With each passing day under the new National People’s Power (NPP) Government, it becomes more apparent that Sri Lanka’s destiny, through the trajectory of its economy, has already been predetermined by the previous administration.
It is a strange twist of political fate that has led to a Government with an overwhelming majority and mandate being unable or unwilling to divert from the path set by its predecessor – an unpopular and defunct parliamentary majority and a rogue administration.
The NPP was itself the most important and substantive anti-International Monetary Fund (IMF) formation in the mainstream, with candidate Anura Kumara Dissanayake (AKD) as the insurgent, anti-establishment candidate.
How has the NPP and its Leader succumbed so quickly and so absolutely to the narratives of the past administration, narratives the NPP itself had sought to debunk? In place of revolution and insurgency, the NPP and AKD have capitulated to Ranilist incrementalism.
The NPP and AKD were brought to power on a wave of popular rhetoric that sought a fundamental transformation of the country’s economy and society; the people are thus entitled to a version of this transformation.
The President announced his Government’s plan to amend the Pay-As-You-Earn (PAYE) Tax system to provide relief to low-income earners by transferring the burden to high-income earners. This is a rational and necessary move, but it is also one that needs to occur at scale, especially as it relates to Sri Lanka’s consistently low levels of Corporate Income Tax (CIT) to Gross Domestic Product (GDP).
A report from PublicFinance.lk from September noted that Sri Lanka’s CIT to GDP was “notably lower than other South Asian countries, despite having a higher tax rate. In 2023, Sri Lanka’s CIT revenue collection was 2% of GDP, with a CIT rate of 30%. In contrast, other South Asian countries like Bhutan and the Maldives, with lower CIT rates of 25% and 15%, collected 3.7% and 2.7% of GDP”.
Higher-than-average tax rates mean little if revenue is not being generated; the above article attributes this to “steep concessionary tax rates in certain sectors and tax exemptions and holidays granted under various laws. For instance, prior to October 2022, Small and Medium Enterprises (SMEs) and sectors such as education and healthcare benefited from concessionary rates of 14%, while manufacturing businesses had a tax rate of 18%. Additionally, tax exemptions and holidays continue to be granted to large firms under the Board of Investment (BOI) and Strategic Development Projects (SDP) Acts”.
The SDP Act was utilised by the minister in charge as an instrument of unrestricted and unchecked corporate socialism; phrasing used by former Director of the IMF Dr. Sharmini Coorey during an address to a Central Bank of Sri Lanka (CBSL) gathering a few years ago.
Dr. Coorey’s comments and the IMF’s central narrative regarding Sri Lanka are in stark contrast to the mainstream commentariat. Many subscribe to the idea that Sri Lanka’s economic weaknesses are caused primarily by the State overspending, when in fact the problem, as emphasised by the IMF since at least 2014, was always revenue mobilisation.
The media and analysis scarcely focuses on the all important tax-to-GDP ratio, which the IMF requires to be 15%, below the median of most successful countries of our size and structure. When they discuss the burden of taxation on the people, they are inadvertently alluding to a relatively higher income decile of people in Sri Lanka because the discussion is usually about income taxes.
Once again, the IMF itself has consistently warned that the structure of Sri Lanka’s tax revenue relies too heavily on indirect consumption taxes like Value-Added Tax (VAT), creating an imbalance. This is because of a lack of an adequately advanced technological system of tax administration.
The impact of indirect taxes on the cost of goods means that Sri Lanka’s current system disproportionately disadvantages the poorest in the country, while objectively, as compared to peer group nations, higher-income segments pay lower rates of tax and corporates have long found ways to keep effective tax rates substantially lower than the official rates.
Why has a solution to Sri Lanka’s regressive tax system that disproportionately impacts the poor not been central to the NPP’s and AKD’s post-election discourse? Economist Dhanusha Gihan Pathirana has consistently criticised the path laid out by the IMF for Sri Lanka, noting that the programme by design only further entrenches Sri Lanka in international capital markets, leaving it vulnerable and exposed to rollover risks.
Once again, the mainstream media, the commentariat, and elite consensus is celebrating the NPP’s capitulation to the status quo and in effect, a betrayal of its base of support.
