Production economy: Think small, Sri Lanka!

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

Why can’t we produce the goods we need? Why do we have to depend on all these other countries?  Why can’t we produce world-class brands? Over the years, these have been million-dollar, or to be politically correct, million-rupee questions. 

From agri-based economic planning to state-owned industries that left a stench not only on the economy but also on the shirts and the sarees of the public, policymakers have ignored or botched time and again economic reforms which could have made Sri Lanka a production-based economy.

Let’s get back to fundamentals – “producing an economic good” and “producing it competitively” are two completely different concepts. I can drive a car, but I’m no Ayrton Senna or Michael Schumacher. In cricket terms, many Sri Lankans can play cricket but only a handful can make it to the National XI. In today’s age, producing an economic good is like playing to win at a World Cup. Observe how the Australians go about their business at World Cups. They play to win. If we are not focused and fail to adapt, we will fail as a nation. As Charles Darwin said: “It’s not the strongest but the most adaptable that will survive.” 

Many centuries ago we produced goods and services for our consumption and all parts and components of that economic good or service had an ecosystem in the same country. With the invention of penicillin, arguably the most important life-saving drug ever discovered, by Scottish scientist Alexander Fleming, the world saw a burst in population and Sri Lanka was no exception. Keeping a growing population fed, housed, and employed paved the way for integrated supply chains to form the world over. 

This is because every country has a competitive edge in a particular good or service. For example, Germany and Japan have it in cars, Korea in electronics, New Zealand in dairy products, etc. Factors such as human capital, education, technical skills, natural resources, the climate, and trade agreements have a direct impact on what we produce. Since independence, Sri Lanka has relied heavily on the big three for foreign exchange, namely tea, coconut, and rubber, but failed to make it as an integrated member of the world supply chain mechanism due to poor branding and value addition. Other countries have successfully done it. There are French champagne, Swiss chocolates, California oranges, etc. 

However, the apparel sector which took off during the post-liberalisation period has eclipsed the rest as a major player in the world apparel sector and an integrated part of the world supply chain. The apparel sector competes on price, quality, service, and delivery with the rest of the world and has won due to specialising in high-value apparel such as lingerie and swimwear. With the exception of the aforesaid example, as a result of not understanding the need for producing goods competitively, we failed to catch up with the fast-growing East Asian tiger economies. 

Joining a global production network

Rather than producing all parts and components of a complicated final product, countries began producing a small component of a big product in a complex procedure. As an example, rather than producing a total computer, companies started producing microchips, transistors, and hundreds of other small components in large scale. Producing small components of large complex products in a gigantic scale brought the cost significantly down and as a result, the price of products became reasonable. This process became a common factor in the range of high-end expensive products like aeroplanes and even to lower-end products like sporting shoes. 

Source: Aeronews TV.com

Going back to my cricket example, winning a World Cup means not only having more talented players but a host of other elements and individuals which are already operating at a world-class level. This includes compatible cricket turfs, safety and cricketing gear (headgear, pads, gloves, cricket bats, boots, cricket bats), training techniques, professional administrators, supplements, and the list goes on. In simple words, now the production of even a simple component or a product is shared across the globe (which is called Global Production Sharing [GPS]). Everyone is contributing to a small component of a complex product and everyone is part of a big value chain (which is called a Global Production Network [GPN]). 

Sri Lanka’s strategy should be to join more and more GPNs if we are serious about converting our economy to a production-based economy. The good thing about joining GPN is that it only requires a basic-skilled workforce to join the network. This will lead to earning better income for unskilled and semi-skilled workers, so the poverty levels will be elevated, because for most vulnerable sections of the society the only tradable good they have is their “labour”, and by joining a GPN we provide the opportunity for them to sell their labour. Countries like China have the unique advantage of being able to produce parts and small components of a complex product as well as assemble it and make the final product due to their large population and availability of labour at all levels (starting from unskilled to supervisory and super skilled). 

How do we do it? 

Some Sri Lankans tend to believe that joining a part of a big production network is an underestimation of utilising full Sri Lankan potential of manufacturing all components under one roof.  Some believe it may hinder Sri Lanka’s ability to create world-class brands and labels. Certainly not; Sri Lanka can create a Sri Lankan label brand for a component rather than a final product. It is already done in Sri Lanka. Certain safety and rubber components that are vital for the automobile sector are manufactured in Sri Lanka. The entire world is aware that Apple computers are not made in the US and even the product itself mentions that it is made in China and designed in the US. The same is valid for Boeing aeroplanes. 

Sri Lanka makes high-end apparel. We manufacture for giant brands such as Victoria Secrets, Nike, and Adidas. But this doesn’t mean that if we launch it under a brand name of ours that there will be the same demand. An apparel manufacturer tried to launch its own brand in India but was not successful. Sri Lanka can move towards assembling and creating more Sri Lankan brands when we evolve from our basics, but as we would all agree, our basics are not right yet. This is where foreign direct investments (FDIs) become critically important. We need to attract one big company to set up here and Sri Lanka should actively capitalise on post-COVID-19 dynamics of companies that are forced to move out from China. If we attract one good investment for a GPN, the rest will follow. That is exactly what Vietnam did, attracting just one company as they knew then the tide would turn. 

Rethink import substitution

A popular strategy to convert Sri Lanka to a production-based economy is considering import substitution. As we have highlighted in this column previously, most of our imports are capital goods and intermediate goods used for many other products (57% of imports are intermediate goods and 23.1% of imports are capital goods). If we are to join GPNs, the inputs have to be competitive. Otherwise, the output will be expensive and uncompetitive.

If we are to carry out import substitution, then ideally it has to be based on the competitiveness of the local substitutes but not substitution through a complete ban or through exorbitant tariff rates for imports. If we are to substitute imports through bans and tariffs it would further impact other local industries due to higher costs and regulatory barriers creating difficulties in managing their input supply chains. That’s why the word “competition” has significant meaning in economic vocabulary. 

The best example for this is the construction industry. Importation of most of the construction raw materials are subjected to a 60%-plus tariff and as a result, our hotel room rates are higher compared to our competitive destinations such as Thailand, given the time taken to capital recover is high (there are more reasons contributing to high room rates but construction cost is one major determinant). So the tourism sector as a whole is impacted just because of one single attempt of import substitution in the construction industry. 

