June 07, Colombo: Former Finance Minister Mangala Samaraweera suggests measures for the government to respond to the worst economic crisis Sri Lanka is facing amid the health crisis.
By Mangala Samaraweera:
The worst economic crisis since Independence is upon us. For some decades now the grim clouds of debt, waste and corruption have been gathering over our island. Now - as this fearsome storm of the Corona virus unleashes its fury – anguish and desperation, grief and sorrow, fear and rage, will engulf us all.
Hundreds of thousands of our countrymen and women are likely to lose their jobs. Hunger will visit countless families. The debt-collector’s dreaded shadow is looming over millions.
This tempest has only just begun. Yet, portends of its destructive fury are already evident. Recently three mothers of Lanka died because they were desperate for a Rs. 1500 donation. Now with the suspension of the Rs. 5000 relief scheme, hunger could soon give way to starvation. According to UNICEF, even prior to the current calamity, nearly one in five small children were already suffered from stunting. The recent Reuter’s report writes that ‘Sri Lanka’s finances were fragile long before the coronavirus delivered its blow…’
But there is hope. Much of this suffering can be avoided. We need to understand the causes of this calamity, devise radical plans and act decisively. There is no other alternative.
The Birth of Tragedy
Sri Lanka’s economy today is like a grand old Walauwa whose proud inhabitants, despite hardships and imminent poverty live on stories of the heroic deeds and the prosperity of their aristocratic lineage. From afar, the elegant roofs, ornate woodwork and sweeping verandahs shine of prosperity, stability and confidence. It is only when one is invited in for tea that the leaky roof, termite infested trellises and moth-eaten curtains become apparent.
If one stays a few days, the venerable edifice’s sorry secrets slowly become apparent. One son stays at home, unemployed. His parents cannot
afford to pay for university. The other son, a school dropout addicted to heroin amply made available by the media moghul ‘uncle’ next door in the
gleaming fairy tale mansion is always on the wrong side of the law. The parents hides the fact that they survive on the remittances sent by their only daughter
working as a housemaid in West Asia. Food is scarce, especially on the days preceding the debt-collector’s arrival. The
plantation behind the house, once the fount of prosperity, lies forlorn and decrepit – half-heartedly managed by a few withering old retainers. The methodsare equally ancient, and replanting last took place an age ago.
Sri Lanka too is in such a sordid state. An eagle flying over the island sees great ports and airports. But swooping down, discovers their cavernous emptiness. As hecasts his eye over the city, grand condominiums contain people who cannot afford the lifestyle they live. Flying up-hill he sees plantations reachingexhaustion and garment factories that cannot compete.
For Sri Lanka lived beyond its means and did not undertake the reforms needed to build the export-oriented economies that have catapulted countries in East Asia and South-East Asia from third-world to first.
The truth of the matter is simple. Like the owners of the Walauwa we failed to learn lessons from our mistakes and change with the times. Infact, on the economic front, we have unlearnt the wisdom we have so dearly purchased. Since 2004, Sri Lanka has not had a major economic reform. In fact, many of the successful reforms ofthe 1978 to 2004 era were reversed between 2005 and 2015. We became closed, insular and uncompetitive. For a while, the returns of past reforms stillflowed. And when they were exhausted, we took on more and more debt to fuel a consumption and white-elephant construction boom. Much of this debt was toxicdollar-denominated, short-maturity commercial borrowing from international capital markets. This is why markets expect Sri Lanka to default – which,should it comes to pass, will be the first time in our post-Independencehistory. As we have seen from Greece and Argentina,any such event will greatly exacerbate what will soon be unbearable hardship.
This crisis has been long in the making. Coronavirus is only a catalyst. It is these two fateful decisions – stopping reform and borrowing
from international capital markets, made between 2005 and 2007 – are the real birthplace of the coming tragedy.
The Worst can be Avoided
The newspapers are filled with ideas for relief plans. Such debate and discussion is good. Nevertheless, the cold, hard and unavoidable
fact is that only the government can provide substantial relief.
