Environment vs. development: It's all about land

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 question of how to develop Sri Lanka without obstructing our valuable environmental ecosystems has come to the forefront yet again. The recent incidents surrounding the development of a road in the territory of the Sinharaja Rainforest, a World Heritage Site, is one prominent discussion.

The deforestation in Haputale for cardamom cultivation and the establishment of a prawn farm in Anawilundawa, a Ramsar wetland, also raised serious concerns among the general public and environmental activists, adding more fuel to the debate on development vs. environmental protection.

This debate has come to a point where questions are being asked on whether Sri Lanka can be developed without disrupting the environment, and whether environmental activism is hindering the development of the country.

This is not the first time this topic had taken centre stage. “Save Wilpattu”, the Mount Lavina beach expansion project and the development of the Port City have been popular thematic stories over the years; the human-elephant conflict (HEC) is a continuous battle that gets primetime news coverage too.

What’s the real problem?

On the surface, it seems that all the incidents are a result of efforts to strike a balance between development and environment – which is true to an extent. However, if we dig a little deeper, in economic terms, it is a clear case of an attempt to maximise the utility of a scarce resource – “land”; at the same time, it is an issue of property rights.

And all that we’re seeing is an outcome of our inability to maximise the utility of land by improving productivity, alongside the absence of “property rights”.

Let me explain why and how.

Forests are sacrificed due to the absence of property rights

One of Sri Lanka’s most limited and precious resources is “land”; being a tiny island which is just a dot on the world map, land is not in abundance for us. Our size as a country is quite smaller than average cities or states in the rest of the world. Unlike other resources, land is fixed in size, and increasing the extent of land (similar to what was done with the Colombo Port City) is an extremely expensive affair, both monetarily and environmentally.

Sri Lanka’s total land extent is about 6.6 million hectares. Can you take a guess on the amount of land owned by the Government and the amount of land owned privately by its own Sri Lankan citizens?

Only about 18% (1.2 million hectares) of the land is owned privately by its citizens while about 82% (5.4 million hectares) of the total land is owned by the Government.

About 28% of our total land is forest cover, according to the FAO (Food and Agriculture Organisation of the US). Out of this, about 573,400 hectares (2,214 sq. mi.) of land is categorised as “Protected Nature Reserves”.

So in reality, the Government owns about half of Sri Lanka’s land (more than 50%), and this can be used for economic activity and environmental purposes. We should not be misled into thinking that private land is owned by anyone else other than our fellow Sri Lankans. In other words, many Sri Lankans do not have the rights to their property; they do not have deed titles; many of our fellow Sri Lankans do not have access to land, and the limited access some Sri Lankans have to government land is on a license basis.

According to news reports, a Sri Lankan has to visit 20 institutions just to get clearance (not to obtain a deed title) on land for cultivation on a lease basis. They have to take a licence from the government office if they are to cultivate on land owned by the government; as they do not own it, they have no incentive to use it sustainably.

As a result of agriculture, illegal settlements, and economic activity, the borders of forest land have always been blurred. It has been reported that usually, surrounding villagers and elite businessmen who have political and influential power encroach forest land for commercial purposes. Information reported on deforestation and obstructions on environmental ecosystems make up just a fraction of the ground reality. This is because most illegal deforestation takes place in obscure locations close to forest cover, which is difficult to track.

Inability to maximise on lands and its utility

The inability to protect our land and forest cover is a completely internal issue and of course a political football pertaining to a very sensitive issue. Whether we like it or not, the “market” works in good-case scenarios and worst-case scenarios. When Sri Lanka has a rising population with more households, and when people do not have land and property rights for agriculture or many more economic activities including housing and investments, what do you think would be the outcome if we fail to improve productive usage of land? For example, if we fail to improve the productivity of land by constructing vertical buildings, what would the outcome be if all five million households expect to build houses on 10 to 20-perch plots of land? The same applies to agricultural land, and this is one of the main contributory factors to deforestation across the globe.

According to the Economic Census in 2013/2014, about 2.2 million hectares were used for agriculture, an increase of 18% from 2002. It is obvious that in order to feed our population and sustain economic activity, our land usage has increased. However, we need to focus on improving productivity and efficiency by utilising it effectively for agricultural purposes if we are serious about protecting our forest cover. We have to move to high-yield varieties and vertical farming, and again, it boils down to accessing property rights if we were to increase the utility of land through investment. No person would invest in land they would not want to own. Unfortunately, most of Sri Lanka’s land is dead capital. No one uses it and there is no economic activity. Now, Sri Lanka expects to be self-sufficient in paddy, milk, maize, and vegetables and is aiming to supply the entire demand for rubber within the country. Sri Lanka is also aiming to expand coconut product exports by fewfold; where do we have the land to do all this? We need to take our land policy seriously or else we will put our forest cover into further risk.

President received firsthand information

The President received firsthand information on the gravity of the land issue. One of the main requests by the people or fellow Sri Lankans is for the Government to provide them with land.

His Excellency the President, in his policy statement, stated that land issues are one of his priority areas. Moreover, there were recent news reports on his directives to the relevant institutions to issue title deeds within three months which pertained to unresolved land issues.

Land issues are very sensitive, and all conspiracy theorists have a collective voice; they all suspect that foreigners and other parties may take over our land. However, since 1948, it’s been purely Sri Lankans who’ve owned the land. The responsibility cannot be passed on as it is our own leaders who control 82% of our land. (According to Sri Lanka’s regulations, there is minimal room for anyone who is not a legal citizen of Sri Lanka to buy land. Even the apartments and condominiums can be bought only if it’s above the fourth floor).

According to data, Sri Lanka lost about 490,000 hectares, or 20.9% of its forest cover, in just 20 years, from 1990 to 2010. If the majority of the land is governed by the State and if there is no room for any outsider to exploit our land, doesn’t this mean that we have really failed in our public policy and in understanding the economics of land management?

However, instead of looking inward, we have become masters of pointing fingers at outsiders and fearmongering to cover up our failure, and sadly, our forest cover has become the victim.

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.

Can industry-specific ministers fix this issue?

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 appointment of cabinet ministers and state ministers is still a topic at dinner tables, especially on the state ministerial portfolios. This is mostly because specific industries or fields have been provided for state ministers. There is general criticism surrounding ministers being appointed to micro sectors of the industries while the general expectation from a minister is to serve a broader mandate, and do justice to taxpayers’ money by formulating and implementing policies.

