It is an uphill task for the Govt.

to attain the
envisaged targets
Vision 2025: Part 2
Analysis so far
Monday, 25 September 2017

In Part 1 of the article series on the Governments Vision 2025 published last
week (available at: http://www.ft.lk/columns/Vision-2025--Part-1--Need-for-
moving-from-a-wish-list-to-a-concrete-plan/4-639757), it was pointed out that
the present vision document was just the fourth of such visions pronounced by
the Government during the last two year period.

These documents which started from the election manifesto of the United
National Party presented to the electorate in August 2015 had one underlying
theme.

That was the new economic philosophy of the Government which was styled as
Knowledge-based Highly Competitive Social Market Economy, a concept
adapted from Germany which had introduced it after the Second World War.
Germanys vision had been to have a third way, different from the Western
capitalism and Soviet Unions communism which had been ruling the world at
that time and proved to be ineffective to meet the aspirations of all the people in
a country. Apparently, UNP too had felt that it needed a new ideology, different
from the extreme state expansion policy which had been adopted by the previous
Mahinda Rajapaksa administration.

However, it was pointed out in the previous article that three shortcomings in the
first three policy statements, namely, lack of consensus among the ruling coalition
parties on economic policy, failure to sell it to people and the Minister of Finance
taking the country in the opposite direction, had hampered their proper
implementation. Hence, the need of the day had been identified as translating the
wish list in the vision into implementable concrete plans.

V2025 has two time bound goals

As pointed out previously, Vision 2025 has two time-bound goals, four
intermediate goals to be realised by 2020 and one final goal to be achieved by
2025. The four intermediate goals have been to increase the average income of a
Sri Lankan, also known as per capita income or PCI, from the present $ 4,000 to $
5,000, generate one million jobs, increase foreign direct investments or FDIs to $
5 billion per annum and double the countrys exports from the present $ 10 billion
to $ 20 billion. The final goal has been to make Sri Lanka a rich country by 2025.

Both goals are ambitious and challenging

These are highly ambitious goals and, therefore, challenging. They are specially
challenging given the high growth rates which the country has to achieve over the
next eight-year period if it is to become a rich country.

In the intermediate target of elevating Sri Lankas PCI to $ 5,000, the country has
to maintain on average a continuous growth rate of 9% per annum in each of the
years from 2018 to 2020. Similarly, to become a rich country by 2025, Sri Lanka
should have a PCI of little over $ 12,000, according to World Banks classifications.
That requires Sri Lanka to accelerate its growth rate to above 16% per annum
during 2021 to 2025.

Sri Lankas efficiency of capita utilisation, known as Incremental Capital Output

Ratio or ICOR, is so low that it has to on average use five units of capital to
produce one unit of output. Thus, the annual investment requirement to attain
the first target of 9% growth is about 45% of the total output, known as the Gross
Domestic Product or GDP. In the latter target, it is an exorbitantly high level of
about 80% of GDP.

No alternative; everyone should tighten belts

To maintain such a high level of investment, Sri Lanka has to, in the first place cut
down its consumption drastically, known to economists as austerity measures or
to laymen, as belt-tightening measures. However, there is a limit to such
austerity measures which Sri Lanka can safely introduce, given the high
preference for consumption by all, ranging from politicians to bureaucrats to
common men and women.

If belts cannot be tightened sufficiently, no alternative but use savings of

foreigners

Hence, there will still be a gap between potential savings and the required
investments. That gap, known as the savings-investment gap, has to be filled by
using savings done by people in the rest of the world. Those savings are mobilised
by a country by making foreign borrowings or attracting FDIs or allowing
foreigners to invest in the countrys securities market, known as portfolio
investments or simply getting foreigners to give free gifts or grants or by using all
of them. In the past, Sri Lanka had tried to fill the gap mainly by borrowing from
abroad but it had increased the countrys foreign debt to unmanageable levels.

Sri Lankas disappointing

growth record
Sri Lankas past track record with regard to economic growth has also not been
very encouraging. On average, during the whole of the post-independence period,
Sri Lankas annual economic growth has been at around 4.4%, as shown by Figure
1. In the first half of 2017, its growth has been still worse at 3.9%. Though the
authorities have expressed hope that there would a bounce-back in the second
half of the year, all the available indicators such as agricultural production and
growth of exports have shown that the country would finally end up at an average
growth of 4% in 2017.

High growth expectations amidst low performance

Though, in its latest projection, the Central Bank has expected that the growth
rate would increase to 7% by 2020, as shown in Figure 2, the projection made by
IMF has been significantly below that. In this scenario, the acceleration of the
growth rate to a minimum of 9% per annum during 2018-20 and to 16% during
2021 to 2025 would certainly be an uphill task.

Linking accelerated growth targets to election cycle

In the case of the three previous policy statements, Sri Lanka still planned to be a
rich country but it had assigned to itself a very long date for attaining that goal,
namely, 2045. But in the Vision 2025, that long date has been advanced to 2025, a
kind of an acceleration of the growth momentum planned previously.

As pointed out in the previous article, this acceleration had nothing to do with the
countrys perceivable economic cycles. Instead, it had been linked to the
countrys election cycle in which there would be two Parliamentary elections one
in 2020 and the other in 2025. The Governments wish to secure victory at these
two elections is understandable. But the goals which it has set for itself and for
sale to the electorate have been too challenging for its built-in capability.