COVID-19 provides us the opportunity to convert Sri Lanka into a production-based economy again, but we need to take the correct path instead of being shortsighted as in the past. We should focus on making our inputs and outputs competitive and look at the broader picture rather than restricting ourselves to micromanagement.  

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.

Public transport reform: Covid is our vehicle

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

We’ve had enough discussions about how Covid-19 could bring about a new normal, and its negative impacts on the economy and our day-to-day lives. However, “crises” do not only bring threats but also open up ample opportunities. That’s probably why wartime UK Prime Minister Sir Winston Churchill said: “Never waste a good crisis.” Reforming our public transportation is one golden opportunity presented to us on a silver platter due to Covid-19. 

What’s wrong with our public transport?

When Sri Lanka progressed to a middle-income country to reach GDP per capita of $ 4,000, people could afford a personal vehicle even with the exorbitant import tariff imposed by the Government. As a result, about 48% of Sri Lankans started commuting to the city in their personal vehicles.

At the same time, our public transport, still lumbering along as it was in the mid-1980s, had not progressed to the aspirations and expectations of a fast-growing middle class. Adding to woes, the quality of public transport depleted at a rapid rate, increasing the number of people commuting in their personal vehicles and burning more fossil fuels, which account for 19% of our total imports. The environment paid the price as our air quality index plummeted. Simply, our problem was that we had been commuting vehicles instead of commuting people. 

Commuting amidst COVID

With Covid-19 hitting us hard, buses and trains cannot operate to their full capacity, according to the Government’s health guidelines. That brings two contradicting problems. People may not have adequate commuting options to adhere to health guidelines, so individuals commuting via crowded public transport pre-pandemic may consider travelling in their own vehicles for health reasons when the economy gradually opens up, spelling disaster and making our existing traffic jam worse.

At the same time, bus owners will be demotivated to field their buses as they cannot make a profit without operating at full capacity without a ticket price revision.

Meanwhile, some commuters may not need to travel at all while “working from home”.

Hidden problems and mediocre solutions

 Whenever the topic of public transportation enters the national discussion, our solutions have been very shallow and out of depth. We have taken a more regulatory and blanket tariff approach instead of understanding the real problems. The popular solutions were increasing tariffs on vehicle imports and discussing a ban on tuk tuks, claiming that they contribute to most of the congestion and accidents, even though hard facts paint a completely different picture.

Looking back 20 years, do you see a different brand or structure of buses running on our roads? It’s the same box-type Leyland or Tata, and the same air-conditioned (AC) Rosa buses. Why has the structure of the buses operating on our roads not changed over the last 20 years, when the world has moved to the extent of offering services of unparalleled comfort and safety?

With limited railway service, the 138 bus route (Maharagama/Homagama-Pettah) is considered the most congested bus route to the commercial capital of Colombo. Even at an electoral level, Maharagama/Homagama is considered one of the most densely populated suburbs where aspirational Sri Lankans live, or in other words, where the educated middle class reside.

Have you ever wondered why AC buses do not operate on this route? Most of the main routes (Galle Road, Kandy Road, Negombo Road, Battaramulla Road, Gampaha, etc.) on which most educated middle-class citizens commute to the city on a daily basis for employment, business, and education, use buses which are in the dilapidated state; the so-called luxury service (AC) is horrendous, despite passengers being charged double the usual price.

Have you ever thought about why, while there is a big demand for people to commute comfortably even at a higher price, no one ever thought to have more AC buses, at least as a surface-level solution? That is where a pragmatic approach to public policy, in this case, transport policy, comes into play.

Deadly combination

Ideology aside, the deadly combination for any market, which leads to its stagnation, is lack of competition, over-regulation, and price controls. Unfortunately, our public transport system has all three in just the right amounts to brew a recipe for disaster, costing the Sri Lankan economy a colossal amount of money and having a significant environmental impact.

The route permit for buses that commute between districts costs several times more than the bus itself. At the same time, the route permit is not competitively priced, creating entry barriers and restricting supply. Private bus owners request that even if new route permits are issued, the existing bus owners should be given priority. Simply put, the public bus owners run a cartel, creating meticulous entry barriers so they can continue to provide a ramshackle service to the public and get away with it. On the other hand, a maximum price ceiling on a ticket price is imposed by the Transport Authority. 

On the flip side, bus owners have no incentive to field a higher quality bus and a higher quality service as the ticket price would be the same, whether a new or old bus. In a similar way, buses can’t charge a premium for providing a friendly and courteous service. Irrespective of whether they operate during off-peak hours or peak hours, the price of a ticket is the same. Due to this, there’s no incentive for buses to operate after dark and the few that do run are often seen racing each other to grab passengers at the next halt, in contrast to the crawl during rush hour.

Think of a situation where airline ticket prices are regulated – undoubtedly, it looks silly, given the dynamism of the industry. The same applies to public transport. As a result, there is no competition in the public transport space. Trains are a government monopoly and there is no competition and no pressure for them to increase their services as they have no incentive, even if they improve the quality and quantity of service. Their incentive is securing overtime via inefficiencies; they earn the same salary regardless of service levels.

The taxi service which has evolved without single government regulation, respecting market forces, is the only hope for the people. As we all know, the night rates are higher in taxis. The taximeter works in a system where when demand in a specific area is high, prices are higher. As a result, resources are better managed and utilised. People can plan their lives methodically and decisions can be made rationally, while convenience is delivered to your fingertips. Of course, there are areas for improvement, but undoubtedly, service levels, experience, and value for money are far superior. 

Central Bank Annual Report 2019 Table 81

Opportunity post Covid-19

Subject experts such as Prof. Amal Kumarage of the University of Moratuwa have done enough research and listed solutions to bring an end to this debacle in many forums.

What the Government could do is reconsider the route permit system and do away with entry barriers for businesses to enter the public transport market which would then end the present cartel.

The Government has to reconsider the pricing formula for bus fares and deploy a flexible pricing structure with the proposed pay card system where buses can charge a higher fare if they operate at night.

A test run has already been done with the participation of some cabinet ministers in this Government.

Given lower fuel prices in the world market, even a concessionary rate can be provided for public transportation to encourage them to operate at lower costs, considering the damage to the environment.