A place beyond the IMF
It should be perfectly reasonable to accept the IMF’s specific suite of reforms while also ensuring a more equitable sharing of the financial burden of those reforms. There is surely a path to renegotiation without rejecting outright the architecture of the global financial system.
Before policymaking can begin to reflect the ground realities and urgent challenges, it must acknowledge some basic facts pertaining to Sri Lanka’s economic situation, facts that can only be stated, not interpreted or editorialised. In this case, we refer to Dr. W.A. Wijewardena, a former Deputy Governor of the CBSL and a prominent public intellectual and columnist.
In an article from November, Dr. Wijewardena notes that the external debt restructuring haircut “will leave a massive external sector gap of about $ 17 billion by 2027 as projected by the IMF in May 2024 based on the estimated foreign inflows and outflows” and suggests that the Government should focus on a significant “improvement in the export of goods and services”.
Dr. Wijewardena also remains skeptical of continued dependency on the tourism industry to drive an increase in export earnings due to two reasons. Firstly, that tourism requires capacity-building, from infrastructure to accommodation and human capital.
Secondly, that there is low domestic value addition in the tourism sector; “To maintain tourists, Sri Lanka should import fuel to power its transportation and electricity generation, vehicles, and above all, foods and beverages. In addition, road and airport expansion also involve foreign exchange expenditure. Under these circumstances, the domestic value addition will be only the profits of the hotels, salaries paid to local employees, and purchase of utilities from the domestic market. Hence, out of the $ 8 billion earned as gross income, the net domestic value addition is projected to be about $ 2-3 billion.”
In remarks to Parliament, Opposition Leader Sajith Premadasa criticised the Government’s failure to follow through on its promised programme of renegotiation with the IMF and bondholders. The speech received little public attention, when in fact the media should have widely disseminated and discussed its contents. Instead, the same, muted response from the commentariat, revealing the capture of the narrative by elite consensus.
The Samagi Jana Balawegaya (SJB) Leader questioned why the Government was not reassessing the rationale behind beginning amortisation payments from 2028 instead of 2033. The latter, more favourable timetable is noted in page 57 of the March 2023 IMF Country Report No.23/116 (Request for an Extended Fund Facility) which discussed a restructuring scenario (for “purely illustrative purposes”).
It notes: “There are many alternative ways of restructuring Sri Lanka’s debt that would also achieve the debt restructuring targets described… The perimeter of restructuring is based on preliminary considerations shared by the authorities and their financial advisors… Accordingly, under the staff’s illustrative restructuring scenario… for official bilateral debt… debt relief in NPV terms is assumed, implemented through a long maturity extension – with amortisation payments starting in 2033.”
This excellent intervention by the Leader of the Opposition also presented some facts about Ghana’s debt restructuring agreements as a comparison to Sri Lanka’s ongoing restructurings, noting that Ghana was also represented by Lazard and Clifford Chance, and “was able to cut its primary debt by 37% and agree to an interest rate of 6%”.
Ghana’s Government rejected the first sovereign bond proposal and negotiated a lower coupon rate; while Ghana does have a lower GDP per capita of $ 2,200 compared to Sri Lanka’s $ 3,900, there are questions to be asked as to how Ghana received a significantly higher haircut than Sri Lanka.
This is especially puzzling when you consider that Ghana has exports to GDP of 35%, while Sri Lanka only has 21%; Ghana also has an external debt to GDP of 43%, whereas Sri Lanka’s is 75% with a total public debt to GDP of over 100%. Ghana’s public debt to GDP was 80% during the time of its debt restructuring negotiations.
Therefore, it is not clear why there should be such a disparity between Sri Lanka’s expected final haircut of 15% (should GDP grow beyond its base-case scenario) and Ghana’s 37% debt reduction.
White-collar vultures
In an article from 11 December, Pathirana notes that Sri Lanka faces $ 4.3 billion in additional foreign exchange payments and critiques “the rationality of the… projections and the opaque and self-serving nature of the International Sovereign Bond (ISB) restructuring agreement conveniently avoided by the CBSL”.
Pathirana’s key critique is that the IMF programme actually saddles the country with more external debt at higher coupons as well as additional expenses arising from the process, which creates a “one-off spike in repayments next year”.
