What does risk management have to do with Sri Lankan families?

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While the number of Sri Lankans living under the poverty line has decreased tremendously, many still live right above it and can fall back into extreme poverty if they experience a shock such as a natural disaster. Photo Credit: Lakshman Nadaraja 

Imagine there is a small fire in your house: someone forgot to put out a cigarette stub and accidentally set your rubbish bin on fire. You will need just one bucket of water to put it out.
But up the ante, and it is no longer possible for an individual to handle it. For instance, if your entire house was on fire, you would need to call your local fire station for help.
Now, go up one more level. You live in a thickly wooded part of a district like Badulla, and a forest fire covering hundreds of acres is threatening homes and businesses—then it would take the resources of the country, and maybe even aid and support from international allies, to battle the fire and help people recover.
I am telling you this story to illustrate how there are levels of risks—and responses—to consider when discussing a subject like integrated risk management.
As part of our work on the recently released Sri Lanka Development Update (SLDU) we considered the risks and opportunities facing Sri Lanka, beginning from the smallest unit of the household and building up to the country, as represented by the public sector.
There’s been a lot of talk about the macro-economy and national level reforms and policy initiatives. However, in this blog I wanted to focus on your families. What does integrated risk management mean for households?
The poorest Sri Lankan families are vulnerable to shocks

Unlike some other countries in this region, Sri Lanka doesn’t have a problem with extreme poverty. Rates of extreme poverty have declined; per capita income has increased, and preliminary results of the Household Income and Expenditure Survey (HIES) show a further decline in the national poverty rate from 6.7 percent in 2012/13 to 4.1 percent in 2016.  

However, unpack the data and you can see that significant poverty still exists in certain areas; a large share of the population subsists on little more than the extreme poverty line.
Consider how such families living in such areas were affected by the floods and landslides in 2017 and the drought of 2016/17. 11 of the affected Divisional Secretary (DS) Divisions by landslides were found to be poorer than the national average. Approximately 12 percent of those affected were poor, nearly twice the national average of 6.7 percent.
It’s not just when disaster strikes that these households need attention. We have to think about, for instance, how the proposed reforms will affect the country’s poor. For instance, the removal of VAT exemptions will raise the cost of living, pushing some households further into poverty, while reforms in trade and business could put pressure on associated businesses and lead to certain households facing income insecurity. At least in the short-term, there will be vulnerable households who need support.

Social protection measures need to be designed and better targeted to support the poor
Like that big forest fire, some risks are too much for people or even families to manage on their own. For instance, the data reveals that social protection measures are needed to mitigate the impacts of drought floods, particularly landslides, on the poor. However, these social safety net programmes need to be better targeted to ensure that those who need it most are the ones who benefit.  
When it comes to the impact of reforms, we can look at innovative and focused solutions to protect the poor. Take VAT exemptions: households in the top 60 percent income bracket account for 75 percent of spending benefitting from exemptions, compared to the bottom 40 percent, who account for just 25 percent. This means that many VAT exemptions are effectively subsidies to the non-poor. Instead, if VAT exemptions were limited to goods and services primarily consumed by the poor, the latter could actually benefit.
A similar argument goes for fuel price reforms. The top 30 percent of household account for 70 percent of direct consumption of fuel. This means that, as long as fuel prices are fixed below market prices as they have been most of the time, richer households are the main beneficiaries from low fixed fuel prices, while the state-owned utilities run losses compensated by the budget. We see these types of implicit or explicit fuel subsidies in many countries and nearly everywhere they are effectively subsidies to the non-poor.
VAT reforms should go hand in hand with strengthening safety net and targeted public expenditure to mitigate the impact on the poor, such as investment in infrastructure in districts with a high poverty incidence, and in the quality of public health and education services, even as we ensure that public funds are used wisely and channelled effectively. Successful fuel subsidy reforms, such as those in Indonesia, channelled the fiscal savings into social expenditure, such as the expansion of free schooling and social protection programs.
Better risk management will produce positive outcomes for the households:
Since the risks are clear, why should Sri Lanka still pursue reforms? As outlined in the ambitious Vision 2025 agenda, the reform agenda is designed to bolster Sri Lanka’s economy, create a stronger public balance sheet and reduce the likelihood of serious shocks to the public and private sectors.
This will be a time of change, and will offer new opportunities for development. For households, trade reforms can mean more and better paying jobs. More business opportunities will become available. As markets open up, Sri Lankan consumers will benefit as quality improves and prices drop.  
Reforms and projects focused on boosting Sri Lanka’s physical resilience will help prevent natural disasters, save lives when people are exposed to them, and help families recover from losses to their property and livelihoods.
In the meantime, fiscal reforms will increase the government’s capacity to support new infrastructure projects, bringing desperately needed roads and health and education facilities to underserved areas.
Most importantly, households will be protected from shocks. By adopting responsible and rigorous measures to manage public debt and drive fiscal consolidation, the Government is protecting the Sri Lankan rupee and insuring that households can benefit from a stable economy.


Ralph van Doorn

Senior Country Economist

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