Many critics question the role a minister could play in a comparatively small industry where the designing, production, marketing, and distribution are mainly done by the micro-entrepreneurs themselves. For example, the state ministerial portfolio for Batik, Handloom Fabrics, and Local Apparel Products has been a topic of discussion since the appointments. Another state ministry that is being widely discussed is that of Cane, Brass, Clay Furniture, and Rural Industry Promotion.

The counterargument is that previous state minister portfolios were just token positions with no decision-making power. It is argued that in this case, ministers have been provided a specific role, scope, and focus, and people can directly hold them accountable for their industries and industry-related concerns. At the same time, a measurable key performance indicator (KPI) can be easily implemented and the respective and relevant institutions can be assigned to each minister. According to a recent TV interview by President’s Secretary Dr. P.B. Jayasundera, state ministers and their teams led by the ministry secretary have been given the decision-making power in that respective industry. According to Dr. Jayasundera, it is a scientific way of structuring and utilising taxpayer money without just appointing state ministers for the sake of doing so.

I believe there is truth to both arguments on the method of assigning the ministerial portfolio. The ground-level reality is that most of these assigned domestic industries are run by micro, small, and medium entrepreneurs (MSMEs) or businessmen who represent the private sector. It is important to remember that these small businesses are still part of the private sector and not the Government. The Government’s role is more to regulate some industries and facilitate the business processes because micro and small enterprises have industry-specific challenges as well as common challenges in running their daily operations. The minister’s role is to work with these sectors and assist them with reducing regulatory barriers for the sector to perform to its full potential.

Common challenges

According to the Advocata Institute’s report “Barriers to Micro and Small Enterprises” in Sri Lanka, one main bottleneck across all industries is access to finance. Access to finance has multiple dimensions extending to the banking and financing sector, but it starts from the fundamental point of business registration.

Over the years, we have underestimated the potential of micro and small enterprises (leaving the medium enterprises aside). We have provided step-motherly treatment to the MSME industry to the extent of not even focusing on their ability to register their businesses.

According to the Advocata report, sole proprietorships comprise about 61% of total businesses in Sri Lanka and provide 27% of national employment. Interestingly, about 25% of the establishments are run by women and contribution from women-led enterprises increases up to 35% in rural areas.

While the whole country focuses on the big picture of revamping the entire domestic and specialised sectors such as batik, local apparels, handlooms, pottery, rattan, etc., our research has revealed that about 45% of micro-enterprises and 10% of small enterprises have not even obtained a basic business registration. The meaning of not having a business registration is that they do not have access to finance or any Government-sponsored programme or project.

Poor enthusiasm for business registration is mainly a result of the horrendous process of registering a proprietorship or partnership. A proprietorship or a partnership can be registered under the Business Names Ordinance Act No. 7 of 1987, which is under the authority of each provincial council and provides room for each provincial council to run their own procedure on registration of a proprietorship or partnership.

So even though a specific minister may have been given scope and specific task of revamping micro, small, and local enterprises, the minister may still face challenges due to common regulatory barriers starting from the business registration process, which is the entry ticket, to finance and markets, and even for relief schemes during Covid-19 brought in by the Government.

The good news is the Government and Department of Census and Statistics (DCS) have initiated an e- registry platform for registering micro and small enterprises. According to Advocata statistics, 97% of micro-businesses and 85% of small businesses are registered as sole proprietorships. This e-registration system is indeed a move in the right direction. Then, the authorities must also ensure that the e-registration process will be simple and not a replication where the same documents are just submitted online. A system of just submitting documents such as deeds, rent agreements, etc. online would add an additional burden for budding entrepreneurs; to scan and submit documents online in addition to the time they spend getting grama sevaka certificates, rent agreements, and a list of other documentation. Advocata has recommended the New Zealand model and a South Korean model where there is a three-step business registration process, while in Sri Lanka the current process has seven steps.

Daily survivors vs. entrepreneurs

Having a simplified business registration process is the first step of addressing the problem of access to finance and providing government assistance and accessing markets. Having a simple business registration process will ensure an effective tax collection system where businesses can grow and expand.

One other reason for the poor enthusiasm pertaining to registering a business is in the fear of paying taxes. As a result, most of these micro-businesses limit themselves to being “daily survivors” as opposed to them becoming real micro and small “entrepreneurs’’.

There is a significant difference between someone who just runs a small business for daily survival and someone who takes a risk in the form of money, property, time, or any form for entrepreneurship.

What Sri Lanka requires is for micro and small entrepreneurs to migrate from “daily survivors” to micro-entrepreneurs. The Government can facilitate the process by having a conducive environment for businesses, and the new state ministers can take this lead.

Industry-specific challenges

While the micro and small enterprises have been oppressed at the registration level, at the same time, there are industry-specific regulatory issues.

Most of these industries require a license for their sourcing and a license or a government authorisation that has to be taken at each touchpoint. In most industries, sourcing of raw material and transportation of raw materials both require licences. Some of the regulations are placed with good intentions, but most of it has ended up with extra bureaucracy burdening the industry and opening doors to corruption. All licences have just ended up being another hurdle for these entrepreneurs to cross. Additionally, these licences are also an opportunity for regulatory officials to earn extra money in the way of corruption and by providing preferential treatment to the affluent and higher classes of business that have networked with local political power centres.

The new industry-specific ministers’ primary mandate when developing these industries has to be a facilitatory role and not an interventionist role. The prosperity of micro and small enterprises will depend on this. The new ministers have to ensure that they do not apply the “brakes” by introducing more regulatory barriers; rather, they should remove those barriers in each sector for sustainable growth.

At the same time, they should not push the accelerator in the wrong direction to create market distortions which will impact other more productive sectors while bureaucratic powers work only thinking about their sector at the expense of others.

Sri Lankans are more than capable of competing at the global level and “daily surviving micro and small businesses” will jump to the seat of “micro and small entrepreneurs” if we facilitate and provide a more simple regulatory scheme.

We should never underestimate the common man’s skill and the ability of micro and small enterprises, which at present are already contributing more than 30% of our national employment.

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 first test of the President’s ‘power’

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

Power cuts in Sri Lanka are not a recent phenomenon. However, this phenomenon is going to be repeated over and over if we fail to find a sustainable solution. The media reported that during the 2019 blackouts, senior officials in the Ceylon Electricity Board (CEB) had to beg the rain gods with a special “poojawa” to fill our reservoirs faster as they ran out of any other option. As reported by media, pressure mounted to a level that the then President was very disappointed with their performance and requested that the Public Utilities Commission of Sri Lanka (PUCSL) and CEB agree on a common plan.

