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NPP’s new plan: A rapid response or a positioning for an election? 

08 Jan 2022

By Rohan Samarajiva The National People’s Power (NPP) released a document entitled ‘Rapid Response to Overcome Current Challenges’ to some fanfare late in December. It is quite progressive in aspects other than economic, as is shown below. But it is described as a rapid response, and must be judged in those terms. None other than the multiplying economic problems demand a rapid response at this time. Therefore, the emphasis here is on the economic aspects of the 26-page document. The NPP’s document is not a rapid response to the unprecedented economic crisis that is enveloping the country. This is a document written in the style of a conventional election manifesto.  Response to the crisis The Government’s story that assigns sole responsibility to the pandemic is losing traction. It is not accepted by the NPP. However, the NPP’s narrative converges with that of the government on the roots of the debt crisis. The NPP, along with the Sri Lanka Podujana Peramuna (SLPP), downplays the immediate and obvious causes, namely the profligate commercial borrowing since 2007 and the exacerbation of the fiscal deficit by the massive tax breaks granted to the rich shortly after the President assumed power in 2019. To assign responsibility to all governments since independence is to diffuse responsibility. It will result in distorted solutions. What does the NPP offer as a rapid response? 
  • A commission of experts will be appointed to conduct a thorough investigation and audit of all current foreign debt 
  • Develop a formal plan for the next five years showing how to improve the level of foreign reserves 
  • Work diplomatically with counterparts to restructure debt repayment and obtain debt relief 
  • Provide a reliable and transparent mechanism for our overseas workers, and members of the diaspora to remit foreign exchange and invest in new entrepreneurial ventures in Sri Lanka that are needed to bring foreign exchange to the country.
Except for the “working diplomatically with counterparts” element, there is nothing here that qualifies as a rapid response. The extent and composition of foreign debt as well as the dates on which payments are due is public knowledge. This suggests that the real purpose of the Commission is to assemble expertise in an area the NPP knows it is weak in. The NPP will have to engage in a rapid learning process, indicated upfront by the statement that a more detailed proposal will follow. But one must wonder what they were doing the past two years without assembling the required expertise. Does the NPP understand the core problem of twin deficits? Does it understand that working with debtors is not just about diplomatic conversations, but about credible communication about actions to address the twin deficits? Does it understand that the most problematic debt is in the form of International Sovereign Bonds? Negotiations with bond holders are fundamentally different from those with foreign governments or international organisations, which are what are normally understood as counterparts.  The fiscal deficit is something a government directly controls. Does the NPP understand that immediate action on the fiscal deficit is one of the best ways of communicating credible commitment to tackle a root cause of the debt crisis, and thereby make debt restructuring talks productive?  The fiscal deficit can be reduced by increasing revenues, decreasing expenditures, or both. Revenues, especially from direct taxes have to be raised (this should not be too difficult for the NPP to live with), but it is not easy to do in the midst of a crisis. Also, given weaknesses in the Department of Inland Revenue, results will not be immediate. Therefore, cutting expenditures becomes the action most likely to yield results quickly.  The need to cut State expenditures is missing in the document. All that can be seen are proposals to further increase Government outlays. Awareness appears lacking that salaries and pensions for the excessively large (and expanding) number of Government employees which ate up 78% of all Government revenues in the first eight months of 2021 did not leave room for anything other than continued deficits, especially because interest payments amounted to 74% of Government revenues in that same period.   Here is what the 2022 Fiscal Management Report says:  “Total expenditure on personal emoluments for public servants including the Provincial Councils’ employees increased by 9.3% to Rs. 564.2 billion in the first eight months of 2021, compared to Rs. 516.4 billion in the same period of 2020. This was mainly due to the new recruitment of 53,000 graduate trainees in the latter part of 2020 and early 2021, provision of permanent positions to 14,500 graduate trainees who have been recruited in 2019 together with 30,000 new recruitments to the Multipurpose Development Task Force personnel under 100,000 job programme in the latter part of 2020.” Laying off State employees is hard, so its omission is understandable. But freezing new hires in the context of the crisis is not. Privatising a white elephant like SriLankan Airlines is clearly not. Cancelling an early-stage highway construction project such as the Ruwanpura Expressway that will have very little short-term economic benefits is not. None of these actions appear to have caught the attention of the authors of the Rapid Response Plan. What value is a Rapid Response Plan that ignores the problem of out-of-control State expenditure? Will such a plan address the causes of the crisis? Will it communicate the right message to debtors? Is this an election manifesto? Not only does the plan sidestep the core problems; it proposes to add to them based on spurious data, as can be illustrated by its treatment of healthcare. In the preamble, it is stated that households spend more than 50% of their income on healthcare. The average monthly household income was Rs. 76,414 in 2019. Readers can assess for themselves the veracity of the NPP’s claim that most households spent more than Rs. 38,000 a month for healthcare.  