Sri Lanka was once considered a development success story. But within the last few decades, this legacy was lost to governance failures and economic mismanagement. In recent years, the country has been characterised by a glaring lack of fiscal discipline reflected in the inability to raise sufficient revenue even to cover current spending. In this context, institutions have a major role to play in ensuring that governments do not fail. Effective institutions can (1) assure the provision of quality services which is essential for eradicating poverty and promote shared prosperity; (2) guarantee high-quality public spending and minimise corruption; and (3) ensure that all citizens benefit from economic growth and that development is not lop-sided. With this understanding, this blog discusses how a Fiscal Council (FC) can help Sri Lanka regain fiscal credibility and improve its overall economic performance.
Having kept monetary policy too loose for too long, Sri Lanka started its tightening cycle in August 2021. It signalled firm intentions to regain the Central Bank of Sri Lanka’s (CBSL) focus on price stability by engineering a reduction in demand through high interest rates and withdrawing liquidity from the economy. Effectively, in the current dire growth outlook for Sri Lanka, the policy intention means forcing a recession to tame inflation. In choosing between the options of an aggressive hike that will lead to a recession or tolerating a prolonged inflationary spiral bordering on hyperinflation, the former is preferable. Once inflation takes hold, the damage can be corrosive, especially its deeply regressive impacts on lower income households. But a contractionary strategy to suppress demand will not achieve the desired outcomes if (a) inflation expectations are not well anchored and people expect rapid price increases to continue, and (b) supply side factors remain unaddressed.
Empty supermarket shelves, endless queues to buy essentials and overnight camping around fuel stations are now regular sights in Sri Lanka. As the economy continues to plummet with no viable short-term solutions in sight, levels of frustration among the citizens continue to rise. The country’s worst economic crisis since independence has battered Sri Lankans from all walks of life but the fallouts are impacting the poor with greater intensity. If urgent measures are not taken to support the most vulnerable at this time, more Sri Lankans will slip into poverty thus increasing intergenerational poverty in the long term. This blog identifies some of the most pressing challenges faced by the poor and vulnerable amidst the prevailing crisis and outlines policy options to safeguard their well-being.
Beedi smoking is widespread in Sri Lanka, accounting for nearly 23% of the country’s smokers. The absence of a filter makes it an unsafe product exposing its users to nicotine, tar, and carbon monoxide. As such, this tobacco product is possibly more harmful to human health than other forms of smoking. However, beedi remains an underregulated product notwithstanding the provisions of the Tobacco Tax Act No. 8 of 1999. This blog argues that beedi taxation is a low-hanging fruit to boost government revenue and reduce the foreign exchange outflow with the added benefit of improving the health of Sri Lankans. An excise tax on beedi can benefit the economy in several ways: it would directly increase government revenue, lower beedi consumption, and decrease raw material import costs thus reducing dollar outflows. Lower beedi use would also lower smoking-related health issues, thereby reducing the government’s expenditure on health.
Global oil prices are in the headlines once again with crude oil prices soaring following Russia’s invasion of Ukraine on 24 February 2022. Global crude oil prices have shot up; the Brent increased by around 22% to USD 114 a barrel at the end of May 2022, from a low of USD 93 a barrel in early February 2022. The volatility of global oil prices has worsened Sri Lanka’s economic woes. This blog discusses the main drivers of oil prices, the effects of price volatility on the Sri Lankan economy and outlines some policy options available to mitigate the adverse effects of oil price fluctuations.