This is an unprecedented crisis. We are yet to fully understand or internalize the suffering and anguish it will bring. It calls for a radical, far-reaching and decisive response. Half-measures cannot be tolerated. Hundreds of thousands of jobs and the welfare of many families is at stake. This is not time for petty political debates and scurrilous token patriotism. We need a clear plan combined with decisive, courageous leadership that places the public interest above anything else. Here is such a framework.
1. Foreign Aid
There are only two viable ways for the government to raise funds at this time. One is to borrow, the other is to obtain aid. The interest rate Sri Lanka will
have to pay for overseas borrowing today is nearly fifty percent. Therefore, until we can implement the measures outlined below, we need aid.
Sri Lanka must fast-track the MCC grant. Worth $500 million (which is roughly equal to a 20,000 rupee grant to every household in Sri Lanka), it can kick-start the
relief and recovery programme. The grant, after all, is designed to deliver urgently needed public transportation and road-work improvements bring jobs, money and ultimately productivity improvements.
More importantly, how can we ask for relief from others if we refuse to accept the largest grant in Sri Lankan history? Why should bond-holders agree to take a haircut if we refuse a $500 million grant? What does it say about how seriously we care about the hunger and anguish of our own citizens? If we don’t care about our countrymen, why should anyone else?
The ability of donor agencies – such as the IMF, World Bank, ADB and AIIB – to support Sri Lanka will also greatly depend on adheringto the rule-of-law, especially in relation to public finance. I warned earlier that failure to put government expenditure and borrowing on a legal footingwould cause delays in aid. I fear the Government’s unfortunate policy of placing the family’s interest over the public interest is leading to preciselysuch delays.
This is also clear from such irresponsible statements implying that Sri Lanka will leave the United Nations. Such talk and, more importantly, failure touphold human rights and the rule-of-law could again lead to the discontinuation of GSP+, which would be a death blow to our already gasping apparel sector.
We need relief and stimulus now. Therefore, the government needs to borrow. But to borrow today it must credibly commit to saving tomorrow. The
main way it can convince official and private creditors that it is solvent is to establish a robust system of fiscal rules that ensure the government savesin good times, so that it can spend in bad times.
The Treasury has been preparing a system of fiscal rules for some time. These need to be made robust and enshrined in the Constitution for them to be credible. A system of fiscal rules that brings down Sri Lanka’sdebt-to-GDP ratio to 70 percent by 2030, will greatly restore creditor confidence. As will the passage of the Monetary Law Act.
However, the credibility of these rules will also depend greatly on the courts enforcing public finance provisions of the constitution. Failure to ensure these safeguards are enforced could undermine Sri Lanka’sborrowing ability.
Credibility will also depend on having a clear roadmap to solvency. Currently, the government has come to the farce of replacing knee-jerk policy, with ad hoc policy. We need a clear plan, includingsome of the ideas below.
3. Asset Transfers to Citizens
Sri Lanka cannot and should not be like the vain inhabitants of a Walauwa who – so proud of their thousand-year name – refuse to pawn the family silver or lease part of theirestate. As a result, their children go hungry, are unable to go to school or do not have medicine they desperately need.
When people are jobless and going hungry, what is the use of the government owning assets in competitive industries such as hotels, port-concessions, oil-farms and plantations? Assets that are often more of adrain than a boon to the public purse. Who wouldn’t sell or lease part of their estate to provide for their children, especially if, as part of the deal, thepurchaser agrees to profit-share (that is pay taxes) and provide employment to the Walawua family’s unemployed, malnourished children?
Selling or leasing these State-Owned Enterprises and using the money for relief, or for settling public debt, will be an asset transfer from the state to the citizen. That is precisely what we need at this time. Even ifprices are low at this point, such assets can be placed in a constitutional-council appointed holding company with an explicit legal mandate for their disposal within a five-year time period.
