Despite a stabilising economy and notable signs of growth, the prospect of debt repayment and its potential impact on a recovering economy remain uncertain.
Following two years of economic contraction, analysts have anticipated a rebound in 2024, with the World Bank revising its forecast to expect a 1.7% economic expansion this year up from an earlier forecast of 1%.
Moreover, the Ceylon Chamber of Commerce’s (CCC) ‘Outlook Report 2024’ notes that Sri Lanka’s economic growth is poised for a modest recovery in 2024, which hinges on effective debt restructuring and the implementation of key structural reforms. The report further highlighted that inflation was expected to stabilise at a mid-single-digit level in 2024, following significant disinflation in 2023.
According to CCC Economist Sanjaya Ariyawansa, despite challenges to growth, there has been a “discernible uptick” in economic activity since Q3 of 2023, signalling a shift from contraction towards growth.
“For companies engaged in export manufacturing, the primary challenges stem from external demand. However, the Ceylon Chamber of Commerce’s latest export barometer survey for 2024 reveals a growing optimism among firms, with expectations that order volumes will begin to recover in the near future. This optimism underscores a cautious but positive outlook for the business landscape, as stakeholders adapt to the evolving economic conditions.”
Factors inhibiting rebound
Ariyawansa however noted that the escalation in power and energy bills had emerged as a significant concern for businesses and investors, particularly impacting the industrial sector, which was in a crucial phase of recovery from prolonged economic challenges.
“While acknowledging the necessity for cost-reflective tariffs to ensure the sustainability of energy supply, the chamber is wary of the adverse effects such measures may have on businesses still struggling to emerge from their contraction phase. The current GDP data underscores the industrial sector’s ongoing struggle to recover.”
According to Ariyawansa, the increase in utility prices, including electricity, ranks as the foremost challenge confronting exporters. “This concern underscores the broader impact of rising energy costs on the business and investment climate, particularly within sectors critical to Sri Lanka’s economic resilience and growth potential.”
Speaking to The Sunday Morning, National Chamber of Exporters (NCE) Secretary General Shiham Marikar outlined the multitude of negative impacts facing importers.
“Rising energy bills is a major issue for Sri Lankan exporters because they’re already working on very thin margins, and they have to absorb this increase, which is out of the question. They can’t increase the prices for customers since they have long-term agreements and similar products are available in neighbouring countries. Therefore, the chances of them losing customers is high. We have made certain requests to consider exporters and introduce some form of concession or incentive, but we have not seen this materialise and we are continuing to lobby.”
Increased barriers
On the flip side, he noted that the situation of employees in the companies compounded the issues faced by exporters: “When day-to-day living expenses increase, employees demand bonuses and salary increments, leading to a significant increase in the cost of doing business in terms of manpower cost.”
He further noted that the dependence on exports for economic revival was an added burden, observing that there was significant pressure from the Government to increase exports. “However, exporters are facing many internal barriers, especially on the cost of doing business, which have to be addressed in order to increase export targets.”
Addressing one of these barriers, he noted that certain authorities were failing to communicate policies that had been introduced, which led to exporters facing difficulties in having to adhere to them. “There is a communication gap between stakeholders and exporters.”
The increase in the cost of doing business has led to businesses relocating as well, with SMEs being especially hard hit, he noted. “We have observed exporters who have already closed shop and opened in other countries which offer more incentives in their free trade zones.”
Impact of debt repayment
Given this backdrop, the potential commencement of debt repayment poses a concern for exporters, which Marikar framed as follows: “One of the major concerns will be the currency fluctuations. When there is a dollar outflow, there will be a shortage of dollars, and I don’t know how that situation will be handled. When we repay our debt, there should be other measures introduced to ensure that it won’t upset the rates in Sri Lanka, especially for exporters.”
“If there’s a gradual increase or decline where exporters can foresee and plan, that is acceptable. We are not saying that the dollar should be controlled by the Central Bank; it should be market-driven. However, overnight changes will have negative impacts on exporters.”
Accordingly, he urged for transparent communication from the authorities.
“The authorities should now start communicating or creating awareness about debt repayment, when it will happen, and whether there will be a dollar shortage, etc. They have to start communicating with the industry to instil some confidence,” he said, noting that while dollar revenue was flowing in through tourism and remittances, there should be programmes in place to create awareness about what might transpire once repayment commences in order to prevent a panic situation.