Simultaneously, the Railway Department requires more competition. The Government can consider keeping the ownership of the railway tracks with the Department and provide private investors with the space to join in a public-private partnership to run train compartments, operations, and cargo. If we can check the location of our tuk-tuk taxi, obviously it isn’t rocket science to develop an application to monitor the arrival and departure times and locations of trains. 

Most of these regulatory reforms won’t affect the Government’s fiscal position, and we should look at options to take maximum mileage of market-based pragmatic solutions rather than inefficient government interventions.

When public transportation sees significant improvement, the Government should consider imposing a congestion tax as done in London, where vehicle entry to the city is expensive, so more people are encouraged to use public transport and congestion is discouraged.

The current higher taxes on vehicle imports is a blanket tariff which has no impact on reducing congestion. When the public transportation is up to the mark, vehicle imports (mainly low efficiency-engine vehicles) will automatically drop, so the Government will not have to crush the dreams of aspirational Sri Lankans progressing to four wheels from two or three. Additionally, the Colombo Municipality will earn extra revenue via the congestion charge. 

Last but not least, the Government should abolish the vehicle permit system and treat all its hard-working residents equally. The vehicle permit system has indirectly allowed daylight robbery of taxpayer money, and of course, it has to be kept active for political reasons. This is the golden opportunity to move from the “do nothing” seat to the “do reform” seat, and we should not waste this crisis without making reforms in our public transport system.

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.

The import ban will kill the aspirational Sri Lankan

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

A friend of mine in his mid-40s had a heart attack. I mean a real one. He was a dynamic rugby player and a national-level athlete in school. Everyone was dumbfounded at how a person with such a high level of physical fitness could possibly have a heart attack. I asked him: “When did you last hit the gym or go for a walk to burn calories?” He replied: “After I left school, I did not do any exercises.” He has also been constantly eating greasy and unhealthy food. That being said, are we still surprised at why a dynamic school athlete, who probably was the envy of some of his classmates at that time, suffered from a heart attack?

Past glories

We always reminisce at what a blissful nation we were during King Parakramabahu’s reign and how our state coffers were full when our colonial masters – the British – left us. It’s a distant memory, even surreal now; how strong the exchange rate was and how we were only second to Japan, which is now the third-largest economy in the world, just a shade over seven decades ago in 1948.

While all that is undoubtedly true, the world has evolved. And alas, we have been under the shade of a coconut tree with a kurumba (local king coconut) in hand dreaming of our past glory, while Japan, despite getting nuked no less than two times, forged ahead as an economic superpower.

It all comes down to choice. Japan as a nation could have withered away dreaming about their past glory, being the first nation to launch a purpose-built aircraft carrier, the IJN (Imperial Japanese Navy) Hosho, and later, to rule the seas (at least for short while) with – to date – the largest battleship ever built, the IJN Yamato.

Japan lost the Pacific theatre and ultimately the war, comprehensively. They arrived at a crossroads and decided not to simply fade away. As I said earlier, it simply comes down to choice, the choice Japan made. We all know what that was and so can comprehend why the West calls Japan the Land of the Rising Sun.

Japan is just like us, in that it doesn’t have much in natural resources, despite churning out cars and electronics to be exported by the shipload.

Returning to the Pearl of the Indian Ocean, the quagmire we face raises the question: Have we been engaging in our daily 20-minute exercise to be in the game or at least in the park, to keep pace with the world?

Definitely not. And as a result, we have blocked our arteries and are staring down the barrel of an impending economic heart attack as a result.

No more new cars

At the time of writing, the Government announced a complete halt on the import of vehicles and luxury goods for the next five years.

I want to get this off my chest – the Government’s or Finance Minister Dr. Bandula Gunawardana’s definition of a luxury good differs from mine. Maybe even your – the reader’s – definition of a luxury good greatly differs from mine.

A pertinent question is: How can a luxury good be defined? And can imports be stopped in this day and age without actually doing the opposite of what was intended; hurting the economy? A high-end Mercedes, Lexus, Range Rover, or BMW, even with the present exorbitant taxes, might be needed for the tourism industry. Luxury goods send the right signals to investors and tourists, of a vibrant economy. The economy also becomes a lot less scary. No one wants to go for a holiday to Kim Jong-un’s land. It’s just too boring…and scary.

Similar to imposing price controls, the Government may have drifted towards this move with the good intention to manage our limited foreign currency reserves. Put simply, we have about Rs. 16 billion in debt payments that need to be fulfilled in the next two to four years. To put things in perspective, this is a colossal amount, equivalent to 16 times the debt-to-equity swap we transacted for the Hambantota Port. Regardless of good intentions, this will follow a deadly sequence of unintended consequences. Leaving aside the revenue losses to the Government and the impact on the retail sector and bank credit, the biggest impact would be for “Aspirational Sri Lankans”.

In any country, aspirations and aspirational people drive the economy. They need a dangling carrot to entice and motivate them to reach higher.

Let me give you a few examples. In the midst of the Covid-19 battle, the GMOA (Government Medical Officers’ Association) requested tax relief on duty-free vehicle permits from the Government; this received significant criticism online and offline.

Though I have my own opinion, keeping that aside, a question we should ask ourselves is: Why, in the heat of a pandemic, is a leading trade union requesting duty-free concessions on vehicles, out of all the consumable goods?

Although I see their request as unfair, the reality is doctors are aspirational Sri Lankans, and vehicles are an element of an aspirational Sri Lankan; I would even dare to stay, a status symbol. If you look at the life cycle of a doctor, you observe that they study very hard to get into medical college, study even harder for about five to six years at that medical college, and undergo training at an obscure hospital thereafter. After burning so much midnight oil, is it unfair for them to buy a vehicle from the market? (I refer to the general right for a doctor to buy a vehicle, not a duty-free vehicle; whether to utilise one’s aspirations at a cost of a pandemic, is a different discussion altogether).

This fate seems to be shared by not only doctors but by everyone who dreams big and is really committed to contributing back to the world. Young, middle-class professionals work very hard to accomplish the aspirations that drive them. While writing this article, I recalled a TV advert by a finance company or bank, of a young couple on a motorcycle stuck on the roadside, seeking shade during a thunderstorm. They want to move up in life to be able to afford a vehicle. It’s the same situation; everyone wants to live a good life because they have all made enough sacrifices. What is wrong with that and why should they have to pay for the cock-ups since 1948?

