Why it takes so long to recover from an economic crisis

Originally appeared on The Morning

By Dhananath Fernando

I have been reflecting on the last few years of public policy and discussion, which I can broadly divide into three main chapters:

Chapter 1 – Denial

Chapter 2 – Realisation

Chapter 3 - Recovery

Chapter 1 – Denial

There was a time when even respected businessmen thought an economic crisis was a distant scenario. Many politicians, across all party lines, failed to consider a situation of 12-hour power cuts and long fuel lines, and viewed debt restructuring and accessing the International Monetary Fund (IMF) as taboo conversations.

We relied on a $ 3.6 billion bailout from an unknown Omani fund and thought China and the Port City would bail us out as a last resort. Some even thought the discovery of a sapphire cluster might be the breakthrough Sri Lanka needed. Sri Lankans believed we were a special nation with a magical power that would rescue us in some other way.

Despite our strategic location, beautiful weather, and natural beauty being undeniable assets, they do not guarantee a rescue from our own bad policies. Our denial was so strong that an international institution titled their report on the Sri Lankan economy as ‘Denial is Not a Strategy’.

Chapter 2 – Realisation

The moment of truth came, but we were too late to respond. None of our bailout expectations materialised and the international financial architecture found it difficult to save us. Our debt is unsustainable and the IMF requires a commitment from our creditors before providing us financial assistance.

We are struggling due to global geopolitics and our poor diplomatic service and lack of professionalism doesn’t allow us to be taken seriously. We hurt all our friendly nations as well as India, China, Japan, and the US. Islamic countries too were concerned and unhappy with us over different issues.

People only realised the depth of the crisis when medicine was in short supply and their loved ones considered leaving the country. Inflation skyrocketed, prices increased, and poverty affected about 30% of the population.

Chapter 3 – Recovery

The moment people realised the severity of the crisis, they started asking about when we would recover. The simple answer is that it takes a long time and now many of us understand why. Overcoming a crisis of this scale, which in itself is a combination of multiple crises, cannot be done easily.

Simultaneously, we face a balance of payment crisis, a debt crisis, a financial crisis, a humanitarian crisis, and a political crisis. The cost of delaying a response to the crisis and mismanagement has to be shared by us all, with mounting tax increases and high inflation pressure from the grassroots.

As a result, we can see constant protests and interruptions to public life, further worsening the situation. At the same time, this opens a new political space where any political party can make unrealistic promises and auction for votes. This vicious cycle is why recovery from the economic crisis takes a long time.

The specifics of debt restructuring are still a mystery to us. We don’t know how the restructuring will be carried out or the impact it will have on the banking industry. It is also unclear how the markets will respond.

Without domestic debt restructuring, even if we apply a 50% haircut on International Sovereign Bonds (ISBs) and Sri Lanka Development Bonds (SLDBs), our debt to GDP ratio after 10 years will be 136%, according to a Verité Research study published in October 2022. Cost of servicing new debt and the cost of rolling over previous debt at a high yield curve will not bring down our debt to GDP ratio.

Nevertheless, it is still possible for domestic debt to be restructured and banking recapitalisation is necessary. According to the same document, investments in Government securities, primarily Treasury bills and Treasury bonds, account for more than 30% of the interest revenue for the total banking industry.

Hence, changing the interest rates on these securities will affect the stability of banks. On the other hand, 82% of the money in the EPF and ETF has been put into Government securities.

As the required changes take place, no one will be happy, so people and opinion leaders will react in different ways. The changes will go back and forth and recovery will be prolonged. Elections will come and decision-making authorities will change and policy decisions will also go back and forth.

All this is why it takes so long to recover from an economic crisis.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Our only saviour is reforms

Originally appeared on The Morning

By Dhananath Fernando

Whether we will be able to receive International Monetary Fund (IMF) Executive Board approval is now a topic of discussion even amongst the most economically-illiterate person. Let us first set the context.

The Sri Lankan Government and the IMF came to a Staff-Level Agreement in early September 2022. One of the key milestones we have to pass through is to get to some level of negotiation with our creditors. Our credit portfolio is diverse. We have multilateral senior creditors followed by bilateral creditors, including members of the Paris Club, mainly Japan.

On the other hand, there are two main creditors who are non-Paris Club members; India and China.

