Export-oriented private sector growth is the only option - Former IMF Director

COLOMBO (News 1st); The only way out Sri Lanka's present crisis is to grow, at a rate of about 5-6 percent a year, in a sustainable inclusive way, said Sharmini Coorey, a Sri Lankan national who worked at the International Monetary Fund (IMF) as a Director.

She was speaking at the 73rd Anniversary Oration of the Central Bank of Sri Lanka on "The Way Forward: Price Stability and Prosperity Need Good Governance, was the highlight of the oration."

According to Coorey, without an annual growth of 5-6%, Sri Lanka cannot escape its high debt burden even after a successful restructuring. 

"Because the debt burden lies with the public sector, the public sector will need to contract not just this year, but also in the decade ahead. So growth will need to come from the private sector and be export-oriented given our foreign exchange needs. There is simply no other option," she added.

She said the Sri Lanka's post-independence economic history is full of stop-and-go policies and brief victories over instability that are not sustained.

"We cannot afford yet another replay of that familiar script," she stressed.

In her presentation, Coorey highlighted three reason why Sri Lanka should not repeat its former measures.

1. First, in all our previous bouts of macroeconomic instability, our public debt ratios have stayed below 80 percent of GDP, tax revenues have never been as low as they were in 2020-21 and we had never defaulted on our debt. According to the IMF’s Debt Sustainability Analysis, even if we successfully restructure our debt and adhere to tight policies that generate primary fiscal surpluses of 2.3 percent of GDP from 2025 to at least 2032, our public debt will decline to only about 95 percent of GDP by 2032. To put this debt level in perspective, in 2022, government debt to GDP averaged 65 percent in emerging and developing economies and—looking at our neighbors—55 percent in India; 40 percent in Indonesia; and 54 percent in Thailand. So unlike in the past where we muddled through with debt to GDP ratios around 60-80 percent, the baseline debt ratio will now be much higher. We will be at a high risk of debt distress even after a successful debt restructuring. If we become complacent and go slow on reforms, we can easily be back in a crisis where we are unable to pay our debts. Except next time, the adjustment will be far more painful because we would have already restructured domestic and external debt. More of the adjustment therefore will fall on our citizens and less on external creditors. This point needs to be widely understood.

2. The second reason this time is different is that many people are now in poverty or very close to poverty and have little or no cushion left. The World Bank estimates that the poverty rate doubled to 25 percent of the population in 2022 while the UNDP estimates that over half the population remains “multi-dimensionally vulnerable.” The World Food Program finds that almost a third of children under 5 are malnourished with 20 percent suffering from wasting. Nearly two-thirds of the population are borrowing or dipping into their savings to feed their families. Many people are foregoing basic needs such as healthcare, and progress in education has been severely hampered by both the pandemic and the economic crisis. The impact on people of another debt default, crisis, and adjustment would be disastrous and raises the likelihood of social unrest.

3. And third, Sri Lanka is suffering from a damaging outflow of skilled professionals who are the backbone of economic recovery and growth. These professionals are not leaving merely because of taxes as is often said. They have lost hope that the poor governance and pervasive corruption that Sri Lanka has been mired in for decades will be effectively addressed. They don’t see a future in a country where the state interferes with practically every aspect of economic life, and politicians and public officials who engage in gross corruption are never punished. Another crisis will turn this outflow into an exodus. 

"We should not try to get out of our current low-level equilibrium through fiscal policies that give a short-term boost but will land us in another debt crisis a few years down the road," she said while adding that "We are on a knife edge, and there is simply no room for slacking off or policy reversals. But, with focus and effort, we can set ourselves on a road to sustained growth and inclusive prosperity. " 

Sharmini Coorey was the Director of the Institute for Capacity Development (ICD) of the IMF.