It is clear that the energy problem in Sri Lanka is extremely complicated. This problem has no simple solution, as structural constraints, economic limitations, technological drawbacks, and many other complications continue to ravage Sri Lanka’s energy sector. The current President has received a mandate for a “system change”. How he solves this problem will be a litmus test on his administration. His approach and ability to solve this complicated public policy problem will determine whether such an ambitious “system change” is possible.

Understanding the context

The uniqueness of electricity is that we cannot store it on a grand scale – until the world comes up with a cost-effective battery storage solution. This places the CEB in a challenging position, as it has to walk a fine line between undersupplying and oversupplying power to the country, without an option to store electricity and manage shortfalls. In other words, all electricity that is produced has to be met by demand, and the CEB has to have a constant supply available, as it would be impossible to predict electricity demand down to the last unit. If the electricity demand is higher than what is generated, the grid becomes unstable. Producing more electricity than is demanded will make it difficult to manage the grid. It would also be very expensive as our electricity supply comes from multiple sources such as hydro, coal, thermal, and few renewable energy sources.

When demand increases, we can’t just activate a power station and supply electricity to the grid, as activating some power plants, setting up the temperature, and resetting the grid takes a few days. That is one reason as to why the CEB requires a few days to overcome this situation with the Norochcholai Plant becoming dysfunctional. Even with low power demand due to the contraction of economic activity such as tourism and some industrial plants, resetting the grid without Norochcholai and managing the capacity with other plants takes a few days. To put it simply, the CEB does not have an easy task at hand. The most economical form of generating electricity is hydropower where the cost per unit is about Rs. 6. We cannot match demand only through hydropower, however, and we have to activate our coal power plants during peak hours when demand rises. The unit cost of coal-generated electricity is approximately Rs. 17.50 per unit and Rs. 25-35 is the unit cost of thermal-generated electricity. According to energy specialist Dr. Tilak Siyambalapitiya, the overall cost of production of a unit of electricity is Rs. 23.32 and the approved selling price is Rs. 16.29. In other words, our selling price only covers about 70% of the generation cost. The important fact is that the cost for each unit we consume is not the same; the cost of the energy we consume during peak hours from 6 p.m.- 1 p.m. is more, as it is mainly generated from thermal and coal.

Sri Lanka’s cost per electricity unit is comparatively high compared to our neighbours like Kerala, Tamil Nadu, India, and Bangladesh. But one real reason for the cost to be lower in these countries is they have blackouts during peak hours without activating their thermal and coal plants, and households have adapted to face blackouts with some capital investments such as battery power and installing inverters. In Sri Lanka, the economic cost of a blackout would be significantly higher than supplying power through coal, thermal, and renewable energy sources. Hence, our cost is high for a multitude of reasons.

The composition of Sri Lanka’s grid is based on domestic consumption, making our peak demand hours in the evenings between 6 p.m.-10 p.m. In contrast, countries with greater industrial development have peak demand hours during daytime working hours. Additionally, in Sri Lanka, there is a tug of war between the regulator, the PUCSL, and electricity supplier, the CEB, on developing a long-term power generation plan and maintaining our power mix. As a result of this cold war, not a single power plant has been commissioned to be built during the last Government. It is rather unfortunate that Sri Lanka’s inability to come to a timely consensus on solutions for this chronic issue has continued to weigh down our national potential.

The CEB monopoly

The CEB has an absolute monopoly in power generation, distribution, development, and technology implementation. It’s a monopoly within a non-tradable sector. They have blocked everyone else and kept complete control.

Even though power generation and power stations have been contracted to suppliers of renewable energy in the private sector, they too fall under the CEB’s control. It was reported multiple times by the media that the CEB buys power from private energy suppliers at a high cost, causing colossal losses for the CEB.

It’s a mafia ecosystem between bureaucrats and the private sector. The more thermal power we buy, the more beneficial it is for the cartel members to make more money. The grid and cable network is also maintained (generation, transmission, and distribution) by the CEB with no competition, making it completely inefficient.

When questioning the CEB on its colossal losses, one common excuse provided by all governments is that the CEB sells units of power at a cheap rate so that all Sri Lankans have access to electricity. However, it is important to note that if the CEB makes a loss, it would be indirectly passed to the taxpayer anyway, as no CEB official or parliamentarian pays the losses from their private money. Our cost of power has a greater impact on Sri Lanka’s investments, and its ability to get faster connectivity to the grid is one main parameter in the “Ease of Doing Business Index” compiled by the World Bank (WB).

The CEB’s losses have also extended into the Ceylon Petroleum Corporation (CPC). In the past, the CPC stated that they would stop the supply of fuel if the CEB fails to settle its debts. This continues to be an ongoing battle. Both the CEB’s and CPC’s losses are passed onto taxpayers, even though their claim that our electricity is reasonably prices is a flawed argument and proves to be counterproductive, given that our energy prices are not reasonable when compared to the region. 

Over the years, it was reported that a grant from the Asian Development Bank provided $ 17 million in 2012 to modernise the System Control Centre (SCC), which is the main control centre for managing demand and supply of electricity.

Even though an SCC is the heart of managing electricity demand and supply and stabilising the grid, it took Sri Lanka more than a decade to execute this decision. The CEB, a state corporation with an asset base of Rs. 500 billion, being unable to finance crucial infrastructure development such as the SCC is indicative of a culture of inefficiency and ineffectiveness that is inherently ingrained within monopolies.

One of the main promises of H.E. the President is creating an e-government system and digitising government systems and processes. If the Government is serious about this, installing smart meters as soon as possible under the digitisation programme must be a key consideration. With the installation of smart meters, a significant cost for the CEB would be reduced. In an age where our bank card is connected to a mobile-based platform, where private buses are in discussion about a smart card, can we as a country still afford to have a system where an officer has to visit every household in Sri Lanka to check the electricity meter and provide a bill? Especially in an energy market where the cost of the unit changes based on the period of the year and as per the time of electricity usage? Introducing smart meters will not be a popular solution, but a system change cannot be achieved without making unpopular decisions!

Possible solutions

The problems at hand have many tiers. The main barriers for reforms are structural. While operational and human resource-related reforms can be undertaken, without structural reforms, the operational issues and human resource issues sustainably fixed will continue to be chronic weaknesses.

