By Sanath Nanayakkare

When a country is in an economic crisis, it creates an environment conducive to implementing economic reforms which would be difficult to do in good times, however, it still depends on how far the reformist leaders can shape the opinion of the people and the people’s willingness to take those reforms on board, Rockefeller International Chairman and Breakout Capital Founder/ CIO Ruchir Sharma said in Colombo recently.

He made this comment while delivering a public lecture at the Central Bank of Sri Lanka where Sharma shared key insights from his newest book, ‘The 10 Rules of Successful Nations’, illustrating what Sri Lanka can do to catch the eye of indifferent foreign investors.

“At a time of crisis, when a new reformist leader is elected to navigate the country through it, the reforms will be painful in the beginning. If the people say,” Okay, go ahead and do something to contain the crisis, that’s fine. That happened in Greece and today the country is a shining star in Europe. But what happened in Argentina was different as the people didn’t want to go ahead with reforms despite the crisis,” he said.

In this book, Sharma delves deep into 10 rules and areas of growth which are namely; demographics, politics, state, debt, currency, investment, inflation geography, inequality and sentiment. He said that he has given his weightings to the above rules from the perspective of an investor looking at a country’s investment outlook.

The following are some select excerpts from his speech particularly indicating where Sri Lanka is ranked on his 10 rules.

Rule 1- Demographics

“We noticed Sri Lanka’s working age population is projected to grow in the next 5-10 years at only 0.1% a year. That is a very low level. This means you need to do something else to offset it. It is very difficult for Sri Lanka to grow at a rate of more than 6% when your working age population is only growing at 0.1% unless it relies on immigration, automation or increase the retirement age of the labour force.”

Rule 2 –Politics

“Most countries carry out painful economic reforms only when they hit a crisis because the population is also ready to back the reformer. Even India made reforms under crisis. Sri Lanka is going to have elections this year and I don’t know which way people are going to be voting. However, implementing economic reforms and maintaining fiscal stability in the foreseeable future would be crucial for any political party that comes to power.”

Rule 3- State

“We have noticed Sri Lanka’s spending as a share of GDP is now under control. Spending is not the problem. But taxes as a share of GDP are very low in Sri Lanka.”

Rule 4- Debt

“Greece was in crisis and today it is a growing economy in Europe. They followed the right policies and got the debt under control and capitalized on tourism and exports to boost the economy. Sri Lanka can take a smooth and continuous trajectory down this path.”

Rule 5- Currency

“Sri Lankan currency ranks pretty well because it is very cheap in the eyes of investors which is at present stable and effective”.

Rule 6- Investment

Successful countries have investments as a share of their GDP of about 25-35% .That is the sweet spot. And more successful countries have a manufacturing base with a share of their GDP at about 20% or so. Sri Lanka is in the middle in this aspect.

Rule 7- Inflation

Sri Lanka has a success story on containing inflation because of reigning in monetary expansion and having a good monetary policy framework. Most central bankers are stuck in the old framework and focus a lot on consumer price increases. But we also need to consider asset price inflation (property prices), stock prices as well. If those too increase and are backed by a lot of debt financing, that could pose a problem.

Rule 8- Geography

Sri Lanka is on the right trade route but has not fully exploited it. Also, the growth isn’t spread out internally. So much of the population and growth activity are concentrated in Colombo area and the country needs to think about new cities or new urban centres.

Rule 9- Inequality

Too much inequality is not great for a country. But Sri Lanka is not affected by this as the country has few billionaires.

Rule 10- Sentiment

Countries which are in a crisis mode are the ones that carry out economic reforms and Sri Lanka can gain approval in this exercise.

“Generally Sri Lanka ranks relatively well from an investor’s perspective as there is a big improvement over the last couple of years. Now the talking point is what is going to happen on the political front. And once that is settled, Sri Lanka needs to determine its growth engine. The classic growth engine for Sri Lanka would be manufacturing-for- exports to enable rapid increase in per capita income.”

Sounding direct without being ruthless, Sharma said at the conclusion that the world’s investor community is indifferent to Sri Lanka and they don’t talk much about Sri Lanka as their expectations about the country are low.

However, he urged Sri Lanka to capitalize on its potential and spring a surprise on the upside to catch the investors’ eye.