Money isn’t everything, but…

Aspirational people drive the entire economy. They are business people who take on the risk of starting a business, pay salaries to employees, and invest their money on research development and technology.

If you ask students at a university or any young graduate during their job interview, what they hope to achieve in five years, their most likely response would be: “Build a house, buy a vehicle, and travel the world.” These are the three things that top the list. Why are banking jobs and even jobs at the Central Bank very high in demand? Simply because of the so-called 4% interest rate for housing and vehicles extended to staff.

Many alternative arguments have come into the limelight; that we have to measure happiness instead of our living standards; some say the material world is not the entire world. That may be true, but for a country which has continuously missed opportunities over and over again, and which is at the edge of another brewing economic crisis, this is not a time to conduct any social experiments and kill the aspirations and hopes of young Sri Lankans.

Of course, I am a true believer that money’s not everything, but there is a cycle that you come to realise and your aspirational motives are what brings you there.

Most of our tariff lines on housing materials are above 60% and the fate is the same for many consumables for middle-class people. How can we justify asking the middle class to sacrifice their living standards by downgrading them at the cost of import controls for someone else’s sins? They have paid their taxes, they have worked hard, and they have done their job. The private sector hasn’t been given any vehicle permits nor have they used any government relief packages. Instead, every corporation has been taxed heavily, even on profits earned over the prior years when the previous Government was in power.

From a different perspective, Sri Lankans who work abroad and send foreign remittances from the Middle East, Europe, and Asia, do so to upgrade the living standards of their families, who consume goods like vehicles and electronics. You can observe how fellow Sri Lankans buy TVs and washing machines from duty-free shops at the airport. Do you think it is fair to ask them to cut their usage of electronics to cover up the failures of our incompetent politicians who ruled the country for the last seven decades?

Solution

We hope the import controls imposed are a temporary move and the Government will reconsider this decision. In this column, we have highlighted multiple times, backed by facts, that import control is not the way to defend our currency nor is it the path to economic prosperity.

In 1972, this experiment failed comprehensively. At the same time, too many controls mean too many regulations, and this may contradict His Excellency, the President’s inaugural Independence Day speech where he hit the nail on the head on why Sri Lanka failed to succeed, speaking of how badly its people were treated with over-regulation. In unprecedented times, it is understood that we need to take hard calls, but the cure cannot be worse than the disease.

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.

Price controls don’t work and I told you so

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

A story my biology teacher taught me when I was a schoolboy is even in the present day a formidable anecdote in the grey area of public policy and economic management. Once upon a time, deer and lions were living in the same forest. The then king was very fond of deer and felt that deer are treated unfairly as they often become prey to a marauding pride of merciless lions. The king ordered his guards to destroy all lions in the jungle. After a few months, the deer population grew rapidly and the king was very happy. A few more months later, the deer population grew exponentially and the food sources in the forest were not adequate for their consumption and they, in desperation, resorted to eating the barks of trees. This resulted in the death of the forest, which ultimately extended to the deer. Soon, there were neither deer nor a forest. The entire ecosystem had collapsed because of one single intervention. 

The public and economic policy have similar dimensions and that is why we should not intervene in markets but allow free exchange, as there could be a chain of unintended consequences, even though the initial intention was good. In the current global economic landscape interdependencies of two or more cogs in the global market make the wheel turn, and the time it takes from action to reaction could be a mere few seconds or just days. A good recent example is the price controls imposed by the Government on tinned fish and dhal which were revoked recently. The Government’s decision to revoke the price controls is commendable, but the damage to the market is done, at least for the moment. 

Markets are not limited to the supply and demand of goods and services so they have a mechanism to reach an optimal price and quality. It’s more than that. It is important that market sentiments are kept consistent so as to ensure the key wheels of the economy – investors, buyers, and sellers – keep turning as efficiently as possible. If this takes place, consumers, that is you and I, get the best products and services at the best price, without being prey to black-market racketeers. 

The domino effect

The Advocata Institute, and this column, highlighted why price controls are impractical and how they lead to the creation of black markets and shortages of food for people. Sri Lanka imports 90% of its tinned fish and has a 35% tariff on imported tinned fish. When the marked/market price is Rs. 225, but the legally allowed selling price is only Rs. 100, the obvious reaction of importers would be to stop importing tinned fish. It’s not the prerogative of a business to knowingly sell at a loss, regulated or not. 

Price controls during a pandemic like Covid-19 look insignificant, but it is not. The stories of the adverse effects of price controls haven’t been spoken about and the connection in this hullabaloo is not visible. It has had the most impact on the poor and vulnerable community in society who do not have a voice. Tinned fish was probably their most affordable source of protein, but instead had to shift to more expensive sources which is beyond their affordability, and in most cases, I’m sure that they stayed with empty bellies due to the unavailability of affordable and nutritious food.  

This has also resulted in the President having to sacrifice his political capital as a significant priority was given to price controls during his address to the nation, and now the decision has been revoked. Price controls in Sri Lanka are not a new phenomenon. Every government has imposed price controls and these have constantly and comprehensively failed, but are continually included in the political theatre to mislead the taxpayer. It is unfortunate that the taxpayers too continue to swallow the same trick, regardless of their past experiences. 

Price controls are not limited to tinned fish and dhal. There are price controls still in place for essential goods such as rice, milk powder, turmeric powder, big onions, and maize. The results from this will not be different from what we experienced with tinned fish and dhal. Not only food essentials, but LP gas and cement also have price controls. In the leisure sector, hotels have a minimum room rate. Our petroleum products (diesel, petrol, and kerosene for example) and bus fares have price controls.   

Price controls, more so than regulation and lack of competitiveness, are sure ways of stagnating any market or industry. Without going into detail, if you observe sectors like public transport, it is evident how the combination of price controls, lack of competitiveness, and overregulation has led to a terrible public service for the taxpayers.

Backward Sri Lanka

Although the world has moved from travelling from Earth to space over the last five decades, the brand of the buses, train compartments, and their service condition have remained the same during the same period in Sri Lanka. The reason is simple. Trains are a complete government monopoly and there is no competitiveness at all; no one can enter that market. As a result, the trains are late, always on strike, and overcrowded. The route permit for a bus is more expensive than the bus itself for most of the routes and is heavily politicised. 

