Sri Lanka has had perhaps the most demanding and exhausting two years since independence. National income from both external and internal sources has suffered on an unprecedented scale, placing the country in an extremely delicate position.
Not only has the impact of the horrific pandemic created many hardships for citizens, but it has also given foreign reservations a knockout punch.
Given the current financial crisis, especially the foreign currency crisis, 2022 will be an extremely difficult year. The trajectory in Sri Lanka will also be heavily influenced by global headwinds such as high commodity prices, increased global logistics, huge increase in shipping costs, supply bottlenecks and high commodity prices.
The total amount of debt owed this year is US$6.2 billion.
This is one of the biggest challenges due to the reduction or loss of foreign income. One consolation is that the Central Bank keeps repeating that it has viable plans to meet all loan installments due this year.
The Sri Lankan economy is currently facing agonizing trends of financial pressure fueled by the rampant rise in the cost of living, exorbitant food prices, a growing shortage of foreign currency for essential imports and many other negative factors.
The government continues to apply many economic stimulus tactics to cushion the fall in the country’s fiscal position. In addition, growing inflationary pressures are hampering government efforts.
Although the country is currently recognized as one of the best in the administration of vaccination against Covid-19, the threat is not yet completely eliminated. The World Health Organization (WHO) said the new variant, ‘Omicron’, is spreading much faster than any of the previous variants and called on all member states to take precautionary measures as the new variant could fuel future flare-ups with serious consequences.
However, despite continued warnings from health authorities, displaying typical Sri Lankan behavior, people have almost completely forgotten the dreadful experience they endured for nearly two years. Except for wearing the face mask, the general public shows no concern about other methods of preventing the pandemic.
The danger is that the country may not be able to endure another period of restriction with closures again from an economic point of view. Covid-19 is perhaps the most relevant reason for the current economic crisis.
Whatever the vaccine, unless otherwise indicated, the entire population does not respect the health instructions, the consequences will be irrevocable. Therefore, preventing a wave of Covid-19 linked to Omicron is one of the highest priorities for economic recovery.
The Central Bank forecasts that GDP growth will be 5.5% in 2022. However, given the current situation, the forecast seems extremely ambitious.
Nevertheless, the Central Bank Governor himself confidently states that they arrived at the figure considering all the relevant criteria based on numerous contributions from the best veteran economists available in the country.
Even a layman understands that the biggest burden for the country today is the huge debt and its repayment. It is common knowledge that borrowing foreign currency from outside sources to pay annual loan installments is not a long-term solution.
However, the biggest hurdle and challenge the government is currently facing is speculation on misinformation by opposition politicians and so-called solutions by “social media” economists.
Critics belonging to the “Yahapalana” era keep exciting the general public by creating various unsubstantiated information. Almost all of them completely ignored that during their own time in power, GDP fell from 4.7% in 2015 to 2.3% in 2019.
As Prime Minister Mahinda Rajapaksa rightly said, the past only matters to the opposition, and the country must always embrace the future, not the past. Essentially, it’s time to collectively focus on how to revive the struggling economy. Typically, Sri Lankan politicians make plans during the first two years in office and the rest of the three years of working on the next election, most often without focusing on what was expected.
The main solution to most of today’s foreign exchange problems lies in exports, foreign investment, tourism and expatriate remittances.
Despite all the global crises, the export sector has shown an extremely honorable performance over the past two years.
From January to November 2021, merchandise export earnings amounted to US$11.1 billion, marking an impressive increase of 22.3% over the corresponding period in 2020. All major product sectors, such as clothing, tea, rubber, coconut, spices, seafood, ornamental fish, and other products and services, have recorded admirable growth. The message sent to the country by this result is that the global export potential of any Sri Lankan product is immense.
Information and communication technology (ICT) services, considered the fourth source of export revenue, is an industry to which the government must give the highest priority. According to data from the Export Development Board (EDB), the ICT industry contributed US$1.0 billion (8.1% of total export revenue) to the economy in 2020.
A report by a reputable global company, JLL, in partnership with the Information and Communications Technology Agency (ICTA) of Sri Lanka, highlighted Sri Lanka’s immense capacity and growth potential on outsourcing and offshoring markets.
Several industry experts with whom this author has had discussions revealed that with the high literacy rate of Sri Lankan youth and the vast talent pool, the ICT/ITeS sector can be developed to even reach 5 billion dollars in revenue in a few years with the right approach from the authorities.
In terms of attracting foreign investment, Sri Lanka currently finds itself in an unenviable position. The downgrading of the credit ratings of Fitch and Moody’s has placed the country in an extremely delicate position vis-à-vis investors. Even with the large number of opportunities available in the country, especially in the export sector, investors are hesitant to invest in Sri Lanka for this reason, which needs to be addressed at the earliest. Statements or criticisms from the Central Bank will not help improve the ranking.
However, the Central Bank is confident that installments due to lenders this year will be paid on time. Responding to criticism, the Central Bank Governor reassured the public that they had viable plans for debt repayment. He said that despite the huge trade deficit, the country’s overall economic situation will improve this year.
Currently, similar to export performance, the tourism industry is also showing signs of rapid recovery after a hiatus of nearly two years.
Tourism, the third largest foreign exchange contributor to the economy with nearly US$4 billion before the pandemic outbreak, is a specific and extremely important sector to be given the highest priority. In particular, unlike clothing, well over 80% of industry revenue is kept domestically.
The Tourism Development Authority of Sri Lanka recently announced that the World Tourism Council (WTC) has named Sri Lanka as the safest country to travel to in the Asian region. It is certainly a silver lining and a huge opportunity for Sri Lankan tourism amidst all the turmoil we are currently experiencing.
The authorities expect to reach 50% of arrivals and revenue in the best year yet, 2018. Therefore, the target is to earn $2 billion in 2022, which will be a huge consolation in the face of decline in foreign income.
The country is currently going through an extremely difficult period. The government is between the devil and the deep blue sea, where the space available to move freely is extremely narrow. The only solution is to strike a critical balance between expenses and income and effectively manage the gap.
The government has imposed many regulatory measures to control public sector spending and control the outflow of foreign currency. However, to achieve the goals in 2022, a consensus between the government, the opposition and the general public is an absolute necessity.