Agreements needed to boost economy

In Sri Lanka the National Government is taking necessary steps to boost the economy of the country and in the process, it plans to create a million jobs over a period of five years. To this end the country needs foreign investments and signing the corporation agreements with investing countries is a precondition for it.

4Sri Lankan economy has registered a strong growth in the first decade of 21st century, despite suffering civil war from 1983 to 2009, southern insurrections of 1971 and 1987-89 and major natural disaster the 2004 Tsunami.  It would be useful to look back at the economy of Sri Lanka. Before 1948, during the final decades of British colonial rule there was an economic policy in place as the plantation economy required extensive infrastructure; the colonial state developed and owned railroads, electrical, postal, telegraphic, telephone and water supply services. During World War II the government set up production units for plywood, quinine, drugs, leather, coir, paper, ceramics, acetic acid, glass and steel. Welfare policies also began during colonial rule, including a network for free and subsidized rice and flour established in 1942. Free education, relief for the poor and subsidized medical care was introduced in the late British period. After 1935 the government took an active role in the planning and subsidizing of colonization schemes, designed to remove landless peasants from heavily populated areas to newly irrigated tracts in the dry zone.

Economic policy since Independence from 1948 to 1977, government intervention was often seen as the solution to economic problems. The expansion of government participation in the economy was fairly steady, resulting in a tightly regulated system. This trend was especially marked during the period from 1970 to 1977, when the state came to dominate international trade and payments; the plantation, financial, and industrial manufacturing sectors; and the major trade unions outside the plantation sector. It also played a major role in the domestic wholesale and retail trade. The government during 1970-77 period applied pro-left economic policies and practices. The trend toward greater government involvement was largely a response to the deteriorating terms of trade. The plantation economy had financed social programs such as subsidized food in the late colonial period, but when the value of exports declined after 1957, the economy’s capacity to support these programs was strained. When the foreign exchange reserves of the early 1950s dwindled, import-substituting industrialization was seen as a solution. As the private sector viewed industrial development as risky, the government took up the slack. When balance of payment deficits became chronic, some nationalization was justified by the need to stem the drain of foreign exchange. Similar concerns led to the tighter regulation of private business and the establishment of state-owned trading corporations. When there were shortages of necessities, government’s expanded state control over their distribution in order to make them available at low prices. During this period the economy of the country was also affected by insurrections of 1971.

The 1977 elections were largely a referendum on the perceived failures of the closed economy. The UNP, which supported a deregulated, open economy, won decisively. The new government rejected the economic policies that had evolved over the previous twenty years. Some observers believed that the economy had been shackled by excessive regulation, an excess of consumption expenditure over investment, and wasteful state enterprises. Between 1977 and 1994 the country came under UNP rule in which Sri Lanka began to shift away from a socialist orientation in 1977, market forces were to play a greater role in allocating resources, and state enterprises were to compete with the private sector. The main elements of the new policy were investment incentives for foreign and domestic capital, a shift in the composition of public spending from subsidies to infrastructure investment, and a liberalized international trade policy designed to encourage export-led growth. Employment creation was a central objective, both through encouragement of domestic and foreign capital investment, and through an ambitious public works program, including the Accelerated Mahaweli Program, which aimed to bring new land under irrigation and substantially increase hydroelectric generating capacity. Two other policies that sought to create employment were the establishment of investment promotion zones (free trade zones) and extensive government investment in housing.

The role of government during the decade after 1977 remained significant; the public investment program, for instance, was implemented on a greater scale than anything attempted previously, and in early 1988 the state remained heavily involved in many areas of economic activity. But while the government increased its efforts to develop the nation’s infrastructure, it reduced its role in regulation, commerce, and production. Its initiatives received the enthusiastic support of the international development community. As a result, Sri Lanka received generous amounts of foreign aid to finance its post-1977 development program. This foreign assistance was integral to the government’s economic strategy. Because budget deficits were large even before 1977, external financial resources were necessary to pay for the increased spending on infrastructure and to make up for the revenue lost as a result of the tax incentives given business. Similarly, relaxing import controls put pressure on the balance of payments, which could be relieved only with the help of foreign aid.

Following the quelling of the southern youth insurrection, increased privatization, economic reform, and a stress on export-oriented growth helped improve the economic performance, increasing GDP growth to 7% in 1993. Economic growth has been uneven in the ensuing years as the economy faced a multitude of global and domestic economic and political challenges. Overall, average annual GDP growth was 5.2% over 1991-2000.The gross domestic product of the country grew at an average rate of 5% during the war period. One of the major factors behind development and economic growth is government spending. Since then, the government has been deregulating, privatizing, and opening the economy to international competition between 1994 and 2004. In 2001, Sri Lanka faced bankruptcy, with debt reaching 101% of GDP. The impending currency crisis was averted after the country reached a hasty ceasefire agreement with the North Eastern rebels and brokered substantial foreign loans. In 2001, however, GDP growth was negative 1.4% for the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States. The crises exposed the fundamental policy failures and structural imbalances in the economy and the need for reforms. The year ended in parliamentary elections in December, which saw the election of a pro-capitalism party to Parliament, while the socialism oriented party retained the Presidency. The government indicated a strong commitment to economic and social sector reforms, deregulation, and private sector development. In 2002, the economy experienced a gradual recovery. Early signs of a peace dividend were visible throughout the economy—Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In addition, the economy has benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI). In 2002, economic growth reached 4%, aided by strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total FDI inflows during 2002 were about $246 million. The largest share of FDI has been in the services sector. Good progress was made under the Stand by Arrangement, which was resumed by the International Monetary Fund (IMF). These measures, together with peaceful conditions in the country, have helped restore investor confidence and created conditions for the government to embark on extensive economic and fiscal reforms and seek donor support for a poverty reduction and growth strategy.

After 2004 the government concentrated on mass production of goods for domestic consumption such as rice, grain and other agricultural products. The resumption of the civil-war in 2005 led to a steep increase defense expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country. Sri Lanka has also accumulated a 9.2% deficit and the central bank has not intervened since late 2006 to print more currency. A sharp rise in world petroleum prices combined with economic fallout from the civil war led to inflation that peaked 20%. However when the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010. The government halted the privatization process and launched several new companies as well as re-nationalizing previous state owned corporations. However this was seen as an attempt to get relatives into the top position and army state-owned corporations were overstaffed as well resulting in major losses and large scale fraud. The negative human right record during this time resulted in Sri Lanka losing the GSP from the EU and resulted in major losses for the Sri Lankan apparel industry.

The change of wind that brought in a National Government in 2015 was elected on a mandate to create one million jobs within five years by increasing investment and boosting exports. It is the responsibility of the government to make these ambitious visions a reality. Now there is protest against the proposed Indo-Lanka Economic and Technology Cooperation Agreement (ETCA). Especially with our history of hostility against the rulers whenever a development project comes up for implementation achieving this vision for job creation, raising standards of living and reduced dependency on single countries is not an easy task. We saw protests with the early colonization schemes, accelerated Mahaweli project, Sampur coal power plant.

But a sound economy is needed to support all the welfare policies that are in place and more to be introduced as part of the reconciliation process throughout the country. If there are fears of any shortfall in the agreement, it should be resolved by consultation than confrontation with the state. It is hoped that the National Government will get the protesters to see the light at the end of the tunnel and sign the agreement and signal to the world that Sri Lanka is open for business and sign similar agreements with many other countries.