By Harsha Gunasena –
Harsha Gunasena
A delegation of International Monetary Fund (IMF) headed by Krishna Srinivasan, Director for the Asia Pacific Department, visited Sri Lanka to hold discussions with the new government of Sri Lanka. The following was stated by Srinivasan according to the statement issued by the IMF on October4, 2024.
“We held productive discussions with President Dissanayake and Sri Lanka’s economic team on the economic and financial challenges facing the Sri Lankan economy. We agreed on the importance of continuing to safeguard and build on the hard-won gains that have helped put Sri Lanka on a path to economic recovery since entering one of its worst economic crises in 2022. We are encouraged by the authorities’ commitment to continue the reform efforts.”
This statement negates the statement in the NPP election manifesto which they have repeated several times in the election campaign that they will renegotiate the Debt Sustainability Analysis with the IMF. Allegations are leveled against the NPP that they have misled the voters, but we knew that this would happen. However, we all should be happy with the current status along with the IMF and Fitch Ratings.
There is a Table in this article which was compiled with the information from the annual report of the Ministry of Finance for 2023 and IMF targets. In the year 2023, in relation to the estimates income was more and the expenditure was less so that the primary balance which is the expenditure minus interest and loan repayments was increased by Rs. 394 billion from negative balance of Rs. 221 billion to a positive balance of Rs. 173 billion. This balance is to be used for repayment of loans and for the payment of interest. The primary balance in 2023 as a percentage of the Gross National Product (GDP) according to the IMF agreement was negative 0.7 and the actual figure was positive 0.6. Hence there was a positive performance according to the IMF target as well.
Economic growth was positive since the third quarter of 2023 and as a result the real economic growth, which means economic growth adjusted for inflation, in 2023 was negative 2.3%. This was better than the figure of negative 3% growth agreed with the IMF. In the year 2024 the growth in the first quarter was 5.3%, in the second quarter was 4.7%. Hence this will well exceed the target agreed with IMF which was 1.5% for 2023.
In the first four months of the year 2024 the primary balance was Rs. 365 billion. This is well ahead of the expected figures. Capital expenses were reduced in order to achieve this result.
According to IMF agreement the government revenue in 2024 should be 13.3% of GDP and in 2025 it should be 14.9% of GDP. If the tax cuts proposed by NPP are implemented the smooth functioning of the fiscal consolidation will be jeopardized. However, a proposal such as the one suggested by the former president reportedly with the IMF agreement could have been implemented.
Also in 2024 government expenditure should be 12.5% of GDP. Hence as indicated in the NPP election manifesto, spending 6% of GDP for education and 3% of GDP for health in near or distant future will be fallacy. Therefore the government will face a challenge of balancing election promises and fiscal consolidation.
The government announced that Sri Lankan Air Lines will not be privatized. Liberal thinking was introduced to Sri Lanka with the term neo liberal which is often used in a defamatory context. Many do not understand liberal thinking. Sri Lankan thinking which is based on outdated Marxist thinking promotes to keep the so-called national assets with the government even though those were running at losses. People, who exercise their sovereignty, like it. This airline cannot be uplifted without new investments or loans obtained with treasury guarantees. The issue is that the government is handicapped to implement either of these proposals. Also, if the Airline continues to make losses the government is unable to finance those losses. If these so-called national assets could be privatized at the market value the government would be able to get some relief for the sovereign debts.
In the accounts of Sri Lankan Airlines for the year 2024, there is a deficit of Rs. 400 billion of the total of Stated Capital, Reserves and accumulated losses. Assets were financed by short-term and long-term loans. The total loans obtained by giving treasury guarantees and concessionary letters from the government amounts to Rs. 146 billion. According to IMF agreement for the year 2024 treasury guarantees should not exceed Rs. 2,100 billion. However, according to the interim report released by the Ministry of Finance for the year 2024, by April 30, 2024, the total of treasury guarantees amounted to Rs. 2,228.
When JR Jayewardene wanted the help of Lee Kuan Yew to develop the Airline, Lee suggested instead to develop the airport. Suggestion was made probably thinking of the strategic location of the country. However, JR opted for the first option. Our leaders are still thinking in the same lines.
