2023 Q4: Things are looking bleak!

Following the public's weariness observed at the close of Q3 2023, Q4 data suggests a continuation of the trend.

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 fourth 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.

As we reported previously the end of third quarter of 2023 had mixed results; hope went up for with the announcement of the government that it had successfully concluded the domestic debt restructure as a steppingstone to restructure its vast foreign debt along with the hope of the second tranche of the IMF funds being released soon. But hope diminished with the IMF second tranche getting delayed due also the continuing nationwide criticism of the domestic debt restructure on its lack of equitability. The ‘Aswesuma’ social safety net program of the government, while almost tripling benefits and increasing the coverage, albeit for a much shorter duration, rather and exit mechanism after several years, ran in to sever controversy as opposition to the selection of recipients without proper census to identify the poor continued to overshadow the positives. The economy stabilized but at a new equilibrium in which the price level was almost double that of the pre-crisis equilibrium. This was a massive blow to the low income and the new poor.

The fourth quarter seems disastrous from the point of view of the people. Nothing the government is doing seems to ignite hope in the people even though the macro economy is certainly stabilizing with inflation falling, interest rates coming down and the exchange rate also stabilizing. This is while the revenue numbers have been increasing and the pressure on the treasury reducing with increased tax collections and market pricing of utilities. This is a double-edged sword. While the economics have been improving the politics have become even more divisive. The left is on a relentless attack on the IMF led program driven by fiscal discipline and withdrawal of money printing capabilities of the Central Bank (fiscal dominance of monetary policy). The budget presented for 2024 did not go well with the people as it calls for even further taxes to be levied on the people while expanding the net; the amount at which business become tax liable has been brought down from 2024 making many small and medium scale enterprises becoming liable soon. The attempt to restructure state owned enterprises have had massive backlash with opposition parties questioning the rationale, while some of the far-left parties have along with their trade unions outright opposed all moves at restructure accusing the government of attempting to ‘sell off’ national assets.

It is true that many economically significant strides have been made in this quarter and generally during the year in moving towards economic stabilization. Sr Lanka has reverted from the brink. But, by and large, the majority of the nation is frustrated. Their hope has disappeared. Things are looking challenging.

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 October; from 01 to 30 November and from 01 to 31 December, 2023. This quarterly report is therefore based on a total survey of approximately 1,500 persons in three months and provides an ongoing commentary on how Sri Lankans feel about their economic future at this moment and the next twelve months. It also provides the reader with the ability to compare this sentiment since July 2011.

2.0          Presentation of specific 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 also regularly presented. Further, the survey 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 fell to its lowest in mid-2022 to a mere 1.4 percent as Sri Lanka defaulted on its external debt for the first time but picked up to 3.7 percent in September that year with a glimmer of hope with the announcement that Sri Lanka had reached a Staff Level Agreement (SLA) the International Monetary Fund (IMF) to receive a bail-out package to climb out of debt. With the IMF funds getting delayed, optimism fell again to 2.4 percent by the end of 2022. But as the IMF Board disbursed the first tranche and all major creditor nations agreed to restructure Sri Lanka’s debt, the sentiment improved with perception of a better tomorrow moving up a tad bit to 2.5 percent at the end of the first quarter 2023. People’s optimism about their own success fluctuated slightly and ended the second quarter at 2.8 percent in June 2023. The third quarter saw much better results with the finalization of the domestic debt restructuring and the introduction of the Aswesuma social safety net program. Having increased to 9.9 percent, the highest reading since the crisis, optimism fell to 4.6 percent at the end of the quarter. The fourth quarter was a disaster. Those who thought they had a chance of advancing in the profession or business, essentially their economic opportunity, was 3.5% in October, 2.7% in November 2.7% and a mere 1.9% in December.

With the expectation of further increases in taxes and massive closures of small and medium enterprises and the difficulty for salaried and self-employed to make ends meet it is only natural to expect falling hope. But to fall almost to the absolute bottom reflects frustration.