Paris Club members agree on equal treatment in debt restructuring. In simple words, all member countries of the Paris Club will be treated equally when it comes to restructuring. India has also agreed to assist Sri Lanka in the debt restructuring plan and has provided a letter to the IMF. However, according to the IMF, letters provided by China are not adequate. It has indicated a two-year moratorium, but given the financial needs expected by the IMF, Sri Lanka will not be on a sustainable debt path after a two-year moratorium alone.

Generally, credit assistance provided by multilateral donor agencies such as the World Bank and the Asian Development Bank is not restructured, provided it has been given with very long maturity periods and very low interest rates. Therefore, restructuring those loans has not been the practice. That is how the global financial architecture is designed, given their assistance in eradicating poverty and the IMF being the lender of last resort. 

However, over the last few years, there has been a request by private creditors, bondholders, and some stakeholders that the credit of multilateral donor agencies should also be restructured and China is one party that has made this request. Unfortunately, Sri Lanka is too negligible an economy to make that request or challenge the global financial architecture. .

Given the delays, there is now an emerging conversation on whether we have any other alternative options if the IMF agreement is further delayed. In fact, I asked this question at the meeting convened by the National Council Sub-Committee on identifying short- and medium-term programmes related to economic stabilisation, on whether alternative options were being considered in the likelihood of a delay. According to its Chair MP Patali Champika Ranawaka, the committee has not considered it, but he has an aim of being prepared for the worst-case scenario.  

As we have been saying over the years, we have come to this situation through our own policy errors and with our bad reputation, we do not have many choices in hand. Therefore, finding a solution without the IMF is a major challenge, but we, as a country, cannot avoid the consequences should this agreement get further delayed; social discussion is needed on what we can do to get it soon and on the available alternatives. 

Managing with what we have

One option is to drastically cut down our consumption, including essentials such as food and medicine, and face the situation with what we have. That option can trigger some level of social unrest because ‘a hungry man is an angry man’. 

Even at this level of consumption contraction, our poverty rate has increased above 30% according to a Parliament committee. Out of about five million households, about 1.7 million receive Samurdhi and another 1.1 million are on the waiting list. Of course, Samurdhi is not a good indication, as some people who should receive Samurdhi benefits are not recipients, while others who should not be in the programme are included. However, managing with what we have is one available option that comes with its own consequences. 

Moving ahead with debt restructuring without China?

The next option is to move ahead with debt restructuring without China. This option has a significant limitation because IMF confirmation is required even to restructure the debt of bilateral creditors. Without the IMF, it will be difficult to get Paris Club members and other stakeholders to a debt negotiation table. The more we delay and if China takes a very hard stance, which is likely, we have to request the IMF to move ahead with those who have agreed and hold China’s debt payments until we come to some level of agreement.

We have to understand China’s point of view and geopolitics as well. Our crisis has also become a tug of war between two economic powerhouses. On one hand, China does not want to align or agree with a US-led programme. On the other hand, the relief measures given to Sri Lanka have to be provided to all other countries making similar requests in future.

Pakistan and many African countries and emerging economies are expected to face debt distress in the coming years. China’s growth predictions are low, impacting global economic growth. Hence, the more we delay opening up Sri Lanka to geopolitical sensitivities, the more we will be pushed to align with certain superpowers. If we were to depend on China or India for continuous relief measures, it would be extremely difficult to avoid becoming a geopolitical pawn.

Possible reforms and opportunities 

In this context, it is clear that all available options (with the IMF or without the IMF), will result in extremely difficult times. However, in a crisis, there will be winners as well. Regardless of any of the aforementioned options, there are basic levels of reforms we have to undertake in any scenario. 

State-Owned Enterprise (SOE) reforms must be at the forefront. Without this, we have no future. One good opportunity is to capture the drive within the Indian market. Even if Sri Lanka does nothing, there will be spillover effects from India. The Indian economy, especially the North Indian economy, is growing very fast and we have to connect to their market. If we had played our cards right, we could have become a good connection point for trade between India and China. Instead, we made enemies all over. However, there is still potential. 

