Renowned economist and former Deputy Governor of the Central Bank of Sri Lanka, Dr W A Wijewardena, discussed with Echelon the critical questions citizens should consider before voting in the upcoming 2024 elections, and how their choices could significantly impact the nation’s economic recovery.
As Sri Lanka approaches the potential 2024 elections, citizens must critically evaluate candidates’ fiscal policies, understand the real costs of government spending, and demand accountability. With the nation’s economy at a crossroads, the electorate’s focus should shift from short-term relief to long-term sustainability, scrutinizing promises of high expenditure and tax cuts against the backdrop of the nation’s debt and development challenges. Empowered with knowledge and a call for prudent governance, voters are urged to shape a self-reliant future, free from the pitfalls of dependency and short-sighted policies, Dr Wijewardena asserts.
What is your assessment of the economy and outlook for 2024?
Reflecting on Sri Lanka’s recent economic journey, 2022 was notably the most challenging year, followed by a somewhat improved 2023. Looking ahead, 2024 is expected to be significantly better, primarily due to increased macroeconomic stability. This stability is evident from a more controlled inflation rate and a forecasted steadying of the exchange rate. However, as Sri Lanka begins repaying its increased foreign debt, we may face pressures leading to a potential depreciation of the currency. The IMF has hinted at the need for a more flexible exchange rate system and cautions against loosening monetary policy to avoid inflation risks.
While macroeconomic indicators show improvement over 2022 and even 2023, real sector development — the production of goods and services by our people using their resources — is what truly impacts the cost of living and overall quality of life. Historical reliance on the IMF for stability hasn’t translated into tangible growth. Real economic progress requires a blend of resources, including physical and human capital, technology, and entrepreneurship, all working efficiently and productively.
President Ranil Wickremesinghe’s aspiration to make Sri Lanka a prosperous country by 2048 is commendable but lacks a concrete action plan. The recent budget failed to outline steps towards this vision, focusing instead on macroeconomic achievements and debt restructuring plans. Consistent, long-term policies are crucial, yet Sri Lanka has struggled with policy inconsistency, often changing with new administrations. This inconsistency needs addressing for any future vision to be realized.
Sri Lanka’s economic growth remains tepid, recently emerging from a six-quarter recession with a modest recovery that still falls short of past performance levels. Achieving a ‘rich country’ status by 2048, as per World Bank standards, will require substantial increases in per capita income and output, considering the projected population growth. This monumental task necessitates immediate, comprehensive planning and action, a challenge yet to be adequately addressed by the current government.
If you look at the policies that have been rolled out in the past couple of quarters, what have we done right and where have we failed?
Seeking an IMF facility to stabilize macroeconomic numbers was a prudent step for Sri Lanka, especially given the country’s foreign indebtedness, which stands at an unsustainable 128% of GDP. The government’s initiative to restructure debt with selected foreign creditors, including bilateral and commercial lenders, was necessary. However, this selective restructuring only partially addresses the issue, as obligations to multilateral creditors and short-term debts remain.
The current approach doesn’t significantly reduce the overall burden of foreign debt but merely postpones repayments. A more effective solution would involve a substantial write-off of the existing debt, a step yet to be negotiated with creditors. As Sri Lanka resumes repayments, especially to multilateral creditors and under arrangements like those with Chinese banks, the limited foreign exchange reserves will come under strain. The Central Bank’s reported reserves of $3.2 billion are misleading, as $1.4 billion from the People’s Bank of China comes with stringent usage conditions and should not be counted as readily available funds. This overestimation of reserves poses a risk of returning to the dire shortages experienced in mid-2022.
The 2024 budget does not adequately address these looming challenges. The government needs to formulate a clear plan detailing repayment strategies for the restructured debts, which are now larger due to deferred payments. The focus should be on reducing the principal amount owed, not just delaying payments. Without significant debt relief, Sri Lanka risks a depreciating exchange rate and further depletion of foreign reserves.
The Central Bank has done commendable work in stabilizing macroeconomic figures, but propelling Sri Lanka forward requires a robust governmental strategy. This includes a transparent and realistic assessment of future repayment obligations and a plan for managing them without compromising the nation’s economic stability. The government’s role is crucial in navigating these challenges and setting a sustainable path for economic recovery and growth.
What about the recent tax changes? Do you think the movement is in the right direction?
The real issue isn’t so much about citizens paying taxes, which many perceive as a burden, but rather the total government expenditure or gross expenditure. During budget presentations, parliamentarians often focus on net expenditure and revenue to calculate the budget deficit, aiming to maintain it at an acceptable percentage of the gross domestic product. However, this overlooks the actual burden on citizens, a concept highlighted by the English economist David Ricardo in the early 19th century.