Structural changes

With the Imposing, a strict leadership style or rolling heads at the senior level of bureaucracy in the energy sector will not be productive given the structural problems that exist. In fact, it will most likely worsen the situation if dealt with in this manner.

As a first step, the monopoly held by the CEB must be un-entangled and straightened out. The ecosystem of corruption, inefficiency, and malpractices has to be exposed to competition, with players entering the market.

There are multiple options to do this, and we have to unbundle the monopoly of power generation, transmission, and distribution as the first step. This will be a major structural change. To ensure competition, in the long run, a competition law has to be established which will not only be beneficial to the power and energy sector but for all Sri Lankan monopolies.

Opening energy for trading

Since Sri Lanka is an island, we are not in a position to trade energy, as our grid is not connected to any other energy market. Even if we generate a surplus of energy, we cannot trade, and in an emergency, we do not have the capacity to manage a sudden shortage.

One suggestion by Prof. Rohan Samarajiva in a report compiled under the chairmanship former Central Bank Governor Dr. Indrajit Coomaraswamy and handed over to H.E. the President is to connect Sri Lanka’s grid to the South Indian grid through an HVDC (High Voltage DC) cable.

Energy trading is already in place between Bhutan and India, and Bhutan is a net energy exporter and their energy cost is very low as their generation is mainly from hydropower due to their unique mountains and geography. This has to be taken up at the highest level with negotiations bilaterally if we are aspiring to be part of a big energy market and if we are serious about being a hub for energy in the Indian Ocean.

In an era of uncertainty and supply chain diversification, it is not a bad idea to move ahead from a simple self-sufficiency mentality to a mentality of generating a surplus and aiming to become competitive within the energy industry.

While we work on these long-term solutions, we have to make sure to build the necessary power plants in the short run to manage our energy supply, while diversifying towards renewable energy sources.

The energy mafia is so large and sometimes they work by planting big ideas that are backed by self-interest of the key decision-makers, including H.E. the President.

If we continue to think in isolation and settle for mediocre options yet again, we will just be postponing the problem before us. Our President has the rare opportunity to fulfil his mandate of a “system change” and tangibly change the system by reforming the energy sector. Alternatively, he could take the easy road by postponing any serious tackling of the problem. I hope the Government will have the courage to change the system, instead of giving into pressure.

By implementing this reform, the Government will be working towards bringing the average Sri Lankan out of the figurative darkness of the nation’s long-running electricity 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.

Sri Lanka’s economy must follow Vietnam

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

With the appointment of the Cabinet of Ministers and state ministers, the real game has started. Now the challenge is transforming an ailing economy to a competitive economy within a short period of time. There are many debates among the public on the division of ministerial portfolios. However in reality, bigger economic challenges and a need to manage foreign affairs will outweigh all micro debates put together.

Problems at hand

The problems in our economy have been discussed extensively. We all know that we are burdened with short and long-term severe economic ailments. We have to literally unlearn, undo, and pay for the sin of economic mismanagement of over 40 years within the next four years. As a matter of fact, $ 4 billion is required each year for debt servicing in the coming four years. Just to put things in context, per year we need four times the value of the Hambantota Port deal to just keep our noses above water. We have to do it for four years provided that there are no major negative shocks in the global and local economy. The poor public finances management combined with deteriorating government income are just additional issues we have to deal with. Sri Lanka managed to contain Covid-19 well compared to our neighbours, but with New Zealand going back to a lockdown and many Sri Lankans working abroad planning to return within the next few months, there is an indication that the risk of a sudden uptick in COVID cases is still high.

Reading the mandate

In this context, people have provided a two-thirds majority for “Saubhagya Dakma”, the manifesto of His Excellency the President. Though it is a reasonable assumption to read this election victory as the citizenry’s overwhelming support of the manifesto, I believe it is also a voice of tiredness and displeasure by all Sri Lankans against the economic and political system that we marinated in for decades. This message can be put simply as a voice calling for a complete revamp of the existing system. In other words, making a competitive, efficient, productive, and sustainable system for a progressive Sri Lanka. The underlying voice is that Sri Lankans are not happy with where we are, although the same Sri Lankans are responsible for electing all governments in the past. It may also be read as a serious betrayal of people’s expectations and under-delivery in performance. A clear mandate was provided in November last year before COVID-19 and it has been re-assured post-COVID with another mandate. Since the world has come to a new equilibrium post-COVID on the economic front, it is important to keep an up-to-date pragmatic approach with the underlying principle of making our economy competitive, efficient, relevant to global markets, and productive.

Role model Vietnam

Through a pragmatic and dynamic approach, one country that has done exceptionally well, not only in the containment of Covid-19 but also in economic management, is Vietnam. Sri Lanka has many lessons to learn from Vietnam if we are serious about transforming our economy! Till 30 July no deaths were reported in Vietnam due to Covid-19 infections, despite Vietnam sharing a border with China and having a population of 95 million. However, over the last few days, according to data, there is a sudden uptick in cases and 16 deaths have been reported. This is also a reminder that Covid-19 management is a continuous battle that must be forged until the world comes up with a vaccine or sustainable solution. By 1986 Vietnam had suffered two wars and their economy and social condition was in shambles. Vietnam won the war with the US but the victory meant very little to overcome economic hardships. Making things worse, they had to fight another battle with Cambodia while it was believed that Cambodia was supported by China. After two crippling wars, Vietnam had lost about 1-3 million young people. Basically, at this point, Vietnam was worse off than Sri Lanka right after the war.

The post-war “Doi Moi” programme transformed Vietnam and put them back on the map in just 10 years. Vietnam managed to pick the right policy mix through the Doi Moi programme and managed to establish a strong economic foundation, stronger than our post-war reforms. This doesn’t mean that Vietnam has solved all their problems, but they have been able to create a strong economy which can withstand a global pandemic. About 97% of their population have health coverage and so far it looks like Vietnam is one of the biggest survivors of the Covid-19 pandemic. They were only able to do this as a result of the business and trade-friendly economic programme they introduced in the early 1990s.

Vietnam started labour-intensive productions similarly to Bangladesh and Sri Lanka, but unlike Sri Lanka, they managed to move on to more technologically advanced product categories. Although Vietnam is somewhat behind us in raw numbers, they are far ahead in the journey of being the next economic miracle in Asia.