The more we delay reforms, it will further exacerbate the problem. As such, reforms are the only saviour in any scenario. It is sad to see how we are distancing ourselves from reforms, with political developments triggering another round of economic and political uncertainty which will lead to social uncertainty. Let us hope reforms move forward fast. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lanka’s biggest insecurity: Fear of competition

Originally appeared on The Morning.

By Dhananath Fernando

If we were to take some collective responsibility for the sad state of our country and attribute it to any cause, I believe it is due to our ‘fear of competition’. 

From top to bottom, Sri Lankans have been fearful of competing. Over a period of time, we have become very reluctant to compete and our fear has grown into incompetence. The fear of competition syndrome is spread across all sections of society, from the top executives to people below the poverty line. 

Sadly, as a country, we have not understood the meaning of ‘competition’. In our vocabulary, competition is where winners are selected and losers are ridiculed. However, competition is actually where the winner and the loser both win – when the winner wins, the loser also wins. How can this be?

A winner is defined as an individual who takes the leap to utilise the resources available to their maximum potential. Even in a 100 m race, the winner is the person who covers the distance within the shortest time span.

The recipe for the title of a winner is determined by the effort endured by any individual to go that extra mile and maximise the resources available. Once that formula is found, even the loser can use the formula of the winning person without wasting their resources further. Losers can ask the winners to run on their behalf next time so that the losers can better use their skills elsewhere.

This is how we all use so many consumable goods. Let us take computers as an example: most of us have lost the race of manufacturing computers while many have not even tried. But someone found the computer formula, so now we can all use the winning formula, which helps many of us save our valuable resources. Thus, losers have also benefited. This is why competition makes winners win and losers also win. It is much more than simply picking a winner – it is about the allocation of resources.  

In the Sri Lankan context, the fear of competition is what mainly led to the misallocation of resources. From top to bottom, not only are Sri Lankans fearful, but we also instigate fear in others. 

It was recently reported that a driver who was providing a taxi service using a mobile app had been threatened by some other drivers who were not using the app-based taxi service. The threat had taken place while the service was being provided to foreigners. The underlying reason for this is the fear of competing with mobile app-based technology.  

Fear of competing with private medical schools

While our tuk-tuk drivers have fear of competition regarding app-based solutions, our doctors have a fear of competition regarding private medical schools. They do not want someone capable with a better service in the market because they are fearful that someone else will overtake them. 

Fear of competition in furniture manufacturing 

Our furniture manufacturers are fearful of competing with other furniture manufacturers in the region. Not only are they fearful, they even ask the Government to support some of these industries with taxpayer money.

Fear of competition in the construction industry

Our bathware and tile manufacturers are reluctant to compete with the same category of products overseas. As a result, our cost of construction is about 25-40% higher than the region due to our widespread fear of competition. Most of our construction materials have a tariff of nearly 100% to avoid competition. Even the private sector is suffering from the fear of competition, which is one of the main reasons Sri Lanka lacks big industries and innovation in the system.

University students’ and the labour force’s fear of competition 

Our university students and teachers do not want to compete with international students. As a result, resistance is high against the entrance of any type of private university to the market. Rankings of our universities and colleges have been deteriorating over the years, but we still remain reluctant to compete. Not only do university students want to avoid competition, but they also want to be dependent on the Government.

Our Government servants and entire labour force are fearful that if we open the job market, foreigners with better skills will replace them. Although we are not competitive, we want to maintain our stake.

Across the board, Sri Lankans are deeply fearful of competing with the world. We lack the courage to admit the truth that our competitors can produce high quality products with high efficiency and productivity. If we are so afraid to compete with the world, there is little reason to claim that we have to improve exports. Exporting would mean competing with the world on an uneven playing field with different tariffs imposed in different regions.

Hasn’t our fear of competition not only made the country worse, but also contributed greatly to our economic crisis? Not just politicians, but all Sri Lankans have promoted fear among our fellow citizens. There are no innovations, inventions, or new technologies without competition. That is the sad truth. We have unfortunately become victims of our own actions.

For once, we should admit that we are the problem without absolving ourselves and instead blaming our political elites. While the poor decision-making of politicians is definitely a problem, if we are reluctant to compete, they can easily say that they simply represented our worldview and opinion.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why Sri Lankans aim low

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Over the years, a lot of weight has been put on building “aspirational Sri Lankans”. Different terminologies have been used to define them; however, the core group of the so-called aspirational Sri Lankans remains the same – “intellectuals”, “business professionals”, “young professionals”, and “members of professional movements”. The key question then is what makes aspirational Sri Lankans aspirational, and why have they been unsuccessful in placing Sri Lanka back on the map?

