- Food insecurity has increased quite significantly
- Prices will not come down to pre-crisis levels
- Time is of the essence in debt restructuring
- Need to reset our political economy meaningfully
- SOE reforms at risk without domestic consensus
- Tariff structure misallocates country’s resources
- Govt. must effectively communicate reforms prog.
“We need to reset the way Sri Lanka is structured. If not, then we are still at risk of going back to the same old economic policies which bankrupted the country in the first place,” asserted Economist Rehana Thowfeek in an interview with The Sunday Morning, pointing out that the International Monetary Fund (IMF) programme “can only do so much to correct these ills”.
Commenting on the current impact of the ongoing economic challenges on the lives of average Sri Lankan citizens in terms of food security and wellbeing, Thowfeek said that food insecurity had increased quite significantly while urban poverty had tripled.
Despite inflation dropping and the rupee strengthening, she said commodity prices would take time to reflect this, noting that although producers reacted quickly to upward pressure on prices, downward adjustments were stickier.
Thowfeek also emphasised on the importance of growing exports instead of restricting imports, effectively communicating the reforms programme, and improving the economic literacy of the population.
Following are excerpts of the interview:
Despite inflation dropping and the rupee strengthening, commodity prices remain largely the same and the people have seen no real relief. Why is this?
Although producers react quickly to upward pressure on prices, downward adjustments are stickier. So, we saw prices increasing quite fast last year from the rupee depreciation and other supply issues, but this is not the case for downward adjustments.
This may be because producers are uncertain if the rupee appreciation and inflation pressure is something permanent or temporary. As time goes by, and producers realise that a change is permanent, then they will adjust prices downwards. This is particularly the case if they notice a significant impact on the demand for their goods and services – it is not sustainable to have very high prices when demand is affected.
Some commodities are expensive due to supply issues, like eggs, the supply of which was directly affected by dollar shortages, import restrictions, and price controls. When these supply issues are dealt with and supply increases, prices will reduce.
This is not to say that prices will reduce so much that they will be on par with prices from before the crisis; this is not going to happen. We are in a different era now and the rupee has eroded in value fundamentally, so even with reductions in current prices, it will still be a lot higher than it used to be pre-crisis. Production costs like electricity and fuel costs are higher now too.
Prices can be reversed if Sri Lanka reforms its economy so greatly that the intrinsic value of the rupee increases eventually.
What kind of impact do you see at present on the lives of average Sri Lankan citizens, in terms of food security and wellbeing?
It is quite bad. Food insecurity has increased quite significantly – an assessment by the World Food Programme last year found that 90% of Sri Lanka’s population faced mild to severe levels of food insecurity, a significant worsening when you consider the fact that only 12% of the population were in that situation back in 2009.
Urban poverty has tripled. Nutritious food is now unaffordable and many are using a variety of coping mechanisms to manage their food intake, including consuming cheaper alternatives and consuming less food altogether. Obviously, this will have a long-term impact on the health of people affected.
It is important that we look at indicators like maternal and child malnutrition to fully understand the impact. I recently read an article about how children are failing to meet their age-appropriate weight recommendations – this is not surprising given the unaffordability of nutritious food. Even an egg, which was considered a cheaper source of protein, is too expensive now, and not available widely either. Other sources of protein like fish and meat are far too unaffordable.
If these issues are not addressed, we will see a worsening of the health of Sri Lankans in the long term, which can increase the costs of Sri Lanka’s healthcare system – malnourished people are more prone to falling sick and would need medical intervention.
There are other impacts too; for instance, malnourished children will find it harder to engage productively in their education, which can impact education outcomes and crime rates will increase. Altogether it is a degression of the standard of living of Sri Lankans.
Despite things having settled down somewhat, given the drop in purchasing power, what are people now prioritising in terms of spending?
I don’t have any data on this, but it is safe to assume that most of the household’s income is spent on food.
Prior to the crisis, people spent, on average, about 30% of household income on food – poorer households spent roughly 50% on food. Now with food prices nearly three times in most cases and incomes which are slow to adjust upwards, the majority of the income goes to buy food, even if it is in lesser quantities and cheaper alternatives.
Other items, like school books, for instance, are also much more expensive and for those already on budgets stretched thin, it is a choice of eating vs. sending your children to school.
What kind of relief, if any, can the people expect in the near future?
If we are talking about the cost of living, relief will come in terms of lower prices of food and other items, but as I said before, it will not come down to pre-crisis levels. And it ought not to come down due to distortionary measures like price controls – it should come down due to sound economic policies, like competition, technology infusion, export growth, etc.
Reforms, like privatisation, trade liberalisation, etc., will ultimately impact all Sri Lankans; it will make Sri Lanka’s economic growth more equitable, inclusive, and sustainable – which it has not been in the past few decades.
How do you view the ongoing debt restructuring process?
There are positive developments on the debt restructuring front – we have received the commitment of bilateral and private creditors to engage with us and that is a big step. The restructuring direction on domestic debt is also much clearer now.
