2022 Q2: Optimism falls further from almost nothing

August, 12, 2022

Perceived Economic Opportunity Index 2022 [PEOI] Q2: April 01 to June 30, 2022

The Foundation of Economic Freedom in Sri Lanka (FEFSL) presents here a summary of perceptions of the people of Sri Lanka about their own and the nations’ future as at the second quarter of 2022. This monthly nation-wide tracking study, reported quarterly, is based on a unique measurement developed by FEFSL. Started in July 2011 this rich dataset can be used by itself or in conjunction with other data to analyze and correlated perceptions of Sri Lankan citizens on a range of issues.

The nation is facing an unprecedented socio-economic-political crisis. The economy is bankrupt. Inflation is soaring. The currency is crashing. Factories are closing. Schools are shut. Markets are running dry. Farmers are unable to cultivate. Fishermen are on stuck on shore. Jobs are disappearing. Banks are auctioning assets of SME entrepreneurs. Five-hour power cuts have become normal. Essentials are in short supply. Fuel queues are kilometers long. There is no cooking gas. Public are facing untold misery.

The political situation is taking a turn for the worse. They are protesting in absolute anger. The public is demanding leadership change, especially President Rajapaksa’s resignation; hence the cry, “#GotaGoHome.” On 31 March, there were protests outside his private residence. Despite emergency laws, a 36-hour curfew, and a social media ban, crowds reiterated this call across Sri Lanka on 3 April, causing the Cabinet including Basil and Namal Rajapaksa to resign. Protestors established ‘Occupy’-style protest sites outside the Presidential Secretariat in Colombo (GotaGoGama), and around the island. On 19 April, the police killed a protester in Rambukkana. On 9 May, goons from the Prime Minister’s (PM) official residence attacked GotaGoGama, prompting counter-violence from protestors. A ruling party Member of Parliament (MP) and his security officer were killed, and some 50 government MPs’ properties were burnt down. Mahinda Rajapaksa resigned as PM. The President falsely promised constitutional reform and on 12 May appointed Ranil Wickremesinghe, the sole representative of the United National Party in Parliament, as the new PM. He appointed a new cabinet with several new faces less the controversial figures who were involved in the 9 May crackdown. PM Wickremesinghe assumed control while President Rajapaksa retreated. With the President’s office under siege, he was restricted to his official residence. An uneasy political calm ensued. The protesters, now infiltrated by various elements of extreme political views outside constitutional provisions, were threatening to push the President out of office by 9 July. Even though the analysis of data herein is up to 30 June it is prudent to update the reader as to the moment of writing this brief. On 9 July, enormous crowds gathered in Colombo despite the lack of transportation and stormed the President’s and PM’s official residences. PM Wickremesinghe’s private residence was torched. President Rajapaksa fled the country, and finally resigned on 15 July. PM Wickremesinghe took oaths as interim President and was elected President by Parliament on 20 July, despite protestors rejecting his leadership as being proxy for the Rajapaksas. Sri Lanka is under a dark cloud of upheaval and uncertainty.

This regular measurement does not provide answers to the question on how perceptions on economic prospects can be improved or what the role of the government or any other stakeholder is in that process. However, it is hoped that necessary action will be taken to build back hope in the population; particularly among the young people who have now come out in their thousands in massive anti-government protests.

1.0          Methodology

The PEOI is calculated based on monthly data collected by PepperCube Consultants on an island-wide random survey of face-to-face interviews among 500 persons. Surveys were conducted from 01 to 30 April; from 01 to 31 May and from 01 to 30 June, 2022. This quarterly report is therefore based on a total survey of approximately 1,500 persons over three months and provides an ongoing commentary on how Sri Lankans feel about their economic future at this present moment. It also provides the reader with the ability to compare this sentiment since July 2011.

 2.0          Presentation of findings

As always, monthly survey data is presented quarterly. The focus is on perception on economic opportunity. Perceptions on one’s ability to save and on corruption are regularly presented. The survey also tracks perceptions on cost of living, development of the country, media freedom and law and order among others. A selected assessment on one of these questions is reported periodically.

2.1          What will happen to my opportunities at work or in my business?  

The question posed to the respondents is whether they believe their economic opportunities, be it in the workplace or in their business, would increase, stay the same, or diminish in the year ahead.

Optimism having hit the lowest it has ever been, at just 1.0 percent at the end of March 2022 picked up to 2.0 percent in April and rose to 3.0 percent in May after Ranil Wickremesinghe was appointed the new PM. But perception of economic opportunity dropped to 2.0 percent again in June. These numbers suggest that the removal of the sitting PM and replacing the position with the new PM only had a very marginal impact on optimism. The reason for falling hope is most likely because the new administration was not able to make any significant improvements in the general economic situation. By mid-April the public began to understand in small measure the gravity of the economic situation when the Minister of Finance announced to the world that Sri Lanka was unilaterally suspending its foreign debt payments. It is ironic that till that day the government had painted a false picture of the nation’s economy promising repayment of all debts and pretending the situation was under control. It was revealed later that on that fateful mid-April evening the Central Bank only had USD 50m in usable reserves thus had no way to make interest payments close to some USD 200m on outstanding foreign currency debt.