A nation bent on consuming

and not saving

Sri Lankas annual domestic savings are on average at about 20% of GDP. This
means that when a Sri Lankan living in Sri Lanka earns 100 rupees, he spends 80
rupees on consumption. This is comparably a high level of consumption,
compared with high savers in the region like Singapore or China which have a
savings record of about 50% of their income.

Relying on remittances to augment domestic savings is not advisable

Sri Lankas domestic savings are being augmented significantly by the inflow of
remittances by Sri Lankan workers abroad. These remittances constitute about
8% of GDP; thus, the countrys national savings which include such remittances as
well have been recorded at a higher level of about 28% of GDP over the last few
years.

However, remittances are not a source of funding on which Sri Lanka can make
too much of dependence since they are subject to constraints. On one side, Sri
Lanka cannot send people out for employment without experiencing a labour
shortage within the country. On the other, the employing countries also cannot
do so continuously due to domestic political and economic problems.

Getting free money spending politicians to get a voluntary

cut is challenging

Hence, it is safe for Sri Lanka to rely on domestic savings rather than
national savings to finance its target level of investments. But to do so, it has to
force all Sri Lankans to cut their consumption at least by another 10% of GDP
allowing the country to increase its domestic savings rate from the current 20% to
30%. However, it requires everyone politicians, bureaucrats and ordinary
citizens to take a cut in the present welfare levels. The biggest challenge for the
Government is to change the mindset of both politicians and bureaucrats to take
this hit.

Avoiding the debt trap by going

for FDIs
However, even when the countrys domestic savings are increased to 30% of GDP
through enforced austerity measures across the board, there will still be a
sizeable savings-investment gap which has to be filled by using savings made by
foreigners. Since the country is already in a foreign debt trap and the Government
has made announcements that it does not want to increase these debt levels any
more, the only available source has been the attraction of FDIs. In the
intermediate targets set in Vision 2025, the Government wishes to increase FDIs
from the present less than $ 1 billion to $ 5 billion by 2020. Based on the track
record of the country, this is again an uphill task.

Sri Lanka should improve

its global ranking

What will go against the Governments desire to attract FDIs is the general
inefficiency of the public sector in the country, unpreparedness of the private
sector for the changing global environment and the indecision of the political
leaders. This has been demonstrated by Sri Lankas very low ranking in all the
global indexes, as presented in Table 1. This is not a new development and the
country had always been ranked low by those agencies even in the past.

Shooting the ranking agencies instead of shooting the rank

When these reports were out, the reaction of the previous Mahinda Rajapaksa
administration was that those compiling agencies were biased, prejudiced and
vindictive and were carrying on a mission to destroy Sri Lankas bright future.

Hence, every time a new index result was out, there were angry retorts and
promises of compiling Sri Lankas own indexes to represent its true state to the
rest of the world. However, they were only promises and none of these
homemade indexes was release subsequently.

Poor FDI record

The result was that Sri Lanka could not attract worthwhile FDIs even after the end
of the war when there was a lot of promise for such investments to take place.
For instance, during 2005 to 2009, according to the Central Banking data, Sri
Lanka had got on average an annual flow of FDIs amounting to $ 644. This number
has slightly increased to $ 793 million during 2010 to 2014.

New Governments track record of attracting FDIs is not better than previous
Government

When the new Government came to power in January 2015, the promise of Sri
Lanka as a destination of worthwhile FDIs was substantially increased on account
of the pledge it had given to the rest of the world that it would usher an era of
good governance, transparency, rule of law and law and order. Yet, FDIs it could
attract during 2015 and 2016 amounted, on an annual average, only to $ 789
million, almost same as the countrys record during the previous post-war period.

In the absence of domestic savings, FDIs will be the saviour

Even then, during the two periods under reference, those FDIs were mainly for
the hospitality and real estate sectors, and not for high tech industries that could
have revolutionised the countrys production structure, the need of the day.

The present Government was expected to take measures to improve the

countrys standing on these indexes. But no action was taken for two years and
the countrys standing deteriorated further during that period. Now that the
Government is planning to accelerate economic growth to a very high level during
the next eight-year period and it plans to depend principally on FDIs, it cannot
ignore the falling standing of the country in the eyes of foreign index compiling
agencies.

Are the claims on job creation in V2025 are correct?

An important intermediate target of the Government during 2018-20 has been
the generation of one million jobs. Vision 2025 claims that from January 2015 up
to date 430,000 new jobs have been created within the economy.

However, this claim is not being borne out by the data that have been published
by the Central Bank in its Annual Reports based on the data compiled by the
Department of Census and Statistics. According to the Central Bank, as at the end
of 2014, the number of people employed in the country had amounted to 8.424
million. As at the end of 2016, this number has declined to 7.948 million recording
a decline of employment by 476,000.

Is it one or one and a

half million new jobs in the

next three-year period?

What it means is that if the Governments objective is to create one million jobs
over the level of employment that had prevailed at end 2015, it has to create
nearly 1.5 million new jobs during 2018-20. This is again an uphill task.

Next part will analyse how exports should be increased

Vision 2025 plans to double exports from the current level of $ 10 billion to $ 20
billion by 2020. The next part will examine the nature of the challenge faced by
the Government to attain this goal within a mere three-year period and the policy
package it should implement if it is willing to adopt a long date for attaining that
target.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
can be reached at waw1949@gmail.com.)
Posted by Thavam