By Harsha Gunasena –
Harsha Gunasena
The next election is going to be a presidential election and according to the constitution it will be held during September-October 2024. Last year we observed the postponement of the elections of local bodies and the explanation given was that there were not sufficient funds to allocate for the elections due to the economic crisis. As a country, solving the economic crisis should be the priority and not who solved it. The upcoming presidential election cannot be postponed while keeping the democratic status of the country.
The government agreed with the IMF the conditions of the revival plan and in return Sri Lanka is getting IMF assistance in the form of 48-month Extended Fund Facility of SDR 2.286 billion (around USD 3 billion) to be released in half yearly instalments. Next major step is external debt restructuring which is already delayed. With this delay the IMF delayed their second tranche and paid it last December amounting to USD 337 million.
Gotabaya Rajapaksa and his group was anti-IMF even prior to coming into power as expressed then by Nalaka Godahewa. That was why there was a delay in seeking IMF assistance when the country was in trouble. Not only that, but they have also taken policy decisions such as reduction of income tax in contrary to previous IMF advice with the support of the Private Sector. Ultimately after the failure of the indigenous methods of Ajith Nivard Cabraal of borrowing from the Central Banks of India and China the then government sought the assistance of the IMF.
Now no one talks about indigenous methods and all the political parties have agreed with the IMF way. However. opposition parties say that once come into power they will renegotiate the programme with the IMF. IMF Senior Mission Chief for Sri Lanka Peter Breuer responded that the IMF is willing to listen to the alternative suggestions of how the programme objectives can be reached. However, the suggestions must be realistic and achievable within the timeframe of the programme. He further said “The path is a knife-edge path. We have to remember that. So, yes, we acknowledge in our press report the green shoots that we see for the economy and that’s the beginning of a virtuous cycle and we have to keep it there”.
Therefore, those political parties should specify the areas they are going to renegotiate and whether they can achieve the result within the time frame.
The IMF primarily focuses on the sustainability of the debt which means after restructuring whether the residual balance of debt could be repaid within the timeframe and at the interest rate agreed and the total debt should not keep on accumulating. Hence the current revenue of the government should be more than the expenses. The government agreed with the IMF that a ceiling which is the primary account balance, meaning the revenue minus expenses other than interest and capital repayment of debt, should be more than 2.3% of the GDP.
Therefore, the aim of the IMF programme is fiscal consolidation and not improving the economic growth rate. Growth rate can be improved only with the background of sustainable debts and disciplined fiscal operations.
It is the duty of the government to have growth-oriented plans. Although the governments say that the engine of the growth is the private sector, there are a lot of public sector institutions operating in the economy. When an economy is small it is possible that the private sector is not in a position to invest in large projects. Hence the governments can invest and subsequently those could be transferred to the private sector. In the USA spaceflight activities will be undertaken by the private sector. In Sri Lanka the government is running hotels.
From mid 1950s the government acquired assets and businesses from the private sector. Therefore, at present considerable wealth is in the hands of the government. In order to have a higher growth rate these businesses should be transferred to the private sector at market prices in a transparent manner. Ceylinco Insurance is the market leader and not Sri Lanka Insurance Corporation. Dialog is the market leader and not Sri Lanka Telecom. Just earning profits is not sufficient.
By privatizing the government enterprises in one way the enterprises will be in more efficient hands to contribute to the economic growth and in the other way cash-strapped government is getting some money. Investments for the economic growth should come largely from the private sector in the coming years.
I have written a critique of the policy statement of the NPP Rapid Response in January 2022. Looks like since then they have changed in line with some of the suggestions made as well although a fresh official policy statement was not issued.
NPP emphasizes central planning of the government. “We advocate a value-added economic approach that considers which products and services should be manufactured, which production methods should be adopted, which technologies to use, how to utilise human and physical resources, how foreign trade structure should be shaped and how benefits of the manufacturing process should be shared among the people.”
China followed the process of privatization of government enterprises and moved from central planning to a great extent. In 1979 a set of radical agricultural reforms were started across China. They ended the commune system, increased the size of allowed private plots, and legalized the informal markets for farm products in rural areas. At the core of the urban reforms in mid 1980s, was the enterprise reform, and its main feature was to allow enterprises to retain part of their profits. Before 1984 all profits of enterprises were fully remitted to the budget. Private firms were also permitted in the cities, and their share in retail sales rose from less than 10 percent in the late 1970s to more than 50 percent in 1987.
If the private sector is equipped with adequate capital and necessary resources the government should not advise them in which businesses they should be engaged and how. However, there should be consistent national policies so that those are not changed every five years.
Ranil Wickremesinghe was appointed Prime Minister in May 2022. In his initial address to the nation, he named Sri Lankan Airlines and said that it should be restructured. He became the President in July 2022 and in August 2022 he gave an interview to the Economist and said Sri Lanka Insurance Corporation will be privatized. SOE restructuring unit was established under the Ministry of Finance and the Cabinet in March 2023 mandated the Restructuring Unit to divest an identified set of SOEs. In March 2024 the government decided to take over USD 210 million and SLR 41.4 billion taken by Sri Lankan Airlines from the state banks.
We have not seen the result yet. I understand that these activities take time and cannot be done in a rush. The so called neo liberalist Ranil Wickremesinghe has taken such a long time to finish this, and I cannot imagine what will happen under center-right, center-left, or far-left government. One reason for the delay may be the forthcoming elections and the President is aware of the public perception.
In Sri Lanka there is a strong public perception that government enterprises should not be privatized. One reason for this maybe they have observed the manner the entities were privatized under the previous governments where those entities were given to their cronies for less than the market value. This defect could be rectified in future transactions. The other reason may be the perception based on socialist thinking that government entities will provide a better service for lessor price. It is not. Think of the behavior of Litro Gas in changing the gas formula and resultant explosions.
Opposition parties take this line of public perception into consideration, when talking about privatization. It is beneficial for politicians to have public enterprises so that they are in control of recruitments.
Private sector also should be geared up to take entrepreneurial decisions. Sometime back Amitha Gooneratne said he failed to convince the Commercial Bank Board to invest in Bangladesh much earlier and finally it got materialized. Recently Ronnie Peiris in an article to Daily FT said that the boards in Sri Lanka are too ‘old school’ and this is hampering Sri Lanka’s march to a new world economy.
Therefore, old school thinking should be abandoned by the political parties as well in order to take Sri Lanka to the next level not only in respect of the economy but also in all other aspects.
(Published in Colombo Telegraph on April 15, 2024)
https://www.colombotelegraph.com/index.php/the-impact-of-the-next-election-on-the-economic-reforms/