But time is of the essence; we must finalise the restructuring by September in time for the IMF’s formal review. Now the challenge will be, once a sustainable debt pathway has been established, how Sri Lanka plans on repaying this debt. For that, we need to go back to the reforms – debt restructuring itself is only part of the way forward.
While continuing with the IMF programme, how can the long-term structural problems of Sri Lanka’s economy be fixed?
I think we must first examine why successive governments have failed to address the long-term structural problems. We know we have to correct the fiscal deficit and we know we have to fix our trade deficit – but why has this not happened? On the fiscal side, why is it so difficult to reform our tax structure and administration? On the trade side, why is it so difficult to liberalise trade?
In my opinion, it points to the issues in our political economy – we need to reset our political economy meaningfully to fix the structural problems. And that means abolishing the Executive Presidency, having better governance, an independent civil service, fixing campaign finance laws, more competition, having accountability and transparency – a lot of things which will make Sri Lanka a level playing field for all citizens to pursue economic opportunities without hindrance.
How do you view the current effort to reform State-Owned Enterprises (SOEs)?
Other than in the petroleum sector, I haven’t seen much meaningful effort to tackle SOE reform. Some SOE reforms we have seen by default – such as imposing cost reflective pricing on fuel and electricity and some reforms will happen due to the IMF programme – such as the Banking Act to improve the regulatory and governance framework of State-owned banks.
Yet I am not sure we have a meaningful domestic effort to understand and tackle the problem. We do have an SOE Restructuring Unit in operation, but there is not much communication as to what is happening. We still see some groups which are against SOE reforms too and with no viable alternatives either, just rhetoric.
Unless we have consensus from domestic groups that this is the way forward for Sri Lanka, then the reforms are at risk. I think since things are calmer now, many are forgetting that we are in a debt crisis and SOEs being part and parcel of that debt crisis.
What steps should be taken to assist the poor and vulnerable citizens amid the ongoing economic hardship?
In terms of social assistance for the poor, there is already a programme in place and it is being improved with the help of international organisations. However, considering the cost of living, it is insufficient.
If the Government is to increase its expenditure on these programmes, then there has to be reallocation from other expenditure items. But the Government is focussing on revenue consolidation and less on expenditure rationalisation, so I am not sure whether the assistance is meaningful enough. The reforms are crucial and need to be expedited; it is the only way out of this mess.
In terms of trade liberalisation, what do you recommend? How can we become a truly export-oriented economy?
We are a highly protectionist country because of our incredibly complex tariff structure, which protects domestic industries and industrialists but is not great for consumers. One of the major complexities are para tariffs, which are even in violation of world trade commitments. Even though we have Preferential Trade Agreements (PTAs) with countries like India and Pakistan, these para tariffs have seriously impacted the efficacy of those agreements.
Our tariff structure effectively misallocates the country’s resources into these protected ‘import substitution’ industries and has fostered ‘industrialists’ who enjoy substantial economic rents from this protection. Consumers have no choice and are forced to consume these local products even though they are of inferior quality – a good example are tiles and bathroom fittings.
Instead of focussing our efforts and resources on producing things we have a comparative advantage in, we are focussing on import substitution. If we can import something for cheaper than we can produce it here, why are we wasting resources producing it?
On the current import bans which are in place, we have to phase them out soon to be in compliance with the IMF programme as well as the World Trade Organization. We cannot be protectionist and become an export-oriented economy. Part of becoming an export-oriented economy is learning to be competitive and protectionism doesn’t foster competition.
The way to fix the trade deficit is not by restricting imports, but by growing exports. For that we need to invest in education, knowledge and skills transfer, physical and digital infrastructure, and getting women into the workforce, to name a few.
What steps should Sri Lanka take to set the stage to not just survive but thrive?
As I said before, we need to reset the way Sri Lanka is structured. If not, then we are still at risk of going back to the same old economic policies which bankrupted the country in the first place. The IMF programme can only do so much to correct these ills.
For example, abolishing the Executive Presidency was a top demand during the Aragalaya, because we all saw how terrible it was to concentrate so much power in the hands of one person – but now this is no longer a priority. It is beyond the scope of the IMF programme.
So, in the future what will prevent an Executive president from making rash and ill-conceived decisions once again? This is what I mean when I say we need to change the entire way Sri Lanka is structured.
How can the Government ensure the people’s buy-in for the required reforms programme?
The Government must effectively communicate the reforms programme – which I don’t think it has done; it is shrouded in mystery as far as the general public is concerned. The IMF programme, for instance, although publicly available, is probably only read and understood by a few – it is better to condense it and communicate it to the public so there is no room for misinformation or a vacuum of information.
Next, we need to improve the economic literacy of the population. Despite the perils of price controls, for instance, I still hear people wanting the Government to control prices, because they think that is a good economic policy. People don’t understand that policies like competition and trade liberalisation, for instance, will lead to more affordable prices and choices, if done correctly.
Finally, I think people are agitating for an election, which would be a good way for the different political groups to gauge the public support for each of their economic plans. We are talking about reforms which will chip down into the very core of Sri Lanka’s existing structure, so they cannot be done without public support and they also cannot be done by a government which is not popular with the people.