Where are our aspirations?

Many Sri Lankans aspire to build a house, buy a vehicle, and probably have a grand wedding and proceed on to provide a good education for their children. Achieving these aspirations continues throughout their lifecycle. Then, the next generation takes the baton and runs the same race. This is the constant marathon run by our “aspirational Sri Lankans” for decades.

The serious question we need to ask ourselves is why basic needs such as housing and transportation have become aspirations for the average Sri Lankan in the 21st Century. Moreover, attention should be given to the opportunity costs of obsessing over housing and transportation by these “aspirational Sri Lankans” – what could be achieved if this was not the case?

Why people consume capital by building a house

While it is true that the financial literacy of Sri Lankans is low and that we have failed at the formation of capital due to excessive consumption from our initial capital instead of investing, we also need to investigate the economic rationale behind such behaviour. The reason as to why basic needs such as housing have become a distant dream to the average Sri Lankan is deeply rooted in the distortion of prices in the housing market due to the implementation of misguided economic policies. Most of the construction material in Sri Lanka is far more expensive than the prices of the said material in the entire region. The total tax Sri Lankans pay for imported steel ranges between 19% and 64%.

The tax on imported tiles ranges between 19% and 93%, and at present, the Government has imposed a temporary import restriction on tiles and sanitaryware, driving the prices of local goods up. Anyone who has attempted to build a house would know how ridiculous the prices for light fittings, curtains, aluminium, and other material are. Sri Lanka also has a shortage of skilled labour, and finding a mason or a furniture craftsman is not only difficult but also expensive. They have become expensive on the basis of productivity. If you are wondering why Chinese labour has expanded beyond large-scale construction to small-scale residential construction, the answer is rooted in productivity. Chinese labourers are five times more productive (according to an in-depth interview conducted by the author with an apartment builder) than the Sri Lankan labourer.

High import tariffs and import bans have led to skyrocketing domestic prices, and now the simple transaction of buying or building a house has become a lifetime dream of the aspirational Sri Lankan. If you ask a banker for their reason for remaining in that job, they will tell you that it is the concessionary “housing loan’” and “vehicle loan” that attracted them. While a fortune will be spent on building a house, there will be limited funds to explore better education opportunities, hereby pushing the tertiary education of young professionals to the grave due to extra prices paid for inefficiencies in housing.

The existing land issues, the inability to transfer properties, and lack of property rights have made the situation worse. So in real terms, the “aspirational Sri Lankan’s” capital that they couldn’t invest for returns was not invested in their house, but rather in the extra price they paid for construction. More importantly, potential aspirational Sri Lankans are expending valuable energy in trying to overcome the consequences of these misguided economic policies.

Where is the capital for the vehicle?

It is no secret that Sri Lanka’s vehicle market is one of the most distorted markets. Based on the usage of the vehicle, the value increases, and we pay exorbitant amounts of tax at the point of importing a vehicle. Making things worse is the vehicle permit system that is only available to VVIPS and few professions.

So what is the incentive to be an aspirational Sri Lankan? Is it to take the risk of investing the capital and trying to consume from the yield, allowing the capital to multiply, while lobby groups and politically connected pressure groups not only get a vehicle permit but also the legal blessing to sell despite tax losses to the government?

The permit culture is not only in buying vehicles, but it is also in the public transportation system where route permits for public transportation are more expensive than the bus itself, even though the cost of a bus is multiplied several times over when you factor in the tax.

Yet again in the real world, the aspirational hardworking Sri Lankan’s capital, which they never invested (which they did not have the knowledge to invest), gets gobbled down in distorted markets that are protected from competition. 

Even when looking at leisure and recreation, the cost of recovering capital invested in the construction of a hotel is passed on as room rates at prices that are higher than those of similar destinations in the region, because of our high cost of construction. At weddings, the costs of the food they serve, electrical appliances, storage, and prices of cutlery, liquor, etc. are added to the final cost of a plate at a wedding. Hence, there is no alternative but to eat away at the capital that belongs to the average aspirational Sri Lankan. 