Ariyawansa too noted that the impact of resuming debt repayments was a critical concern for businesses given that the country was projected to face an average annual foreign debt service payment of $ 4,383 million from 2022 to 2027. “Currently, Sri Lanka benefits from a balance of payment surplus, primarily due to the debt standstill on some external debts. The future annual repayment figures will depend on the outcomes of negotiations with commercial creditors,” he said.
“To manage these repayments effectively, Sri Lanka will need to sustain the growth momentum in remittances, tourism, and both merchandise and service exports,” he added, noting that debt restructuring was pivotal for businesses, as it would determine the economic landscape in which they operate, influencing both domestic and relocated enterprises’ strategic decisions.
The way ahead
University of Colombo Department of Economics Senior Lecturer Prof. Chandana Aluthge too confirmed that things may be on the rebound. “Last quarter, the economy registered a GDP increase, which is a good sign that Sri Lanka’s economy is turning around. Possibly we will experience 1-2% positive economic growth this year.”
With the increase in remittances and tourist arrivals, and with the Government nearing the completion of debt restructuring, Prof. Aluthge believes that “there is no reason for the economic contraction to continue”.
Addressing debt repayment, he said: “Sri Lanka is already repaying debt – what we have stopped is paying debts on sovereign bonds, etc. while we continue to pay other bilateral loans. One important component of debt restructuring is to get a grace period, for instance five years of no repayment, after which we will recommence payment. This will give the country sufficient time to accumulate foreign exchange by the time repayment starts.”
He noted that in order to reach this stage smoothly, the Government had to strengthen the export sector in order to swiftly earn dollars, ensuring a constant inflow into the country. Given the volatility of tourism and remittances as sources of forex, the stability and growth of the export sector is essential for a country such as Sri Lanka.
“Tax is the most prominent source of Government revenue in any country. Our problem is that we’re relying heavily on non-income tax revenue such as VAT. When VAT is increased, everyone has to pay, while income tax is paid by the affluent. Unfortunately, in Sri Lanka, tax payers are few and we lack an automated system to bring everyone into the tax net.”
Similarly, Ariyawansa said: “Businesses, especially those in the consumption domain, are feeling the brunt of the higher VAT rates. While there is an understanding of the need to enhance tax collection, the prevailing sentiment among businesses is a call for further broadening of the tax base. Such a move would help to moderate the tax rates to more sustainable levels, thereby fostering a conducive environment for growth and development in the business landscape.”
To ensure future stability, Sri Lanka needs “the commitment, the right policies, and the right frame of mind,” Prof. Aluthge noted.
For instance, the process of launching a business in the country has to be simplified and corruption has to be tackled in a more strenuous way since it keeps out genuine businesses. “We need an investor-friendly and production-friendly environment. Free trade zones alone will not attract investors – they should feel that doing business in Sri Lanka is convenient and brings them an advantage or profit.”
Emphasising on the importance of preparing a conducive environment for investors in order to ensure economic growth, he said: “It is always better to get investors than borrowing or taking out loans.”
“Relying heavily on tourist arrivals and remittances in the mid-term or the long-term is not a helpful strategy, unless we engage with businesses with a stable and continuing foreign exchange inflow. Otherwise, Sri Lanka will not have a future,” he warned.
Without all this, the country will return back to square one, he reiterated. “The situation is crucial for Sri Lanka. There is no time for experiments.”
Consumer impact
The World Bank in its ‘Sri Lanka Development Update’ of October 2023 notes the reversal of previous poverty reduction gains over the past decades, anticipating a fragile recovery due to the scarring effect of the crisis, depletion in human capital, and tight external financing.
While it notes that poverty reduction could resume from 2024, it depends on continued implementation of structural reforms and a restoration of economic growth and job creation.
Consumer rights activist Asela Sampath pointed out that consumers were at the receiving end of the economic contraction, with discretionary spending seeing a notable decline due to spending on utilities.
“Consumers have significantly reduced purchasing, especially of daily necessities. The reductions in prices of goods don’t directly benefit the end consumer, since the middlemen take advantage of it. Especially in urban areas, people have had to sacrifice a significant portion of their daily necessities in order to be able to afford power and water bills.”
He noted that having to spend foreign exchange for unnecessary imports while repaying debt would directly impact the ordinary consumers of the country.