Sri Lanka’s economic malaise: Lessons from Thailand

Thailand’s economic journey offers some valuable insights to Sri Lanka. Although Thailand is by no means perfect, there is much that Sri Lanka can learn from its Southeast Asian neighbour

By Ruchira Gunawardana 

Thailand, touted by the World Bank as one of the greatest development success stories in modern history, offers some economic lessons that Sri Lanka must take to heart. Back in 1997, with the onset of the Asian Financial Crisis, Thailand’s economy was in dire straits: foreign exchange reserves dwindled, the currency (Baht) crashed and the economy endured a deep recession; prompting Thailand to seek International Monetary Fund (IMF) assistance for a package worth as much as $19.9 billion. 

That was Thailand’s last IMF program. Not only did Thailand repay its debts to the IMF four years ahead of schedule, but also poverty and inequality both reduced markedly. 

Today, Thailand is an upper-middle income country with a GDP per capita 76% higher than Sri Lanka’s, and a Human Development Index (HDI) ranking in the ‘very high’ category, compared to Sri Lanka’s ‘high’ HDI. The Baht has been proclaimed the world’s most resilient currency (by a recent Financial Times piece) and this exchange rate stability has made the Baht the world’s 10th most frequently used currency.  

Fiscal discipline

If we consider Sri Lanka’s economic malaise, the lesson on fiscal discipline (or lack thereof) should take precedence. Sri Lanka running massive budget deficits for decades, in 2021 the budget deficit being a shocking 11.7% of Gross Domestic Product (GDP) , the country has fully eroded its external buffers, and hitherto filled the financial gap with costly debt. Hence, with all this debt accumulation, it obviously came to a point of unsustainable debt. 

In addition to the debt service consuming a huge portion of the already exhausted fiscal space, this vicious cycle ballooned Sri Lanka’s government debt to 113.8% of GDP in 2022. This made the country’s economy extremely fragile, so much so that any external shock (like the Covid-19 pandemic) could instantly drag the country into an economic implosion. 

To build a resilient economy going forward, the tax revenue-to-GDP ratio has to be raised at least to 18% (from 8.3% currently) and maintained at that level indefinitely, to ensure that the economy is capable of withstanding external shocks and ensure debt sustainability. This would free up more resources for the Government to utilise to upgrade infrastructure, strengthen healthcare services and improve the education system. 

Conversely, Thailand boasts a much higher tax-to-GDP ratio of 20.2%; and unsurprisingly, its debt-to-GDP ratio is at a healthy 60%, and nearly all the public debt held domestically, which, alongside high domestic savings rates and a developed domestic bond market, mean that debt sustainability is guaranteed well into the future. 

Pre-pandemic, Thai budget deficits have been contained at 1% of GDP , a rare feat for a developing country, since India’s budget deficit, for example, was 7.69%, which India’s recent budget has sought to address with a value-added tax hike. 

Given Sri Lanka’s often turbulent political landscape, characterised by an inclination towards fiscal irresponsibility, establishing and safeguarding independent fiscal institutions and bolstering national budgetary oversight is an absolute priority to prevent political interference in matters related to her macroeconomic stability. 

In this regard, the Parliamentary Budget Office Act, the envisaged Public Financial Management Act and Debt Management Agency Act would play a critical role in preserving fiscal discipline and upholding the integrity of government spending.  

Prudent monetary policy

Thailand stands out as an emerging market due to its excellent inflation targeting. Thailand’s average inflation rate in recent decades has been maintained at 2%, the coveted target that even many developed countries have failed to reach, which is indeed commendable. 

Thailand’s central bank , the Bank of Thailand (BoT), is the monetary authority tasked with conducting monetary policy independently to achieve its inflation target. Therefore, the issue of fiscal dominance over monetary policy in Thailand is non-existent, as the BoT is vested with the power to firmly and freely conduct its monetary policy without interference from the government and the treasury. 

In this context, the Central Bank of Sri Lanka Act would at last bring prudent monetary policymaking to the country, with the legalisation of the flexible inflation targeting framework and the curtailment of monetary financing of the budget deficit (‘money printing’); thereby anchoring inflation at mid-single-digit range (4%–6%). 

Thus, necessitating fiscal discipline by placing the onus on the Treasury to manage its finances since it cannot rely any longer on the Central Bank, to cover its cash flow shortfall. With inflation strongly anchored, it removes the uncertainty that hinders both domestic and foreign investment.  

Investment and international trade

Although Sri Lanka was one of the earliest nations in Asia to liberalise its economy, this proved to be far from reality. Soon after the liberalisation, successive governments imposed various complex import controls such as a distortionary tariff structure, which combined with an ‘import substitution policy’ led to an ingrained inward-looking attitude among Sri Lankans . 

Sri Lanka’s economy is ‘open’ only in name and on paper, with just two Free Trade Agreements (FTAs) in operation, compared with Thailand’s 14 FTAs alongside the Regional Comprehensive Economic Partnership agreement. 

