A new deal for Sri Lanka

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 coronavirus 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. 1,500 donation. Now, with the suspension of the Rs. 5,000 relief scheme, hunger could soon give way to starvation. According to UNICEF (United Nations International Children’s Emergency Fund), even prior to the current calamity, nearly one in five small children already suffered from stunting. The recent Reuters 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 verandas 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 mogul “uncle” next door in the gleaming fairy tale mansion, is always on the wrong side of the law. The parents hide 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 methods are 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 he casts his eye over the city, grand condominiums contain people who cannot afford the lifestyle they live. Flying uphill, he sees plantations reaching exhaustion 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 Southeast 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. In fact, 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 of the 1978 to 2004 era were reversed between 2005 and 2015. We became closed, insular, and uncompetitive. For a while, the returns of past reforms still flowed. 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 toxic dollar-denominated, short-maturity commercial borrowings from international capital markets. This is why markets expect Sri Lanka to default – which will be, should it come to pass, the first time in our post-Independence history. As we have seen in 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 – that 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 internalise 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 are at stake. This is not a 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 and the other is to obtain aid. The interest rate Sri Lanka will have to pay for overseas borrowing today is over 6%. Therefore, until we can implement the measures outlined below, we need aid.

Sri Lanka must fast-track the MCC (Millennium Change Corporation) grant. Worth $ 500 million (which is roughly equal to a Rs. 20,000 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 roadwork improvements and 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 (International Monetary Fund), World Bank, ADB (Asian Development Bank), and AIIB (Asian Infrastructure Investment Bank) – to support Sri Lanka will also greatly depend on adhering to the rule of law, especially in relation to public finance. I warned earlier that failure to put government expenditure and borrowing on a legal footing would cause delays in aid. I fear the Government’s unfortunate policy of placing the family’s interest over public interest is leading to precisely such delays.

This is also clear from such irresponsible statements implying that Sri Lanka will leave the UN. Such talk and, more importantly, failure to uphold 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.

2. Borrowing

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 saves in 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’s debt-to-GDP ratio to 70% by 2030 will greatly restore creditor confidence, as will the passing 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’s borrowing 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, including some 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 their estate. 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 hungry, what is the use of the Government owning assets in competitive industries such as hotels, port concessions, oil farms, and plantations? Assets which are often more of a drain 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, the purchaser agrees to profit share (that is pay taxes) and provide employment to the “walauwa” family’s unemployed, malnourished children?

Selling or leasing these state-owned enterprises (SOEs) and using the money for relief or to settle public debt, will be an asset transfer from the State to the citizen. That is precisely what we need at this time. Even if prices 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. We know 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.

4. Reforms

From 1978 to 2004, Sri Lanka continuously pushed through productivity enhancing reforms: Tariffs declined over that period, foreign investment was liberalised, we signed free trade agreements, and we privatised. As a result, Sri Lanka was able to maintain a very creditable growth rate despite wars, insurgencies, and no access to foreign markets.

We need relentless focus on productivity and competitiveness. The proof of that are exports. If exports climb, it means that our productivity is rising. At this critical time, we need to restart the reforms that stopped in 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 inefficient assets in competitive sectors, the State needs to eliminate corruption and waste for SOEs in monopoly sectors. The root of this mismanagement is politicisation. And politicisation can be greatly reduced through a single, simple reform act. This act will, first, ensure the directors 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; and third, in addition to audits by the Auditor General, SOEs will be legally required to comply with the Colombo Stock Exchange (CSE) 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, digitisation, and eliminating 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 will succumb 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 been amended 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 mean that 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 total taxes. In addition to moving towards direct taxation, we also need to reassess 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 we can 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, but rather our present. We need to act now.

The Government must take the above measures in order to:

  1. Ensure that the Rs. 5,000 relief continues throughout this crisis period and increase it to Rs. 10,000 for the most vulnerable families.
  2. Supply banks with the necessary funds to effectively implement and extend the moratorium on loan payments, especially in microfinance and leasing.
  3. Provide firms with further concessionary loans and other relief, subject to the condition that they do not lay off workers.
  4. Commence a labour-intensive public works drive in productive infrastructure, especially public transportation.
  5. Reskill workers who are made unemployed, making them employment ready for new generation and export industries.

Then, I pray, the three scourges of unemployment, debt, and hunger can be kept away.