Economy ticks up in the first quarter but difficult challenges linger
Sri Lanka is now gearing up to adopt a new path towards a competitive, open, green and digital economy that is socially just, especially focused on the export market and built for the benefit of today’s youth.
To achieve this goal, the country must break away from the old political system and embrace change.
Sri Lankan fiscal and monetary authorities have just started discussions with the bilateral creditors on debt restructuring of USD 7.1 billion out of the total USD 25.9 billion owed to external creditors.
It is now holding debt restructuring talks with Paris Club members together with India, while also holding discussions with China separately.
Three baseline restructuring scenarios with a six-year maturity extension for all of them and nominal haircuts ranging from 15 per cent to 30 per cent, with higher coupons corresponding to lower haircuts have already been proposed, reliable official sources said.
Each of the three baseline scenarios also implies roughly equal net present value relief of 23-28 per cent at the International Monetary Fund’s (IMF) preferred 5 per cent discount rate.
Sri Lanka owes USD 7.1 billion to bilateral creditors, according to official government data, with USD 3 billion owed to China, USD 2.4 billion to the Paris Club and USD 1.6 billion to India.
In a latest progressive move, President Ranil Wickremesinghe, honouring a pledge he made after assuming the premiership last May, announced that the government has decided to appoint five youth representatives to both the Selection Committees and Monitoring Committees of the Parliament, which will be completed this month.
Additionally, the government will present the Jana Sabha draft bill to the Parliament, following former Speaker Karu Jayasuriya’s proposal.
To make these objectives a reality, everyone should be united and work together towards building a new, competitive, and sustainable economy that is inclusive and just for all communities in Sri Lanka.
As the government strives towards this common goal, the opposition parties in Parliament should extend their support to the ruling party’s progressive measures without jumping up against every proposal, frequently barking at each and everything making use of parliamentary privileges while wasting valuable time of the legislature.
The uncertain political situation and heightened fiscal, external and financial sector imbalances pose significant impact for the outlook.
Growth prospects depend on debt restructuring and growth enhancing structural reforms. At the same time, fiscal consolidation will likely dampen these prospects, with the fiscal deficit expected to gradually fall over the medium-term.
Inflation is projected to come down from a high base as monetization of fiscal deficits is reined in. The current account deficit is expected to decline due to import compression, despite decelerating exports as result of weak global demand.
Additional resources will be needed in 2023 and beyond to close the external financing gap.
As per the latest economic indicator report of the Central Bank, headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2021=100) decreased to 35.3% in April 2023 from 50.3% in March 2023.
The lower level of realised inflation compared to the projections made, was mainly due to higher than expected price decreases observed in volatile food and non-food items.
At the time of changing administration, the inflation rate was at 70 percent. By the end of last month, it had decreased to 50 percent and now it is at 35 percent. The government also aims to bring it down to a single digit by the end of this year.
The cost of living, a major headache for consumers for much of this year, has eased considerably as fuel and gas prices have now been slashed bringing expectations among the people of impending the ease of skyrocketing of essential commodity prices.
The Ceylon Petroleum Corporation revised fuel prices where a litre of 92 octane petrol was reduced by Rs.7 to Rs. 333, 95 octane petrol by Rs.10 to Rs. 365, diesel by Rs. 15 to Rs. 310 and super diesel by Rs.135 to Rs. 330.
The price of a 12.5kg LP Gas cylinder was reduced by Rs. 100 with effect from midnight on Wednesday (03) while the 5kg cylinder was reduced by Rs. 40. The 3kg cylinder was also reduced by Rs. 19.
Meanwhile, the Central Bank in its annual report that was released recently observed that several inherent weaknesses and policy lapses of the previous regime had triggered the severe economic problems that engulfed Sri Lanka.
It projected that the economy will shrink by 2 per cent this year, but expand by 3.3 per cent in 2024. The prediction is more optimistic than the IMF’s prediction of a contraction in 2023 of around 3 per cent and growth of 1.5 per cent next year.
“Although the corrective measures affected the vast community in the near term, they were necessary to safeguard the economy and economic agents from potentially devastating consequences of unrestrained economic instability. These were hyperinflation, collapse of economic activity to a much deeper level, and a complete disconnect of the country from the rest of the world, with far worse consequences to the people and businesses,” the report by the Central Bank noted.
However, debt restructuring could pose near-term challenges in the financial sector that need to be addressed proactively by the government and the Central Bank, it said.
The envisaged normalisation of foreign exchange inflows and the completion of the debt restructuring process during 2023, as well as the sweeping reforms in the public sector, are expected to pave the way for the country’s progress towards improved and sustainable economic prospects, it added.
To emerge from the current economic crisis and improve long-term growth prospects, Sri Lanka needs to enhance fiscal and debt sustainability, and implement growth enhancing structural reforms.
These measures need to be accompanied by tighter and more consistent monetary policy to contain inflationary pressures that forecast Sri Lanka’s economy to contract further in 2023 before it begins a gradual recovery in 2024, as the country navigates an unprecedented economic crisis.
The economy contracted by 7.8% in 2022 and is expected to contract by 2% in 2023 as it continues to grapple with the challenge of debt restructuring and balance of payments difficulties.
Reform measures, such as the reversal of the tax cuts of 2019, and the recent approval of the IMF’s Extended Fund Facility arrangement will support the country’s efforts to stabilize its economy.
Sri Lanka’s recovery from the crisis hinges on timely progress on debt relief and steadfast implementation of reforms.
President Wickremesinghe has presented a 25-year long term plan to transform Sri Lanka to a developed nation by 2048.
During this long journey for prosperity, many future governments of different ideologies may come into power.
These rulers of different political parties with their own game plans are used to making frequent policy changes and under such a set up, it is an extremely impossible mission to continue with the current plan specifically geared for the youth of this country.
Be that as it may, the continuation of this 25-year prosperity initiative is a necessity provided the island nation’s populace is willing to shed its selfish mentality of waiting for governments to provide everything for them, from the cradle to the grave, ignoring what they have to do for the country.
No policy will become a reality unless it is managed properly. Even if President Wickremesinghe manages it properly at present but successive governments abandon it in the future, this long term plan will end up as a futile exercise .This is a snag which must be avoided at all costs.
People should not allow the recurrence of consequences experienced under the past 16 IMF reform programs due to frequent policy changes of successive governments in accordance with their rulers’ whims and fancies. Now the time has come for us to not miss the bus.
Carcharodon