How they did it

Simply, they carried out reforms to improve the competitiveness of the Vietnamese economy. Tariffs at the border were lowered to improve the competitiveness of Vietnamese products. The Government limited its role to that of a facilitator and the private sector and foreign direct investment were given the opportunity to lead the economy. Global co-operation was embraced and Vietnam signed 10 very well negotiated free trade agreements. Though I am not a strong proponent of free trade agreements and I believe in unilateral trade facilitation, Vietnam has signalled how serious they are on trade through their consistent collaboration with other markets.

With the Doi Moi programme, they first managed to get one main investor, Nokia, and then built confidence in capital markets. As a result, other investors rallied around the main investment and diversified rapidly. Today, Vietnam has become the China of China. Vietnam has good trade relations with both China and the US and have become the largest beneficiary of trade tensions between these two global economic giants. Due to trade tensions between the US and China, most Chinese-manufactured products were transhipped through Vietnam. On the other hand, most US-allied countries looked at a business-conducive market outside China to diversify their factories and Vietnam had the right ingredients for investments. While most other regional markets, including Sri Lanka, were trapped in labour-intensive industries, Vietnam had already moved to high-tech and advanced product categories through global co-operation.

Samsung shifted its smartphone production to Vietnam, Apple is reported to manufacture its Airpods in Vietnam, and Google plans to shift its smartphone production from China to Vietnam. As a result of co-operation with these global companies, homegrown Vietnamese companies are now emerging, showing competitive potential in global markets. A good lesson for Sri Lanka on understanding the recipe to improve local production is that local production can be improved only if we produce goods and services on a globally competitive scale. Vietnam has proven this.

China Plus One strategy

With Covid-19, ideologies on self-sufficiency are resurfacing, but the reality is that the world has decided to diversify its supply chain. China is the factory of the entire world, but due to rising labour charges even before Covid-19, companies were considering moving out of China. However, given the large infrastructure and business ecosystem and the availability of a range of skills (low-level skills to high-level, specialised skills) in one market, China is still competitive. But now companies are moving to a “China Plus One” strategy – meaning they keep their supply chain in China while investing in another Plus One market as a contingency. Again, Vietnam became the ideal location given the close proximity to China and more than that, its business-conducive environment. Sri Lanka too can get few investments if we play our cards right with big-ticket investors using a China Plus One strategy.

Lessons and solutions

Sri Lanka needs to unlearn from the era of producing everything on our own. That is history. Now the world is in a place where they produce only parts and components and have moved on to assembly. Sri Lanka needs to get onto this boat and begin producing parts and components and that too, competitively. Just producing products for the sake of producing them is not the way to boost local production. Like Vietnam did, first, you get the know-how and play with world-class players on your own soil which will produce results. This will not only improve our share in global markets but also improve local production. I hope the new Government and the respective ministers will understand the dynamics and capitalise on this wave. I wish them all the strength and vision to build a resilient economy and wish Sri Lanka’s economy will stand the test of time.

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.

New government must ‘unlearn’

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 election is over and a strong and secure mandate has been provided to President Gotabaya Rajapaksa and the Government. The President has already announced that the new Parliament will be convened on 20 August and I congratulate all the members who will represent our citizenry in this Parliament. It is certainly going to define a new era for Sri Lanka if the newly elected members take it seriously.

Regardless of which party won or the composition of the government, Sri Lanka’s challenges were always going to remain unchanged. A new government cannot create a new Sri Lanka unless the government takes a new approach and starts to unlearn and undo the wrongs we’ve been committing for decades. 

Challenge 1: A severe economic recession 

The official data released by the Census and Statistics Department just the day before the election indicated a 1.6% negative economic growth (economic contraction) in real terms in the first quarter (January-March). Considering the depreciation of the Sri Lankan rupee, in US dollar (USD) terms, it is approximately a 5% contraction of the economy in the first quarter. Sri Lanka took strict social distancing measures towards the end of March, so we have to expect further economic contraction in the second and third quarters. The new government’s biggest challenge would be realigning the economy. 

According to the Export Development Board (EDB), exports have been picking up almost on par with last year’s exports, which is a big relief. A potential reason behind the recovery in exports could be the fact that India and a few competing countries have failed to manage Covid-19. As a result, some degree of production has been parked in Sri Lanka even though our cost factors are high. In the long run, we should be able to keep those orders on our shores by offering competitive prices. Otherwise, once those markets (India, Philippines, etc.) open and bounce back to normal, we will have to fall back to square one.

The EDB has expressed concern about the apparel sector’s ability in securing orders after August. Therefore, the new government has to get prepared early by starting negotiations with the International Monetary Fund (IMF) as soon as the new Parliament is summoned. Our neighbouring countries such as Nepal, the Maldives, Bangladesh, and Pakistan have already managed to secure IMF bailout programmes to overcome the brewing global economic crisis. 

Challenge 2: Trust, cohesiveness, and diversity

Over the last few decades, Sri Lanka has had emotional wounds which haven’t recovered yet. Over the years “suspicion of others’ religious and ethnic identity” has taken root amongst our fellow Sri Lankans and petty politics have ignited these fears in order to polarise Sri Lanka.

All political parties created suspicion between each other for their political advantage. Now, the very same suspicion has become the main bottleneck for us to move forward towards economic development.

In my view, this paranoia of suspecting each other is one reason why Sri Lanka is lagging in economic development when compared to other competitive East Asian countries. For more than 30 years, our Sinhalese and Tamils were suspicious of each other and did not respect our diversity. This led to the creation of the LTTE, who also capitalised on these fears while all of us became victims and losers.

If you remember, thereafter tensions were created between religious groups for converting people to a different religion for financial incentives. The wounds are not yet fully healed between the North and South, and new tensions have erupted between Muslims, Catholics, and Buddhists.

Our suspicions go beyond that. Businessmen have been labelled as a group of people with an “only for profit” motive (“businesskaaraya”), regardless of the service and assistance they provide to our economy. Private enterprises have always been attacked for playing a villain’s role over the years. As a result, all our young graduates keep expecting government jobs.

Now, we are in a situation where our revenue is not adequate to pay the salaries, pensions, and social security expenses of the government. Going a step further, we have created suspicion on foreigners and foreign investors with the famous term “foreign conspiracy”, while completely disregarding diversity. Every white-skinned person has been labelled a threat for an invasion rather than an opportunity to explore opportunities for co-operation globally.

We are where we are now as a collective result of all these domestic perspectives. We all unanimously agree that we have played far below our potential and that we are a deeply divided nation.