There is also a great deal of land that the state acquired through land reform. However, unlike in many East Asian countries, that land was never redistributed to citizens. Consider the case of the plantations. Weknow that small-holder plantations have higher yields. So why then are not plantations broken up and given to the people of those areas, especially as they are some of our poorest citizens? The wealth-effect alone could help restore some consumer confidence.
From 1978 to 2004 Sri Lanka continuously pushed-through productivity enhancing reforms: tariffs declined over that period, foreign investment was liberalized, we signed FTAs, we privatized. As a result, Sri Lanka wasable to maintain a very creditable growth-rate despite wars, insurgencies and no access to foreign markets.
We need a relentless focus on productivity and competitiveness. The proof of that is exports. If exports climb, it means that our productivity is rising. At this critical time, we need to restart the reforms that stoppedin 2004. These reforms can be structural reforms or they can simply be updating archaic laws for present needs. Here are examples of both.
One example of structural reforms relates to the management of SOEs. Other than disposing of inefficient assets in competitive sectors, the state needs to eliminate corruption and waste for SOEs in monopoly sectors. Theroot of this mismanagement is politicization. And politicization can be greatly reduced through a single, simple reform act. This act will, first, ensure thedirectors of all SOEs are appointed by and responsible to a holding company board, which is appointed by the Constitutional Council; second, all directors’appointments are subject to ‘fit-and-proper’ criteria, as is already the case with bank directors; third in addition to audits by the Auditor-General, SOEswill be legally required to comply with Colombo Stock Exchange disclosure guidelines.
Sri Lanka’s economy is also greatly held back by archaic laws. Our Customs Act dates from 1869, when Queen Victoria still reigned. We keep talking about single-windows, digitization andeliminating corruption. Why then do we still have this ancient act? Because inefficiency serves the corrupt, creating opportunities for bribes. The solution is not to place officers of integrity in charge. For they too willsuccumb to the corruption. The solution is to change the system. It is hard, unglamorous and often unseen work. But it must be done.
Similarly, production of high-value crops – including fruits, vegetables, spices and flowers – could be swiftly and greatly enhanced if more land was available in the wet-zone. Why then has the Paddy Lands Act not beenamended so that it doesn’t apply to the Wet-Zone? In fact, a significant share of land under the Paddy Lands Act in the wet-zone was never really used for paddy in the first place. But political opportunism and a lack of courage meanthat these fetters on our economy continue to persist. We could not afford such chains before this crisis. To continue with them in the face of this calamity is unconscionable.
5. Just Taxation
Sri Lanka has a highly unfair tax system. Direct taxes, which are paid for much more by the middle-class and the rich, are one-fifth of total taxation. Indirect taxes, which place a much greater burden on the poor, account for four-fifth of totaltaxes. In addition to moving towards direct taxation, we also need to re-assess property taxes. Many people have been made millionaires through land value
appreciation arising from public investment in infrastructure like highways. It is only right that some of that value is shared with the broader public, especially less fortunate citizens at such a time of hardship and suffering.
We need to act now.
These are unprecedented times. Calamity is upon the world and upon Sri Lanka. We will be worse affected than many other countries. We need all the help wecan get. But in order for others to help us, we need to help ourselves. Much sorrow, grief and pain can be avoided if we act now. Politicians often say the future of the country depends on this reform or that policy. At this dire time- it is not our future that depends on a clear economic relief and revival plan- it is our present. We need to act now.
The Government must take the above measures in order to:
- Ensure that the Rs. 5000 relief continues throughout this crisis period and increased to Rs. 10,000 for the most vulnerable families.
- Supply banks with the necessary funds to effectively implement and extend the moratorium on loan payments, especially in micro-finance and leasing.
- Provide firms with further concessionary loans andother relief, subject to the condition that they do not lay-off workers.
- Commence a labour-intensive public works drive in productive infrastructure, especially public transportation.
- Re-skill workers who are made unemployed, making thememployment-ready for new generation and export industries.
Then, I pray, the three scourges of unemployment, debt and hunger can be kept away.