It is true many Sri Lankans get into this trap by trying to live beyond their means, spending lavishly at weddings, building bigger houses than they require, and buying vehicles due to a lack of financial literacy. But the reasons why artificial value has been created for basics such as housing and commuting is misguided economic policies.

What young entrepreneurs chase as aspirations are not the real aspirations that could put Sri Lanka back on the map. The very reason for this is that our prices do not indicate the true value of the product or service and the real value it offers. The concept of “price” is of paramount importance. It is the single indicator of value, resource scarcity, productivity, supply, demand, and so many variables that are all encapsulated in that single number called “price”.

When governments and policies intervene in demarcating prices, the price set is a result of people chasing the wrong things and the entirety of society has to bear the cost and loss of it.

What we need is to set a culture of hard work and free exchange where young entrepreneurs are provided with a level playing field, right incentive structures, and motivation to be productive and innovative – that is the real expectation of the aspirational Sri Lankan which has now been shadowed by glittery basics such as housing and buying a vehicle. Until we work towards that, we will not be able to see a new Sri Lanka nor will aspirational Sri Lankans ever prosper.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Cost of construction and controlled prices on cement

Originally published in Daily News

By Ravi Ratnsabapathy

Sri Lanka suffers from high construction costs which makes housing unaffordable. A study on domestic migrant workers by Caritas Sri Lanka (2013) showed that for 61% - one of the reasons to migrate was to build a house. Numerous other surveys confirm this finding.

High construction costs also present problems for businesses, particularly tourism where the cost of the building forms a large part of the initial capital outlay. Last week, an article in the Daily News reported that a top executive in a private-sector property company had stated Sri Lanka’s construction cost is at least 30% higher than of Malaysia; a country that it several times wealthier than Sri Lanka.

How can someone on a Sri Lankan salary expect to build a house paying 30% more than someone in Malaysia?

According to a report by Jones Lang LaSalle (2014): “high project development costs coupled with the high borrowing costs for housing loans have breached affordable limits and restricted the home buying prospects for Sri Lanka.

Based on our understanding from the affordability assessment, only the top-income-earning resident Sri Lankans can buy homes in Colombo. Residents with limited income are forced to opt for properties that are at least 20-25 km away from the city limits.”

This is a complex problem and the government controls the price of cement to keep costs under control, but this is obviously not working if construction costs are much lower in other countries.

There are a number of reasons for high costs including supply constraints-shortages of sand and aggregates as well as high cement costs that contribute to high costs of concrete. Then there is the high price of other materials which are high due to protective taxes including steel bars and rods (taxed at 89.66%), ceramic Tiles (taxed at 107.6%), sanitaryware (taxed at 72.4%) as well as aluminium extrusions, granite, electrical fittings and carpets,

Apart from protective taxes, the lack of scale amongst contractors, low labour productivity, outmoded methods and long delays in approvals all contribute to higher overall costs.

The impact of the taxes may be illustrated by comparison to regional prices. For example according to information collated in in September 2016, steel costed around USD 723mt in Sri Lanka but costs only USD500mt in Thailand and USD 470mt in China.

What is surprising is that even cement is higher than the region, despite the price control. How can this be? The problem is in the way the government goes about setting price controls, the Consumer Affairs Authority applies a narrow range of controlled prices on cement which vary by product and manufacturer. The prices are determined based on cost estimates for each product provided by each manufacturer.

Usually if a controlled price is set too low it results in shortages but there are no visible large scale shortages, although these are not unknown, being witnessed in 2011 and 2014. Temporary shortages of cement occur from time to time due to hoarding when traders hoard stocks, in anticipation of price revisions.

It is likely that involvement of the industry in the price setting process means that they set at a level comfortable to the industry. With set prices there is no competition among producers on price, so normal competitive forces do not function either.

Quality

Why not solve the problem of high priced local cement by simply importing cheaper cement, if it is available elsewhere? The local cement industry claims this will lead to low quality (and low cost) cement imports, something that has been experienced in the past. Cheap cement is available overseas but the possibility of substandard cement or construction work is of serious concern since the consequences will manifest long after construction is completed and carry grave consequences.

Cheap imports of cement would benefit consumers but how should quality be ensured?