Market entry is extremely difficult and prices are controlled. As a result, buses are always slow with very poor safety precautions. Passenger service is unimaginably terrible as a result of the absence of choice for people to shift to alternatives. Simply, bus owners have no incentive to provide a better service. Making things worse, private vehicular traffic to the city is increasing alarmingly, combusting more hydrocarbons and impacting the environment. As a side effect, we spend billions of dollars on importing fuel to burn on bumper-to-bumper traffic. This is just a single example of the disastrous combination of price controls, lack of competitiveness, and overregulation. 

The other two main macro decisions by the Government this column has highlighted are most likely to cause further unintended consequences with the gradual opening up of the Western Province from tomorrow (11) onwards.

1. Imposing import controls will have an impact on local industries and employment, along with shortages of essential items for consumption, and cause supply-side shocks and create inflation. 

2. Money creation (quantitative easing or money printing) will further depreciate our currency in the long run and create an artificial demand for imports. Already our rating has been downgraded by Fitch.  

Enhance competition

We need to realise that not making a bad decision is equal to making a good decision. Rather than controlling prices, we need to enhance competition with the gradual opening up of the economy, and not waste time during this crisis, without easing regulatory barriers such as price controls and opening up for regulation that is both consistent and transparent. Institutes like the Consumer Affairs Authority’s mandate need to be revisited and they should lead the promotion of competition instead of becoming the neighbourhood cop for price controls. 

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.

What economics can teach Sri Lanka about PCR testing

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

Beginning with our education system, when a student successfully completes their Ordinary Level they are segregated into Commerce, Arts and the ones with the best results choose Maths or BioScience. A completely new direction from the humble times of the O/L. A student at the end of their studies in their chosen field can become a great medical practitioner, a legal profession, or even an engineer. But during their time at university or as a matter of fact in school their basic knowledge in economics, such as what drives inflation, interest rates, why am I getting less dollars than last year at the money changer, is at the mercy of a silver tongue politician, a master of selling excuses. The excuses which are hastily gulped by you, the ordinary citizen. The current economic situation created by Covid-19 is a sterling example of this disconnect. Many well-educated citizens who haven’t studied rudimentary economics during their learning years join the workforce in obedience. What you don’t know won’t hurt you. Sometimes even those who studied economics have forgotten that ‘Economics’ is the social science of production, distribution, and consumption of goods and services. We all often miss the common sense that we have to make a continuous effort on making our choices with limited resources available and organise and coordinate to achieve maximum output by increasing productivity. Ultimately economics is about you. In this case “ability to test” at present is our limited and most scarce resource. How we utilise it to the greatest effect is probably the decision-maker on how fast we can overcome and how to minimise its impact on the wallet of each Sri Lankan. Undoubtedly “testing” in isolation will not work without the policies of social distancing and medical policy management. Economics, medicine, bioscience, technology or anything is no longer isolated. There is always an economic angle. We have to find the winning formula to come out of COVID-19.

Economics of testing strategy

The countries who faced the pandemic successfully have one thing in common. Their testing strategy and coordination between policies has been incredible. New-Zealand, Vietnam, South Korea, Taiwan the unsung hero and even China have given absolute priority to testing. Ability to test has been discussed on various platforms in Sri Lanka. But still, the public seems to run on an attitude “This shall be passed”. Some tend to think opening up is the end of this battle, without weighing the pros and cons to the economy. Let’s face the grim reality we are not a rich country and the world doesn't want our currency, hence running the press in perpetuity is not a solution, it’s the opposite of it. Hence, the only viable economic option is to be at the helm of the new normal and “testing” will determine the shape of the new normal.  Sri Lanka did a commendable job in combating the wave 1. (Wave 1 is infected cases directly from China). We had a very successful quarantine process and all index cases (cases, where the person got infected, is traceable) at the beginning was identified and did not provide any space to progress onto community transmission (infected cases from small clusters of the population). In contrast, some developed countries like Italy and the USA were hit immediately with community transmission right from wave 1.

However, Sri Lanka has seen a sudden uptick in cases as a result of coordination issues between our social distancing policy and a few vital loopholes in our testing policy. At the beginning, the testing capacity was about 100 and to increase that limit to 1,000 we took a considerable amount of time. Testing even at this juncture is a limited resource, so we have to maximise the productivity on testing. We have to maximise resources to increase testing capacity, while also ensuring that we test the right samples while overall testing numbers are increased. That is where exactly we slipped (Advocata highlighted the loophole in the testing policy)

Source: https://www.worldometers.info/coronavirus/ (Accessed on 1st of May 2020)

Basic visual diagram to understand the initial testing strategy by the author

We took a fairly long time to increase the testing as it is yet not up to a reasonable level. We did not utilise the private sector from the get-go, even though it has critical capacity for lab tests in the island. Additional lapses in testing the forces who are a high-risk segment (as they manage the isolation on the frontlines) caused a sudden increase in infections. According to medical experts’ opinion COVID-19, some infected cases indicate symptoms (symptomatic cases) while there are many cases that don't indicate symptoms (asymptotic cases). However, they both are the carriers of the virus. On our testing strategy, since testing capacity is limited, we have to provide priority for individuals who are symptomatic and who have been contacted with a previously identified patient. In economics, we had the opportunity cost of not testing asymptomatic cases at the beginning. It is not that simple; there are some high-risk groups who arrived from overseas and some asymptomatic cases in quarantine centres. So maximising the limited resource “testing” became very complicated. We did not expect a member in the triforce to get infected and the possibility of their high-frequency commuting carrying the virus across domestic borders. Some of them having gone on leave to take a break after the yeoman service they delivered have now become part of the problem by increasing the probability of more cases in low-risk areas. Countries like Vietnam identified this loophole early and they conducted frequent tests among high-risk groups. Drivers, cleaning staff at hospitals and often committing all individuals all fall into high-risk categories.

