Monday Sep 23, 2024
Monday Sep 23, 2024
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While the Government has implemented immediate poverty alleviation schemes, inclusive growth-promoting policies should be adopted as part of the long-term poverty reduction strategy for narrowing inequalities through sustained economic growth, which could generate employment and income opportunities
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By The Pathfinder Foundation
Strengthening Digital Public Infrastructure (DPI) in Sri Lanka
Digital transformation is vital for Sri Lanka’s national growth and societal development. This transformation involves integrating digital technologies across all aspects of governance and public service delivery to improve efficiency, accessibility, and transparency. Despite significant investments, Sri Lanka still ranks 96th on the UN’s E-Government Development Index, indicating the need for continued efforts in digital infrastructure, service quality, and human capital development. A national strategy centred on Digital Public Infrastructure (DPI) can drive these efforts, focusing on enhancing public services, fostering economic growth, ensuring digital inclusion, and strengthening cybersecurity. Emphasising data-driven decision-making and adopting principles such as interoperability and inclusivity will be essential for successful digital transformation.
Effective digital leadership, robust governance frameworks, and public-private partnerships are crucial for building resilient DPI systems. These systems should be based on common design principles, ensuring openness, scalability, and modularity. Furthermore, a unified approach to data standards and integration will enhance functionality and secure data exchange. Inclusivity and accessibility should be prioritised to bridge the digital divide and build public trust. By investing in connectivity, digital identity, payments, and cloud infrastructure, Sri Lanka can position itself as a leader in the global digital economy. A comprehensive DPI strategy will streamline Government operations and foster socio-economic opportunities, paving the way for a digitally empowered society.
Environmental sustainability
Economic growth generates environmental implications by using the stock of natural capital, exhausting the material inputs from the planet, and creating negative externalities on the environment. Modern approaches to economic activities are sensitive to their environmental implications on pollution, climate change, and biodiversity loss. In addition, sustainable production and consumption practices have become integral parts of the core business in every form of economic activity, making them more competitive in the global marketplace where voluntary sustainable standards are increasingly gaining ground. The future growth path of Sri Lanka must integrate strategies for sustainable use of natural capital and better environmental management practices, minimising and mitigating the environmental impact of growth and development.
Strategies for a green economy
The transition to a green economy is a pressing need in the face of environmental challenges and a strategic road to reach the Sustainable Development Goals (SDGs). To align economic growth with environmental sustainability, Sri Lanka must implement green economy strategies that prioritise the efficient use of natural resources and emission reduction and promote sustainable practices in all sectors. Key strategies include investing in renewable energy, enhancing energy efficiency, and implementing waste reduction and recycling programmes. By integrating these approaches, Sri Lanka can minimise adverse environmental impacts and foster a resilient economy that supports SDGs.
Sri Lanka’s current initiatives, such as solar, wind, hydropower, and bioenergy investments through the Sri Lanka Sustainable Energy Authority (SLSEA), demonstrate a commitment to green economy strategies and achieving the SDGs. Expanding renewable energy projects, improving energy efficiency, and introducing more comprehensive environmental management techniques can help Sri Lanka’s green economy and long-term sustainable development.
Poverty and income vulnerability
The impact of the economic crisis on the country’s poverty has been devastating. As per the international poverty line of middle-income countries, World Bank estimates show that 5.7 million people (25.6% of the population) earn less than $ 3.65 a day. In addition, people above the poverty line have fallen closer to it, showing an increase in vulnerability. While the Government has implemented immediate poverty alleviation schemes, inclusive growth-promoting policies should be adopted as part of the long-term poverty reduction strategy for narrowing inequalities through sustained economic growth, which could generate employment and income opportunities. In situations where large-scale poverty exists, such as in the case of Sri Lanka after the economic crisis, a sustainable poverty reduction strategy will require more than economic growth and the adoption of pro-poor policies.
Modernisation of the agriculture sector
Sri Lanka’s agriculture sector, comprising plantation and non-plantation crops, has lagged due to the lack of modernisation and productivity growth. From a comparative perspective, the Netherlands – a small country with a similar labour force as Sri Lanka, has only 200,000 farmers. Yet, it has become the world’s third largest agricultural exporter after the USA and Brazil. The agricultural value addition to its $ 1 trillion GDP is less than 2% in the Netherlands. Due to high farmer productivity, however, the share of value addition by an average farmer is as high as $ 78,000 a year.