The problem is that Sri Lanka lacks a comprehensive building code; essential for consumer protection and public safety. Although old regulations such as the Factories Ordinance exist these are not up to date and enforcement is weak. A Standard Code of Practice to regulate and enforce design, construction and compliance requirements is necessary.

While a uniform code is absent, a multiplicity of approvals exist: at provincial, district, Pradesheeya Sabaha, urban and municipal level. These become even more complex when central agencies such as Urban Development Authority (UDA), Sri Lanka Land Reclamation and Development Corporation and Department of Agrarian Development. This leads to overlaps of authority, conflicts of instructions, contradictory regulations and compliance loopholes.

There is a lot of red-tape but it does not improve safety.

A proper code, legally enforceable, covering all classes of buildings and including safety, structural stability and accessibility is needed. The code should be enforced by holding the building contractors and architects responsible for any failures and carry criminal and civil penalties.

Along with a code, building contractors and architects should be licensed and carry professional indemnity insurance. The objective of licensing is to ensure that work is done by people who are conversant with the standard (which should carry statutory force) and conduct their duties competently and professionally.

In the event of any failure in buildings they may lose their license to practice. This is apart from any action taken in the courts. The insurance ensures that consumers can receive compensation for shoddy work.

Specialist licenses should be necessary for more complex work including:

(a) Piling works

(b) Ground support and stabilization works

(c) Site investigation work

(d) Structural steelwork

(e) Pre-cast concrete work

(f) In-situ post-tensioning work

Underinvestment

Sri Lanka has abundant limestone deposits in the North but even ten years after the end of the conflict the cement plant in the area remains closed

Underinvestment in the sector may be attributed to a combination of the uncertainty surrounding prices and protectionism. Investment decisions are long-term and price controls; despite industry influence in setting them, does add a new level of uncertainty over future profits, deterring investment. This is particularly so in the cement industry because the start-up costs are high and the gestation period for a plant is long.

In 2013 the Government imposed a restriction on the number of cement plants that may be operated in a port limiting it to one per port. If a new factory is to be set up, priority has to be given to existing operators in the port, effectively limiting competition.

Overall construction costs

Despite price controls being imposed on cement, Sri Lanka has high costs of construction. There is no coherence in policy with different objectives are being pursued in isolation, unlike for example in the UK where the Government in partnership with industry has developed a strategy to improve the performance of the construction sector by 2025. Objectives include lowering costs: a 33% reduction in the initial construction of new build and the whole-life costs of built assets, a 50% reduction in the overall time, from inception to completion of construction and a 50% reduction in greenhouse gases.

Overall, intervention in the construction market has resulted in raising, rather than lowering construction costs.

Further, by failing to understand the proper role of the state and intervening unnecessarily in setting prices it has neglected its core responsibility – regulation to protect consumers. Although in most circumstances the best protection is the common sense of an individual consumer, in instances where technical knowledge is needed to detect poor quality there is a case for regulation, particularly if public safety is involved.

The lack of a building code is a serious failure on the part of the state.

To protect consumers the Government should stop regulating the price of cement and focus on drawing up and enforcing a proper building code.

To lower costs the tax structure on construction materials must rationalised and competition facilitated.

A roof over your head or a castle in the sky?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

As Sri Lankans, we are conditioned to have 4 priorities in life: 

1. Get a degree 

2. Build a house

3. Buy a car

4. Be a good citizen.

While this is the mantra of every teacher and every parent, the system in which we live and work in is filled with barriers. Let’s take the first goal for example. Before you get a degree, the first step is getting into school. Entering grade 1 is a painful and tedious process and even if you succeed, only about 7% [1] of school leavers will have the opportunity to enter a state university. What happens to the remaining 93%? The rest are dependent on external degrees, vocational training and private education institutes for their tertiary education.

Every dream we are conditioned to hustle for does not come easy. What is truly terrible is that the system also prevents you from realising your dream through hard work. Let’s analyse the case of owning a house. 

Is the dream of owning your own home a realistic one?

I recall a recent conversation with my retired parents. “After pouring all of our EPF/ ETF, gratuity and housing loans and spending every cent kept we had saved for medical treatments, we still could not finish the ceiling and the light fittings of this house”.

