By Harsha Gunasena –
Harsha Gunasena
Ajith Nivard Cabraal on behalf of Sri Lanka Podujana Peramuna has proposed a twelve-point methodology to boost the economy of Sri Lanka. The political movement represented by Cabraal promotes authoritarianism and chauvinism and the same represented by the present government promotes democracy. Both political movements promote market-based economy. Based on the accepted political thinking, the first movement represents the far right. Therefore, it is pertinent to examine these proposals carefully.
Sri Lankan economy is in dire straits. Income of the state has been lessor than the expenditure from the date of independence except for few years. The deficit was covered by domestic and foreign borrowings. As a result of the prolonged deficits of the government budget, government debt increased gradually. If these expenses were used at the optimum level, then there would have been an economic growth which would have facilitated the repayment of debts. For instance, expenditure on education would have created an educated young generation which would have been capable of enhancing the national production. Eventually it would support the growth of the economy. When the economy is growing income of the government also will grow with increased income from taxes and thereby the debts can be settled. In other words, there is no harm of borrowing if the benefits are more than the expenses incurred.
When this government came to power on one hand government debt was going up and on the other hand government revenue was going down. In 1990 government revenue as a percentage of Gross Domestic Production (GDP) was 19.6%. in 2014 it dropped to 11.5%. In 2018 it marginally increased to 13.3%. Government debt as a percentage of GDP was 71.3% in 2014 and in 2018 it was 82.9%. Government debt is comprising of foreign debt and domestic debt. This increase was due to the increase of foreign debt. In 2014 the component of foreign debt to GDP was 30% and in 2018 it was 41.6%. The reasons for this increase were foreign borrowing to bridge the budget deficit, low growth of GDP, and depreciation of the Rupee during the tenure of this government. Decrease of the growth of GDP started in 2013, during the tenure of the previous government which was 3.4%. Average GDP growth from 2010 to 2012 was 8.5%. Average growth rate from 2013 to 2017 was 4.2% and in 2018 it was 3.2%. IMF predicted that the growth in 2019 would be 2.7%.
Although this government as well as the previous government declared that the budget deficit would be reduced, it has not reduced to the expected level. Ruling parties give relief to the people in the years of the elections and as a result budget deficit increases in those years.
In addition to the budget deficit there is a deficit between the receipts of exports and the payments to imports. A Considerable amount of this deficit is covered by the foreign remittances received from the people employed overseas. Exports should have been increased in order to bridge this deficit. In 2004 income received from the export of goods and services as a percentage of GDP was 35.3% and in 2010 it was reduced to 19.55%. In 2014 it was 21.09% and in 2018 it was marginally increased to 22.7%. Therefore, the economic prosperity during the previous government which is highlighted very often was a myth. Prosperity was there superficially but erosion was started underneath.
Cabraal’s twelve points should be viewed in this background. His first suggestion was to immediately slash tax rates by at least 20% while also abolishing several obnoxious taxes which have seriously affected business sentiment and confidence. By reducing taxes the rich will be encouraged to invest. As a result there can be an economic growth. This is an accepted phenomenon. During the economic slowdown of the previous years many suggested that the economy can be stimulated by reducing taxes and increasing the government expenditure. This was tried by the present government as well in their first budget prior to the general election. With the increasing growth of the GDP there is an increasing chance of paying the debt. Since the government revenue has reduced drastically this government had to increase taxes in order to rectify the situation. Not only that, out of the total tax revenue ,80% comes from indirect taxes and only 20% comes from direct taxes which means those who can pay, pay less compared to those who cannot pay. Moreover, the expected income from Value Added tax is also not received. This situation is obnoxious in the point of view of the state. During the previous regimes various tax concessions were given to the private sector and it is doubtful whether the state got the return expected. Although It may have been unpopular at this crucial point and detrimental to the reelection of the government, it was mandatory to take certain steps to increase the revenue of the government.