We are further divided on political ideology, so much so that we kill each other and damage each other’s property. The new government has the challenge of undoing and unlearning these practices. “Suspicion” is the seed that can crack any relationship, friendship, partnership, or co-operation. Even in Buddhism, “suspicion” is considered an emotion to be treated with extra caution.

Sri Lanka’s strength is its diversity. Starting from our biodiversity, diversity in weather and cultural and architectural diversity have always been our edge. Our exports need to be diversified, our economy has to be diversified, and our Sri Lankan mindset and experiences need to be diversified.

How can we create diversity without respecting diversity between people and all Sri Lankans? One of the main challenges for the new government will be establishing diversity and bringing everyone together in heart and in practice rather than spending years on documenting regulations and strategies. All political parties need to co-operate with the new government, as Sri Lanka is wounded beyond her threshold of tolerance. 

Challenge 3: Establishing competitiveness

Making Sri Lanka an economically advanced nation can only be part of a broader strategy, which is dependent on making our economy competitive. To establish competitiveness we need to increase our productivity and efficiency. The game is like winning the World Cup, where the only way to do it is to play well and play better than all the other teams. The same applies to our economy. There are multiple ways to improve productivity and efficiency. We need to think on a global scale and produce in relation to global markets while joining the Fourth Industrial Revolution. That is the next challenge for the newly elected government. 

The recent reality TV programme performed by teenagers which is getting popular across the world is one good example of the miracles as a result of competition and a competitive environment.

Young Sri Lankan teenagers proved that Sri Lanka can compete. Some of the young artists have not only challenged local original musicians but also western original musicians in their vocals and musical capacity. Some have been compared in foreign media for their performance and this is an indication that the younger generation is ready to compete and they have the fire to compete on the global stage.

Another event that made headlines was Sri Lanka’s national debating team becoming the runner-up in the World Schools Debating Championship by debating in a language which is not their mother tongue – another good example of the benefits of competition and why Sri Lanka can compete on a global level if we pick our strengths right and create a competitive environment.

The new government should push Sri Lankans to work hard for free exchange and create an environment of opportunities for any individual to be successful regardless of religion, ethnicity, caste, or creed. Sri Lanka has been practising to avoid competition and be isolated from the world – the complete opposite.

The new government has the challenge of undoing and unlearning most of what we have been doing over the years. I wish all the courage to His Excellency the President, the new government, and the new Minister of Finance and all the strength to bring in the hard reforms and to put Sri Lanka back on the map.

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 Lanka cannot be developed?

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

Since Independence or even before that, as Sri Lankans, we have had one main question. How can Sri Lanka be developed? This same topic has been resurrected again, as usual just before another general election. Fighting terrorism, raising national security, adopting a new constitution, and many more popular topics, boil down to the same question over and over again – how can we develop Sri Lanka and why have we failed to do so for many years? 

We have analysed, reanalysed, and one can even claim overanalysed our economy. The same problems and the same solutions have been discussed for decades. The stories of how Singapore was behind us and how the then leaders in Singapore envisaged Sri Lanka as their role model for development is a story we have heard repeatedly.

How South Korea was just an underdeveloped nation compared to Sri Lanka in the 1960s and how Sri Lanka was just behind Japan at Independence are stories any Sri Lankan can repeat with their eyes closed. After having learnt lessons told by these stories, why couldn’t Sri Lanka accelerate growth to become a developed nation? This definitely is something hard to comprehend. 

After thinking this over and over again, I felt that “Sri Lankans do not want to make Sri Lanka a developed country”, is a reasonable conclusion as to why we failed. Simply, we do not have the fire in our belly to overcome the hard economic conditions we pass through. Over the years, we have become a nation which has become more dependent on the Government. Rather than us as individuals taking ownership of what we do and how we could overcome challenges in life, we have moved to the backseat, expecting governments to present solutions on a platter.

It is true that we have extraordinary talents and skills but collectively, we have been mediocre and settled in an “average” mindset. Making the “average mindset” an advantage over the years, our political elites across all political parties have been promising more government-centred solutions instead of empowering individuals to take and drive the economy at the ground level. 

Making our people purely dependent on the Government has become the main economic policy followed by all mainstream political parties. Such a dystopian economic policy advocated by the political parties is based on number play and talk show screens where they point fingers at each other. The unique selling point of a political party’s economic policies have been the size of the relief package, number of government jobs, and glittery promises, which are beyond delivery under any realistic circumstances.

While political parties and politicians have taken our citizenry for a ride, the citizens themselves have evolved to live in an average world, with an “average mindset”. The composition of Sri Lanka’s Parliament, and the calibre and quality of our representatives in Parliament, is an equal representation of the vast majority of Sri Lankans. Both seem to lack a burning need/desire to get our economy on the right track.

Even someone with a political party affiliation would agree that the choice of candidates before us to exercise our franchise is extremely poor. However, considering the support base across for all political parties, we have to agree the choices that are provided are a fair representation of our people. 

Regardless of which government is in power, our economic policy has been more or less the same. Though there are micro changes in certain policies, in a wider spectrum, our way of economic management has been the same for over nearly two decades. Different governments came into power and pretty much the same faces ruled the country (crossovers between political parties) without having the courage to drive a serious economic reform plan. At certain junctions of our political economic history, economic reform plans were discussed by the people and policymakers. However, certain cross sections of society with vested interests chose their personal benefits and perks over the good of the nation and they did not allow any progressive plans to take off. 

We burnt days into years and years into decades just enjoying the events, stories, and dreams created by the people’s representatives themselves. They crossed over from one party to another, made controversial statements, the rest agreed and disagreed; we brought in new faces to politics, criticised each other, and to this day, the same circus continues.

As a consequence of being ardent fans of this drama, Sri Lanka has become older instead of becoming rich. Sri Lankans have trapped themselves in this drama at the cost of a hardworking route based on the free exchange of ideas and limited ourselves to a more inward-looking approach, giving up the journey to improve a country that aspires to have a higher standard of living.

We proudly scream the words: “Sri Lanka has been a developing country and will be a developing country for the rest of our lifetime.”

Instead of passing the blame onto politicians, we the people have always been less aspirational about overcoming the deteriorating economic conditions, and that is the very reason we have failed over and over again. 