He notes that this will be compounded by the “impending maturity of $ 3.6 billion in currency swap arrangements” with India and China, while also criticising the extraordinary profit-taking by private investors: “Local entities… were allowed to swoop in like financial vultures during the Covid crisis, snapping up Sri Lankan ISBs at fire-sale prices – discounts of up to a staggering 45-50%. This windfall for the privileged few came at a steep price for the nation, further draining our dwindling foreign reserves.”
The critique that the IMF programme and debt restructuring deal serves the interests of private wealth above those of wider society sounds like some type of hyperbolic Leftist critique, but consider the following from Dr. Wijewardena from an article from September:
“Throughout the post-independence period, the sharing of the wealth of the country has been awkward and exclusive… the richest 20% of the country had appropriated for itself about a half of the country’s income, while the share of the lowest 20% of income earners had been about 5%… This outcome is bad enough, but the worst has been the ‘K’ type economic development that has taken place in the past few years after the country was hit by the Covid-19 pandemic and the unprecedented deep economic crisis thereafter.”
The critique of the phenomenon of post-pandemic ‘K-shaped’ recovery was almost exclusively made by the Left-of-Centre in both developing and advanced countries. A wide range of government interventions from fiscal stimuli to furlough schemes while fulfilling some part of its objectives also revealed disparities in outcomes.
In Sri Lanka, Dr. Wijewardena explains that the imposition of IMF conditionalities and spending restrictions led to “the rich moving up on the rising part of the ‘K’” becoming richer while “the poor sliding down the falling part became poorer… because it favours physical and financial capital owners, protecting their rights and ignoring human capital owners. This is evident from the quantitative target set by IMF conditions for attaining a surplus in the primary account of the Government budget.”
Pathirana and Dr. Wijewardena are aligned here in their critique, as the latter notes: “To generate a surplus in the primary account, the governments are forced to protect the interest payments but cut the payments to the labour. Therefore, in the current model, labour gets less but the rich class owning capital gets more.”
Thus, the burdens of the fiscal consolidation, especially the way in which it was being pursued by the previous Government, has been placed disproportionately on the middle class through increased direct taxes, while for those with incomes below the threshold or little to no income at all, there is no respite because they are paying more through indirect taxes.
Gatekeepers of elite consensus
This is ultimately the major complexity; in order that the reforms continue, there must be ‘buy-in’ and commitment to these goals from the political class and the citizenry. However, if the average Sri Lankan perceives themselves as taking on a disproportionate amount of the burden of the economic adjustment, the momentum of the reform programme will suffer.
The NPP was voted in on a premise of transforming Sri Lanka’s government and governance as well as altering the dynamic between Sri Lanka’s divergent income groups. In that regard, nothing less than this total transformation will do; simply increasing the tax-free threshold and introducing a few extra percentage points to the tax rates of large corporates alone will not be adequate to fundamentally alter the inequitable dynamics of the Sri Lankan economy.
The liberal political culture of incrementalism, minor changes around the edges of a system, has failed liberal parties in a context where an electorate is yearning for something far more radical, a solution that matches the size and urgency of the issues faced by a majority of the population.
As Dr. Wijewardena notes about the previous Government, former President Ranil Wickremesinghe, despite being a “seasoned and mature politician,” was still unable to “read the reality at the ground level where people had been sliding down the declining part of the ‘K’ growth model. Since the poor have become poorer and the rich have become richer, the widening income gap has also created social disunity, frustration, and anger among those in the middle and low-income classes”.
This social disunity, frustration, and anger has dissipated in the aftermath of the election, giving the Government and AKD some much-needed time and space, but this is unlikely to last for too long, especially if the people can sense that familiar, bitter taste of Centrist incrementalism that so often dooms even the most popular of Sri Lankan governments.
AKD must avoid Ranilist incrementalism and embody the bold and insurgent candidate that the people voted into power, instead of morphing into just the latest gatekeeper of elite consensus.
(The writer has 15 years of experience in the financial and corporate sectors after completing a Degree in Accounting and Finance at the University of Kent [UK] and also holds a Master’s in International Relations from the University of Colombo. He is a media presenter, resource person, political commentator, and foreign affairs analyst. He is also a member of the Working Committee of the Samagi Jana Balawegaya [SJB]. He can be contacted via email: kusumw@gmail.com and X: @kusumw)