The value of the Sri Lanka rupee had crashed to 365 to the US dollar by the end of June. It was 300 at the end of March and 203 at the beginning of 2022. Interest rates had climbed; 12 months Treasury Bill rates were around 25.0 percent at the end of June, up from 12.3 percent at the end of March. They were 8.2 percent at beginning of January.

Given the massive printing of money and the delay in increasing interest rates inflation was beginning to get completely out of hand. The below tables and graphs from the Central Bank Weekly Report 01 July 2022 indicates the sudden and significant increase in the inflation rate at the end of the first quarter. The most recent data indicates that at the end of June year-on-year inflation measured by the Colombo Consumer Price Index was 58.6 percent. This was unprecedented.

Inflation rates at the end of June, 2022

Source: Central Bank of Sri Lanka Weekly Economic Indicators, 01 July 2022

With the economy in a dramatic nosedive, it is to be expected that the public would lose confidence in the government and prospects for their future. This is what is reflected in the surveys. The slight uptick is the mere desperation of the people for ‘some miracle’ to happen with the change of the leadership at the PM’s office. Over the last several quarters our analysis was that the economy was on a very precarious position, that the management of the nation was completely unacceptable. In our last quarterly report, we said “Now it seems it is only a matter of time before the catastrophe.”

The high point of 20.0 percent of optimism soon after Gotabaya Rajapaksa was elected by a huge majority was short lived. The fall was dramatic since late 2020. At the end of June 2022 Sri Lankan public was being driven to absolute despair. The promise was gone. The population was staring into a dark abyss.

2.2          How much can I save?

Here our objective is to determine the perceptions on the ability to save; an inadvertent way to estimate cost of living as well. To assess the ability to manage the cost of living and to have something left over, we asked the respondents about their expected personal savings in the coming 12 months. After the perception of the public’s ability to save a ‘little more’ than what they do at present fell to an all-time low of a mere 1.0 percent at the end of the first quarter this figure rose to 2.0 percent in April, to 3.0 percent in May and fell back to 2.0 percent in June. The below chart reflects how difficult it has been for the people of Sri Lanka over the last decade.

Inflation is almost an abstract phenomenon to the homemaker. What she is confronted with are prices are actual purchases. Below is a snapshot of prices from end June 2022 compared to a year ago.

Market prices of grains, vegetables and other food items 

Source: Central Bank of Sri Lanka Weekly Economic Indicators, 01 July 2022

2.3          What about national development projects?

The public do not expect development projects to be implemented anytime soon. We present here the trend in the perception on the progress of development activity in the coming twelve months. The positive perception of continuing or expediting development projects is at a mere 1.0 and 2.0 percent during the quarter.

This is an all time low for the indicator. But the outcome is to be expected. The expectation of multilateral and independent analysists is that overall economic growth of Sri Lanka may fall to negative 7.0 to 8.0 percent in 2022. With the economy contacting and the optimism at the very bottom with no real hope in the horizon, the public are at a point of hopelessness. It is difficult to estimate when major development projects would begin. And whether the mega projects of the past would ever be undertaken by the state given the expenditure rationalization that would have to be abided by is a question. It is our view that future infrastructure projects would be more partnerships with the private sector on concession basis rather than debt funded state ventures.

2.4          Will corruption reduce?

The question posed is if the respondents perceive that corruption will lessen in the coming 12 months.

The confidence the public have on corruption falling is next to nothing; at an all-time low at a mere 1.0 percent. This is a significant finding to show how public opinion has be totally overturned since election.

3.0          Concluding Thoughts

The positive feeling about the future that was seen when President Gotabaya Rajapaksa in November 2019 has all but completely disappeared at the end of June 2022. The public is totally disillusioned. They are angry and they have lost hope in their future. This is a most disturbing situation for any nation to be in. With street protests gaining momentum and economic conditions worsening every day what awaits Sri Lanka in the coming days and months seem bleak.

As we pointed out at the end of the first quarter, our continuous monthly measurements suggest that while the pandemic had some impact on the level of confidence it was certainly not the reason for this total crash. It has now been proven by economists the world over that Sri Lanka’s implosion was man-made. The crisis was a result of several major policy errors; both in macro management and in agriculture. In fact, we warned at the end of 2021 that “if the government continues to mishandle the situation, people’s frustrations could certainly boil over, and the peaceful situation turned in to one that would no one wishes to experience.” It now seems inevitable that will happen.

Sri Lankan politicians and policy makers have a tremendous responsibility in their hands now. The nation is crumbling. It must be saved before it implodes completely.

The Foundation of Economic Freedom appreciates the generous support by the Friedrich Naumann Foundation for Freedom to undertake this work.