As Sri Lanka approaches a critical juncture in its economic recovery, a leading economist has outlined a path to improve debt management through a shift towards trade-oriented production. With significant debt repayments set to resume by 2028, Emeritus Professor of Economics, Premachandra Athukorala, stresses that a robust strategy focused on export-oriented production is essential for the nation to maintain a healthy primary surplus and manage its substantial debt effectively. This economic shift, he suggests, could position Sri Lanka for long-term stability and growth.
The Challenge of Debt: A Call for Economic Restructuring
Sri Lanka’s debt situation is alarming. With foreign debt levels nearing USD 70 billion and the total debt hovering around 104-105% of GDP, the country faces a substantial fiscal challenge. Nearly all of this debt is in foreign currency, limiting Sri Lanka’s monetary flexibility and increasing its vulnerability to currency fluctuations. At a recent public lecture at the Centre for Banking Studies, Professor Athukorala shared that restructuring the economy toward a trade-oriented model is the most viable path forward.
“Achieving a primary surplus is key to handling our debt and stabilizing the current account,” Athukorala noted. “The only way to reach this is by moving away from a non-tradeable economy and developing a dynamic, export-oriented manufacturing sector. This shift would support our debt goals and drive sustainable economic growth.”
The Burden of Debt Repayments and Limited Government Spending
Professor Athukorala calculated that once the IMF program concludes, Sri Lanka will need to allocate around 5% of its GDP annually just to cover interest payments on its debt, excluding the principal. This substantial fiscal obligation will undoubtedly limit government spending on domestic projects, especially in sectors focused on non-tradeable goods and services. According to Athukorala, the fiscal pressure will make it challenging for the government to invest in infrastructure and other non-tradeable sectors, which traditionally require substantial funding.
“In this context, government spending options will be extremely restricted,” he emphasized. “Allocating resources to non-tradable sectors will be difficult when the debt repayments alone demand such a large share of the national income.”
Lessons from Other Countries’ Debt Recovery Experiences
Drawing from his research on approximately 60 countries that have successfully overcome debt crises, Athukorala pointed out that a decisive shift towards tradable production has been a common factor in their recoveries. He noted that these countries achieved growth by reallocating resources toward sectors that generate foreign revenue, particularly export-oriented manufacturing. By doing so, they not only improved their current account balances but also created new employment opportunities and strengthened their economies.
“This approach has worked in many debt-laden countries,” he explained. “A focus on export-driven manufacturing and integration into global markets helped these nations stabilize and grow, offering Sri Lanka a possible blueprint for success.”
The Need for an Updated Trade Strategy in a Changing Global Economy
While promoting export-oriented industrialization has long been a priority in Sri Lanka’s economic policies, Athukorala expressed concerns that recent political platforms have failed to address crucial shifts in global trade patterns. Many recent presidential election manifestos have included promises to support export-oriented production, but Athukorala argues they overlook the changing nature of the global trade environment.
Traditional trade strategies focus on horizontal specialization, where a country specializes in producing entire products. However, Athukorala highlighted that modern trade dynamics emphasize vertical specialization. In this model, countries specialize in specific tasks or components within a product, integrating more efficiently into global value chains. Today, nearly two-thirds of global manufacturing is part of these complex global production networks, where various components are produced in different countries before final assembly.
“The world has moved beyond simple horizontal specialization,” Athukorala observed. “Vertical specialization is now the most dynamic part of global trade, and we must align our economic strategy accordingly.”
Aligning with Global Value Chains to Boost Competitiveness
Athukorala underscored the importance of Sri Lanka adapting to this vertical specialization trend to maintain its competitive edge in the global market. He pointed out that by focusing on specific components or stages within production processes, Sri Lanka can attract investment and participate in international supply chains. This approach offers more flexibility and can enable the country to tap into high-demand industries without the need for extensive, costly infrastructure.
“Participating in global value chains allows us to be part of a larger ecosystem rather than producing and exporting finished products alone,” he explained. “This integration is crucial if Sri Lanka is to remain competitive and maximize its economic potential in the modern trade landscape.”
Strategic Focus: Export-Oriented Manufacturing and Services
For Sri Lanka to succeed in its shift to a trade-oriented economy, Athukorala recommends prioritizing sectors that can capitalize on global demand. By focusing on export-oriented manufacturing and specialized services, Sri Lanka could develop a diverse and resilient economy that withstands fluctuations in global markets. Investing in sectors like technology, apparel, and value-added agriculture could drive job creation and boost foreign revenue.
“Targeting export-oriented sectors with a focus on value addition will provide a steady revenue stream for debt repayment while fostering economic growth,” Athukorala suggested. “Our manufacturing and service industries have the potential to transform Sri Lanka’s economy and reduce its dependency on debt.”
A National Policy Shift to Support Economic Restructuring
Athukorala’s call for a shift toward a trade-oriented economy aligns with the broader need for policy reform. This includes revisiting trade policies, creating incentives for export-driven businesses, and improving infrastructure to support global supply chains. Moreover, the government must work to attract foreign investment, particularly in sectors that align with global demand trends and offer long-term growth potential.
For these changes to take root, Sri Lanka’s policymakers must focus on clear, actionable goals that prioritize sustainable growth and debt reduction. This could include partnerships with international organizations, trade agreements that lower barriers for export-oriented industries, and fiscal policies that support business development in tradable sectors.
Looking Ahead: Preparing for a Self-Sufficient, Debt-Free Future
Professor Athukorala’s vision for Sri Lanka centers on self-sufficiency and sustainable debt management. By building a robust export-oriented economy, the country can generate foreign revenue, improve its fiscal balance, and reduce dependency on external loans. This approach offers Sri Lanka a way to break the cycle of debt accumulation, ultimately leading to a more resilient and self-sufficient economy.
The path forward will require commitment from both policymakers and the business community. However, Athukorala’s recommendations provide a blueprint for Sri Lanka to manage its debt while ensuring steady economic growth. By focusing on a trade-oriented production model, investing in export-driven industries, and aligning with global trade trends, Sri Lanka has an opportunity to secure its financial future and reduce its reliance on debt over time.
In conclusion, Sri Lanka’s shift towards a trade-oriented economy could mark the beginning of a transformative era. Professor Athukorala’s call for restructuring aims to build a stronger, more resilient economy that meets the demands of a globalized world while safeguarding the nation’s fiscal health. With a focus on exports and vertical specialization, Sri Lanka can work towards a debt-free, prosperous future that benefits its people and strengthens its position on the international stage.
