Sri Lanka’s current efforts to promote maritime and commercial hubs as integral components of its development strategy will receive a major boost through the ‘Maritime Silk Road’ (MSR) that is being promoted by the Boao Forum for Asia (BFA).

A Winning Combination
The combination of Sri Lanka’s geographical proximity and multifaceted ties with India which stretch back millennia not least through Buddhism; and the close all weather friendship with the People’s Republic of China which spans over six decades, creates an unprecedented development opportunity. Maximizing commercial opportunities with both countries are not mutually exclusive objectives. Sino-Indian economic ties were given a major boost during President Xi’s recent visit to India. This will inevitably generate new opportunities for Sri Lanka as well (see previous Pathfinder Alert 64 at www.pathfinderfoundation.org). This poses the question as to what would be the most conducive framework for maximizing the benefits from the proximity to India and the closeness to China. Getting the FTAs with the two countries right would act as a major engine for growth and development. It is noteworthy that Mexico has benefited greatly from the North American Free Trade Agreement (NAFTA) which links it both to the US and Canada.

A Results – Oriented Visit
President Xi’s visit to Sri Lanka delivered an array of concrete outcomes across a wide range of activities. A total of 27 agreements were signed in important areas.

Even though historical relationships between Sri Lanka and China date back over about 20 centuries based on shared religious and cultural values, the economic links and formal diplomatic relations were started in 1950s. Currently, Sri Lanka is having an enduring, multi-dimensional and deep-rooted relationship with China. The long-standing ties of closeness between the two countries are underpinned by mutual trust and confidence. A close identity of views and mutuality of intere st remain the hallmark of bilateral economic ties. 1952 Sino-Lanka rubber – rice pact and 1962 the First Agreement on Economic and Technological Cooperation are very important formal relations among them. More recently, economic and political ties have been strengthened between the two counties culminating in the establishment of formal diplomatic relations. The economic agreements signed in 1982; Sino – Lanka Joint Trade Committee and Sino – Lanka Economic and Trade Cooperation Committee were amalgamated in 1991 as the Sino-Lanka Joint Commission for Economic and Trade Cooperation. Further, Sri Lanka-China Business Cooperation Council was formed in 1994 and 8 bilateral agreements and Memorandum of Understanding (MOUs) were signed in 2007 on the occasion of golden jubilee celebrations of diplomatic relations between two countries.

The government has called for submissions from all stakeholders as part of the preparatory process for its Budget. This has elicited responses from a variety of quarters, including political parties, trade unions, businesses and other interest groups. Some of the wish-lists which have emerged in the media bring to mind a comment made by Lee Kuan Yew some years back. He said that Sri Lankan democracy was a periodic auction of non-existent resources. This comment has even greater resonance today now that Sri Lanka is a lower-middle-income country exposed to the discipline imposed by rating agencies and international capital markets in a manner it was not when Mr. Lee made this remark. It is important to explore why this is so. There are fundamental problems at three levels which need to be considered: revenue, expenditure and debt dynamics. Failure to take these into account will undermine the commendable progress that has been made towards a more stable macroeconomic framework largely as a result of the fiscal consolidation achieved during the 2009 – 13 period.

Sri Lanka has been well known for its impressive record in social development for several decades. The introduction of free education from independence has been a major part of this narrative. This has enabled Sri Lanka to attain very high enrollment rates in primary and secondary education. Female participation rates in formal education have been particularly impressive. However, the quality of learning outcomes has been a serious problem which has preoccupied successive governments since the 1971 insurrection. Despite this, the record of remedial action has been very mixed at best. Improving the quality of education has hitherto been an intractable challenge. Sri Lanka’s performance, when benchmarked against the successful countries of East and South East Asia, is disappointing. The present government is attaching the highest priority to reforming the education system to strengthen the employability of students in a modernizing economy. Efforts are being made to improve Maths, Science and English education; as well as training and skills development. The tertiary sector is being opened up to private universities, including foreign universities. Particular emphasis is being placed on Engineering and IT. It is timely, therefore, to examine some of the fundamental premises determining educational outcomes in order to ensure that the current initiatives achieve their objectives.

Sri Lankan farmers, small and medium enterprises, service providers, big businesses and households have been afflicted by one of the highest electricity tariffs in the world and uncompetitive fuel costs for many years. This has been undermining the economy’s competitiveness thereby discouraging investment and employment generation. The enormous losses incurred by the CEB and CPC have added to the debt burden imposed on the current and future generations of Sri Lankans.

The Indian Budget Speech, to be delivered by Arun Jaitley today, is likely to be the most reform-oriented since Dr. Manmohan Singh’s much heralded effort in 1991. India’s growth rate has halved to 4.5% last year. Policy paralysis has reduced confidence among both domestic and foreign investors. Bureaucratic inertia had stalled the pipeline of large infrastructure projects. The budget deficit had increased to unsustainable levels and inflation was persistently high leading to elevated interest rates that stifled economic activities.

The World Bank has just published the Report from its International Comparison Program (ICP). It confirms a number of aspects of the conventional wisdom regarding the trends that have emerged in recent years while challenging others.

Historical Legacy
Since the mid-60s, the public service has been subject to a high degree of politicization under successive regimes. During the 70s and 80s, the public service cadre and recruitment procedures went through many changes primarily to serve the partisan objectives. Even during the so-called economic liberalization phase, our political leaders continued to appoint increasing numbers of party supporters, friends and even relatives disregarding well-known and accepted management practices. Since 2005, the country has experienced a dramatic increase of the public service from 600,000 to 1.4 mn.

Prospects of a Bright Future
Sri Lanka has potentially extremely favourable medium-term prospects. In addition, macroeconomic conditions are likely to be more benign in the short-term, with 2014 being better than last year, provided the US Federal Reserve’s tapering program does not cause severe turbulence in emerging and frontier markets. However, there are challenges that need to be addressed if Sri Lanka is to realize its full potential. It is arguable that the lack of the necessary human resources will be the most significant binding constraint that holds back the country’s development. At present, the human resources necessary to support the government’s five-hubs + tourism strategy are not available within the country.

Learning from History and the World
Sri Lanka’s financial sector has experienced significant developments since partial liberalization in the post-77 era. To move from a highly protected environment to a liberalized economy may have required some shock treatment such as the opening of the financial sector. However, unfortunately, the lack of a clear strategy and ad hoc approach to regulation has led to the emergence of a plethora of banking and non-banking financial institutions servicing a limited segment of the population and geographical areas of the island. In realizing that the financial system is the lifeblood of an economy the Central Bank of Sri Lanka (CBSL) has drawn a roadmap for more a efficient and competitive financial system in the country. The efficiency of financial intermediation is a very important determinant of development outcomes. Above all, a stable financial system is a crucial element of a conducive business environment for supporting sustained growth. The recent global financial crisis has highlighted the hugely disruptive effects of instability in the financial system. Robust and stable financial institutions on the one hand and sound regulation on the other are the twin pillars that provide confidence to all stakeholders in the financial system.