Therefore, all these things should be balanced. If there are any obnoxious taxes those should be removed. Discussions should be carried out with the private sector who pays the taxes.
He went on to suggest that the interest rates should be reduced. This is being done now. He wanted to stabilize the exchange rate by instilling confidence among key investors and gradually steer the Sri Lanka Rupee to a value of around Rs.150 per USD by end 2021. He further stated that such gradual strengthening of the Rupee will be based on the improvement of the business environment which will then allow all stakeholders to gradually adjust to the strengthening currency.
During the tenure of the previous government the value of the rupee was kept at artificially inflated value. The main reason for this decision was that if the rupee was devalued the government would have to pay more in terms of the Rupee for the foreign currency borrowings. In two instances Central Bank could not hold it and there were rapid depreciations of the Rupee. However, the main victims of this policy were the exporters. Consequences were visible and during that period exports reduced drastically. There is no proposal to improve the exports among these proposals and this proposal discourage exports. For Sri Lanka there is no other way for solid development other than export of goods and services by linking to high end production and service channels since we are having a small domestic market. Policy should be to focus on the exports and if the exports improve Rupee will be eventually strengthened. Rupee cannot be strengthened by mere improvement of the business environment. There are no short cuts in this process and jargons of words would not serve any purpose.
During the previous regime GSP+ relief to export the goods to European Union with concessionary customs duty was withheld. At that time the government did not agree to grant certain human rights of the people as a condition of that relief. As a result, the exporters who exported goods to European Union were affected. This government obtained this relief back.
He wanted to renegotiate all unfavourable commercial agreements that have been entered into or to be entered into by the current Government including the Hambantota Port, Mattala Airport, Millennium Challenge Agreement. This is a good move. As a result of a similar negotiation by this government, we were able to convert an unfavourable agreement with China to hand over them a portion of the reclaimed land under the Port City project to a 99 year lease agreement.
His next major suggestion was to build 600km ellipsical ring expressway around the entire island and to Initiate several other mega infrastructure development projects in order to give a significant boost to the real economy at the ground level. Duty of the government is to invest in infra structure. This will result in the promotion of investments. It is also true that mega investments would be a stimulation to the ailing economy. It would be beneficial if low interest loan can be obtained for a long period. It would be hard to get low interest loans since we are a middle-income country. Politicians like this type of mega projects. Stimulation will be sustainable only if the production and exports follow. These mega projects should not be white elephants such as Mattala airport.
Based on the situation of the country it is the responsibility of the innovative rulers to find out the ways to get more benefits by investing a lessor amount. A considerable amount can be saved by reorganization of the public sector. Ranil Wickremesinghe, when he became the Prime Minister in 2001 at the time the economy recorded a negative growth, stopped the recruitments to the public sector altogether. As an experienced politician he would have known that it was a political suicide, but he did it since it was essential at that time due to inflated public sector.
Cabraal’s short term proposals such as to call for a moratorium on capital repayment by customers who service their interest payments without interruption, for a period of 18 months; government to establish a Business Revival Fund to provide relief to the financial institutions to face the rapidly increasing NPL scenario; and stabilise all financial and banking institutions immediately and wherever necessary, provide liquidity support; were good proposals. However there are fundamental flaws of his overall economic recovery plan.
In order to come out from the present situation effectively the budget deficit should be reduced. Small and medium entrepreneurs living throughout the island should be supported effectively. Production and the exports should grow. Tax concessions and low interest loans should be given to the exporters. Then the trade deficit would be favorable and the economy would be expanded. More importantly the country should have the rule of law. This is of paramount importance for the foreign investors to come.
This government is trying to find out lasting solutions to the two basic questions of the country, budget deficit and the trade deficit. Although the movement is slow the selected path is correct. In the run economic growth is affected. There are no quick solutions to the chronic economic problems. The duty of the next government should be to expedite the slow movement and not to mess it up by going in a different direction.
