Perceived Economic Opportunity Index [PEOI] 2023 Q1: January 01 to March 31, 2023

The optimism of the Sri Lankan people is at rock bottom. But a distant glimmer of hope has appeared.

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 end of the first quarter of 2023. Started in July 2011, this forward-looking nation-wide tracking study, conducted monthly and reported quarterly, is based on a set of questions and answers developed by FEFSL to measure the mood of the people of Sri Lanka on their perceived opportunities into the future.

In concluding our last quarter 2022 report, we said “after [President Gotabaya Rajapaksa] was chased away by an unprecedented uprising of the people, a glimmer of hope arose as the nation’s reigns were taken over by President Ranil Wickremesinghe in July 2022. However, as at the end of 2022, this optimism had begun to fade again.” We added “the future of the nation depends on the ability of the government to stabilize the economy and turn it around. It must be said that the tough but necessary action of the Central Bank has worked in creating some stability in the macro economy. But the government must now undertake painful economic reforms that would reset the economy for it to grow again. These reforms are also critical in ensuring that Sri Lanka can obtain Board approval of the International Monetary Fund (IMF) based on the Debt Sustainability Analysis (DSA) undertaken earlier in the year to begin disbursements of the proposed USD 2.9b Extended Fund Facility (EFF).”  But to ascertain the IMF Board approval Sri Lanka’s official creditors, led by China, India, and the Paris Club (including Japan) had to provide ‘specific and credible financing assurances’ to the IMF. In essence, agreeing to work out a debt treatment for Sri Lanka in accordance with the DSA. We reiterated that “the next few months are crucial.”

The government pressed ahead with tough reforms. Even as the increased taxes started hitting the people; income taxes increasing from 18 to 36 percent at the highest margin causing a huge backlash among professionals, corporate taxes almost doubling to 30 percent in some sectors like export, and from 0 to 30 in agriculture, and doubling of VAT rates along with interest rates going beyond 30 percent (Treasury Bills and Bonds) causing business shut downs particularly in the SME sector, the authorities increased electricity tariffs for a second time with the average increase being 75 percent while for the lowest user category the increase was 270 percent. Fuel prices also kept adjusting to global prices and by middle of the quarter with some prices being more than double prior to the adjustments.    

Protests continued across the country, but at a much more subdued intensity. The new political formation (National People’s Power) with an ideological foundation of strong left (Janatha Vimukthi Peramuna) continued to gain ground promising ‘relief’ to the people without the IMF led reform. The main opposition Samagi Jana Balawegaya (SJB) took a moderate position; it generally supported the reforms but continued to be critical of the veracity of some of the measures and was vociferously opposed to the anti-democratic actions of suppression of dissent. his background, the government postponed the local government elections, due early March, on the grounds that it was not possible to allocate funds to conduct the polls.

While democracy was under threat with the clampdown of dissent and taking away the opportunity to exercise one’s franchise, the economic situation seems to be improving at least at the macro level.

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 for this assessment were conducted from 01 to 31 January; from 01 to 28 February and from 01 to 31 March, 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 analyzed and presented quarterly. The focus is on perception of economic opportunity. Perceptions of one’s ability to save and of 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 1.4 percent at the end of March 2022 picked up to 3.7 percent in September that year with the harsh economic situation improving at the margin giving the people a glimmer of hope with the announcement that Sri Lanka had reached a Staff Level Agreement (SLA) the International Monetary Fund (IMF). The hope was for Sri Lanka to elevate the SLA into an agreement with the executive board of IMF for a USD 2.9b Extended Fund Facility (EFF) program over a four-year disbursement schedule. With the EFF getting delayed, optimism had fallen to a mere 2.4 percent by end of 2022, second only to the figure in March which was the lowest since the inception of the index eleven years ago. With the continuation of reforms and the resulting pain, optimism fell further to just 1.7 percent in February. However, with the IMF Board approving the EFF and disbursing the first tranche and all major creditor nations agreeing to restructure Sri Lanka’s debt, the sentiment has improved with perception of a better tomorrow moving up to 2.5 percent. Perhaps the large-scale positive publicity program floated by the government also helped to build at least a little hope among the people. It must be noted however that optimism is still at rock bottom with only 2.5 percent of the respondents saying they see a better future for them in the coming one year.       

