Stimulus could add to perilous public finances: Dr. Sally

Published in The Daily FT.

By Chandani Kirinde

The stimulus packages put in place by the new Government for various sectors are not sustainable, with the extra layer of spending adding to the already perilous state of the country’s public finances, well known economist Dr. Razeen Sally said.

“The budget deficit and the current account deficit required an IMF bailout. The IMF conditions are being broken, which means another crisis is in the works. There is ever more spending with ever more entitlements. The tax concessions mean there is probably going to be even less revenue coming into the exchequer and all these problems in the macroeconomic front are going to be prevent Sri Lanka getting out of its rut, however well certain projects may get done, Dr. Sally said in an interview with Daily FT.

He said some of the welfare measures announced by the Government may be election gimmickry with the upcoming Parliamentary Election in mind but reversing them after securing a victory was going to be difficult.

“This is an extra layer of spending entitlements which are going to be difficult to reverse because your vote banks are there.”

Dr. Sally said those in power don’t understand this going up to the very top. “The best of them, on a good day, understand projects but not these complicated policy issues and the importance of building up institutions to get the job done over a period,” he said.

Asked about the appointment of more technocrats to some key Government bodies since taking office, Dr. Sally said while having better technocrats was good, there were no easy technical fixes.

“However good an appointment maybe, whether it’s the head of the Tourist Board or the Board of Investment (BOI), without other things changing, the outcomes are not really going to change. If you have an economy that is on the brink or spills over into a macro economic crisis where a new bailout is required, if you have continuing corruption, if you have as part of the bargaining game within the family some bad appointments made somewhere, say two or three bad appointments in return for one good appointment, that’s still not going to change the problem of SriLankan Airlines or the Ceylon Electricity Board (CEB) or the Ceylon Petroleum Corporation (CPC) where you have the really big losses,” he said.

On the plus side, he said the new Government would get some projects done which the last Government could not do whereas the Rajapaksas and particularly Gotabaya Rajapaksa had a track record of getting big projects. 

“But what I think they don’t understand are policies and institutions because they have been making things so personalised,” he pointed out.

Dr. Sally also said that with the return to power of the Rajapaksas, he feared the country would be back to illiberal democracy and authoritarian populism.

“Our institutions are so fragile the little that was accomplished by the last Government was not on the economy certainly, where they did a worse job than the Rajapaksas; it was more on a liberal political space, so I think that’s going to go,” he said.

He said the new man in charge, President Gotabaya Rajapaksa, was different from his brother Mahinda Rajapaksa in his style of governance and it would certainly resonate with a big portion of the population.

“The big man culture in Sinhala society in particular, which probably exists in other parts of Sri Lankan society too, is strongly rooted in Sinhala hierarchy. Every so often there is this yearning for this big man to come in and cleanse society, sweep things clean, and sort out all the big problems. We’ve seen it happen from the day after the election and not only among the Sinhala Buddhists but also among some Muslims, who, having being arch opponents of the Rajapaksas before the elections, have now become enthusiastic supporters because he is different from Mahinda,” he said.

He said this yearning for the big man propelled J.R. Jayewardene and then Ranasinghe Premadasa to high office too.

“If any person takes a step away from these events, we know this is not a good permanent solution because big men have their own flaws and they abuse power and most importantly they don’t nurture institutions, they destroy them, they make things worse, they make society worse and disputes within society worse.”

Asked if the preference for big man politics was a global phenomenon given Modi in India and Trump in the USA, Dr. Sally said that while it was happening in many places, there were reasons to fear it more in Sri Lanka than in many other places.

“In the West, where institutions are stronger, there are checks and balances. In the USA there is the Trump phenomenon, but the institutions have survived Donald Trump reasonably well. The media, the Supreme Court, strong state governments, vibrant civil society – we don’t have that as such or are much weaker.”

On developments in India, Dr. Sally said that what differentiated Sri Lanka from its closest neighbour is that India was big and diverse. 

“Even though Modi and the present incarnation of the BJP is getting more of a Hindu agenda through than before, it is a too big and a complicated place whereas 20 million people in a small space, two-thirds of them Sinhala Buddhists, it means you can take over the institutions and wreak damage much more and much more quickly; that is my fear.”

He said there was a difference between Lee Kuan Yew and Singapore and the Modis and the Rajapaksas of this world or even the Putins in Russia. 

“Lee Kuan Yew was populist, he was charismatic, he was ruthless and in his prime he was a dictator of sorts, but he was highly unusual in that he built institutions to outlast him. He had that farsighted vision that Singapore wasn’t going to really turn the corner by him ordering this, this and this. That’s a city, it’s not a complicated country. It was about attracting the talent in his generation, delegating, saying ‘you do this, you do this, and we have a division of labour among us’ and gradually building up the institutions over three generations to survive his death, which is the story of Singapore. But as a big man politician he is exceptional.”

Dr. Sally, who is a visiting Associate Professor of the Lee Kuan Yew School of Public Policy of the National University of Singapore and worked briefly as an Advisor to the Finance Ministry, said he found working with the last Government a “complete waste of time” because it was “so spectacularly bad”.

He said they came in without any kind of plan as they didn’t expect to win that Presidential Election and what eventually materialised, more than halfway into their term, was a Christmas tree wish list.

“These are all the good things that are going to happen by waving a magic wand in in 2020 and 2025. So, there was never a credible plan with maybe a list of two or three priorities on which they really focused as opposed to 100 or 200 priorities.”

He also said that the last Government made some terrible appointments starting with Ravi Karunanayake (Finance Minister) and the then Prime Minister (Ranil Wickremesinghe) appointing his Royal College classmates and by the time there was some realisation about these bad appointments it was too late.

“We know that the JVP and the LTTE combined did a very good job of assassinating the best of Sri Lankans. What’s left is the dregs, particularly in the UNP, so there is very little talent left even if the party acquires some kind of democracy.”

He said the last Government went to the IMF and were told to do this or that. “This was again part of the problem. The IMF wrote the blueprint, the Government half adopted it and then it was easy for the other side to point to them as a way of selling out. It was never homegrown and then came the bomb blasts which showed the last Government was a genuine national security threat.”

Asked what reforms should be put in place by the new Government, Dr. Sally said public finances must be made sustainable which means reining in public expenditure, and simplifying the tax systems, not higher taxes but simpler taxes with a much bigger incentive for everybody to pay taxes other than get around it.

“We need a medium-term fiscal sustainability program going beyond the IMF program to rein in these twin deficits, to keep the currency stable and prevent going for another bailout. I think we still need another big deregulation agenda.”

He also said Sri Lanka would remain fairly entrenched in the China camp even though the President had declared his Government would remain neutral in its foreign relations, particularly given the geopolitics in the Indian Ocean region.

“Maybe more than his brother, Gotabaya Rajapaksa will try to be on friendly terms with India and maybe the West I am not sure, but I think the direction of movement is still towards China. It was the same under the last Government. They repaired relations with the last Government very quickly. That I think will continue but what will accelerate the momentum is that the Chinese have personal connection with the Rajapaksas which they didn’t have with the previous Government and they’ll be all too ready to bail out.”

He said the Rajapaksas come with baggage, vis-à-vis India and the West, on human rights issues and on minority issues which is inevitably going to complicate relations with the West and India while there were no complications seemingly in their relationship with China.

“We will be going further in the Chinese direction which of course means that whatever the rhetoric, Sri Lanka is not going to remain natural. Sri Lanka is in the China camp is far as politics/geopolitics in the Indian Ocean is concerned and thinking anything else is wishful thinking.”

Dr. Sally said he remained pessimistic. “I don’t follow the conventional wisdom of some people who are very bullish on the Rajapaksas.”