This is an astounding claim for any country, but especially for one with a universal free healthcare system. If true, something has to be radically wrong.  The latest available Government Household Income and Expenditure Survey (2016) shows that 7% of non-food expenditures of a household were spent on health and personal care (beauty care included). Because non-food expenditure is roughly two-third of total household expenditure, healthcare expenditures are even smaller as a proportion of total expenditures; of total income, even less.  The highest percentage of household expenditure spent on health and personal care was back in 1995-’96, at 10.4% of non-food expenditures. For 2016, the highest percentage was seen in the Northern Province (10.9% of non-food expenditures; again, much lower as a percentage of total expenditure and of income). In terms of income deciles, the poorest decile spent 11.4% of its non-food expenditures on health and personal care, a far cry from the claim of more than 50%.  Errors or falsehoods of this magnitude raise questions about the seriousness of the document. But the healthcare claim has not been inserted just for emotional appeal. An entire section of the Rapid Response Plan is devoted to health and promises are made: 
  • A health system that provides all citizens with necessary treatments by constantly monitoring their health
  • A quality health service to all citizens without discrimination on the grounds of gender, income or social status, profession, etc.
  • A set of actions to reduce the percentage of the income of a family unit allocated for healthcare
  • A minimum of 5% of Gross Domestic Product (GDP) on healthcare
  • Taking measures to increase the active and healthy lifespan of a citizen
Most of these actions, especially the last one, are commendable, but are they realistic at this time? Do they qualify as rapid responses, or are they better suited for an election manifesto? Sri Lanka’s GDP in 2020 was $ 80.71 billion, or Rs. 16 trillion; 5% of that is Rs. 807 billion. The total allocation for health and pharmaceuticals in the 2022 Budget was Rs. 300 billion. More than doubling healthcare expenditures in one year is completely unrealistic. Such sudden increases, even if affordable, cannot be efficiently spent by the administrative machinery.  These kinds of claims would be taken more seriously if it was coupled with matching cuts, for example from the bloated defence budget (Rs. 373 billion for 2022) or from the massive highways allocation of Rs. 270 billion. But no compensatory cuts are proposed.  No doubt, we could usefully spend more on healthcare in a rapidly ageing society like ours. But is this a realistic objective at this point of time, when State revenues are inadequate to meet contractual obligations (salaries, pensions and interest) and the country is on the threshold of a default? Is this a rapid response to overcome the current crisis?  The national healthcare system is a critically important component of the social security net that must be safeguarded. But foregrounding it in this manner indicates that the authors are confusing rapid response and the empty promises made in election manifestoes.    Failure to understand the global context It is to the credit of the NPP that it has understood that the country cannot do without greater exports, though they have not escaped the import minimising mindset. They have not quite grasped the nature of the global economy and the realistic choices open to a small economy the size of Greater Mumbai. They appear not to have heard of global production networks that now dominate the global economy.  Apple products are one of the best examples of global production networks. Most Apple products are designed either in the US or Israel and assembled in a Taiwanese-owned Foxxcon factory in China or elsewhere. Components of the iPhone 6 came from 815 production facilities in 31 emerging nations like Thailand, the Philippines, Indonesia, Vietnam, Costa Rica, Puerto Rico, Morocco, Malta and Brazil from Asia, Europe and North America. The breakdown of the final production cost of an iPhone 6 by country revealed that each country captures only a very small value. For instance, the value addition in China, the country of final assembly, was about $ 10 per phone. Yet it contributes significant earnings because of the massive scale of operations.  