Sri Lanka in ICU, what is the medicine?

President Ranil Wickremesinghe on the job for one year

Sri Lanka declared to the world in April, 2022 that the country is bankrupt and that we have reached out to the IMF for the 16th time for a bailout. The exception this time around was that we could have avoided the disgrace on the global stage had we listened to the opposition way back in June, 2019 and engaged the IMF.

The then Government did not listen to the professionals. The hierarchy did not even listen to the agricultural experts from the University of Peradeniya on the policy decision on fertiliser. The net result was the President got kicked out, houses of the policymakers were burnt and people revolted. Sadly, brand Sri Lanka was in the global media news for the wrong reason adding to the negativity from the Easter attacks.

Data driven reality?

We are now into the first year post the Aragalaya where research has revealed that almost 60% stated the objectives that it was designed to implement have not been achieved. If we analyse the decisions taken on banning imports or curtailing debt repayment – experts say that this is not the medicine to get a patient that is in the ICU. The professionals advocate that we must take stock of the current situation with data and take hurtful policy decisions in the area of increasing income and reducing expenditure so that we can turn the economy around. The million dollar question that the IMF will ask Sri Lanka is have we done this or are we on the direction of doing this. 

Let’s be data driven on this analysis. As per Central Bank reports, the overall tax revenue has increased to Rs. 1,198 billion during the period January-June 2023 from Rs. 799 billion a year ago given the reform process that was introduced. However, the recurrent expenditure has increased to Rs. 2,325 billion, which is poor management. The public sector salary bill if dissected, 49% is accounted for by the defence forces which has not done its task be it the Easter attacks or the Aragalaya burning of property last year. For the year 2023, if we analyse the crime rate on drugs and shootings have escalated to a point that the daily TV news bulletins are reporting the violations as a KPI. This reality has got the attention of foreign countries to re- consider the travel advisories to the foreign guests coming into Sri Lanka. This means that very soon the only revenue curve that is showing an upward trend will be affected.

We have no option but the Government hierarchy must relook at this line item and how to manage the ‘rank promotions’ and continuity of this resource. I would push for re-purposing the amazing skill set of the forces than the current strategy that is being pursued.

To summarise the financial performance, the interest payments have increased by 98% to Rs. 1062.1 billion from Rs. 537.3 billion spent last year whilst the net-net is that Sri Lanka is in the red by Rs. 1014.7 billion at a disastrous -59% performance during the period January-May which is not going to be favourably looked at by IMF.

2023 first half performance and the IMF

If we do a deep dive on the first six months performance (January- June) 2023, the total expenditure and net lending has increased by +40% to Rs. 2.56 trillion as against the Rs. 1.82 trillion performance last year. However, the overall budget deficit during the same period (January-June) 2023 has increased by +37% to Rs. 1.24 trillion as against Rs. 0.903 trillion performance last year. This does not stack up well for Sri Lanka given the poor implementation of the IMF expectations.

As at March, 2023 the IMF reform agenda performance is at 25% being implemented whilst 65% of the tasks at pending state and 9% having no visibility to the general public. With just two months to go for the IMF review, the challenges seem uphill for a favourable review. I guess time will tell.

Consumer reality

Whilst the rhetoric is seen in the daily media on sexy ideas of how ASEAN will be our next export destination, making of ‘greater Yala’ as a regional classification for tourism, driving the Gem and Jewellery to get global attention and lately we see heads of states rolling into Sri Lanka be it the French Prime Minister or Japanese Foreign Minister and this week the media will be on the meetings with the Singaporean government hierarchy. However, the reality at the consumer end which is very hurtful has not got attention.

If we are once again data driven, the overall consumption of groceries, food, beverage, personal care and home cadre has been reduced by 75% of the households in Q2, 2023 which was 69% in Q1, 2023 and 62% in Q3, 2022.

If one does a deep dive into the consumption data, what is worrying is that the high nutrition items such as milk powder the consumption is as high as 82% of households (up from 75% in Q1, 2023). High protein items like fish and meat contraction in consumption is as high as 76% of the households. A point to note is that the consumer segment that was increasing consumption of household products due to the increased disposable income has crashed from 6% household last quarter to 2% in Q2, 2023 which means that cost of living is getting further challenged even though the Government is reporting that the inflation has dropped.

