Glancing through the biography of T. S. Jinasena, the founder of the Jinasena Empire, showed that he hinged his life and his success on disciplined adherence to some simple idioms. This article takes three of TSJ’s idioms and applies them to Sri Lanka and our economic development.
‘You must make hay whilst the sun shines’
The sun shone on Ceylon when we were given Independence. We were the ‘poster child’ of the East. We had strong leaders. We had exemplary civil service. We had a positive trade balance and balance of payments accounts. Our fiscal account was positive.
This situation declined, with the politicisation of the economy. The ‘Sinhala Only’ policy of 1956 brought divisive populist politics into play. And we don’t seem to have ever recovered from this decline. Every political party has been exploring mechanisms to get themselves elected, and to stay elected and not given adequate attention to developing the nation.
We could have ‘made hay’ in 1977 when President Jayewardene won with an astounding majority, and he opened out the economy. We could really have been another Singapore and made headway in that direction. But, then came the war and Presidents Jayewardene’s method of dealing with it. The changes he made to the Constitution are blamed for a reason for the mess we are in today.
The Tsunami came in 2004. The eyes of the world were on Sri Lanka. President Kumaratunga appointed a powerful group of business leaders to lead the country's Tsunami reawakening. Foreign funds flowed in. The post-Tsunami year posted one of the nation’s highest GDP growth rates, showing the positive sensitivity to growth from FDI. But, we slipped back into a ‘life as usual’ scenario. One of apathy. Politicisation. Corruption. A general slumber.
Sri Lanka won the war in 2009, and President Mahinda Rajapaksa was widely respected by every Sri Lankan. He could have become a king and led the nation to be something very different. He could have united the people, followed the example of Singapore making Sri Lanka a secular, inclusive nation.
He could have adopted an outward approach, making English our language of education and Government. He had the political backing of the people of Sri Lanka to be the Lee Kuan Yew we have always been waiting for. But he was voted out in 2015.
We didn’t make hay with the Coalition Government of 2015. We could have. But our elected leaders chose infighting and corruption over rapid sustainable national development. The ‘Bond Scam’ and the eroding relationship between the President and the PM led to this coalition being voted out. Sadly, this was a coalition that many pinned much hope upon.
Finally, the landslide mandate that President Gotabaya Rajapaksa received, together with the 20th Amendment giving the President more power, gave every Sri Lankan hope of systemic change and sustainable rapid economic development. This regime crumbled in record time, and we are facing a catastrophic economic crisis.
Sri Lanka has not followed this idiom. We have squandered the opportunities we had to set the nation on a path of rapid and sustainable economic development.
‘You must cut your coat according to your cloth’
The British left Sri Lanka with positive Fiscal Deficits and Trade Balances. We have been left a good infrastructure and a solid civil service. Everything was going well until 1956/7, when our imports began to overtake our exports.
And this gap only widened over time. One may cite this as an era of borrowing cloth to make one’s coat larger.
Government policy at the time was more inward looking. The long-term economic plans adopted were import substitution-oriented and not sufficiently export-oriented. Into this policy mix came the concept of State ownership of enterprise. This began the era of twin deficits, where a Fiscal Deficit began to accompany a trade deficit.
Had we ‘cut our coat according to our cloth’, we should have arrested the twin deficits in the late 50’s by promoting export of manufactures and by limiting the size of the state. The country that went down this road during the same period was Singapore, and during this short period they have transcended from third world to first.
Again, the point of the idiom is that you must have money to spend money. The Singapore policy was to raise taxes first and then increase Government expenditure. In Sri Lanka we increased Government expenditure on the basis that economic growth will bring in higher Government revenue. We didn’t realise that we were feeding a monster. Government expenditure and welfare expenditure kept rising with no relationship to income.
Similarly, we didn’t bother adequately about a trade deficit. Had we addressed this issue in the late 50’s the world of manufacturing was open to us and we could have made good use of our geo-location, geopolitics, maritime infrastructure, and availability of labour to create a regional manufacturing hub.
The only era in our history when we did address the issue of a positive trade balance was during the Premadasa Presidency, where he successfully promoted exports. The diversification of our economy into the export of manufactures came from this point. However, the policy was not continued and hence, we continued with negative trade balances, which led to spiralling debt.
We also went through a period of belief in a ‘Service led economy’. The economic thought at the time was that service incomes in foreign exchange could help us to offset trade deficits. From then came our dependence on tourism and remittance money.
Post Easter Bombing and COVID-19, we seem to have realised that service inflows are volatile and their volatility is a function of external economies. President Wickremesinghe in his every policy discourse has emphasised the need for ‘export led development’.
Beggars can’t be Choosers
In 2022, we did not ‘make hay while the sun shone’ and we ‘didn’t cut our coat according to our cloth’ and we are beggars! Our total debt is over 100% of GDP. Our dollar debt is approximately US$ 50 billion and our rupee debt is around the same magnitude. Today, we are beggars.
We have defaulted on our international debt for the first time in history and we are working with the IMF to get into a restructuring programme.
The IMF dictate is not one cutting coat’s according to cloth, but of making the coat unaffordable to most. This is called demand compression. The theory dictates that increased prices will compress demand and through this compression of demand, our trade balance will be resolved. This process will be very painful to the people of the nation. It could lead to many Aragalaya's and many Governments falling in quick succession.
The IMF dictates that we negotiate with our creditors, and once we have come to an agreement with them on restructuring our debt, we can commence the IMF restructuring programme. Our largest creditor is China, to whom we owe around US$ 7 billion. We owe India almost US$ 4 billion. The owing to India is for ‘humanitarian assistance’ in terms of Credit Lines extended to us when we had no foreign exchange to import essentials. The Chinese loans are on commercial terms as payment for infrastructure projects.
We do not know the stance of the Chinese or the Indians on debt restructuring discussions.
Whoever we turn to for respite, the terms of credit may not be optimal. We will be receiving ‘lender of last resort’ assistance. But we are beggars and hence, we cannot be choosers!
We do have some choices. And that is who we align ourselves to and how. I will deal with this in next week’s column.
Sheran Fernando is a Co-Founder of Innosolve Lanka (Pvt.) Ltd, a start-up dedicated to introducing sustainable mobility solutions in Sri Lanka. He is an economist by training with wide commercial experience, including 20 years in the automotive industry. He belongs to the alumni of Harvard Business School (OPM53)
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