In Sri Lanka, with its 2.2 million farmers in the agriculture sector, an average farmer’s value addition is only $ 3,500 a year, which can be largely attributed to low productivity, low-value chain development, and low application of technology in the sector, causing persistently high-level of rural poverty. Accordingly, over 90% of the country’s poor live in the rural and estate sectors. The Sri Lankan agriculture sector needs more significant reforms for both modernisation and productivity enhancement, investment in 4IR technology transfer, and increased scale of operations.
Modern industrial development drive
A successful industrialisation process requires creating a conducive business and policy environment that eliminates impediments to industrial expansion and enhances the global competitiveness of industries. Industrial policy intrinsically links with a range of other policy domains: While it cuts across trade, investment, technology, factor markets, and education, a conducive business environment also requires various enabling and modernising policies and regulatory mechanisms, including those needed for greening and digitalising industries. Industrial sector development is directly linked to agriculture sector development because they fulfil each other’s input requirements and help absorb excess labour from the rural agriculture sector. Sri Lanka needs to create an enabling environment for industrialisation by (a) knitting together a series of diverse policies and regulations, (b) adhering to 21st Century industrial standards in terms of knowledge, technology, digitalisation, and environmental standards, and (c) reflecting the national priorities and the need for inclusive growth.
Modernisation of education and healthcare
Although Sri Lanka could boast about its “free education” and “free healthcare” maintained historically, they lack modern international standards regarding quality improvements. In addition, the inequalities concerning service delivery and access to opportunities in both sectors continued to prevail, resulting in equity issues in the outcomes. The two industries must undergo reforms and provide opportunities to perform competitively and efficiently by minimising inequalities.
Education to match economic development strategy
Sri Lanka’s education was formalised by the C.W.W. Kannangara Reforms in 1943, and the Free Education Act of 1945 recognised education as a right to be provided free of charge on an equitable basis by the state. Since then, a series of laws, reforms, and strategic policy documents have ensured that education remains relevant and adaptable to the country’s needs and global changes. Significant milestones include the Education Reforms of 1972, the ratification and adaptation of the World Declaration on Education for All Framework for Action in 1990, the Compulsory Education Regulations and education reforms of 1998, and the adaptation of the World Declaration on ‘Education for All’ (Dakar Framework for Action) in 2000, all of which have shaped policy and practice to maintain the relevance of education to the socio-economic context of the country.
The youth unrest in the north and south of the country was also a driving force for change in education in the 1990s. However, by 2010, the state realised that piecemeal reforms and laws had resulted in a disjointed education system that lacked equity, quality, and relevance. Therefore, a new Education Act was drafted in 2010 to reorient education according to a new set of goals and principles that recognise the country’s multiethnic, multi-religious, and multi-linguistic society and establish equity in education.
The Draft Act also argued that curricula were not updated and aligned to learning outcomes, methods of learning, and teaching and evaluation practised globally, which prepared young people for a diverse and competitive world of work. The draft Act, however, was not fully approved, and the National Education Policy Framework for 2020-2030 was drafted throughout 2020 after a diagnostic review of the education system and its nexus with the economy.
Sri Lanka has been struggling to make lasting changes in its education system as proposed reforms were interrupted due to changes in Government. The challenge ahead is, therefore, to implement a dynamic education policy that addresses the mismatch between the skill set required for economic development and what exists in the labour force and the implementation of policy with full participation of the stakeholders.
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Mainstreaming gender into development policies in Sri Lanka
Mainstreaming gender into development policies in Sri Lanka is a multifaceted endeavour aimed at achieving gender equality and empowering women and girls in all spheres of life. The National Policy on Gender Equality and Women’s Empowerment, launched in 2023, provides a robust framework for incorporating gender perspectives into national laws, policies, programs, and mechanisms. This policy ensures women have equal rights and opportunities within the governmental, public, and private sectors.
By recognising women’s unique challenges, especially during crises, the policy aims to reform archaic laws, address gender-based violence, and promote economic empowerment through targeted interventions. For instance, it includes measures to improve the livelihoods of displaced women and enhance access to education and state services for female heads of households.
Sri Lanka’s commitment to gender mainstreaming is further reflected in its alignment with international goals, such as the Sustainable Development Goals (SDGs). Achieving SDG 5, which focuses on gender equality, involves eliminating discrimination and violence against women and girls and ensuring their full participation in economic, social, and political spheres. The country’s efforts include implementing gender-responsive budgeting, promoting women in leadership positions, and enhancing data collection to inform evidence-based policies. Despite significant progress, challenges remain, particularly in translating the educational achievements of women into labour force participation and addressing the underrepresentation of women in decision-making roles. Strengthened regulations and continuous policy reforms are essential to overcoming these barriers and fostering a more inclusive and equitable society.
