Time for austerity

Sri Lanka is facing multiple financial problems. The rapid depletion in foreign reserves has precipitated a debt crisis with the Government unable to service its debt and interest to international creditors. Early signs of spiralling inflation that would increase poverty across the country are also a deep concern. There are mixed signals from the Government as to whether it would approach the International Monetary Fund (IMF) for a bailout facility and a possible facilitation for debt restructuring. 

If this is to happen there would certainly be conditions linked to such a facility. Even if the Government does not opt for the IMF option and attempts to raise funds through the international financial markets or with friendly Governments, it would have to implement some of the very conditions that would be part of an IMF bailout since no creditor would be willing to risk placing their money with an administration that would not be able to offer a return on investment. The floating of the rupee as done recently, would definitely have been one of these conditions demanded by the IMF.

Another significant condition that would be imposed on the Government by any potential creditor is to reign in on spending. Irrespective of the conditions that would be demanded by lending agencies such as the IMF curtailing unsustainable spending by the Government is a good policy. The Sri Lankan State has been living beyond its means for a very long time which has burdened the taxpayer, and stifled private sector innovation and investments. It is unfortunate that the necessary restructuring of the economy had not taken place during periods of stability. However, if this crisis is what it takes to correct the path on Government spending, then it may be the silver lining in this very dark cloud that hangs over the economy.

The public sector employment has bloated in recent years with respective Governments using public funds to create jobs for their loyalists. The current public sector workforce is estimated at over 1.5 million. This is a burden that cannot be sustained, especially at a time Government revenue is falling. One of the first things the Government should do is to place a moratorium on State sector recruitment other than into vital areas such as healthcare and education. Politically motivated graduate job schemes, that have bloated the public sector in the last two decades without proper rationale for the jobs created, should be halted immediately. 

The defence sector which absorbs the highest proportion of Government expenditure, without generating economic activity in return, is an important area to address. The fact that Sri Lanka maintains the world’s 17th largest military does not reflect on the military needs or the national security realities of the country. 

The other area that needs urgent attention is the loss-making State Sector Enterprises (SOEs). Loss incurred by SOEs has long been an issue that has worsened fiscal problems in Sri Lanka. Prolonged losses by SOEs, partly due to unsound decisions made by policymakers, have resulted in large budget deficits; and despite the need to reform critical SOEs, successive Governments have failed to achieve this in a genuine and sustainable manner. The lumbering giants such as the Ceylon Electricity Board, Ceylon Petroleum Corporation have become a burden on the taxpayer and a drain on the country’s finances. These are institutions that could be restructured, reformed or privatised. 

The current Government has the necessary political space, with a significant majority in parliament in order to implement these necessary reforms and the time to recover from the immediate shocks to the economy since national level elections are at least two years away. All it lacks is the moral conviction and the courage to face the reality of the dire economic situation.