Sri Lanka: V2025 — Dreams Vs. Reality

At present, the country’s per capita income is around USD 4,000. In order to reach the projected per capita income of USD 5,000, as envisaged in V2025, the GDP growth rate should be at least 8 percent a year in the next three years, compared with the growth rate of 4.4 realized last year and 4.7 percent estimated for this year. In other words, GDP growth rate should almost double from the present low growth trajectory.


by Prof. Sirimevan Colombage

( September 18, 2017, Colombo, Sri Lanka Guardian) The government launched a new policy document titled ‘V2025: A Country Enriched’ early this month. The launching event seemed to have been designed to attract the youth with choreographic acts in an ultra-modern stage setting. The few youngsters who appeared along with President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe on the stage posed questions to the two leaders.

The V2025 document starts with the statement, “Our vision is to make Sri Lanka a rich country by 2025. We will do so by transforming Sri Lanka into the hub of the Indian Ocean, with a knowledge-based, highly competitive, social market economy”. This vision along with the pledges that followed make the document impressive. Nevertheless, the feasibility of its ambitious targets needs to be considered in the context of the county’s political and economic realities.

Problems of implementation

This is the third policy document presented by the government during the last two and half years. The Prime Minister presented the first two economic policy statements to the Parliament in November 2015 and October 2016. The contents of all these statements are more or less similar. Most of the proposals mentioned in the earlier two statements were not implemented. Had they been implemented, of course, the need for a third one would not have arisen. Releasing the same types of statements at short time intervals in this manner causes market uncertainty and confusion discouraging domestic and foreign investors.

The brief booklet, consisting of around 50 pages, has a long list of wish list to be fulfilled during the next 8 years. Surprisingly, it does not elaborate any specific policy strategies to be implemented to achieve the envisaged objectives. It also does not contain any statistical tables or charts which would have been useful to substantiate the facts behind the Vision.

Macroeconomic vulnerabilities

Although strengthening the macroeconomic framework is cited as an important element in the document, no attempt seems to have been made to link the pledged progress with the macroeconomic setting, similar to the previous two statements. This is a common drawback that could be observed in the economic policies implemented in Sri Lanka in recent decades.

This is in contrast with the development mechanism applied in the aftermath of economic liberalization in 1977. The National Planning Department of the then Ministry of Finance and Planning compiled the Public Investment Programme in collaboration with the relevant line Ministries. It was a kind of an indicative planning mechanism devised to go hand in hand with the free market economy so as to facilitate private sector activities.

Such macroeconomic framework ensured resource balances while carrying out the development plans. Of course, resource balancing was not fully achieved during the implementation stages due to the impending financing gaps in fiscal operations and balance of payments, and the resultant inflationary pressures. Nevertheless, the macroeconomic framework provided a safety valve to avoid aggravation of such imbalances. Eventually, the planning outfit of the Ministry of Finance disappeared some time ago due to changes in the government and for various other reasons. Economic policies and projects implemented without a sound macroeconomic framework usually end up with resource imbalances, inflation, debt accumulation and a host of other problems, as experienced in recent times.

Over-optimistic growth targets

The document states, “Over the next three years, within the 2025 Vision, we will implement a comprehensive economic strategy to address constraints to growth. We will aim to raise per capita income to USD 5,000 per year, create one million jobs, increase FDI to USD 5 billion per year and double exports to USD 20 billion per year. These intermediate targets lay the foundation for our Vision 2025: Sri Lanka to become an upper-middle income country.”

At present, the country’s per capita income is around USD 4,000. In order to reach the projected per capita income of USD 5,000, as envisaged in V2025, the GDP growth rate should be at least 8 percent a year in the next three years, compared with the growth rate of 4.4 realized last year and 4.7 percent estimated for this year. In other words, GDP growth rate should almost double from the present low growth trajectory.

The country will reach the upper-middle income category by 2025, according to the document. This means that per capita income should be over USD 12,000 by that year implying a fourfold increase from the present level. In order to attain that target, GDP should grow by at least 15 per cent annually during the next 8 years. This is more than a threefold increase of the present GDP growth rate which is running around 4.5 percent.