Economics on increasing testing capacity

One main delay to increase the testing capacity was lack of engaging the private sector on testing at the beginning of the pandemic. Private sector labs are mainly run by major hospital groups that are well regulated by the Ministry of Health and have the critical capacity to get the numbers in. A PCR test is a confirmatory test (Symptoms have to be indicated and a doctor has to recommend the test) and an individual cannot get it as a screening test (a test to identify an infection/ disease). As a result, private hospitals can only conduct PCR tests for the in-house admitted patients only. Of course, the cost of the private sector tests will be higher but by restricting private sector to conduct the tests as a laboratory test and imposing price controls on the tests is a sure way of discouraging the ability to increase the testing capacity from volunteer testing. The outcome would be someone who could afford a test at a higher price will now utilise the state health apparatus, adding further strain on limited resources. At the same time price controls will discourage the private sector to invest and further expand testing capacity. In an ideal case scenario, the private sector has to be encouraged to conduct the tests out of hospital premises to reduce the degree of transmission of the disease. 

Given community infections being reported we can’t adhere to our previous testing priority strategy as now the asymptotic cases have been reported and the opportunity of voluntary testing has to be opened up. The cost of an economy that is idle is not bearable for a developing country like Sri Lanka.

Solution

The only solution lies in improving our testing strategy and increasing capacity. There were some locally made PCR tests reported which is commendable and we should encourage them to upscale it to a commercial level. However, introducing a commercial scale medical equipment takes time as the process needs extensive testing is needed for approvals to ensure accuracy and reliability of the tests. Increasing testing by using basic economics on what is available and more feasible. Having fewer regulations on the private sector on testing, while we maintain free testing conducted by the government is the first most economically feasible option. Engaging the private sector will save an opportunity cost of testing more cases in the government healthcare for people who can’t afford it. As community infections have been reported now voluntary testing ability is a must. Only the private sector is likely to bring the investment for advanced and convenient testing like drive through tests, and mass-scale testing needed for industry. To coexist with Covid-19 till the boffins at labs to come up with a vaccine is still in the distant horizon, hence increasing tests is the only way out to defeat the invisible enemy at the moment. 

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.

Let’s not look too far ahead

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

In cricket, most great batsmen will tell you that they don’t go out to bat thinking “I will score a century today”. They break their innings down to phases; “let’s score 10 runs”, “let’s score 20 runs”, “let’s survive the next four overs”, etc. Basically, “let’s face the next ball”. While this may be misconstrued as a lack of ambition, the underlying principle is that when you look too far ahead you can lose sight of the here and now. In cricket, this could mean getting out for zero while your mind is on the 100. Covid-19, the virus that found its origins in China, not only has Sri Lanka locked in its megalodon jaws but the entire world as well. While this too shall pass, we have to admit that we are well and truly in an unprecedented crisis. We will not be safe until the world is safe and that is the reality. Having faith that things will be back to normal soon is good but our actions should go beyond simply being optimistic and hopeful. Without beating around the bush, let’s be realistic and pragmatic by being scientific. In the past, we have relied on soothsayers who appear on television, devil dancers, turmeric (good luck finding turmeric, now that there’s a price control), and our love of bashing coconuts. The fact is that until we see the production of a vaccine or an acceptable solution, the entire human race is sailing in the eye of the corona storm. Many corporate dons and government officials in Sri Lanka have been pitching in with their business plans and strategies on what can be done “post-COVID”. Sri Lanka has faced the pandemic reasonably well compared to a few of the other countries, but in a crisis of this magnitude, in a closely connected world, the impact of a neighboring nation’s mishandling of the crisis can serve as a cautionary tale for the rest of the world. There is no point in early celebrations for doing well or having anxiety about those who may have mishandled the crisis, as we all are at square one and need to overcome this together. Sentiments on anti-globalisation and going back to the fallacy of “self-sufficiency” is not the solution as we failed that experiment comprehensively almost five decades ago. In a crisis of this scale, all predictions made will fall apart in a matter of not months but days. Take Sri Lanka as an example. We had all planned to open up the Western Province on 22 April but reported cases increased rapidly just two days before. How do we plan in an unpredictable crisis and what should we do is the question that has to be answered sensibly.

Historical examples may have limited relevance

As with managing any crisis, we generally make our decisions based on historic perspectives we have and connect with learnings from peers. First, we have to realise Covid-19 is an unprecedented scenario and how we managed previous crises will hardly help us to overcome the current battle. The strategies that worked for us in overcoming the Boxing Day Tsunami, fighting the brutal civil war against the LTTE, and overcoming the Easter Sunday bombings last year may not work in this battle against Covid-19. We are in a situation where every contract/agreement signed at every level has been challenged. It starts from a simple violation of a rent agreement, by not being able to pay the house rent on time, to a national-level crisis where we lack adequate foreign currency to pay our foreign debt commitments. Having seen the negative side, the reality is there will be a multitude of opportunities which will open up once the storm dies down. The challenge is the inability to predict the opportunities or the shortfalls. So when managing and strategising for the long term, a “one size fits all solutions” plan is very futile at this juncture. However, it doesn’t mean that we need to take a comfortable seat or take a “do nothing and wait” stance. Our game plan has to be pragmatic and dynamic. A game plan can be pragmatic if we have our basic fundamentals right. Predicting opportunities and developing strategies for a crisis without having the “basics” is similar to trying to solve an integration and differentiation mathematical question without having the basic knowledge of addition, subtraction, and multiplication functions. In a recent conversation with Advocata, Export Development Board Chairperson Prabash Subasinghe said it well: “This is a marathon, not a race.” At this point of time, it is of paramount importance that we have a strategy to float for the next 12-18 months and we have to play it dynamically and sail based on the direction of the wind. For the economy to stay afloat, we have to negotiate with the International Monetary Fund (IMF) for a balance of payment (BOP) bailout programme and request them to provide financial assistance to keep us afloat in the coming months. At the same time, we need to use our foreign office and actively seek bilateral loan facilities to manage the crisis. Import controls, liquidity injections, the Government taking over food distribution, and price controls are not at all advisable actions and they won’t help us to keep the rupee afloat, versus the dollar. Rather we will lose our dynamism and pragmatism and crush even the little credibility we have on markets.

