Lanka has achieved much in a short time - George Soros

by Gamini Warushamana

The Sri Lanka Economic Forum which concluded on Friday has identified five key challenges in the economic development of the country.

Director, Centre for International Development, Harvard University, Prof. Richard Hausman said that limitation in export growth, very low tax revenue, structural transformation of the economy, urbanization and inclusion of economic growth across all sectors and regions are the five major challenges Sri Lanka faces in economic development.

He said that economic growth is limited as a result of limitations in export growth. The data and composition of the goods and services exported by the country (export basket) shows its limitation over decades and has been stagnant since 1995. A large share of exports continues to be agricultural products such as tea and rubber. As a result there is a large external deficit and mounting external debt.

The outstanding external debt is high, over 220% of export revenue. He said that to achieve sustainable growth, export growth should be high and, therefore, increasing the export of goods and service is a challenge.

Very low tax revenue is another issue. Sri Lanka’s tax revenue is 12% of GDP and around 5% of the Budget deficit. Since the fiscal account is always negative there is no public savings and it hinders public sector investments especially in infrastructure and human resource development. This is not so in countries such as Singapore and China.

In this situation, the agricultural sector cannot create job opportunities and it should be from elsewhere, industry or service sectors. This transformation has not taken place and is the main reason that Sri Lanka’s export basket has remained stagnant over decades, he said.

The present structure of the Sri Lankan economy is similar to that of several economies that have now transformed to a better position. The situation in Thailand in 1991 from the point of view of its export basket composition was similar to that of Sri Lanka today.

In Thailand, after 1991, there was rapid development in the industrial and service sector and transformation of the structure of the economy with the industrial and service sector growth. New products such as electronics, cars, machinery and chemicals were added to the basket. Agricultural products such as rubber hold a large share of Thailand’s exports and these items were not removed but new items added.

The situation in Turkey in 1994 is another example. After 1994 the same thing happened and the structure of the economy was transformed by adding more industrial products to the basket.

Costa Rica is another country and its position in 1996 was also similar to that of Sri Lanka. The main export was coffee and the situation began to change after 1996 and the structure of the economy changed.

Prof. Hausman said that even today Sri Lanka is competing with poorer countries where the main exports are concerned. In tea, and in garments, the competitor countries are poorer than Sri Lanka.

In the panel discussion that followed, George Soros said that he was impressed by what the government has achieved in a very short period. The country is moving towards a more open society. I am pleased to assist Sri Lanka and my people here are looking for investment opportunities, he said.

However, Soros warned of another global crisis and said that the global situation is hostile and Sri Lanka will face many challenges.

Soros said that China has a lot of problems and it can transfer the problems to other countries. “The devaluation of the Yuan will affect the rest of the world. China is in a serious transitional problem and it is the beginning of a crisis and this environment reminds me of the 2008 crisis. There are serious challenges in the financial markets and I remind my investor people to be very cautious.

“Banks that lend much money to developing countries are now pulling back their money. Financing will be difficult in the coming years. In an inflationary situation households get many benefits such as lower oil price, increase in disposable income. However, today the world is in a deflationary situation and developing countries that benefited from the commodity boom will not be able to do so any longer. Avoiding this situation and confronting this hard reality is a challenge for Sri Lanka.

“To be exceptional, Sri Lanka can use opportunities for investment in the tourism sector, exploit the opportunities in India which has higher economic growth and leap forward in agriculture by improving productivity and leap forward to the knowledge economy,” Soros said.

Prime Minister Ranil Wickremesinghe said that the Sri Lankan diaspora in North America, Europe and Australia is expected to bring investments to Sri Lanka. “Since most of them are professionals we expect them to bring investments for sectors such as education, especially higher education projects,” he said.