Looking at the historical trends the unfortunate reality is that Sri Lankans have continued to lose hope in their future over the last decade or so. The two markers are when optimism rose was with the change of government in January 2015 and once again with the change of government in November 2019. But that change spelt disaster and the nation’s optimism has disappeared as seen above.

The trend data seem to suggest that without a change in government this pessimism will not reduce even though the care-taker government has done much to restore stability by starting the necessary reform process. The question then is what can the next government do to infuse hope in the people again? For a sustained improvement in the mood of the people what kind of reforms must be undertaken? Will the new government be willing to continue the process already started? Will it succumb to populism and if so, what will happen to stability, and expected growth?

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. The ability to save which was low anyway, fell to the bottom with the bout of unprecedented inflation.

As seen in the Central Bank of Sri Lanka (CBSL) chart headline inflation reached almost 70 percent towards the third quarter of 2022. However, inflation began to fall rapidly since then reaching 4.0 percent by the fourth quarter 2023 with the hiking of policy interest rates by the CBSL, the impact of the base effect and falling demand. Improving the supply side situation also certainly helped ease inflation.

The projection for the next 12 months is reasonably low. With the passage of the new Central Bank Act, the government and the CBSL have agreed on a 5.0 percent target for the coming years. Soon the Government is to agree with the CBSL on the inflation target for the next

Taking the harsh reality of making ends meet into consideration with the new, heightened price level along with market pricing of utilities and fuel, the budget proposed an LKR 10,000 monthly increase in public sector salaries from April of 2024. But subsequently it was revised so that the eligible would receive half of that amount starting January and the rest as planned in Aprill. The government requested the private sector to provide a raise in salary to their employees 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.

By the end of 2022 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 this perception gradually rose to 3.8 percent by the end of the first quarter 2023 and with inflation falling rapidly it increased to 5.1 percent in July but fell again to 2.9 percent by September 2023 with increasing taxes and utilities. By October the figure fell to 1.7 percent, stayed at the same level in November and with the hope in the budget rose marginally to 2.0 percent by end December 2023.

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 quite clear that people of Sri Lanka seem to have lost hope in attacking corruption. It is significant that post the change of the presidency in 2019 and the parliament in 2020 hope rose but it was short lived.

The perception of reducing corruption was around 8.6 percent at the end of third quarter 2023. This was very likely the result of government and opposition coming together to agree on legislation on the new anti-corruption Act in line with global best practices. However, that sentiment seem to have reduced somewhat with the figure falling to 4.8 percent by end of the fourth quater.

2.5          A Question on Global Integration

Besides the questions we ask respondents monthly to establish trends, we also seek to understand how people react to current issues. Given the lack of hope in the economic conditions and the need to reverse this trend, there are two schools of thought developing in the current discourse. One is a more insular structure where domestic players are protected with high import tariffs and other levies, duties, and quantitative restrictions. This is relevant because what seem to be a large section of society is of the view that it was the liberalization of the late 1970s that created an ‘open economy’, even the factually incorrect as many restrictions remained, that caused the economic crisis of Sri Lanka by ‘killing off’ domestic industry and ‘privatizing’ state owned enterprises. A smaller group is to open the country and integrate with the world. This calls for trade reform including lowering of tariffs and forcing domestic producers to compete with regional and global manufacturers.

The responses to the question above continue to be unexpected with those agreeing strongly or agreeing somewhat being more than those disagreeing with a fair number unable to comment.  We plan to monitor this trend to assess if this thinking will be sustained.

3.0          Concluding Thoughts

The foregoing data analysis show that “things are bleak”. Even hope for a somewhat better tomorrow has all but disappeared and most are not too optimistic. Sri Lankans are angry and desperate. Data from the last eleven years suggest that it would be at the next election that the people will have an opportunity to revive their hope.

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