My parents’ house was hardly anything fancy. It was a simple, single story, 1500 sq ft structure with basic amenities. This is the most common form of most Sri Lankan houses, even after pouring years of money and energy into building them.

The statistics by the Ministry of Housing and Construction [2]  shows that more than 250,000 families live in temporary houses and more than 400,000 families live in houses with roofs with galvanized sheets. Another 386,000 families live in partly constructed houses; either the floor is not cemented, or the walls are not plastered. Isn’t it a very poor performance for a country categorized as Upper Middle Income by the World Bank? 

Why is this so challenging?

The challenges of building a house are numerous and varied, from settling land disputes to finding a good contractor, the list continues on. A major factor that is often not included in this list of woes are the taxes on building and construction material that results in exorbitant raw material prices. The prices of these items are high, but we rarely question why.

Here is a breakdown of border taxes of a few raw materials:

• Wall tiles and floor tiles: 107%

• Construction steel: 90%

• Sanitary ware (Commodes, squatting pans): 62%

Graph by JB Securities

If you have ever attempted to build a 100 square foot basic toilet you may have realized how expensive material and labour can be. My focus is on basic sanitary facilities and not a 5-star grade bathroom with a bathtub and expensive fittings. How can a population afford to build a basic bathroom when their steel is taxed at 90% and their wall tiles and floor tiles are taxed at 107%?

The consequences of the tax create a chain reaction where individuals spend nearly two times greater than the actual price for steel in your basic construction. The reason why most of the houses are incomplete and most of the people becoming house builders for a lifetime is that they spend money for basics like steel, wall tiles and many other basic units double the actual cost and then inevitably run short on cash for the completion.

Why do these high taxes persist?

The purpose of high tariffs is to discourage the importation of construction material which is already available for a very reasonable price with higher quality in the global market. The excuse subsequent governments provide is that this is done to protect the local manufactures, but what is the rationale behind this kind of protectionism? Tariff protection is often provided for local manufactures, to give them breathing space in which to grow, and innovate up to the point that they catch up with global competition. However, this industry has been protected for a few decades and the lobbying gets stronger every year for more protectionism.

Is it fair to keep half of our population in temporary and incomplete houses as a result of tariff rates as high as 107% on basic material required for construction? Additionally, the purpose of this tax is to discourage some else who produces efficiently and effectively, in favour of more inefficient local production. In economic terms this is called a rent and the businesses who gain from this are the rent seekers – something Sri Lanka has many of. Most of the self-proclaimed successful businessmen are not the ones who have done better than the competition but have minted money from taxpayers by hiding behind government protectionism.

High taxes at what price?

The market contraction as a result of the unfair tariff policy goes beyond what can be seen at surface level. High taxes have an unseen dire impact on other supporting industries connected to construction. For instance, once you spend all your money for steel, tiles and electric materials you will be forced to cut your expenses on furniture, curtains, and other items which are also supplied by local businesses. Most Sri Lankans build a house on a housing loan. In addition to paying off a loan with interest, we also have to pay the rent of 107% on construction material - how justifiable is this? 

This was simply a common man’s perspective. Even when considering industrial and commercial buildings, the situation is no different. For an instant if you are investing on a property in the leisure industry as a result of incurring a greater expense on construction material, one would  have to consider the higher interest rates on loans and recovery of the capital. That higher recovery rate will create higher room rates, making the property almost uncompetitive in the market.

The dream of buying a car and dream of getting a degree is no different from building a house.  Unfortunately, what former Indian president said about dreams is perfectly applicable to Sri Lankan’s dreams of building a house.

“Dream is not that which you see while sleeping it is something that does not let you sleep”. And yes, for the majority of Sri Lankans it’s a dream that doesn’t not let us sleep, keeping us up with worry till the last day and the last hour of our lives.

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[1] University Grants Commission. 2018. Handbook of Statistics-2018. https://www.ugc.ac.lk/downloads/statistics/stat_2018/Chapter1.pdf

[2] Ministry of Housing and Construction, Housing Needs Assessment and Data Survey, 2016.

[3] Calculation by Advocata, using 2019 Tariff Guides 

An ‘unhealthy’ tax regime: Is the Govt. stifling basic needs?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Anuki Premachandra

This year’s global theme for World Health Day, which falls today, is universal health coverage (UCH) for all. In comparison to most countries in the region, Sri Lanka is in a positive trajectory towards this, with a policy goal to ensure universal health coverage to all citizens through a well-integrated, comprehensive health service.