The status of our basics

The next question is what can we do and what should we do to get beyond the floating stage. We have to evaluate the status of the basics and spend time on getting our basics right at this dark and stormy hour. Our fundamentals for sound economic policy have never been right in the last three to four decades. We should not lose the benefits of bringing hard reforms and getting the fundamentals right while we fight this crisis. For example, when pay cuts and job losses take place post opening up, people will actively look at part-time opportunities and work more to earn an income. At that point, if our business registration takes three months and if getting an online payment platform takes months for an e-commerce business to take off, the million opportunities created due to Covid-19 will be taken away by our neighbouring competitors. A study done by the Advocata Institute has found that registering a sole proprietorship is far more difficult than incorporating a private limited company. If we fail to fix that level of basic reforms (which can be easily fixed) we will not have any space to capitalise on the opportunities even if we get the support from development agencies over the next few months. Convoluted and complicated customs procedures and red tape have been discussed for years. South Asia Gateway Terminals (Pvt.) Ltd. (SAGT) CEO Romesh David, at a recent online forum on Sri Lanka’s exports economy with Advocata, said that even in the context of Covid-19, goods can cross borders and systems can be automated. If we are not ready to fix these basic regulatory barriers at Sri Lanka Customs, even our revised export target will be just an imaginary number. In summary, our strategy from a national level to that of a small business has to encompass the ability to float pragmatically as we are still in the eye of the storm. At the same time, we have to make sure to utilise our energy on getting our basics in economics right if we are to capitalise on the opportunities that will unfold when the storm is over. In difficult times people will be open to hard reforms and governments can spend political capital on getting hard reforms done. The Government should move back to their role as a facilitator rather than trying to become an active player and throw long-term strategies during one of the most serious crises in the history of mankind.

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.

Sacrificing food security for self-sufficiency

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

The fallacy of a society that thrives on the myth of “self-sufficiency” after the colossal failure during the mid-70s that left nearly the entire population sans the ruling elite’s belly full is making the rounds again. The very definition of the term “self-sufficiency” has different meanings. One school of thought is going back in time to an era where Sri Lanka never existed on the international map with absolutely zero trade. In this instance, one had no choice as you live off of what you grow. Then there are the alternative arguments – the one that argues that one needs self-sufficiency to ensure food security; to be self-sufficient in food but import fuel, coal, medicine, raw materials, and other “essentials” as prescribed by the state. There are others who believe our trade deficit is beyond our means and we need to be self-sufficient to the extent of our export capacity. Out of all the arguments, the one on food security is the most popular. Hence, let›s take a look at data and definitions on food security and evaluate whether Sri Lanka can truly be “self-sufficient”.

What does food security mean?

The popular belief of “food security” is to have enough food for our consumption during a crisis. The present global COVID-19 crisis we are grappling with is a prime example. Another common myth on food security is having sufficient food stocks to last six months and the ability to produce the required calorie intake within the country’s territorial borders. The Food and Agriculture Organisation of the United Nations (FAO) and the World Food Summit have defined food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences for an active and healthy life.”

Despite popular belief, to achieve food security, the country in concern need not produce the food it needs within its borders. The key is to produce the required food at scale and desired quality economically. Otherwise, we will waste our precious and limited resources. For example, take Singapore which has a land area of just 725.7 km2, compared with Sri Lanka’s 65,610 km². Singapore has topped the global food security index for the second year running, despite lacking commercial agriculture. This is because Singapore has integrated fully into the global food supply chain and constructed adequate storage to feed its citizens during external shocks. This is truly remarkable as Singaporeans can consume food that is, as defined by the FAO, safe, sufficient, and to the preference of the consumer. In comparison, Sri Lanka is ranked 66th in the same index. How can we ensure fellow Sri Lankans have access to food physically and economically at all times? According to the FAO definition, it is evident through the COVID-19 crisis that although we have food physically, our food security as a country has been hit by not having physical access to this food due to delivery concerns, people losing both economic and physical access to food due to the interruption of their daily wages, and the absence of food preferences. The failed socialism experiment adopted by the Bandaranaike Government failed to achieve any of the above. Food was inadequate, to say the least; choice was a dream and quality was never present. If a citizen was apprehended with anything more than that was rationed, it was deemed a heinous crime and he or she was promptly jailed. Flour was infested with bugs and rice with stones, and apparel was perfumed with the stench of kerosene and the risk of setting on fire those who were careless near the wood-fired kitchen stove. We had the longest queues in the world for the poorest quality of bread, and that too for only one loaf irrespective of the size of your family. In summary, for the urban community (where the majority had cash to buy food), food security was challenged by the absence of physical access and preferences, while the rural and estate communities’ food security was challenged by the absence of income and preferences as they consumed whatever that was available in their gardens or that grew in the wild. So it is obvious that food security is not something we can attain just by trying to be self-sufficient as there are so many other components to it such as access, affordability, safety, preferences, and nutritional value. According to FAO, the average daily per capita energy requirement per person is 1,680 kcal and Sri Lanka on average is at about 500 kcal above the limit, but according to census and statistics data, the energy intake in the poor segment across Sri Lanka is below world standards. So if we are serious about food security in the long run, we need to ensure our people can afford safe and nutritional food, maintain access, and ensure choice rather than living in the fallacy of self-sufficiency. To achieve this, we need to create secure access to the global food supply chains so that our people can afford the diverse range of food required to meet their energy intake (balanced diet). Then the next question one may have is whether this means that we are going to import all our food and whether we have enough foreign exchange to import all that we require.

Low agriculture productivity

To answer both aforementioned questions, we need to check why the productivity in our agriculture (sector) is low. The technology not reaching our paddy fields is the common excuse that has been given over the years. But have we thought about the reason why technology hasn’t reached the paddy fields? Out of 6.5 million hectares of land in Sri Lanka, 5.4 million hectares are owned by the government. As a percentage, private lands are just 18% of Sri Lanka’s total land extent. Farmers are required to take a permit from the government office if they are to cultivate a higher-yielding paddy. Access to a bank loan is very limited for most paddy lands as farmers are not given the title to the land they cultivate. No construction can be done on paddy land as it’s forbidden by law. Under the current regulatory regime, no investor would invest in a greenhouse farm or high-tech farm. In addition to the above, most of the paddy lands are fragmented, so the opportunity to scale up for a big operation is very limited, keeping costs of production high. This means that even if we were to go back to self-sufficiency and cultivate in our backyards, we have just a fifth of our entire land to cultivate, build houses, and do all other industrial work. This also means that we have about 25% of our labour force engaged in farming, but contributing only 7-8% to our GDP, which leaves most of our land unproductive.