Whether the IMF supported reform program is right for Sri Lanka is the primary question that is being discussed at various places today, be it an official seminar presided over by the President or at an informal gathering of rural folk on a Sunday evening. There are clearly two opposing views. One that supports the reform agenda and the other that opposes reform. The latter, led by the left-wing political forces are vociferous in their opposition, particularly to privatization of state-owned enterprises. The claim is that the government is ‘selling the family silver’ to pay off loans. And also, that the state should be very much involved in the running of the economy from production to distribution is an argument strongly put forward by these groups. The narrative is that two generally centrist political parties (at times swinging to the right and to the left) who ruled Sri Lanka for 75 years since independence have failed and that the opportunity to finally make this country a better place must be afforded to the extreme left led by the Janatha Vimukthi Peramuna (JVP).

Given the desperation of the people who have lost pretty much all hope it is not surprising that the main leftist political party has seen a surge of support. Left wing populism was certainly on the rise during the first quarter of 2023.  

2.2          How much can I save?

Here our objective is to determine the perceptions on the ability to save. This is also a way to estimate the cost of living. The cost of living is the combination of income one receives and the expenses one must meet to maintain a certain lifestyle. Given the catastrophe many saw their incomes fall; some lost it all by losing employment. Only some, who are able set their own prices, managed to adjust their income upwards with rising costs. However, expenses have skyrocketed.

As seen in the table and chart below inflation reached dizzy heights, in excess of 70 percent, towards the third quarter. However, inflation began to fall slowly during the last quarter with the hiking of policy interest rates by the Central Bank. It should be noted that in January 2023, the base year for the measurement of inflation, the Colombo Consumer Price Index (CCPI), was updated to 2021 from 2013. The inflation figure for January 2023 as depicted here is 51.7 while the comparable figure for the same month using the previous index was 54.2.  

 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. By the end of 2002 those who thought they could save a little more than at present were at a low of 1.4 percent. But as inflation began to fall, albeit slowly, this perception gradually rose to 3.8 percent. It is relevant to note that inflation in Sri Lanka was in the mid-single digits for a very long time before suddenly increasing to dizzy heights with the total mismanagement of the economy.

2.3          What about national development projects?

On an ad hoc basis, we consider certain other aspects of public perception. For some time now we have considered ‘development projects’ here interpreted as large construction-related mega projects. As far as the public is concerned, they do not see development projects coming back on stream for a long time to come. However, towards the end of the first quarter 2023 there seems to be some level of optimism that projects may start again with the perception on the progress of development activity would stop or slow down in the coming twelve months falling to 75 percent from 85 percent.

In fact, no sooner the IMF agreement was signed, it was visible that some heavy equipment was moved into construction sites in the city that were completely stopped. The government also announced the release of large amounts outstanding to the contractors who were awaiting payment for work completed. The question of how many projects would restart does not have answers yet as the fallout from the collapse of the construction industry continues to take a massive toll on employment in the sector.  

2.4          Will corruption be reduced?

The question posed is if the respondents perceive that corruption will lessen in the coming 12 months. It is evident that the hope for reduced corruption post the two elections is completely gone.  

The perception of corruption is at hovering around the worst it had been for the last eleven years with the hope of corruption reducing in the coming year falling to just 2.6 percent.

3.0          Concluding Thoughts

The optimism about the future that was seen when President Gotabaya Rajapaksa was elected by a huge majority in November 2019 disappeared as he and his government floundered and bankrupted Sri Lanka for the first time in history. After he was chased away a glimmer of hope arose as the nation’s reigns were taken over by President Ranil Wickremesinghe in July 2022 who managed to bring the hopeless situation under some control. However, this optimism began to fade by the end of the year and the outlook looked quite gloomy as the tough reforms including increased taxes began to bite. The first quarter of 2023 seems to have turned things around once again with the government entering into an IMF program along with all major creditors agreeing to restructure their debt to Sri Lanka. With the promise of sustained improvement of the economy, a glimmer of hope is once again noticed among the people.    

While the main opposition in principle agreeing to the reforms while arguing for a greater focus on a strong social safety net for the lower income groups, the expected large-scale protests led by the extreme left and trade unions have thus far not materialized. However, the leftwing parties continue to oppose the IMF program and are rallying the people for a reform-free solution.  

Sri Lanka is not out of the woods. The economy is expected to shrink by at least 3.0 percent in 2023 after registering the largest negative growth in its history of 7.8 percent in 2022. This means closing down of businesses and loss of employment while annual inflation still hovering at around 50.0 percent. Unless the government is able to maintain the momentum of reform it is certainly not possible to get the nation back on a sustainable path of growth. But, to do so, the government must pay much more attention to equity; to understand and effectively deal with the unprecedented suffering of the lower income groups. To what extent the government will succeed will be seen in the second quarter of 2023.   

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