to operationalise all the laws.
Further, she said that through the act, the Economic Commission would be given the power to recommend to the finance minister to declare investment zones and manage those.
She said that there were several provisions in the bill that mandated more transparency where certain agencies and boards needed to release data on a regular basis. “But the broad idea is, does it still go far enough?” she added.
Stability more important than creating institutions
Speaking to The Sunday Morning, an economic analyst who wished to remain anonymous said that even though laws could be amended, it was difficult to change overnight. “Even if the current governing party changes following the elections, Sri Lanka will more or less stay on the reform agenda,” the analyst added.
According to the analyst, from the point of the reform agenda, bringing in the Economic Transformation Bill is a good thing, while the Public Financial Management Bill is one of the prior requirements of the IMF in relation to disbursing funds post the second review.
On abolishing the BOI and forming an Economic Commission, he said that even in a company, changes were made from time to time: “If things are effectively managed after that, it won’t be a problem. However, keeping the overall Government policy stable is one of the major requirements to attract investments and promote exports, rather than creating institutions,” the analyst added.
When contacted by The Sunday Morning, SJB Economic Council member, MP Kabir Hashim said that the council was still studying the bill and that its stance on the bill would be shared with the public soon.