52% of Sri Lanka’s population is female, with approximately 5.7 million menstruating women. However, for many Sri Lankan women, access to safe and affordable menstrual hygiene products has become a luxury. In light of the continued unaffordability of menstrual hygiene products for women in Sri Lanka, the Advocata Institute proposes a few policy recommendations.
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Originally appeared on Daily FT, Economy Next
By Nishtha Chadha
This year’s International Women’s Day theme is #EachforEqual - a concept grounded in the idea of ‘Collective Individualism’. Collective Individualism is the idea that each of us is part of one whole. Our individual actions, conversations, behaviours and mindsets go beyond the confines of our individual lives, and can have a significant impact on our larger society. Collectively, we have the capacity to create a gender equal world.
Gender equality in Sri Lanka
Sri Lanka still has a significant way to go when it comes to gender equality. The Global Gender Gap Report 2020 ranks Sri Lanka 102 out of 153 countries in the gender equality index. Women’s economic participation and opportunity, educational attainment and political empowerment are major areas of concern, and only seem to be getting worse.
In 2006, Sri Lanka ranked 13th on the same gender gap index. In other words, over the last 14 years, the country has dropped 89 places on the index. Today, women are twice as likely as men to be unemployed, and barely 9% of Sri Lankan firms have women in top managerial positions. Only 5% of Sri Lanka’s parliament is made up of female representatives.
Gender equality is not just a women’s issue, but a business issue. The World Bank Vice President for South Asia Region, Hartwig Schafer, has stated that Sri Lanka specifically could grow its economy by as much as 20 percent in the long-run by closing its gender gap in the workforce. Increasing women’s labour force participation can improve productivity by not only adding more people to the workforce, but also by enhancing diversity of thought in the workplace.
So, why aren’t Sri Lankan women achieving their full potential?
A recent publication by the World Bank ‘Getting to Work : Unlocking Women’s Potential in Sri Lanka’s Labor Force (Vol. 2)’, cites that cultural norms continue to be a pervasive barrier to increasing women’s labour force participation in Sri Lanka. Entrenched with gender stereotypes, these cultural norms have direct implications on women’s educational pursuits, career longevity, and ability to participate in decision-making roles. What’s important to understand about cultural norms, however, is that they do not exist in a vacuum. Gender stereotypes which limit a woman’s ability to access education and economic opportunities.
One example of these discriminatory policies are the exorbitant taxes on menstrual hygiene products in Sri Lanka. Access to safe and affordable menstrual hygiene products remains somewhat of a luxury for many Sri Lankan women. A leading contributor to the unaffordability of these products in Sri Lanka, is the taxes levied on imported items.
Sanitary napkins and tampons are taxed under the HS code 96190010 and the import tariff levied on these products is 52%. Until September 2018, the tax on sanitary napkins was 101.2%. The components of this structure were Gen Duty (30%) + VAT (15%) + PAL (7.5%) + NBT (2%) and CESS (30% or Rs.300/kg). In September 2018, following social media outrage against the exorbitant tax, the CESS component of this tax was repealed by the Minister of Finance. Yet, despite the removal of the CESS levy, sanitary napkins and tampons continue to remain unaffordable and out of reach for the vast majority of Sri Lankan women.
The average woman has her period for around 5 days and will use 4 pads a day. Under the previous taxation scheme, this would cost her LKR 520 a month. The estimated average monthly household income of the households in the poorest 20% in Sri Lanka is LKR 14,840. To these households, the monthly cost of menstrual hygiene products would therefore make up 3.5% of their expenses. In comparison, the percentage of expenditure of this income category on clothing is around 4.4%.
The impact of unaffordability
The high cost of menstrual hygiene products in Sri Lanka has direct implications on girls’ education, health and employment.
According to a 2015 analysis of 720 adolescent girls and 282 female teachers in Kalutara district, 60% of parents refuse to send their girls to school during periods of menstruation. Moreover, in a survey of adolescent Sri Lankan girls, slightly more than a third claimed to miss school because of menstruation. When asked to explain why, 68% to 81% cited pain and physical discomfort and 23% to 40% cited fear of staining clothes.
Inaccessibility of menstrual hygiene products also results in the use of makeshift, unhygienic replacements, which have direct implications on menstrual hygiene management (MHM). Poor MHM can result in serious reproductive tract infections. A study on cervical cancer risk factors in India, has found a direct link between the use of cloth during menstruation (a common substitute for sanitary napkins) and the development of cervical cancer; the second-most common type of cancer among Sri Lankan women today.