/ October 24, 2019
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Mr . Gunasena
Your critique is clearly biased . As a finance professional how could you justify leasing the Hambantota Port – or for that matter any national asset to a foreign entity for 99 years ?
The Mattala Airport is by no means a white elephant. It has great potential if well managed . One could also assume you found no fault in it being used to store paddy .
Your critique is clearly biased . As a finance professional how could you justify leasing the Hambantota Port – or for that matter any national asset to a foreign entity for 99 years ?
The Mattala Airport is by no means a white elephant. It has great potential if well managed . One could also assume you found no fault in it being used to store paddy .
/ October 24, 2019
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Thanks for your comment. Sri Lanka is having a budget deficit from the begining except for two years.After we borrow, to repay the debt we have to borrow more since there is a deficit in the following years as well. In this type of situation returns of the investment should come quickly. Therefore rather than getting dragged into the debt trap more, leasing is good. However if we can stay without leasing it would have been better. Situation does not permit that I believe.
Just compare the Mattala Airport with jaffna Airport.
What do you say about the outright sale of Shangrila premises? A portion of reclaimed land of port city was planned to sell outright to China. This government changed it to a lease which is better.
Just compare the Mattala Airport with jaffna Airport.
What do you say about the outright sale of Shangrila premises? A portion of reclaimed land of port city was planned to sell outright to China. This government changed it to a lease which is better.
/ October 25, 2019
7 1Mr. Gunasena,
Enjoyed reading your article. You call for public sector reforms and cite Ranil’s courage to freeze recruitment in 2001 and yet you don’t seem to have noticed his 2015 action to increase the salaries by Rs.10,000 per month across the board for 1.5 million public sector employees. The cost of this action is around Rs.200 Billion PER ANNUM (well over $1 Billion per annum). Just to put it in context, this seems equivalent to the cost of the Hambantota harbor, meaning that 4 such harbors could have been built during the last 4 years! Further, this salary increase is permanent and the need for the state to find at least $1 Billion every year will continue in perpetuity. The sad fact is, this salary increase was not even asked for by the employees but was given voluntarily to fulfill an election promise. Further, if I recall correctly, the public sector salaries were again increased by over Rs.2000 per month back in July of this year and another increase has been promised for January next year! I can’t help but agree with calls of “bribing for votes” here./ October 26, 2019
0 0Mr. Anil Karunaratne,
Thanks for your time.
I agree with you. I said this in the article.
“Although this government as well as the previous government declared that the budget deficit would be reduced, it has not reduced to the expected level. Ruling parties give relief to the people in the years of the elections and as a result budget deficit increases in those years.”
This was done ahead of the general election 2015.
When questioned about the extra ordinay expense PM said they wanted to revive the economy by pumping money to this sector.
I also said this in my article.
“During the economic slowdown of the previous years many suggested that the economy can be stimulated by reducing taxes and increasing the government expenditure. This was tried by the present government as well in their first budget prior to the general election.”
Reference was to the point you raised.
I have pointed out the matter of stopping the recruitments since it was unprecedented, probably may not occur in the future.
I have looked at the issue in the point of view of the national interest. I believe that the present policies are favourable to the country in the long run. If I am proved wrong I would accept it.
Eagle Eye / October 24, 2019
This Government keeps on saying that exports should be promoted as a solution to the trade deficit, but very little effort has been taken to achieve this.
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This Government does not think of reducing imports as a solution to trade deficit. Think of the amount of foreign exchange drained out as a result of importing duty free vehicles to MPs and bullet proof cars to President and PM. This Government ruined the agricultural sector and allow traders to import food items that can be produced in the country. This Government allows to import all kind of junk which are not really essential. I was wondering why this country should waste foreign exchange earned by hard working ladies in the Middle East to import very expensive perfume, make-up stuff, whitening cream and jewelry used by high class women who hardly contribute to the economic development of the country and foreign liquor and cigarettes.
Harsha Gunasena / October 26, 2019
Thanks for your comment.