Sri Lanka experienced a dramatic decline in its trade balance during the second half of 2011. The trade deficit which was $5 billion at end-2010 almost doubled to $9.7 billion at the end of 2011. In simple terms, we have spent much more on imports than we have earned through exports of goods. The earnings from services, remittances and net capital inflows were insufficient to offset the much larger trade deficit.

No sensible policy maker, economist or politician will deny the fact that Sri Lanka, at present, is on the verge of a major economic crisis. The looming economic disaster, if not prudently managed, will drive the country to a negative territory in the international ratings making it extremely difficult to attract foreign portfolio and direct investment. Of late, the gravity of the situation has been highlighted by many prominent and respected economists. The following headlines that appeared in the recent print and social media is a clear indication to this fact. ‘Coming out of economic crisis: timing is running out for Sri Lanka,’ ‘Sri Lanka is on the doorstep of a public debt driven crisis,’ ‘The impact of the global financial crisis on Sri Lanka,’ ‘Financial crisis in Sri Lanka.’

Last month there were reports in the press that a group of Indian citizens was planning to raise their national flag on the island of Kachchativu to coincide with India’s Republic Day celebrated on 26 January. That threat failed to materialize. February is an important month for another reason. Around that time of the year, both Sri Lankans and Indians from Tamil Nadu will jointly celebrate the St. Anthony’s festival there. Despite the bonhomie atmosphere during the festival season, the small island wedged between Rameshwaram and the Delft island will continue to be a bone of contention between the two countries until the fisheries dispute is amicably resolved.

The history of State-Owned-Enterprises (SOEs) goes back to British colonial rule. Even after the Independence, ownership and management of commercial enterprises by the state were, justified by the parties identified with socialist ideology. State involvement in businesses increased due to regimes which gained power on a populist agenda.

The new government is expected to begin functioning with the swearing-in of the Cabinet on 4th September. It will have to hit the ground running as there are a number of major issues which require urgent attention. These include important issues, such as responding to the UNHRC Report and Constitutional Reform. However, it is arguable that the most difficult and pressing challenges relate to the economy. These include containing short-term dangers and measures to promote long-term inclusive growth and development.

EASE OF DOING BUSINESS: Low Hanging Fruit for the New Regime

Sri Lanka is once again allowing politics to suppress and postpone urgently needed economic policy reforms. Since independence, time and again political opportunism and short-term political expediency have undermined sound economic policy-making. Politicians have been able to get away with this partly due to the low level of economic awareness among the population. While Sri Lankans are knowledgeable and engaged on political issues, their interest in economic issues is governed by an entitlement culture, which has been fostered by politicians from all parties.

The current government has attached high priority to the constitutional amendments, electoral reform and reconciliation. These are undoubtedly extremely important national issues which need to be addressed. However, it is important not to lose sight of the imperatives for urgent economic reform. The Pathfinder Foundation (PF) has constantly argued for the need to stabilize the economy through fiscal consolidation and to increase productivity/competitiveness through structural reforms.

Prime Minister Modi made some important observations at the event for the business community organised by the Ceylon Chamber of Commerce (CCC). These comments provide important insights into how Sri Lanka can increase the economic benefits of increasing its engagement with India.

Mr. Modi’s visit to Sri Lanka, the first by an Indian Prime Minister in 28 years, presents an opportunity to examine the ways and means of strengthening Indo – Lanka economic relations to boost the prosperity of this country. The path of Indo – Lankan bilateral relations will have a significant influence on Sri Lanka’s ability to realise its full economic potential. Mr. Modi’s re-setting of India’s relations with its neighbours offers an opportunity which needs to be grasped. There are a number of areas where his visit can serve to advance the agenda.

There has been considerable interest in Sri Lanka since the recent election. Relations with India, the US and Europe has been reset. Japan has made a strongly supportive statement. Visits to China by the President and Foreign Minister also signal that relations with China will continue to be of high priority. This pragmatism is very much in the country’s interest.

President Sirisena’s meeting with Prime Minister Modi, in Delhi, this week offers an opportunity to reset bilateral relations to achieve the declared goal of ‘irreversible excellence’. This important visit affords an opportunity to look back at the Joint Statement which was issued after Prime Minister Ranil Wickramasinghe’s discussion with the then Prime Minister of India, Atal Bihari Vajpayee, in October 2003. Many of the elements of that Joint Statement are relevant even today.