UHC is a health care system focused on medical service delivery – it predominantly revolves around accessibility, affordability, and availability of healthcare services. However, in the case of Sri Lanka, health needs to be looked at from a broader perspective.
This World Health Day, while commending the country on a great public healthcare system and better access to water and sanitation than most other countries in the region, I’m going to explore the case of how some simple taxes on items that contribute to your health can lead to complicated concerns on your health. Are Sri Lanka’s tax policies depriving you of accessibility, affordability, and availability of proper healthcare, hygiene, and sanitation?

Taxing your menstrual health
Menstrual hygiene is not commonly discussed in Sri Lanka, having very little literature and understanding of proper menstrual hygiene management. This is also probably a reason why a basic item required for proper menstrual hygiene – sanitary pads – have total taxes as high as 62.6% levied on them, despite being a country with 4.2 million menstruating women. More often than not, women are compelled to use unhealthy menstrual hygiene products or practices owing to their monetary conditions. Naturally, an intervention like taxes only worsens this situation. The most appalling of findings is that unhealthy menstrual practices can contribute to cervical cancer, one that unfortunately has proven to fall to the plight of many Sri Lankan women.

Every year, 1,136 women are diagnosed with cervical cancer and 643 die from this disease in Sri Lanka (HPV Centre, 2018). Cervical cancer ranks as the second most frequent cancer amongst women in the country, wherein poor menstrual hygiene management is a direct causal factor of this. Of our population, 52% is women, out of which 4.2 menstruating women stand the risk of being diagnosed with cervical cancer due to poor menstrual hygiene. If we are taxing something as necessary as sanitary napkins that contribute to healthy menstrual practise, are we not then making health a privilege instead of a basic human right?

Taxing your access to proper sanitation
In a recent interview, Senior Advisor at the Sri Lanka Water Partnership Kusum Athukorala stated that the main problem they have had to deal with when conducting sanitation programmes in rural schools is the lack of a proper disposal mechanism for sanitary pads. It is either this or the lack of proper toilet facilities. According to the WHO, although sanitation coverage in Sri Lanka is 92% – the best in the South Asian region – an area that they too have identified as one that requires further development is rural school sanitation. Period-friendly toilets matter.

Additionally, although over 50% of our population have access to household sanitation facilities, diving deeper into the breakdown of these numbers is important. Despite great sanitation coverage, 7.2% of our urban population, 7.6% of our rural population, and 17% of our estate population still rely on a shared toilet facility for their sanitation needs, according to the Household Income and Expenditure Survey 2016. Why then do our rural schools lack proper toilets and why does a portion of our population rely on shared toilets for their sanitation needs? The answer lies in the prohibitively high cost of building toilets.

Total import taxes on sanitary ware like commodes and squatting pans are over 60% and wall tiles, floor tiles, and finishing ceramic are taxed at over 100%. Out of our population, one million people live in temporary houses and 1.2 million people live in underserved settlements. Access to proper toilet and hygiene facilities are very limited in these types of households owing to the exorbitant cost of constructing one. Having access to sanitation is a basic human right, yet a portion of our population suffer on a daily basis from the lack of access to a clean and functioning toilet. Without toilets, untreated human waste can impact a whole community, affecting many aspects of daily life, and ultimately pose a serious risk to health. The issue runs deeper into societal impacts, such as teenage girls often leaving school at the onset of menstruation due to lack of privacy and the risk of contaminating infections due to unhygienic toilet facilities. This narrative needs to change.

This World Health Day, while we commit our country to global goals that provision for more accessible and affordable healthcare facilities for all, let’s also look at health in a broader perspective. In Sri Lanka, universal health coverage can be realised through affordability, accessibility, and availability of better health, sanitation, and hygiene facilities – end taxes on periods and toilets!

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Anuki Premachandra is the Manager – Research Communications at the Advocata Institute. She has a background in public policy with an active involvement in policy communications. She is also an advocate for the reduction of the period tax and contributes to research and policy work in that subject area. If you have any questions or feedback on this article, she could be contacted on anuki@advocata.org or @anukipr on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka.