Dilemmas and Main Issues in Sri Lankan Economy (1977 to up to date)

The main reason for the Sri Lankan economy to fail

Economy can be considered as the blood of the country as it is the mechanism of which match the limited resources with unlimited needs and decides how the limited resources are allocated within the country. And combination of economics and politics will decide that how will be the social, technological, environment and legal environment is going to be. Therefore it is crucial for the country success with the economic aspects.

However the main issue with Sri Lankan economy is lack of contribution from professional economic policy makers to lead the economy and run the mechanism in the country. What I am saying is if the economic policies implemented was success, we should have be in a much better place in the world. This emphasize that whoever the person/s made policies in the economy had to be much more competent to make strategies with a clear long term plan.

Issues in Sri Lankan economy

In 1977 the constitution changed by creating an executive presidency in the country and a prime minister run the country including the economy. With that change liberalization was introduced to the economy. There to now Sri Lanka used open market economy. However I have identified these issues in the economy.

·         Sri Lanka couldn’t diversify the export products or couldn’t success in specializing a product or service that the economy could rely on.

In the recent past Sri Lankan government has identified some key focal areas to address the external imbalances of the economy, especially with regard to reducing its high and increasing trade deficit (Appendix 1, Figure 1) in order to make the economy comply with the Marshal-Lerner condition (Sinha, 2010.). Sri Lankan’s oil import bill accounts for an estimated 27% of the imports while investment goods import component of 24% of total imports. These inelastic import components in the economy as well as less specialize in product or service and inability to compete with foreign products had led to imports of the country exceeds exports of the country throughout the period. Because of this reason, Sri Lanka's Export goods price elasticity + Import goods price elasticity totaling less than 1, resulting in the country not complying with the Marshall–Lerner condition. Because of this reason Sri Lanka couldn’t gain the advantage of the rapid rupee depreciation which happened after 1977 due to moving into a flexible exchange rate system.

 As the solutions for the above stated problems, I prefer that Sri Lanka should have a clear plan to specialize in diversified fields. If I take an example, for the purpose of attracting tourists to Sri Lanka we should promote our culture (events like Sinhala and Hindu aluth awrudda, Vesak celebration, unique religion available for us etc.) and with a proper infrastructure facilities covering all the areas with the purpose of attracting such tourists. 2^nd solution is the economic decision makers should identify the importance of moving back to an agricultural based economy. As we have a proper irrigation projects given by our great ancestors, perfect weather conditions and geographical conditions to grow variety of agricultural products in all around Sri Lanka we should have emphasize the importance from the contribution agriculture sector. And the 3^rd solution is to improve the contribution from the textile sector by making ambitious foreign trade agreements with Sri Lanka’s top export destinations such as European countries.

·         Social welfare activities were not directed to the right persons.

In Sri Lanka, welfare projects such Janasaviya, Samurdhi, Mahapola, Bursary was undertaken by different political regimes with the purpose of eliminating poverty and inequality in distribution of income, improving health and education in Sri Lanka. But it is uncertain that the objectives those welfare projects was achieved.

 According to appendix 1, figure 2, the income inequality in Sri Lanka is high and has remained more or less unchanged, for more than three decades. While the share of household income of the poorest decile has remained less than 2 %, the corresponding share of the richest decile has remained around 38 % throughout the period from 1990/91 to 2012/13. Even in the 9th household income decile, the share of total household income, is only 15%, while the share of the richest decile, is more than twice the share of the 9th decile, indicating that it is the people in the richest 10 % of the households, who hold the major share of household income. The gini coefficient is almost same throughout the period from 1977 to 2010 (Appendix 2, Table 1).

The other major problem is alleviating poverty. Poverty reduction in Sri Lanka has been uneven across sectors. Rapid in the urban sector, but slow or stagnant in rural and estate sectors. National poverty rate reduced from 26% in 1990-91 to 23 percent in 2002. While urban poverty halved during this period, rural poverty declined by less than five percentage points and poverty in the estates increased significantly (Kelegama, 2001). Sri Lanka however experienced a major decline in poverty between 2002 and 2009 from 23% to 9% of the population. But on that time it has identified that an estimated 9% of the Sri Lankans who are no longer classified as poor live within 20% of the poverty line and are thus vulnerable to shocks which could cause them to fall back into poverty (Department of Census and Statistics, 2015).

·         Under different political regimes there was no consistency and coordination in economic policies

Throughout the year’s citizen of Sri Lanka elected different political regimes in to the power to run the mechanism of the economy. Under each regime different ministers was elected by the president to run each sector. But the problem is if there was a goal or a target to be achieved as a government of Sri Lanka in the long term.

The policies implemented were according to personal agendas. As an example there was no rational to build Mattala airport, Hambantota harbor in the Hambanthota area. The purpose was just to improve the standard of living in the hometown of the president Mahinda Rajapakse. And under many regimes, the state owned enterprises was overstaffed with no purpose, just as an act of a political promise. The companies that was privatized under a one regime was reestablish as state owned enterprise can also be taken as an example for inconsistency in policies. Sri Lanka Insurance, Sri Lankan Airline is the examples.

·         The civil war (1983-2009)

According to Nisha, Sisira (1999) the country had to ​the government had to incur direct costs such as military costs and cost of damages to social and physical infrastructure and also indirect cost such as loss of income due to forgone investment, lost income of reduced tourist arrivals, loss of income due to forgone investment, loss of investment due to lost human capital. During this time EU revoked GSP plus preferential tariffs from Sri Lanka due to alleged human rights violations, which cost about USD 500 million a year.

Consequences of having issues in Sri Lankan economy

·         High government debt

Due to unavoidable military and defense expenditures during the civil war period, due to the budget deficits and trade deficits throughout the years and due to high expenditure by the governments that an objective was hardly achieved or which barely brought an value to the economy, the government had to experience huge amount of amount of debt from local and foreign sources. This situation leads the country liable and had to incur significant amount of interest payable making the government into a serious situation. (Appendix 1, Figure 3)

·         Youth unemployment

Youth unemployment is a major issue in Sri Lanka in which many qualified youth who have the technical skills or appropriate academic qualification does not have jobs. Mismatch of education and job market is a major reason brought forward for the unemployment of educated youth in Sri Lanka. This is absolutely true that the kind of jobs created by the corporate sector is not matching with the expectations of graduates. Corporate sector often wants individuals who are prepared to do exactly what the employer says without raising many issues

·         Loss of foreign  investment

Sri Lanka lost its investment potential due to the uncertainty created by civil war. As an example, two electronic manufacture giants, namely Motorola and Harris Corporation which obtained BOI approval to establish plants inside Katunayake free trade zone in 1982, withdrew their investment projects from Sri Lanka with uncertainty created by the ethnic war. Peace and security are necessary conditions, but not sufficient conditions to attract foreign investment. Many other conditions have to be put in place to attract FDI. It is important to ensure an attractive investment climate. Consistent macroeconomic policies, good governance, economic stability, guarantee of property rights, rule of law and absence of corruption are among the conditions required to attract FDI. Consistency and predictability in economic policies and political stability are preconditions to attract FDI. However it is not sure that Sri Lanka is able to attract such foreign investors into the country by comparing with other countries easiness of starting and doing a business (Appendix 2, Table 2).

·         Migration of skilled workers

Brain drain can be described as the process in which a country loses its most educated and talented workers through migration. This situation leads most highly skilled and competent individuals to contribute their expertise to the economy of other countries. When the people who didn’t get satisfied with the situation in the economy, the working conditions, infrastructure they always finds an alternative. Finding a job in a developed country become a better solution for them. With the availability of high quality infrastructure facilities and with high salary will ensure them to live a luxury life. But how this brain drain of skilled workers affect to the economy. The economy is loss of tax revenue, loss of potential future entrepreneurs, shortage of important and skilled workers, loss of innovative ideas and country's investment in education etc.