A recent LirneAsia report stated that 27% of adults restricted their meals to feed the children. In the estate sector poverty is as high as 51% which is the reality whilst the overall poverty in Sri Lanka has catapulted to 7 million people from the number of three million people a few years back. When analysing the key issues at the consumer end the cost for utility services – electricity and water was cited and the current increase of 36% on the water bill that will come to effect will add to the consumer purse which means that the Sri Lankan consumer is going to sink. The Nielsen study revealed that people have reduced the use of telephones – fixed and mobile which means the current economic crisis is pushing the Sri Lankan household towards isolation. This is serious.

Let’s be real, Sri Lanka is in the ICU and things are getting critical. The current data does not show a recovery given that we have to pay $ 5 billion by the year end as per the debt agreements whilst as per WTO stipulations one cannot continue to have import restrictions in an economy. The question is where does Sri Lanka go from here?

Corruption?

For the first time in the history of IMF stipulations, a clause has been introduced to Sri Lanka that curbing corruption has been a key factor on the reform program. However, sadly there is no data to state that this reform agenda is taking form in the country. Be it the allegations in the Ministry of Health where the no confidence motion on the Minister has been shifted for September not been sensitive to the public outcry or the medical profession advice to the Government. The President refused to meet the medical union last week when they turned up at the President’s office even though there was a heavily armed guard from morning. We can behave in an arrogant manner but what we forget is that the world is watching us.

Corruption continues to be the agenda even though the anti-corruption bill was passed by cabinet a few weeks ago. The lower quartile of the households are fighting to keep the house fires burning, sadly on the end of the spectrum corruption is taking place without correction.

The top 5 medicines?

In this backdrop, the question is, what is the medicine that can be prescribed to the patient who is in the ICU. There is no real thrust in exports as the Ministry for Industries reported that there will be a -22% decline in exports for 2023 with the apparel industry dropping by almost $ 1 billion due to the global economic meltdown, namely in the US and UK.

The best practices reveal that Cambodia, Vietnam and Bangladesh together with Sri Lanka were at $ 2 billion in the 1990s. Today, Sri Lanka is at $ 12 billion, Bangladesh is hitting $ 59 billion, Vietnam has catapulted to $ 371 billion in exports and Cambodia is at $ 23 billion. The insight from theory performance is ruthless focus on Free Trade Agreements (FTAs). Sri Lanka is weak in driving the current FTA with India even though the Indian economy is growing at +6% GDP growth and will be the third largest economy globally in the medium term.

Whilst tourism is demonstrating organic growth, until we see a 360 degree communication campaign like what Maldives, Thailand, India or Malaysia has been embarking for many years, we cannot expect a spike in the brand health for Sri Lanka Tourism. If we talk frankly, road shows, exhibitions and visits by artists and sports personalities don’t build brands. We have to use the science of tourism brand building if we are serious about this industry going to be the medicine for the patient in the ICU.

Based on the research by Nielsen IQ, the top 5 medicines recommended by the business leaders of Sri Lanka are – privatisation of SOEs, cut down of public expenditure, removing the import restrictions, drive SMEs for exports and building confidence for investors to come into Sri Lanka. The data that has been provided above makes it very clear that the current medicine that is being prescribed is very different to the voice of the business leaders. It is very sad that even today, we don’t see a genuine effort by the Government machinery to listen to the professionals. The earlier administration was kicked out by the people for ‘poor policy making’ and sadly the current administration is continuing in the same trajectory where another revolt is imminent. Some experts speculate that the second Domestic Debt Restructuring will have to be done.

Conclusion

In this backdrop, it will be interesting to see what the reaction of the IMF will be given that the first review will take place in September, 2023. A 25% implementation and 65% pending and 9% having no visibility does not augur well for the patient in the ICU. I remain hopeful.

(The thoughts are strictly the writer’s personal comments and do not reflect the organisations he serves in the South Asian region or in Sri Lanka. He can be reached via email at [email protected].)