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While inflation may have decreased in real terms, stagnant wages and rising taxes have eroded the purchasing power of citizens, exacerbating poverty and inequality
The economic landscape of Sri Lanka has been a subject of fervent debate in recent times, with conflicting narratives surrounding the notion of stability. On the surface, there are indicators suggesting positive growth and progress, yet beneath the veneer lies a stark reality of pervasive instability, particularly for a significant portion of the population.
In a recent episode of Face-the-Nation, a prominent TV broadcast program by News1st, titled “Economic Stability – Myth or Reality,” a panel of esteemed economists and experts delved into the multifaceted nature of Sri Lanka’s economic stability. The panellists included economists Dr. Howard Nicholas, Dhanusha Gihan Pathirana, Institute for Political Economy co-founder Prof. Kanchana N. Ruwanpura, and Advocata Institute CEO Dhananath Fernando. Through their insights, the discussion touched upon critical aspects such as income inequality, inflation dynamics, social welfare measures, trade agreements, and the role of government intervention in managing strategic sectors. This article aims to dissect the key points raised during the program and provide additional analysis of the prevailing economic challenges in Sri Lanka.
Absence of stability for the majority
Despite optimistic economic indicators touted by the Government, the reality on the ground paints a different picture, one characterised by widespread instability. A substantial portion of the population continues to grapple with financial hardships, unable to afford basic necessities such as energy bills. While inflation may have decreased in real terms, stagnant wages and rising taxes have eroded the purchasing power of citizens, exacerbating poverty and inequality. The burden of servicing public debt has led to cuts in essential services like health and education, further widening the gap between the rich and the poor. Moreover, the precarious state of non-performing loans and bankruptcies among businesses underscores the fragility of the economy, despite superficial signs of growth.
The recent boost in foreign exchange reserves owes more to external factors like remittances and tourism than to sustainable economic reforms, leaving the country vulnerable to future shocks due its continuing balance of payment deficit. As highlighted by the United Nations Development Programme (UNDP), rising income inequality and multidimensional vulnerabilities underscore the urgent need for a more equitable approach to economic stabilisation, with a particular focus on addressing the plight of marginalised groups, including women.
Debunking the money printing myth
Contrary to popular belief, Government money printing is not the primary driver of inflation in Sri Lanka. This misconception, propagated by global neoliberal think tanks advocating for austerity measures, fails to acknowledge the nuanced factors influencing price levels. Evidence from global central banks, including the US Fed and the Bank of England, attests to the limited role of money supply expansion in inflationary pressures. In reality, inflation stems from a combination of demand-pull and cost-push factors, exacerbated by imported inflation, monopolistic practices, and inflation expectations. Commercial bank deposits issued as debt are the largest supplier of money in countries all around the world. According to the Central Bank of Sri Lanka, the domestic credit (rupee money supply) issued by local commercial banks in the last three years were 85.0%%, 80.1% and 85.5% respectively.
While conventional wisdom dictates raising interest rates to curb inflation, such measures often come at the expense of economic growth and employment, disproportionately affecting vulnerable segments of society. Alternatively, progressive taxation policies offer a more equitable means of managing inflationary pressures while ensuring social welfare and economic stability. Moreover, advocating for democratic oversight of the Central Bank is crucial to aligning monetary policy with broader socioeconomic objectives, including full employment and financial system regulation.
Revisiting social welfare measures
The efficacy of targeted cash payments for the poor has come under scrutiny, with evidence suggesting significant shortcomings in reaching intended beneficiaries. Administrative inefficiencies, delays in updating eligibility criteria, and leakage in the distribution process undermine the effectiveness of cash transfer programs, leaving many vulnerable individuals without adequate support. In contrast, energy subsidies offer a more inclusive and immediate form of assistance, benefiting both low-income households and struggling small and medium enterprises (SMEs). Additionally, subsidies for public transport alleviate the financial burden on working-class families while promoting sustainable mobility solutions.
However, it is essential to address loopholes that allow for the disproportionate benefit of affluent individuals, such as those driving fuel-inefficient vehicles. Implementing measures to discourage the importation and usage of such vehicles amidst a foreign debt crisis, coupled with incentives for their re-export, can mitigate adverse environmental and economic impacts while bolstering foreign exchange earnings.
Enhancing the effectiveness of social welfare programs is crucial in providing relief to vulnerable segments of society. This entails considering universal benefits, streamlining administrative processes, leveraging technology for targeted delivery, and ensuring adequate funding to meet evolving needs. Moreover, investing in education, healthcare, and social infrastructure is essential for building human capital and reducing inequality in the long term.
Rethinking trade agreements and industrial strategy
Sri Lanka’s approach to trade agreements warrants reconsideration, particularly in light of prevailing economic conditions and developmental priorities. While trade agreements can be mutually beneficial under certain circumstances, entering into unbalanced agreements risks exacerbating existing inequalities and undermining domestic industries. A more cautious and strategic approach to trade policy is necessary, taking into account factors such as technological disparities, labour productivity rates, and the prevalence of precarious employment. Furthermore, the Government must adopt a proactive role in nurturing strategic industrial sectors through targeted interventions and supportive policies. Emulating successful models from other East Asian economies, such as South Korea, entails protecting and promoting local industries until they achieve competitive status on the global stage. This entails fostering a conducive ecosystem for innovation, investment, and skill development, alongside prudent regulation to prevent market distortions and ensure fair competition.
While cautious of unbalanced trade agreements, Sri Lanka must actively pursue trade diversification and market access opportunities for value-added products and services. Prioritising sectors with comparative advantages, such as tourism, IT services, and niche manufacturing, can enhance export competitiveness and reduce reliance on traditional industries based on low-wages. Moreover, attracting foreign direct investment (FDI) through a conducive investment climate, transparent regulatory framework, and infrastructure development is critical for stimulating economic growth and creating high-income employment opportunities, that are aligned with strategic sectors.
Empowering women and marginalised groups
Addressing gender disparities and promoting social inclusion are integral to achieving sustainable development and economic stability. Investing in education and skills training for women, expanding access to finance and resources, and eliminating discriminatory practices can unlock the untapped potential of half the population. Similarly, empowering marginalised groups, including ethnic minorities, rural communities, and persons with disabilities, requires targeted interventions to address systemic barriers and promote social cohesion.
The notion of economic stability in Sri Lanka appears to be a myth as it is a complex reality shaped by a myriad of socio-economic factors. While there are some signs of progress, the pervasive instability experienced by a majority of the population underscores the need for a more inclusive and equitable approach to economic management that acknowledge structural inequalities. Addressing issues, such as income inequality, inflation dynamics, social welfare provision, trade policy, and industrial strategy requires concerted efforts from policymakers, civil society, and the private sector. By acknowledging the multifaceted nature of economic stability and adopting evidence-based, people-centred policies, Sri Lanka can chart a path towards sustainable development and shared prosperity for all
its citizens.
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(The writer is a co-founder of the Institute for Political Economy (www.ipe-sl.org) and a former elected Local Councillor for London in the United Kingdom. He could be reached via email [email protected].)
