What Can We Learn from Sri Lanka’s Debt Default?
- Economic development achievements and failures;
- Realistic targets for economic development;
- An outward-oriented, market-friendly policy agenda;
- Risks to implementation.
- A sharp decline in revenue from taxing the three tree crop plantation economy caused by a fall in global commodity prices, a botched land reform programme and the costs of some improvement in the extremely exploitative living standards of the plantation workers;
- Emerging sectors like tourism, apparel and IT services were granted generous tax exemptions which worsened the negative revenue from the plantation sector. While this may have been required to get emerging sectors over initial hurdles, continuing them has eroded the revenue base. The graduation from a low to middle income country status, the loss of concessionary financing and exposure to international capital markets and rating agencies required better macroeconomic management. An International Monetary Fund (IMF) supported stablisation programme was initiated in March 2023 and early signs seem positive.
- Revenue reduction was not compensated by rationalisation of expenditure. Thus, a primary surplus in the government budget was only achieved in three years since 1954. The outcome has been a build up of unsustainable fiscal defects and public debt over decades. This was compounded by fiscal forbearance in monetary policy through deficit financing and financial repression;
- Addressing macroeconomic stress through IMF programmes were not sustained because of the electoral cycles. Thus, the problem kept building up until it reached the default in 2022 where the structural weakness in the budget was compounded by imprudent tax cuts in 2019.
- Reducing the anti-export bias in the trade regime through more effective export marketing and a more realistic exchange rate alongside gradual reduction of import protection;
- Better targeted investment promotion, time-bound investment incentives and cutting red tape through digitisation of approval processes;
- Outsourcing tourism promotion to experienced marketing consultants in key markets;
- Better incentivising remittance funds into the formal banking system.
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