Sri Lanka’s international trade-to-GDP ratio halved from an outstanding 89% in 2000 to 46% in 2022; exports-to-GDP ratio too halved from  40% in 2000 to 20%. This indicates an extremely precarious position of the country’s economy. Sri Lanka has not just become closed off from the rest of the world, but her international competitiveness has stagnated.

Subsequently, the lethargy in economic openness infected foreign direct investment (FDI) inflows, as the FDI-to-GDP ratio halved from close to 3% in the late 1990s to 1.2% in 2022. Amid the dearth of foreign capital to fuel high-quality economic growth through industrialisation, technology-transfer and knowledge-transfer to meet the needs of a 21st century populace, Sri Lanka’s economic development languished. 

Thailand, meanwhile, embarked on an ambitious policy of export-oriented growth, driven by FDI, after following a failed policy of import substitution. Thailand is now a beacon of economic openness, with exports accounting for 66% of GDP, while international trade contributes to an overwhelming 134% of GDP. FDI was the cornerstone of this strategy, with Thailand attracting billions of dollars worth US and Japanese investment.

 Ironically, it should ideally be Sri Lanka that ought to have been export-oriented in the first place, since Sri Lanka is a small economy compared to Thailand’s vast domestic market. It is impossible for Sri Lanka to reach developed country status without being export-oriented, since the country’s domestic market is simply too small to spearhead economic growth. Sri Lanka has to focus on exports as a means of fuelling economic growth, with particular focus on value-added services exports given the country’s limited factor endowments. 

Additionally, Sri Lanka must streamline and simplify archaic customs procedures and other such internal impediments that stifle export competitiveness, besides FTAs, while improving the ease of doing business and enhancing investor engagement. 

Over the years, Thailand has accumulated massive amounts of foreign-exchange arising from sizable current account surpluses, thus building up mammoth reserves (among the largest in the world), which it has used to reinforce the Baht’s stability, plus providing Thailand a powerful external buffer against global economic shocks.  Thailand first started out by exporting textiles and garments, but later ventured into high-tech, high-value products such as cars, electronic integrated circuits and machinery. In contrast, Sri Lanka’s basket of export goods has remained more or less the same since her independence. 

Initially, Sri Lanka has to implement considerable value-addition across its traditional exports such as tea, coconut, rubber and gemstones, which has huge potential. Information and communication technology (ICT) also holds great promise, particularly, if Sri Lanka could export ICT services to emerging Africa.  

Sound institutional framework

Interestingly, despite Thailand’s constantly terrible political climate, it has maintained macroeconomic stability for a very long time. How? Thailand’s institutions are so strong that regardless of political cycles and spins, their policy holds supreme. 

The best example is seen in Thailand’s Free Trade Agreement (FTA) negotiations with Sri Lanka that proceeded uninterrupted even after an election, breakdown of democratic principles, and the country functioning without a proper Prime Minister for more than three months since elections. That is in stark contrast to Sri Lanka, which had to end numerous FTA negotiations abruptly after changes in the political sphere. 

Thailand’s Department of Trade Negotiations, the key institution in her drive to economic openness, comes under the umbrella of the Commerce Ministry, yet it is autonomous of changes in Commerce ministers and secretaries. This is exactly what Sri Lanka must look at; it should reform its governance and institutional structures to ensure that even after secretaries, ministers and governments change, the policies stood consistent and upheld into the foreseeable future. 

Furthermore, Thai citizens have lost trust in their central government due to the erosion of democracy; as a result, local governments have taken charge and pressed ahead to actively engage with civil society in developmental activities, without any support from the central government. 

It is so significant that the World Bank has partnered directly with Thai regional and local governments in providing development financing and technical assistance, instead of working through the ministries at Bangkok. Sri Lanka must seriously consider this approach to governance, to insulate economic progress from political instability. 

 Way forward

Thailand is by no means a perfect economy; it is beset with daunting challenges such as an ageing population and slowing productivity growth. However, Thailand provides a glimpse of the way forward for Sri Lanka and the growth model that Sri Lanka must adopt.  Sri Lanka must draw inspiration from Thailand’s economic lessons and forge ahead with a growth model that aligns with her inherent strengths and opportunities, while taking concrete steps to eliminate weaknesses and threats. 

In this endeavour, special mention needs to be made on education reform; it has always been education reform that sparked inclusive and sustainable growth in all nations that achieved economic prosperity. 

Sri Lanka must inculcate an entrepreneurship-driven mindset in children from the start while providing quality education that is useful and relevant to tomorrow’s world, which can unlock innovation. 

Ultimately, it is innovation that can propel Sri Lanka to development, and a comprehensive innovation policy framework with a robust implementation mechanism. This is where Thailand has fallen short, and where Sri Lanka should advance.

(The writer is a student of Economics at The Australian National University. He can be reached at [email protected].)