Economy Laid Bare

Dhananath Fernando. Chief Operating Officer and a founding member of Advocata

Dhananath Fernando is the current Chief Operating Officer and a founding member of Advocata, an economic policy think tank in Sri Lanka. He was the winner of the ‘Asian Think Tank Shark Tank Competition – 2018’ in Jakarta, and a finalist at the ‘Think Tank Shark Tank Global Competition’ in New York in 2019. Dhananath has served as a speaker at several national and international forums, including the Walter-Scheel-Colloquium for the United Nations ‘Sustainability Development Goals 2030’ in Bonn, Germany in 2015. He is also a regular speaker at the Asia Liberty Forum since 2015 and often provides commentary on economic issues on national television. 

Having earned his Bachelor’s Degree in Bio Sciences and Bio Chemistry at the University of Colombo, Dhananath is an alumnus of the International Visitor Leadership Programme by the State Department of the United States of America, as well as of the ATLAS Think Tank Leadership Academy in Washington, DC.  

Prior to founding the Advocata Institute, Dhananath was employed as an Associate Research Director at Breakthrough Business Intelligence, a leading market research agency in Sri Lanka. From 2009 – 2012 he was the Executive for Training and Development at MAS Holdings’ Sleekline Strategic Business Unit, one of the leading apparel manufacturers in Sri Lanka and Asia.

According to Dhananath, the Advocata Institute was created due to the fact that its founding members believe in a lawful, free and harmonious society. “Sri Lankans should have equal opportunities to succeed through hard work and free exchange regardless of ethnicity, cast creed or religion. The founding members – Murtaza Jafferjee, Ajith Fernando, Ravi Ratnasabapathy, Deane Jayamanne, Riyad Riffai and Asantha Sirimanne and I set up Advocata in 2016 to promote sound policy ideas for a freer Sri Lanka.”

“Advocata’s success is entirely a team effort and I have been just a part of that incredible team. The founding members, Board of Directors and the senior team, Dr. Rajapatirana, Aneetha, Anuki, Subashini, Lauren, Erandi, Thiloka, Sumhiya and our interns (who are with us and who were with us) are the real heroes behind the work we do”, he added.   

Dhananath describes his philosophy in relation to overcoming challenges as such – “My thoughts on overcoming hurdles resonate with a famous quote by Confucius. “The man who moves a mountain begins by carrying away small stones.” There is a sequence of actions that need to be followed with consistency and discipline. Addressing challenges is an ‘evolutionary’ process rather than a ‘revolutionary’ process. I believe that taking a step back and assessing the smallest details to move a mountain should be the first step to overcome challenges.”

With Sri Lanka’s economic status currently in decline, Dhananath expressed his view of the impact of the government’s actions on the country’s economy in the time of COVID-19. 

“The government did a commendable job in containing the spread of the virus, which itself made a positive mark on our economy. The economic consequences would have been far worse if the spread of COVID-19 was uncontrollable. I have mixed thoughts about the current economic management. The government’s attempts to negotiate bilateral loans with neighboring countries like India and China, is a step in the right direction to overcome foreign exchange challenges. Commencing a negotiation with the International Monetary Fund is another positive decision. I hope the government eases import controls in the near future. The government’s reasoning behind import controls and import substitution as a short-term measure to overcome macroeconomic challenges and foreign currency shortages is understandable. However, continued import controls in the long-term will negatively impact our exports. Exports and imports are on either side of the same coin. About 80% of our total imports are investment and intermediate (57% intermediate goods and 23% investment goods) goods, which are used as inputs for exports and consumable goods. In other words, most of the commodities that add value to our exports are imported. Consumption imports account for just 20%, which include essentials like pharmaceuticals. 

Quantitative easing or money printing, is another area that requires close attention from the Central Bank and the government. As markets begin to open up, there is a higher chance to distort the prices of commodities and services in the market via quantitative easing and ballooning the budget deficit.

Imposing price controls on essentials items was a decision taken by the government with intentions to provide food items for the most vulnerable people in the society for a reasonable price. However, this backfired at the initial stage as it created a shortage of commodities in the market as a result of price controls. The government’s removal of price controls on tin fish, face masks and dhal is a step in the right direction. Overall, the coming months will be challenging for all countries and Sri Lanka is no exception.”