Though our literacy rates are high, our economic education and exposure levels are very poor. Lack of proper English knowledge and major gaps in our education system complements this vicious cycle. As a direct outcome of these weaknesses, our voters are easily misled as they are not trained to analyse and evaluate information and have become victims of misinformation. As a matter of fact, our knowledge on matters of the economy has been significantly poor even though we produce a significant number of economic studies graduates in our higher education system. Their lack of a skill set to fit into our job market speaks volumes of the expired economic theory most of them have internalised after spending three to four years cramming and memorising. 

Whichever government that’ll be formed next week will have the same challenge of making Sri Lanka a developed nation. It is an economic reality, regardless of any party affiliation or any ideological affiliation, that we badly need to make our economy competitive.

Without bringing in the reforms to make our economy competitive and having the will and courage to pick the right policy choice to make it competitive, Sri Lanka will hardly have a future. The main problem why we can’t go for a serious economic programme is because our people simply do not want to. We have become victims of our own attitudes, behaviour, and misinformation. 

Only time will tell whether the new government has the will and courage for an economic reform plan. Irrespective of whether the government picks a strong and viable economic reform programme or not, our clock ticks faster and we have to live only with the hope that things will get better, till time really tells us.

No strategy will work until we work!  

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.

Two ways the private sector has failed 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

There are two main models of growth and development, which have been discussed and used interchangeably. The state sector-led development model where the government maintains a fair share of businesses by expanding the state footprint is widely popular in Sri Lanka. The second model is a private sector-led model where private enterprises and individuals are provided the opportunity to lead growth and development. Interestingly, the state sector-led model doesn’t rule out the engagement of the private sector. Having a conducive environment for businesses, a high-doing business index, and maintaining a business-friendly environment have always been part and parcel of the promises made by political leaders including ideologues who favour a state sector-led model.

The state sector

In any business model, the main factor is “ownership” or the incentive to have ownership. Ownership comes in different forms, but in business, it is associated with risk. The higher the risk, the higher the gain. The person who risks their money, reputation, time and any form of capital has a natural incentive to recover it or make a benefit out of it. In private business, the individual or the shareholders have risked their private money (property) in the business, so they are psychologically driven to perform well, supervise their teams, recruit cutting-edge talent, and delegate responsibilities with the objective of growing together.

In the state sector, it’s different. The people who manage the specific organisation haven’t really invested any risk. They are just managers and responsible officers. So even if the business/organisation performs well or not, it hardly has any impact on them personally. They will not lose any private property or anything personal in the state sector business model. Instead, in a private sector investment, the investor and the person who takes the risk have so much to lose. In the state sector-driven model, the main source of money is taxpayer money, which was collected at different stages of the economy through imports, income, profit, etc.

As per the Sinhala folktale and anecdote, The Porridge Pot of Seven Villagers (aadi 7 denaage kanda haliya), no one is responsible for anything and everyone assumes the other person will perform. Ultimately, no one performs. When no one takes the responsibility, gaps are created for corruption. The question then arises: Without ownership or stake in your private property, why should someone take the risk of blocking corruption?

It is generally discussed that bribes are a necessity to be paid at all levels of a project/investment or else the project will be blocked at each stage from approval to functioning. This is a good example of the window for corruption that is caused by a lack of ownership. This is the inherent problem in the state sector model and the reason for its inability to improve productivity and efficiency.

Many Sri Lankans are of the view that the private sector running a business is equal to common people losing access to their common public property. A slightly different sentiment which is very deeply rooted in society is that when the state runs the business, it is more people-friendly and that prices tend to be more reasonable.

Also, government jobs are very popular during election times across all voters. Someone with basic mathematics can understand as to how unsustainable our state sector and state-owned enterprises (SOEs) are. According to the recent report by the Labour Department (1) (May 2020), about 1.2 million people work in the state sector. In addition, our SOEs are making eye-watering losses. According to the Committee on Public Enterprises (COPE), the total loss suffered by SriLankan Airlines from 2009 to 2019 sums up to about Rs. 240 billion (2), exceeding our expenditure on Samurdhi, our main social security programme for the poor, which is about Rs. 94.7 billion (3).

The private sector

While our state sector has really brought us to our knees, our private sector performance has been equally bad. There are about 3.4 million private-sector workers in Sri Lanka and another 2.7 million are own-account (self-employed) workers. More than 200,000 are employers. The private sector failed Sri Lanka miserably by adding burden on two fronts. One by burdening the common Sri Lankan by blocking the opportunity to consume good quality, reasonably priced, and competitive goods and services by hiding behind high import duties and adding most of the product categories into the negative list. When you impose a higher import duty for a consumable good, it increases the price of that respective product, making it impossible to compete in the local market.

As a result, consumers only have the choice to buy locally manufactured goods and services. Buying locally manufactured goods and services benefit these respective companies and local entrepreneurs. This can be argued as a good thing, but earning a profit by avoiding competition from the global stage and adding an additional cost to the Sri Lankan consumer to pay for the extra inefficiencies is unjustifiable. Instead, most in the private sector should be able to compete with global products by increasing their efficiency and productivity, rather than hiding behind government protection.

Below are some import protections and the numbers are extremely high. How can we justify an extra protection tax of 26.6% on a pair of school shoes, a protectionist tax of 19.6% on construction steel, and 53.62% on floor tiles and wall tiles in a country where the mean household income per month is Rs. 62,237 (4)?

Secondly, some businessmen are dependent on government contracts and licenses, creating an environment of symbiosis for corruption between politicians and the business community. Today, this has become a practice from national level to the local government level, and this is the private sector’s main contribution to taking mother Sri Lanka backwards. To keep this level of protection by higher import duties, most of the senior businessmen have to align with political powers. Even if Sri Lanka is to continue down the path of import substitution, our local products have to be competitive for this policy to succeed.

At the national level, high-level agreements, contracts, tax holidays, moratoriums, and loan reliefs have been provided by each government to their connected business circles. Instead of competing with technology and skills (except for a few players in apparels, rubber, tea, IT, and services), most business leaders have compromised their ethics, modesty, accountability, and genuineness over quick and short-sighted profit margins by avoiding competition at the global level. As a result, Sri Lankans have to pay the price for our domestic inefficiency, while the economy has become uncompetitive and irrelevant to global markets.

Some businessmen went a further mile to establish monopolies while hiding behind high import tariffs. Most of these private-sector monopolies rely on unethical business practices, giving rise to multiple situations of conflict of interest. They have pressured small players and have bought them over by unethical tricks or sometimes the use of power, rather than setting an example for Sri Lanka by empowering our youth to compete for ideas at the global level. Sri Lankan businesses have decided to remain isolated, being planted while isolating our consumers from access to world-class products that would improve their living standards significantly. Some Sri Lankan micro, small, and medium-scale businesses have been hindered from accessing world-class raw material and ingredients.

