Economic reforms difficult to implement - IPS
Sri Lanka’s fiscal constraints, the demographics of a contracting
labour force and skill deficiencies suggest that a rise in
infrastructure investment will spur growth only temporarily, Executive
Director, IPS, Dr. Saman Kelegama told the launch of the IPS ‘State of
the Economy Report 2015’ at the IPS auditorium last week.
He said sustaining higher growth in the long run must come via a
competitive export sector through improvements in productivity, notably
innovation and investments in human capital. Overhauling Sri Lanka’s tax
system, tackling loss making State-owned-enterprises (SOEs), improving
labour market efficiency, filling skill gaps in the workforce, improving
agricultural productivity, a better safety net for the poor and the
vulnerable are among a raft of reforms that need attention, Dr. Kelegama
Such reforms are politically difficult to deliver through the
legislative phase and are often even more difficult to implement.
Reforms generate distributional impact that creates ‘losers’ and
‘winners’, entailing short-term adjustment costs and the potential for
Thus, while reforms need to be ambitious in scope, it is typically
the case that ambition may have to be tempered by political and economic
realities. An agenda for reforms must begin by strengthening
interactions between institutions, policy processes, and policy
The environment in which many of these transitions take place is
strongly influenced by broader factors such as the quality of
institutions and governance in a country. The Sri Lanka: State of the
Economy 2015 report addresses these through an overarching theme of
‘Economic Reforms in Sri Lanka: Political Economy and Institutional
Challenges’. The report examines in detail the many interrelated reforms
that touch on important economic policy areas - trade and investment,
labour market, foreign employment, education, health, social protection,
agriculture and the environment.
The report argues for coherence and prioritization in the design of
reforms on several fronts, so that they add up to a plausible overall
economic strategy that will help Sri Lanka to achieve sustained high
growth in the long run.
It takes a look at the many promising development achievements,
opportunities and challenges ahead for the country. The report argues
that rising socio-economic prosperity in Sri Lanka, if fostered
skillfully and inclusively with progressive reforms, can spur economic
dynamism and social progress and place the country on firmer ground, as
it makes a decisive transition into a middle-income economy and beyond.
The State of the Economy Report of the IPS is the flagship
publication of the Institute. It is a publication that attempts to
provide a broad overview of the Sri Lankan economy while highlighting
policy options to move the Sri Lankan economy forward to a higher growth
trajectory with a human face.
“We started this as an annual publication in 1992 and this is the
23rd year of its publication. Every year the publication has a theme
which varies from broad macro topics such as ‘Post Conflict Economy’ to
sectoral topics like ‘Plantation Sector’ to micro topics like
‘Empowering the Poor’,” Kelegama said.
“Last year we focused on ‘Rising Asia: Opportunities and Challenges
for Sri Lanka’. This year we focus on ‘Economic Reforms - Political
Economy and Institutional Challenges’,” he said.
Deputy Minister of State Enterprise Development, Eran Wickramaratne
said the government has to face many internal and external challenges.
The economy of India and China are slowing down and how long this will
last has to be seen. Sri Lanka is facing current account and budgetary
“We need to focus on a vibrant export policy. There has been some
movement in the exchange rate. There has been a huge time lag in this
regard. The immediate priority is to focus on foreign reserve stability.
We need to also focus on attracting more foreign direct investments,” he
The Deputy Minister said the rational for bringing State Owned
Enterprises under one ministry was to reduce the burden on the tax payer
who has to pay for extravagant travel costs and political interference.
This move is misunderstood as a drive towards privatisation. One size
fits all theory does not work. “We will look at each institution
separately to boost productivity. Deficits in management skills will be
addressed through innovative structures without which the SOEs cannot be
turned into profitable institutions,” he said.The private sector invests
in training which is not the case in public sector. Investing in
training is vital to enhance productivity. Deputy Director, IPS, Dr.
Dushni Weerakoon said infrastructure alone without broader reforms will
take the country nowhere. Export growth has been marginal. Measures to
sustain economic growth is inadequate. In the past few years foreign
funding came with non-concessional borrowing. Foreign direct investments
were drying up. The growth process needs to change but there are many
constraints in the labour market with low productivity in sectors such
as agriculture. Foreign inflows have dropped during the past seven
months. Inflows to government is low this year compared to last year.
Long term loans dropped from US $ 1,119 million last year to US$ 579
million this year. There are huge operational losses in SOEs. Sri
Lanka’s fiscal deficit expanded 240 percent in the first six months of
this year. Core inflation has increased year-on-year.
The external sector performance in the first seven months of this
year has been lacklustre. Export earnings have been stagnant. “There
needs to be an increase in foreign capital inflows in next three to four
months if not we will have to go for a standby agreement with a donor.
Fiscal policy should be an immediate priority for reforms which should
be introduced in the next Budget. Steps should be taken to enhance
revenue and rationalise spending”, she said.
Reforms should focus on raising productivity and efficiency in SOEs.
The labour force is declining with around 60 percent in the informal
sector lacking social security.
There is low female labour force participation with less social
security. Agricultural productivity must increase. Second generation
reforms are far more complex and difficult to implement than first
generation reforms. Urgent reforms by weighing options and implementing
what is feasible is paramount, Weerakoon said.