Questioned about his predictions in the event that Sri Lanka goes into recession, Dhananath replied, “Sri Lanka will most likely go through a recession. However, the Central Bank of Sri Lanka has predicted a 1% economic growth. According to IMF predictions, the entire global economy will contract by -3% in 2020 and grow by 5.8% in 2021 given that no serious global shocks take place. The IMF predicts a – 0.5% contraction in the Sri Lankan economy. As a result, we will experience high levels of unemployment and salary cuts, which subsequently impacts purchasing power. Asset prices are likely to plummet, decreasing overall wealth and standard of living. The global recession in 2008/9 resulted in the loss of about 90,000 Sri Lankan jobs and this number could be larger for COVID-19 economic impact as the entire world is affected. On the bright side, the ‘new normal’ will create many new opportunities. Post COVID-19, consumer behaviors will change and opportunities will be created and some may lose the market. The best example is the increase in the usage of electronic and IT services. Many schools in Colombo are currently conducting classes virtually. At the same time, basic products like personal protective equipment and sanitation products have experienced significant growth. For example, the entertainment and event-management industries, however, have been negatively affected. The gravity of the impact depends on companies’ adaptability to the ‘new normal’. However, due to low income and changes in consumer behavior, a drop in aggregate demand is inevitable.”

On the topic of the industries most affected by COVID-19 and the impact of it upon the national economy, Dhananath stated, “The tourism industry has experienced a significant impact due to travel restrictions across the world. Additionally, spending on a ‘holiday’ is not an essential, and thereby many travelers will cut their travel expenses down. The countries from which high-end tourists visit Sri Lanka are terribly affected by COVID-19 too. In 2018, we earned approximately USD 4 Billion, which is about 4% of our GDP. His Excellency Gotabaya Rajapaksa has proposed a plan to increase this to USD 10 Billion. As the impact of COVID-19 is relatively low in Sri Lanka, we can try our best to attract tourists by taking precautionary measures and marketing Sri Lanka as a safe destination however, it will take time for tourism to ‘get back to normal’ or adjust to the ‘new normal’.

The apparel sector is suffering from a sizable economic hit. The total apparel exports are worth approximately USD 5.4 Billion. They are challenged from both the demand side and the supply side. In terms of demand, most of our export destinations are severely impacted, which has shifted their priorities and decreased imports. The recent turn of events in the U.S. would make this impact even harsher as about 37% of our apparel products are exported to the U.S. In terms of supply in China, most imports and supply chains were disrupted and are currently recovering slowly.

Thirdly, the daily wage earners and the entire informal sector are terribly hit, which is out of the limelight. About 60% of our employment is in the informal sector and most of these businesses are unregistered. For example, shops and garages on street corners, and organizations, which employ a small number of people on a contract basis are negatively impacted. Many of them do not have access to formal finance channels as they are unregistered. Loan sharks who finance at a 10% monthly interest rate (120% annual rate) are their main source of financing. They are now in deep waters, unable to settle their debts due to decreased revenue. Most of these organizations in the informal sector depend on secondary industries such as apparel and tourism. Therefore, the poorest in the society who have only labor as the only tradable service to earn an income will experience significant issues with the knockdown effect of COVID-19.”

“Currency depreciation is a technical area where many economists provide different insights. It is important to have a sound understanding of the reason behind currency depreciation. Countries like Hong Kong have a system called the Currency Board. When you have a currency board in place you can only create money up to the level of reserves of that country. The money in the entire financial system is supported by a combination of other stable currencies such as the U.S. Dollar, Sterling Pound and gold reserves. This is also known as the hard peg, which means that the currency of a country is pegged strongly to a stable currency. Sri Lanka has a soft peg, which means it is not strongly supported by stable or hard currency reserves, and the Central Bank can intervene in the money supply without adequate reserves. The Central Bank usually intervenes with money supply when the government has a budget deficit. Sri Lanka in general, has a budget deficit of about LKR 1 trillion (1000 Billion). When a country has a soft peg system, their currency value will be dependent on the relative inflation of the currencies that have pegged the Sri Lankan rupee. When a currency depreciates, the prices of the imports increase. The main import in Sri Lanka is fossil fuels, which is connected to almost all sectors of the economy including utilities like electricity. The cost of pharmaceuticals and food items will rise and have an overall impact on our cost of living. A higher cost of living adds more pressure on companies to increase salaries, which results in expensive labor. As a result, overall costs rise significantly. On the other hand, exports will be encouraged. Exporters will benefit as they earn more in LKR value due to currency depreciation”, responded the expert when asked about the impact of the deprecation of the Sri Lankan rupee and the means by which industries can face and overcome this challenge. 