Reducing corruption vulnerability
The corruption vulnerability of the Sri Lankan economy and its potential expansion is high, so even the Extended Fund Facility (FEE) arrangement with the IMF specified the need to reduce corruption vulnerability. Corruption affects the economy through its negative implications of creating market distortions, damaging the investment climate, eroding the ease of doing business, increasing the costs of doing business, and promoting misallocation of resources. While regulatory reforms and digitalisation are needed to reduce corruption vulnerabilities, the reforms that directly address the issue at source are necessary to combat corruption and unlock the country’s growth potential.
Final reflection and future direction
Contrary to the widespread perception that the COVID-19 pandemic caused Sri Lanka’s unprecedented economic crisis, the root cause is largely attributed to the culmination of debt distress that has been building up for over two decades, aggravated by several major policy blunders, including tax cuts in 2019. Those policy blunders made the country more vulnerable to external shocks, priming the economy to collapse. It resulted from ‘non-tradable’ sector bias in the country’s growth momentum, in which credit-financed fiscal expansion played a significant role. Without a sustainable growth momentum from an export-oriented ‘tradable’ sector, the Government could not finance its growing import requirements and meet the maturing external debt obligations. Eventually, the COVID-19 pandemic (external shock) triggered the economy’s collapse.
Sri Lankan authorities mistakenly overestimated their capacity to manage the crisis independently without entering into a stabilisation arrangement with the IMF. A decision to seek IMF support was significantly delayed despite repeated professional advice, including from leading independent think tanks to seek IMF support. Timely action with IMF support could have helped the Government to manage the crises at a lower economic and socio-political cost and avoid a sovereign debt default.
Sri Lanka’s policy response to the crisis has been two-fold: First, the country needed immediate adjustments to restore economic stability and debt sustainability. Secondly, Sri Lanka must ensure recovery from the crisis and economic progress beyond the recovery.
Immediate policy responses
Along with the assistance from the FEE arrangement with the IMF, the Sri Lankan economy was able to make a quick turnaround within two years (2022-2024). Despite the painful adjustment cost, this unique achievement is remarkable, as confirmed by improved macroeconomic indicators. The domestic and foreign debt restructuring (except for commercial debt) has already been concluded, improving the room for internal and external finance management.
Progress beyond recovery
Sri Lanka must undertake its long-overdue structural reforms to unlock its growth potential, shifting the policy focus from the ‘non-tradable’ sector towards the ‘tradable’ sector. This is fundamentally important not only to sustain economic stability and debt sustainability but also to ensure a long-term progressive growth path of the economy and to avert possibilities for another crisis. Accordingly, Sri Lanka must achieve a fast track of export expansion, which in turn depends on effectively addressing supply-side limitations and constraints in generating FDI inflows. A series of structural reforms in the medium term is needed to ensure economic progress is on the right track to achieve high-income status by the mid-21st Century.
“Nation that disregards new things…”
Challenges to reforms exist primarily because of resistance to changes, even though many would acknowledge the value of Munidasa Kumaratunga’s famous poetic line: “The nation that disregards new things in the world does not rise!” Reforms are aimed at long-term benefits of the nation so that they may not be politically correct in the short-run and for everyone, referred to as “adjustment costs”. However, the cost of any deviation from the structural reform process would be heavy on the economy and the nation’s future.
Stop being a repeat IMF client
It is, however, a remarkable development that there is now a broader political consensus over the EFF arrangement with the IMF. Being a “repeating client” of the IMF, Sri Lanka has resorted to IMF assistance 17 times from 1965 to 2023. India, for example, sought IMF assistance for the last time in 1991. Since then, India has never asked for IMF assistance because the country has continued with reforms and achieved economic recovery and progress. Similarly, Thailand never sought IMF assistance after 1997. Thailand, too, recovered from the financial crisis with IMF assistance and continued with reforms since then to recover from the crisis and ensure greater economic performance. Sri Lanka must stop the cycle of repeatedly resorting to IMF assistance by not abandoning the current reform process but by implementing it to achieve economic stability and progress.
Concluded.
Effective digital leadership, robust governance frameworks, and public-private partnerships are crucial for building resilient DPI systems. These systems should be based on common design principles, ensuring openness, scalability, and modularity. Furthermore, a unified approach to data standards and integration will enhance functionality and secure data exchange. Inclusivity and accessibility should be prioritised to bridge the digital divide and build public trust. By investing in connectivity, digital identity, payments, and cloud infrastructure, Sri Lanka can position itself as a leader in the global digital economy. A comprehensive DPI strategy will streamline Government operations and foster socio-economic opportunities, paving the way for a digitally empowered society 