Ricardo argued that the true burden on citizens includes not only immediate taxes but also future obligations arising from government deficits financed through borrowing. These bonds issued by the government must eventually be repaid, shifting the tax burden to the future. Today, we also contend with deficit financing through money printing, which leads to inflation — effectively an ‘inflation tax’ that reduces people’s real income. This is known as Ricardo’s Equivalence.
In 2024, Sri Lanka’s total gross government expenditure is about 11.5 trillion Sri Lankan rupees, exceeding 38% of the GDP, a substantial burden. To alleviate this, the focus should be on reducing total government expenditure, not merely cutting taxes. If taxes are reduced without corresponding expenditure cuts, the government must finance the deficit through borrowing or inflationary measures, both of which ultimately burden the citizens.
Countries like Singapore recognized this early on and curtailed the growth of public expenditure. In contrast, Sri Lanka has yet to implement such measures effectively. Despite the President’s budget speech alluding to living within means, as advised by Buddha, concrete actions to reduce government spending have not been taken. It’s essential to address the root of the problem — the heavy expenditure programme — to genuinely alleviate the burden on the people.
There could be all kinds of promises that could escalate the gross expenditure and we may not even think about it. There could be promises to ease the tax burden. Of course, the cost of living is always a concern, but as citizens, what should we be thinking about if there are elections next year?
As elections approach in 2024, citizens should educate themselves on three critical aspects to make informed choices.
First, we should understand that there is nothing called a free lunch. Understanding the true cost of government spending is critical. It’s essential to comprehend the Ricardian Equivalence principle, which highlights that the real burden isn’t just the taxes paid today but also the future costs of government expenditure. Citizens should scrutinize candidates’ promises regarding government spending, currently at 38% of GDP in Sri Lanka. If a candidate proposes high expenditure or tax cuts, ask where the funding will come from. Reducing total government expenditure is crucial, as borrowing or money printing to cover deficits eventually burdens the populace through future taxes or inflation. As Singapore’s first finance minister, Dr. Goh Keng Swee, emphasized, more government services mean higher costs for citizens, directly or indirectly.
Second, citizens must hold politicians accountable for their spending plans. Lavish promises should be backed by viable funding strategies. Encourage candidates to disclose how they intend to finance their programmes without burdening taxpayers or relying on unsustainable debt. The goal is to shift from dependency on external funds to self-sufficiency. Singapore’s approach, ensuring every expenditure is funded responsibly, serves as an excellent model. Ask candidates to commit to prudent fiscal policies, like establishing sinking funds for debts, a practice successfully employed during the British colonial period in Sri Lanka but later abandoned.
Third, we must constantly assess the future impacts of fiscal policy. As citizens, we need to understand the long-term implications of fiscal policies. Every decision today affects tomorrow’s taxpayers. Ensure that candidates are not just seeking immediate gratification or electoral success at the cost of future financial stability. Seek assurances that foreign loans and investments will be used prudently for projects with high returns, ensuring the ability to repay with interest. This not only builds trust with foreign investors but also secures a stable economic future for the country.
By focusing on these three areas, as citizens, we can push for a governance model that promotes sustainable growth, financial stability, and a self-reliant future, free from the pitfalls of short-sighted and dependency-inducing policies.
People tend to blame the government for everything or they tend to look up to the government or look to the government for help with everything. What do you have to say about the need to have an attitude shift?
The issue at hand is the pervasive dependency syndrome affecting not only citizens but also politicians. This mindset leads to the belief that lavish expenditure programmes can be sustained through borrowing, foreign aid, or heavy taxation. However, such a dependency is unsustainable in the long run. While reliance on others might be necessary during immediate crises like tsunamis or earthquakes, continual dependence undermines self-sufficiency. All major religions advocate for self-help, emphasizing that divine assistance or any external support is futile if one doesn’t strive to help oneself.
This message of self-reliance needs to be instilled in everyone from schoolchildren to adults. It’s crucial for individuals to understand that there’s no perpetual external saviour — not parents, taxpayers, the central bank’s money-printing capabilities, or foreign grants. Politicians, too, must realize they cannot continuously rely on these sources without dire consequences.
The goal is to eradicate the dependency syndrome from our mindset and encourage everyone, including entrepreneurs, citizens, and leaders, to stand on their own feet. Self-sufficiency and proactive effort are the keys to sustainable development and prosperity. This principle of self-reliance is the message we need to internalize and propagate.
Any closing remarks?
The Central Bank has fulfilled its responsibilities, so we shouldn’t fault it for the current low economic growth. Instead, the onus lies with the government for failing to devise and implement a strategy to mobilize resources and stimulate genuine income growth for the populace. If this situation persists, the responsibility ultimately shifts to the citizens for not electing a government committed to a long-term vision. In essence, as the popular adage suggests, if you want to understand the nature of today’s politicians, simply look in the mirror — it reflects the choices and character of the society that elects them.