Speaking of how the country’s economy can be developed post-COVID, Dhananath explained, “Sri Lanka’s economic fundamentals have not been in the right shape for decades, which is why we cannot observe continuous momentum. For example, we have not performed well in terms of Doing Business Index and Economic Freedom of the World Index. Via COVID- 19, we have a much-needed opportunity to correct our fundamentals in order to increase the competitiveness of our economy. As the first step, we need to simplify unnecessary regulations. The President made it clear in his Independence Day speech that our growth has been hindered due to overregulation. Easing our regulations is an easy step. For example, registering a proprietorship or partnership requires so many documents that take weeks to obtain, while in many other countries it can be done online in a few minutes. Easing regulation impacts the micro scale businessman as well the large-scale multi million investor. 

The second step is joining a global production network and value chain. Many centuries ago, manufacturing a basic tradable good was meant to be an exercise where thousands of small components of the product were manufactured in the same country or the same factory. Now the world has moved that each factory manufactures a tiny little component of a very complicated product in large scale and assembles it in another place. This has become a common phenomenon from manufacturing an aeroplane to manufacturing a running shoe. Except our traditional export products such as tea, coconut and rubber, the other main industries, which contribute to exports are the industries that caught this wave very early. Sri Lanka is already manufacturing for global brands like Victoria Secrets, Adidas, Nike, Mercedes Benz. Similarly, we now have to connect to a few more industries such as electronics and food concentrates, processed food, etc. In order to do that, we need to attract one good investor in the production sector so there is a higher chance that other production giants will follow with confidence. That is the strategy Vietnam achieved many years ago. Sri Lanka need not follow the same path, but as a strategy it’s widely agreed that we need to manufacture products, which are compatible at a global scale. To compete on a global scale, the quality has to be exceptional and the cost has to be competitive and reformation is required. I believe we have a great opportunity to get the most awaited reforms done, which should not be missed.”

Deeply passionate about aiding people in need, social responsibility plays a vital role in Dhananath’s life. Over the years he has contributed in various ways by volunteering his time and services to many worthy causes. 

“Volunteering at CandleAid is my main social contribution. CandleAid is a government approved humanitarian organization. One project out of the many I coordinated at CandleAid was “English and Personality Development for Undergraduates” in Sri Lanka. We train students with the necessary tools to learn and improve their English conduct. Many trained undergraduates identified the lack of English knowledge as the main hindrance in their entrance into the job market. Personality development and professional development was considered second, and we encapsulated a 3-day residential programme with a stellar faculty including Dr. Suranga Nanayakkara from University of Auckland and Deepal Sooriyarachchi for mentorship.

Another CandleAid project I consider most precious was training students to swim for their safety. In Sri Lanka, about 755 lives are lost via drowning. Except for a few national, private and international schools, swimming pools are not accessible to 98% of Sri Lankan schools. In this programme, students who do not have access to a swimming pool and students who are visually and audibly impaired, were trained by an instructor and their progress has been monitored over 12 weeks.

I am a main organizer and curator of the AK Lit Fest or ‘Annasi and Kadalagotu’ Literature Festival. The AK Lit Fest is a tri-lingual literature festival dedicated to local literati. The original concept was by Capt. Elmo Jayawardena and I have been a part of it since its inception, and its curator for the last 3 years. The AK Lit fest celebrated its 5th anniversary last year and we have been a platform for literati such as Timraan Keerithi, a daily laborer poet who won the prestigious State Literature Award. Some of the most colorful memories of the AK Lit Fest were, when at the very first AK Lit Fest, Chammi Rajapatirana, an autistic individual, launched a book titled ‘Traveler’s Tales’, which was later shortlisted for the prestigious Gratiaen Award, also when, during a short story competition at the AK Lit Fest a 99-year-old Sri Lankan (Uncle Siri) contested and joined the stage to read a story he wrote to his grand-daughter, which is a reminiscence of the AK Lit Fest and the social service that I truly and humbly care about.” 

Dhananath is also an enthusiastic mountain climber and trekker. The Everest Base Camp in Nepal at 5600 meters above sea level, the Numburchuli trek in Nepal at 6900m above sea level, walking 190km and the Chardar Trek, a frozen river at the Indian-Tibetan border, which he crossed walking 105 km in minus 40 Celsius (one of the wildest treks based on a ranking by CNN) are few of his trekking and climbing highlights.