Describing this as a supply chain is deceptive, suggesting that Apple buys those intricate and complex components off the shelf. In a sophisticated product like an iPhone, that cannot be done because the brand name holder must ensure the quality of the product supplied to the global market. This web of prearranged contractual relationships is known as a global production network. Sri Lanka has missed out on these attractive opportunities for the most part, but Global Production Networks (GPNs) are not completely absent here. Lanka Harness, a factory located in the Biyagama Zone, makes precision sensors for airbags and seat belts of high-end automobiles. The proportion of the value of the sensors in relation to the total value of the vehicle is miniscule and the raw material is imported, but because of the scale of their production and adherence to quality standards, Lanka Harness is an extremely profitable company. In today’s global economy, no set of officials, however well-intentioned and informed, can make decisions about what products and services should be manufactured using what production methods as the Rapid Response Plan sets out in ‘Our Approach’. The relationships developed by the founder of Lanka Harness led to this unlikely success, not some bureaucratic calculation. The State can only shape the broad environment within which such investment decisions are taken, not take them on behalf of the companies and entrepreneurs who are risking their capital.  The NPP seems oblivious to the two-way nature of trade. They want to export, but they also want to establish protective barriers against imports. This will not only kill the prospects of companies located in Sri Lanka being able to benefit from participation in global production networks, it will also violate the terms of the few trade agreements Sri Lanka belongs to.  The current Government’s temporary import restriction policies have already drawn warnings in this regard. It is unfortunate that a political force that has opposition to corruption as its most attractive feature should propose a license raj that will be a breeding ground for bribery and corruption. Many praiseworthy elements Though not belonging in a rapid response, the NPP document has many impressive elements that one hopes will influence the election manifestoes of all political parties in the near future. They are evidence of the NPP’s evolution from an insular political formation and give hope that it will be able to evolve also in its approach to economics, a process that appears to have started.  Under education, the NPP promises “measures to regulate the quality as well as fees of private education and measures to regulate postgraduate studies in both public and private higher education sectors”. This is a sea change and a decisive break from the competition it was engaged in with its breakaway PSP within the State universities. If the NPP and its core Janatha Vimukthi Peramuna (JVP) can step back from absolutist opposition to private provision of higher education, there is hope for the finding of middle ground in many other areas. Even more stunning is its position on fundamental liberties. It promises to “act against the persecution and oppression of socially marginalised sections of society such as same-sex, transgender, and other communities. Strive towards a society where freedom and equality for all are guaranteed and where people can live free from violence and oppression.”  It commits to “reform laws to prevent discrimination based on gender and sexuality.” This is a sea change from 2015, when a JVP MP said: “I am totally against Lesbian, Gay, Bisexual and Transsexual (LGBT) rights. This is not the need of the human being. We need a future generation.” To desist from such condemnations and stay silent is one thing; but to actually include statements against discrimination in a formal policy document take guts. It should be noted, and applauded. Not ready to govern   Overall, the Rapid Response document must be welcomed as a salutary advance in the thinking of the JVP, the core component of the NPP. In a time of crisis, when it is becoming evident that sticking with the dogma of the past no longer an option, the massive progress made by the NPP is a sign of hope. However, it appears that the NPP has much homework to do both with regard to a rapid response to the crisis that is now upon us and with regard to the actions to address the underlying structural problems of the economy essential for its non-recurrence.   The document is based on a fundamental misreading of the present situation. Its purpose appears to be that of positioning the NPP as a credible alternative to the current Government as well as the Samagi Jana Balawegaya (SJB). It is not a Rapid Response. No one should expect the NPP to become neoliberal; but it is not too much to ask that it recognises the impossibility of “tasting the fruit before planting the tree,” as the famous left-wing economist Joan Robinson said after a visit to this country in 1959. If by some chance, the NPP comes to power because of the disastrous mismanagement of the current Government and disarray in the Opposition, they and the people at large will find themselves in deep trouble. We are currently paying the price of electing a President and a Government that is learning on the job. The country cannot afford to repeat that painful experience. The time to engage in learning is now; the time to gain power and write election manifestoes is after the learning has been completed.

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