Economic policy

Go or stay? Years of poor economic policy are killing the aspirations of Sri Lankan youth – The Island

By Sathya Karunarathne

Migration abroad for work or study seems to be a popular option for young people in Sri Lanka. Central Bank data shows that in 2019 alone, the 25-29 age bracket saw the highest number of overseas departures for skilled, semi-skilled and unskilled jobs. This age group also saw the second highest number of departures from professional, intermediate and clerical level jobs. UNESCO’s Eurostat data collection on education for 2020 indicates that the total number of Sri Lankan students abroad is 24,118.

A significant segment of the young population seems dissatisfied with the opportunities and choices available in Sri Lanka. The figures above reflect their lack of confidence in a better and safer society in the years to come. For decades, this lack of opportunity has been blamed on war. However, even twelve years after the end of the war, little has changed. It is worth exploring why.

How did we come here?

The island nation’s predicament had been in the making for almost 70 years. Consecutive governments since independence have failed to implement policies aimed at ensuring economic growth and better living standards.

Trade is the engine of growth, but over the past fifteen years Sri Lanka has shifted away from trade-led growth. Although Sri Lanka was the first country in South Asia to embark on economic liberalization in 1977 and despite the relatively strong economic performance that resulted even during the war years, Sri Lanka began to move away from international trade and investment.

From 2004, import tariffs were raised on an ad hoc basis to fund a growing defense budget. In 2009, Sri Lanka had one of the most complex import tax regimes in the world, consisting of paratariffs (taxes above customs duties) and customs duties. By 2009, overall coverage had more than doubled, from 13.4% to 27.9%. Sri Lanka’s import policies at that time were as protective as they were 20 years ago. While Sri Lanka has continued to miss the mark of economic globalization, our East Asian neighbors such as Vietnam and Thailand have achieved prosperity by successfully integrating into global value chains.

This was compounded by increased state spending and increased state involvement in the economy. Much of it is financed by debt. Government spending in Sri Lanka has skyrocketed. Due to excessive borrowing, the central government’s highest recurrent expenditure is on interest payments, which was 36% in 2020. The country has a bloated public sector. The Ministry of Finance says that 30 percent or the second largest of central government recurrent expenditure is spent on wages and salaries. That was a staggering $794.2 billion in 2020, a 15.7% increase from 2019. The Economy Next reported in June that 86% of tax revenue was spent on wages and pensions in 2020. moreover, these salaries are only part of the problem, much of the spending is wasted and fuels mismanagement, corruption and negligence within some 527 state-owned enterprises whose cumulative losses outweigh the profits.

Tax revenues have not kept pace with expenditures and the tax system favors indirect taxes. In 2020, of Sri Lanka’s share of tax revenue, only 22.1% were direct taxes, with 77.9% being indirect. This is a highly regressive phenomenon, as much of the indirect taxation ends up affecting the goods and services consumed by the average Sri Lankan, placing a heavier burden on those with lower incomes.

The subsequent government’s reluctance to rectify these economic miscalculations through harsh reforms has brought the island to a precarious state of high levels of accumulated debt with exponentially growing interest payments. The country now has a debt-to-GDP ratio of over 101%, while foreign exchange reserves have shrunk to 2.8 billion – enough for less than two months of imports. Fitch Ratings estimated Sri Lanka’s foreign currency debt service obligations through 2026 at $29 billion. Sri Lanka’s debt is on an unsustainable trajectory.

So what is at stake for young people

people in all this?

Young people in Sri Lanka sit helplessly as failed policies cause the economy to collapse, further alienating them from their aspirations, hopes and dreams. The Labor Force Survey for the fourth quarter (Q4) of 2020 reported a surprising youth (15-25 year old) unemployment rate of 25.7%. In terms of education level, the highest unemployment rate is recorded in the GCE A/L group and above. Although the labor force is educated, its main source of employment remains the informal sector. Nevertheless, skills shortage and mismatch has been identified as a major barrier to employment. For example, a 2019 survey estimated a shortage of 12,140 ICT graduates. A World Bank study recognized poor English skills as another barrier.

On top of that, COVID has exacerbated Sri Lanka’s challenge of providing jobs. Unemployment as a percentage of the total labor force fell from 4.5% to 5.2% between the fourth quarter of 2019 and the fourth quarter of 2020.19 This, together with the poor economic conditions in the country, will lead to more job losses in the coming months. For example, with the ration letters from the credit banks, the employees in the import sector are panicked. Also, as the prices of essential items increase, the demand for other products and services will decrease, as people are forced to forego small luxuries such as ordering a meal from a restaurant in order to survive. This poses a threat to business and employment.

To curb the outflow of dollars, the country resorted to increased import restrictions. These unsustainable policy responses have deprived Sri Lankan youth of the luxury of dreaming and aspiring. Buying a car and housing are two of those aspirations that slip through the fingers of the average Sri Lankan. The Vehicle Importers Association of Sri Lanka (VIASL) said that the price of some vehicles in the local market had increased by around Rs 10 million due to import restrictions.20 A 2017/2018 R wagon which was being sold at 3.5 million rupees is now being sold at Rs.6 million. Those building or repairing houses are facing difficulties as cement importers have restricted the release of cement due to partial suspension of imports and price controls, leading to severe shortages. This, coupled with high tariffs on building materials, will further contribute to making building a house an illusion for the Sri Lankan middle class.

Even Sri Lanka’s escape routes are closing. Students aspiring to leave the country for higher education fear that banks will issue dollars to finance their stay. Migrants cannot take their savings with them, meaning they face a much tougher start in another country – last month the Central Bank issued a new order under the Foreign Exchange Act declaring limits to migration allowances26. Social media is awash with exasperated complaints about price hikes and shortages of essentials such as medicines amid the pandemic.

It is safe to conclude that young people have found themselves in a perilous socio-economic fabric with looming uncertainty.

Go or stay?

If the government wants to retain young people, they must be given signs of stability and hope. The excessive reliance on import restrictions as a political solution to the current currency crisis shows the government’s reluctance to implement painful but necessary reforms. Stability and hope lie in reforms that politicians resist.

Increasing sources of government revenue, reprioritizing government spending, limiting intervention, relying on markets and recognizing the vitality of trade in a globalized economy is the path to prosperity for Sri Lanka. It will not be easy or painless, the political mistakes accumulated over the past two decades require very tough reforms, but it is the only lasting way out of the current mess.

Sri Lanka faces a grave crisis, but it offers an opportunity to learn from past mistakes and rebuild the island’s institutions with the hopes and dreams of young people.

Sathya Karunarathne is a research analyst at the Advocata Institute and can be contacted at [email protected] Learn more about Advocata’s work at www.advocata.org. The opinions expressed are those of the author. They do not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.