OF SUBSTANCE AND SPIRIT
It’s difficult not to discern the similarities. But the impact of the crisis in Sri Lanka on the people’s lives is many times more severe even school examinations were called off. Their pupils had no pad paper to write on. People struggle with fuel, power and food shortages. Dollars are running out to pay for essential imports including medicine for Covid-19 patients. The government imposed a four-day week for public servants to allow them to grow crops for food. Many Sri Lankans are unable to seek medical help because there was no gas to run their cars.
Perhaps not on the same scale, but what is happening in Sri Lanka today reminds us of our own experience in the 1970s through the 1980s.
Yet in the 1960s, Sri Lanka, Burma now Myanmar, and the Philippines were considered as the most promising developing countries. They were the “Tigers of Asia” because of their impressive growth performance. Their population were mostly young people; the level of literacy was high; democracy was robustly taking roots. They were cut out for take-off.
But the three of them faltered because of internal strife and corruption. Such deadly combination emasculated the foundation for more sustainable economic growth. Today, the World Bank places all three in the group of lower middle-income economies. Their per capita income could not break out of $1,046 to $4,095.
What is most appalling about Sri Lanka is that her own political leaders should have been more inspiring, but they are not. Last week, Sri Lanka’s Prime Minister Ranil Wickremesinghe was quoted in CNN saying “It is no easy task to revive a country with a completely collapsed economy…if steps had at least been taken to slow down the collapse of the economy at the beginning, we would not be facing this difficult situation today.”
He had no idea that if proper steps were actually carried out, he would not have been there. He was elected to manage the crisis. And crisis management is not really a question of good or bad, it’s preventing the bad from getting worse.
As a people who were in the same boat many years ago, we could be more supportive. But when the news of the Sri Lankan crisis hit the headlines in the Philippines last month, some of our market analysts and policymakers were just too quick to deny that the Philippines is unlikely to face a similar economic meltdown. The Philippines is in a different situation, that it is on the way to further growth and development.
But we also need to understand that the Philippines went through 23 adjustment programs with the IMF so our situation was much longer compared with Sri Lanka’s 16. Such a succession of technical and funding support from Washington should count in our learning curve even as this by no means suggests the Fund was always correct in its assessments. We have learned because we made mistakes one after the other, and that without external shove, pursuing structural reforms and building institutions would have been more difficult and more prolonged. In fact, we began to entrench these reforms starting only in the early 1990s.
It is to be expected that Sri Lanka’s on-going negotiation for its 17th program with the Fund could only be protracted. They are still smarting from the weak implementation of their 2016 Extended Fund Facility. There is nothing deliberate about it but the trinity of the 2017 drought, 2018 political crisis and the 2019 terrorist attack definitely held back Sri Lanka’s journey to recovery.
Populist moves exacerbated Sri Lanka’s woes. They slashed income tax and VAT when public revenues were not doing well, all in the name of promoting public welfare. That cost the economy at least two percent of GDP. Fiscal deficit ballooned to 12.8 percent in 2020 and 11.4 percent in 2021. As if these were not enough, imports of protective equipment were exempted from duties, tax payment schedules were extended and other forms of tax forbearance granted. There was no way to fund the budget except to bloat their debt in excess of 100 percent of GDP.
As we transition to the new political leadership today, let Sri Lanka’s tale be cautionary. Bringing down the price to ₱20 a kilo could only be done if we keep the tariffs on open rice imports and from the proceeds, make our farmers competitive by harnessing better technology and collective use of land, rather than extending price support. Abolishing fuel taxes to mitigate the rapid increase in oil prices will only undermine the national budget. It’s also wrong to restore the oil price stabilization fund and the power of the National Food Authority.
Yes, the similarities between the Philippines and Sri Lanka are unmistakable particularly in our common failure to fully convert investment to capital stock. One can attempt to explain this phenomenon in terms of the prevalence of poor governance in the public sector.
Some favored groups were given undue advantage in the accumulation of wealth by appropriating state power. They cornered public works contracts, government procurement, and industrial incentives. Economic efficiency declined and resource allocation distorted, thus reducing the profitability of investment and magnifying the country’s vulnerability to the financial crisis in the 1980s. Economic growth was stunted, poverty and inequality worsened.
Avoiding this type of policy errors is a big hurdle for Sri Lanka. It was once a big hurdle for the Philippines, too. This time around, it’s not different: We should continue to avoid it at all costs. We all dread scrounging for food and fuel. Market analysts and policymakers hate to eat their words, too.