Therefore, the slogans the government tries to implement are not a reality in the ground. Similarly, it is uncertain the reaction of the government to the IMF agreed condition of recapitalization of Bank of Ceylon and Peoples Bank. Former president proposed to issue 20% of the shares of those banks to the employees and depositors but I think that those two banks should be listed in the stock exchange and 20% of ownership should be privatized. If so, it would be a revolution in the banking industry in Sri Lanka as happened at the point of incorporation of Sampath Bank.
Adopting a policy against privatization stating that some of the government entities are strategically important and not defining the dividing line is not beneficial to the economic development of the country. The business community should be given back the wealth taken over from them by the governments from 1956 in the guise of nationalization. Socialism in 21st century is not that the governments should engage in businesses or centrally handling the economy. It is that the governments should work towards distributing the benefits of development of the country to the people and lifting them from poverty. Also reducing the income inequality of the country. This could be done through the system of taxation.
What is more important is the approach of the NPP to handle the economy. The source to find out is the election manifesto. The Extended Fund Facility program of IMF is aimed at fiscal consolidation and not economic growth. Even during this difficult period, the country has achieved considerable economic growth ahead of IMF agreed targets. To uplift the economy, we should achieve higher economic growth at the earliest.
During the Mahinda Rajapaksa era the economy was centered on constructions done with borrowed money and the productivity of those projects was low. Based on the problems faced by Sri Lanka, economic growth should be centered on trade, based on exports. The swing moves to both sides, not only to one side. Similarly imports also should be improved along with exports. Out of the imports to Sri Lanka in 2020 consumer goods amounted to 21% and the rest were intermediate and capital goods.
NPP plans to have a production economy. Although they say that they promote exports as well this word connotes that ‘we produce for our country’ or ‘if we grow, we eat’ type of concept which had prevailed in Sirima Bandaranaike era. This system is an extension of the defensive system of import substitution that prevailed during Mahinda Rajapaksa era. This is proved by imposing additional tariffs for imported potatoes and onion by the government.
The export promotion system which is the opposite to this system converts our market beyond that 22 million to indefinite level. This is an offensive system. Those who provide inspiration for this are the ones who have done away with the defensive mentality especially the governments, people, the trade negotiators in respect of free trade pacts with other governments and business community. It appears to be that none of the above are in this mentality. Unfortunately, except for a few the business community also are not in this mentality. That is why out of the prominent businesses in Sri Lanka there is a lessor number of exporters and there are more banks. It appears to be that the NPP government does not have the capacity or intention to change this mentality. Fifty years back the Marxist Minister of Finance NM Perera said, export or perish.
NPP said that it will abolish the pensions of the former presidents and members of Parliament. This was a popular slogan. The government recently appointed a committee to investigate this.
As per the Article 36(1) of the constitution the president is entitled to a pension; when a person appointed the president that parliament should decide on it; any subsequent amendment, repeal or replacement of this Article and any subsequent law or any provision thereof inconsistent with this Article shall not have retrospective operation; and Parliament may by resolution increase, but shall not reduce, pension entitlement of the holders of the office of President. In addition to that under the President’s Entitlement Act No. 4 of 1986 a retired president is entitled for a pension, a residence, transport and payments to a secretary. Parliamentary Pensions Law No 1 of 1977 was approved by the National State Assembly. In Sri Lanka laws cannot be passed with retrospective effect.
An essential condition for elimination of corruption of the politicians is to increase their direct benefits such as salaries and pensions, not to reduce those. Also, proportional representation system where a lot of money to be spent on elections, should be changed to a mixed system. There should be severe punishments for corruption and there are laws for that. Thereafter only corruption would be reduced and talented people will come to politics. In order to eliminate the corruption and inefficiency of the public servants the excess employees should be removed, and the salaries of the balance should be increased. Efficiency targets should be set. Thereafter the red tape culture also should be changed.
The main reason for the economic problem of our country is not corruption but the steps taken by populist governments to pacify the voters and invest in low yield projects. Borrowed money was spent on these instances.
It should be emphasized that an ideology which is against globalization, privatization, minimal intervention of the economy by the government .and free trade would not be able to find out the solutions for the economic issues the country faces even if they are against corruption although it is appreciated much. Hence the government should seriously consider these points.
(Published in Colombo Telegraph on October 17, 2024)
https://www.colombotelegraph.com/index.php/challenges-faced-by-the-new-government/
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