Another set of businessmen have been arguing on the need for global competition to all industries, except to the industry they are operating based on baseless excuses. One common argument is that the industry is at an infant stage, so they expect import tariffs or types of protectionism. But most of these industries are far from the infant stage. They have been in operation for more than a few decades.

The companies that were open for competition and competitiveness excelled and they extended their business to other parts of the world like India, Bangladesh, and Africa. This fear of competition in the vast majority of Sri Lankan businesses is one reason why Sri Lanka could not become a breeding ground for world-class businesses and have failed to operate beyond this tiny island. So now we have an extremely tail-heavy inefficient public sector and an equally protectionist political party-aligned business sector making all Sri Lankan’s suffer.

The solution for this is not moving back to the state-led business model, but to have an open mind to be open for competition. Till we reach that state of mind, Sri Lanka will suffer economically and continue to be irrelevant in global markets, while more graduates and youth will gather on our roads requesting more government jobs.

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 we can’t afford another lockdown?

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

With the sudden spike in Covid-19 infections over the last few days, we have seen a re-emergence of discussion on a possible second wave. Globally, the Covid-19 numbers are increasing on the one hand, while countries have decided to resume activities on the other. However, when there is movement and interaction of people, there is a higher probability of the virus spreading.

Sri Lanka’s economy is at a stage where we can’t afford to face any economic shocks, given the bad economic fundamentals we have been practising over the years. The pandemic has re-exposed these weaknesses and for this, we might have to pay a considerable price as compensation for our past sins of economic mismanagement.

A second wave of the pandemic would bring in a significant array of economic challenges for both the developed and the developing worlds. However, Sri Lanka’s challenges are structurally unique as our economic problems have reached a boiling point.

Our economic problems at a boiling point

Relief schemes provided by the Government during the first lockdown and the economic revival measures scraped the bottom of our barrel, and the ability to absorb a second lockdown is a serious question.

We require foreign currency to pay our external debt at an average of $ 4 billion for the coming three years. Our exports have been declining over the years and Covid-19 has impacted the remaining markets; with a second wave, it will continue to bring new challenges. Our tax revenue is declining and rating agencies have downgraded our credit rating. As a result, investor confidence is low, making it difficult to raise money from markets even to roll over our debt and interest repayments.

Most of our workforce is in the Government and our government expenditure is burdened by salaries, pensions, and welfare structures. These welfare structures (Samurdhi relief, support for low-income differently-abled persons, financial support for the elderly, financial support for kidney patients, flood and drought relief, allowance for preschool teachers, etc.) are inefficient and ineffective. Our remittances, which is one of the main sources of foreign currency, are expected to decline further with Covid-19.

To manage the existing limited foreign revenue and foreign reserves, the Government has imposed import controls. The need to manage our foreign currency income is understandable. However, we cannot rule out the consequences of a further decline in government revenue and the impact this will have on our export industries. Furthermore, prices of consumable goods in the mid and long run are very likely to go up, making things further difficult.

How import controls hit govt. revenue and exports

According to 2018 statistics by the Ministry of Finance, 49% of government revenue was generated from import-based taxes. As per the Mid-Year Fiscal Position Report 2020, from January to April, over 55% of government revenue had been from import-based tax (savings from the lower fuel prices in the world market are one reason for higher import revenue). The Government extending import controls will result in a further decline in government revenue in the next quarter. While income is declining, our main expenditure items such as salaries and pensions are on the rise. Our recurrent expenditure – salaries (Rs. 253.8 billion), pensions (Rs. 79.8 billion), interest payments (Rs. 336 billion), and other payments (Rs. 150.7 billion) – are at Rs. 820 billion from January to April 2020, but our total revenue including a profit transfer from the Central Bank is at Rs. 476 billion. Calculations illustrate that after paying interest payments, we are running short of revenue to pay even our salaries and pensions, let alone other payments.

While import controls impact our national revenue significantly, it will have a higher impact on local businesses – just take computers, for example. If there is a restriction on computer imports and spare parts over time, we will face a challenge in replacing and upgrading the computers we use at present. Needless to say, this would affect the work of government offices and decrease our work efficiency as a significant proportion of the work is done through computers. This is just one example. We haven’t really felt the impact of import controls as we are still using existing stocks. Most imports we use for the moment are, to an extent, durable product categories, but in the mid and long term, people would feel the drop in efficiency and witness price increases.

The very same import controls impact our export businesses as most of the imports are used by local businesses to produce consumable goods and exports. (Think on the same lines of restrictions on importing computers.) The efficiency drop will impact the prices of exports to increase, making it difficult to compete in global markets. Industries like plantations will have further pressure to increase salaries with the high cost of living. Already many industries have indicated the difficulty to sustain their operations due to import controls. From the Government’s point of view, the need to manage the availability of foreign reserves is justifiable, but there will be significantly bigger costs and consequences to the local economy and the consumer.

Can we afford another lockdown?

Looking at the problems at hand and as all problems are reaching a boiling point, it is difficult to have another standstill in our economy. The only possible solution is to keep the movement of people between selected borders between districts or divisional secretariats while adhering to health guidelines, thus keeping the economy afloat running. Of course, the commute of the workforce between borders will have complications, but since most of us have hit rock bottom in our economic conditions, we are left with a very few alternatives.

The ideal solution for the foreign currency shortage is to secure a programme with the International Monetary Fund (IMF), as recommended by us. Such an IMF programme will require significant structural reforms. Another significant determinant by the IMF would be the need for a democratically elected government, meaning that a possible postponement of the election would be detrimental to seek such financial injections.

Probable solutions

The problems at hand have no quick fixes, and quick fixes will only worsen the current situation. First of all, we as a community should take precautions, adhere to all health and safety guidelines, and thereby stop contributing to the spread of Covid-19; we really can’t afford a second lockdown. Secondly, the problem with our economy is neither the high imports nor the consumption of imported goods – our problem is that our economy is not competitive or efficient. Our problem is poverty and the poor man or woman’s only tradable good is labour. There are limited or no opportunities to trade this tradable good called labour to earn a decent living as our economy is not competitive enough. Until we resolve this issue by setting our economic fundamentals right, our current crisis will exacerbate, also meaning that we cannot afford a second lockdown.

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.