Importing food and the trade deficit

Extreme self-sufficiency is not at all an option regardless of how resourceful we are, as it is obvious that we can’t produce all that we need – for example, fuel and machinery. The only way to keep our trade deficit narrow and convert it to a surplus is to develop our exports. Exports and imports are two sides of the same coin. We import products we cannot produce or products for which we do not have a competitive advantage. We export commodities and services where we have a competitive advantage. Following is an extract from FAO which summarises why food security can only be achieved by global collaboration: “Global food trade has to be kept going. One of every five calories people eat has crossed at least one international border, up more than 50% from 40 years ago.” Therefore, our inability and traditionally lethargic approach to developing our exports should not be a trade compromise for the real and meaningful food security of our people.

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.

Attracting foreign exchange: Are we on the right track?

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

What should be our mandate for the coming Sinhala and Tamil New Year? We have to be psychologically prepared to work harder and develop the ability to drive and lead in the best of times as well as the worst of times that are about to dawn on the horizon. Amidst the COVID-19 battle and a quarantined Sinhala and Tamil New Year, the recent figures by the Department of Census and Statistics indicate that our per capita GDP for the year 2019 (which is a reasonable measure to evaluate the standard of living) is at $ 3,852 per annum, a drop from $ 4,079 in 2018 (In USD terms, this is a 5.5% drop compared to 2018 and a 3.9% increase in LKR terms). In 2015, our GDP per capita was $ 3,842. In USD terms, we have pretty much slipped to where we were five years before.

Just to bring our performance into perspective, Japan’s GDP per capita is around $40,000. The standard of living in Japan is 10x as Sri Lanka. Our GDP growth rate is estimated to be at 2.3%, another 0.3% drop from the initial estimation of 2.6%. What this means is Sri Lanka will take 30 years to double our living standard if we are to move at this pace. And even then, we will be falling 5x behind Japan’s present standard of living. We are heading towards a difficult and challenging time period with a bad start. We can overcome this only by working together locally and forging partnerships globally. We have to find opportunities in this crisis and navigate by adding more value to our goods and services which the global market seeks. Our mandate in this New Year should be to be competitive, serve market opportunities, and capitalise on the limited opportunities before us. However, this is easier said than done. In this context, the decisions we make and the messages we push will determine where we are heading towards and the fate that awaits us in the not-so-distant future.

Measures by the Central Bank

It is no secret that Sri Lanka requires foreign exchange to pay back our import bills and the loans that we have taken. We import almost double what we export, hence the balance in the current account – or in common man’s term, imports exceed our exports. This trade deficit has to be narrowed, and this is the challenge. Over the years, instead of implementing the required reforms to make our exports more competitive and to close the gap, our constant strategy has been curbing imports to narrow the trade deficit. Today, we have arrived at the point of no return. With little growth in exports and debt beyond our means, the Sri Lankan taxpayer has racked up debt of about $ 16 billion payable by 2023. The Government took to implementing a futile policy of banning the importation of non-essentials including vehicles. Our rupee has depreciated nearly 70% over the past decade. On 8 April 2020, the Sri Lankan rupee passed 200 against the dollar. Given the ongoing crisis, we are left with few options to save precious foreign reserves as raising money from the market at the present risk premium is almost impossible. However, data indicates that the Central Bank continues with quantitative easing – printing money or adding more money into our financial system – which is the main reason for our currency to depreciate. On 24 February 2020, the Central Bank of Sri Lanka made a Rs. 24 billion profit transfer; on 13 March, the Central Bank injected Rs. 50 billion by buying government securities; and on 17 March, the Statutory Reserve Ratio (SRR) was brought down to 4% from 5%, which injected a further Rs. 50 billion to the Sri Lankan economy. The meaning of the statutory rate cut is that all licensed commercial banks earlier had to maintain a mandatory reserve of 5% of their total deposits with the regulator (deposit liabilities), but now have to maintain only 4%. This money will most likely be utilised towards relief measures provided by the Government. As we continuously highlighted in this column, the Yahapanala Government made the same mistake of imposing import controls and providing cash injections to the system, which resulted in the rapid depreciation of the rupee. The value of the rupee is a market function and trying to distort (it) by intervention is not advisable. In this case, with the devaluation of our rupee, the prices of food and medicine will go up, thereby increasing poverty levels.

Appealing for foreign currency deposits

On 2 April 2020, the Governor of the Central Bank appealed to domestic and international well-wishers on behalf of the Government of the Democratic Socialist Republic of Sri Lanka to deposit foreign exchange into Sri Lankan banks with an assurance that no questions would be asked on the financial trail of the funds. In the appeal, the Governor of the Central Bank mentioned that the money would be accepted without any hindrance from the Central Bank and the banking system and will be exempted from exchange control regulations and taxes for three months from 2 April 2020 onwards. At the point of writing this article, the Central Bank has not published further guidelines; only the statement by the Governor is available. However, it is of paramount importance that these measures do not impact Sri Lanka’s ratings by rating agencies as this would further erode our capacity to work with international donor agencies and financial markets. We have to be cautious not to open space for money laundering while we take decisions at this serious moment to attract more foreign currency. As a result of the serious efforts by the Central Bank of Sri Lanka, we were delisted in the grey list of the Financial Action Task Force (FATF) in October 2019. The FATF is the global policy setter on anti-money laundering and countering the financing of terrorism. A delisting from the FATF grey list is a positive indication to the market to attract quality investments which look for a credible financial system. At the same time, we have to be vigilant not to breach the code of conduct and ethical guidelines of international donor agencies, as there is a high possibility of Sri Lanka knocking on their door as a fallback option. In 2001/2002, a similar tax amnesty scheme was brought by then Minister of Finance K.N. Choksy and the proposal was reversed soon after the new Government was elected in 2004. There are no short-term solutions to mitigating long-term macro issues. Time and time again, it has been proven that curbing imports is not the solution and monetary prudence is the way to stabilise the rupee. The motivation behind these measures is understandable as our foreign exchange income is very tight, but in this new Sinhala and Tamil New Year, we must ensure the cure is not worse than the illness.

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.