It is miraculous to expect such swift growth within a short time span of 3 – 8 years. The average GDP growth rate achieved throughout the last four decades following the liberalization of the economy in 1977 is only 5.1 percent a year. The country’s potential growth remains only around 4-5 percent. The reason is that Sri Lanka has failed to move from its traditional factor-driven growth model to technology-driven growth model, unlike the fast-growing East Asian economies. Hence, raising GDP growth to 8 percent as envisaged in the new document does not seem to be feasible.

More importantly, the GDP growth predictions implied in the Vision document are far above those can be found in the Staff Report of the International Monetary Fund (IMF) for the second review of the Extended Fund Facility concluded in June 2017. The annual growth projection presented in that report (compiled in consultation with the local authorities) for the period 2018-2021 is only 5.0 percent, which appears to be more realistic. If we use these figures, the maximum per capita income that could be reached in 2020 will be around USD 4,600, which is lower than the level envisaged in the Vision.

Export projections are over-ambitious

Doubling of annual export earnings from the present level to USD 20 billion, as expected in the V2025,will require an annual export growth of at least 25 percent. Again, it contradicts with the official projections given in the IMF report which forecasts an annual export growth of only around 5 years for the next four years.

It is illusive to expect doubling of export earnings, considering the dismal performance of the export sector in recent decades. Although industrial exports account for nearly 80 percent of total export earnings, Sri Lanka still depends on low value added, low-tech and labour intensive basic industries, mainly garments which account for almost one half of total export earnings. Other industrial exports consisting of food and beverages, rubber and leather products, machinery and transport equipment and petroleum products too are primary level industries.

The East Asian countries, by contrast, phased out such primary industries decades ago and diversified their industrial structure towards high-tech products such as electronic and electric equipment, vehicles, computers, ships, medical apparatus, and optical and scientific equipment.

Given our traditional and static industrial structure, a miraculous growth in exports cannot be expected in the next few years. The much talked about achievements such as GSP+ or the planned free trade agreements like the Economic and Technical Cooperation Agreement (ETCA) with India can do very little to boost the export sector. The reason is that export constraints arise mainly from domestic factors rather than from limited market opportunities abroad.

Dwindling FDI inflows

Foreign direct investment (FDI) is expected to rise to USD 5 billion per year during the next three years, according to the intermediate targets given in V2025. This seems to be a gross exaggeration, as the official projections given in the IMF report indicates FDI inflows of only around USD 1 billion per year over the period 2018-2021.

A five-fold increase in FDIs cannot be expected, given the unfavourable domestic conditions and the global capital market developments. Domestically, factors such as macroeconomic disarrays, political instability, poor business confidence and corruption have made severe dents in the country’s image in front of foreign investors. Meanwhile, inward remittances from migrant workers have been declining in recent months worsening the balance of payments situation.

In the circumstances, the government would be compelled to depend on foreign borrowings on commercial terms to carry out the huge infrastructure projects such as the central highway. In the circumstances, the reduction in the debt burden as envisaged in V2025 too is doubtful.

Wrap-up

The V2025 booklet looks more like a hurriedly-prepared election manifesto targeting the upcoming elections, rather than a coherent policy document addressing the structural weaknesses in the economy. It contains a long list of “We will …” statements. This implicitly indicates that the political authorities are yet to introduce the much-needed policies. This is rather an unfortunate situation, as Sri Lanka has already completed 40 years of economic liberalization by now. The neighbouring countries which launched economic liberalization much later have overtaken us.

The government is fast losing time to implement any long-term development programme, as it has already completed over one half of its term. Amid this time constraint, it pledges to fulfill many promises within the fastest possible time span of next eight years including the immediate interim period of next three years.The credibility of the projections given in the document is questionable due to their wide deviations from macroeconomic realities, as discussed here. The absence of any policy strategies in V2025 to tackle the economic challenges too leaves much ambiguity.

In the meantime, it is not yet clear how the recently established National Economic Council chaired by the President would take up this document. All these point to market uncertainties deterring the country’s economic progress in years to come.


(Prof. Sirimevan Colombage, Emeritus Professor, Open University of Sri Lanka, could be contacted at sscolom@gmail.com)

Author: Sri Lanka Guardian

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