The unaffordability of menstrual hygiene products is proven to have direct consequences on women’s participation in the labor force. A study on apparel sector workers in Bangladesh found that providing subsidized menstrual hygiene products resulted in a drop in absenteeism of female workers and an increase in overall productivity.
Slashing taxes for gender equality
Internationally, repeals on menstrual hygiene product taxation are becoming increasingly common due to their proliferation of gender inequality and the resulting unaffordability of essential care items, commonly known as ‘period poverty’. Kenya was the first country to abolish sales tax for menstrual products in 2004 and countries including Australia, Canada, India, Ireland and Malaysia have all followed suit in recent years.
If Sri Lankans are serious about creating an equal platform for women and girls to achieve their full potential, ‘Collective Individualism’ is certainly the key. Gender equality can no longer be just a ‘women’s issue’. It’s an ‘everyone issue’. Each and every Sri Lankan has a responsibility to demand real action from their policymakers, to promote gender-sensitive policies and abolish taxes like this, which actively limit a woman’s ability to achieve her full potential.
By reducing the rates of taxation, the cost of importing sanitary napkins and tampons will simultaneously decrease and stimulate competition in the industry, further driving prices down and encouraging innovation. The conventional argument in favour of import tariffs is the protection of the local industry. However, in Sri Lanka, sanitary napkin exports only contribute a mere Rs. 25.16 million, or 0.001%, to total exports.
Increased market competition would also incentivise local manufacturers to innovate better quality products and ensure their prices remain competitive for consumers. Other common concerns pertaining to the issue of low quality products potentially flooding the Sri Lankan market if taxation is reduced are unlikely to materialise, since quality standards are already imposed by the Sri Lankan government on imported products under SLS 111.
If menstrual hygiene products are made more affordable it is likely that more Sri Lankan women will be able to uptake their use, allowing them to attend more school days, work more consistently and, by extension, access more opportunities. Moreover, with more products entering the market, women will have expanded consumer agency, allowing them to purchase products that address their specific needs without being economically burdened for it. This would remove a significant barrier to women's empowerment and create a wide-scale positive impact on closing Sri Lanka’s present gender gap.
Gender equality can only be achieved when we begin dismantling the structures that disadvantage our most vulnerable counterparts. Abolishing Sri Lanka’s menstrual tax may just be one small step towards achieving this. The Advocata Institute has launched an online campaign titled ‘the costs of being a woman’, which highlights taxes that disproportionately affect women. With every discriminatory tax and policy that is abolished, the collective impact could be transformative.
That is what #EachforEqual is about - sharing the responsibility to create a more equal world for each and every one of us.
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
By Nishtha Chadha
On 22 October, the Committee on Public Enterprises (COPE) presented its Third Report to Parliament which examines the performance of 23 state-owned enterprises (SOEs) over the last 19 months. The findings are certainly characteristic of the widescale corruption, wasteful spending, and poor management practices that Sri Lanka’s SOEs are renowned for.
The Chairman’s Note within the report states: “As people are the true shareholders of public enterprises, the right to ascertain that public enterprises invest money so that people get a fair share of its benefits rests with them while it reinforces the democratic foundation of our country.” But unfortunately, as they stand today, Sri Lanka’s SOEs serve exactly the opposite function. Rather than equally distributing the benefits of invested taxpayer money through the Treasury, SOEs place an exorbitant burden on an already debt-ridden economy.
Investigating just 23 of the 450 institutions that the Committee is responsible for overseeing, the report paints a frightening picture of the cumulative extent of damage SOEs have done to Sri Lanka’s economy in recent years. There is no doubt that the current system within which SOEs operate cannot be sustained by the economy. A multitude of reforms have thus been proposed to reduce the toll that SOEs take on the Treasury, ranging from the creation of a public enterprise board to partial and complete privatisation. However, little to no headway has been made in terms of implementation, likely due to the size of these reforms and supplementary lack of political willpower.
How bad is the damage?
According to the Third Report of the COPE, the 18 SOEs with furnished financial statements investigated in the report made a net loss in 2018 amounting to Rs. 61 billion. The report highlights that the Ceylon Petroleum Corporation alone made an enormous loss of Rs. 105 billion in 2018, while the National Water Supply and Drainage Board incurred a loss of Rs. 505 million, and Elkaduwa Plantation Ltd. incurred a loss of Rs. 33 million. Of the 23 institutions being examined, five were found to have annual losses over Rs. 2 million, while another five did not have furnished end-of-year financial statements to present.
The report also outlined several accounts of a wide array of malpractice, including tampering with financial statements, bloating project valuations, conducting unauthorised procurement, failing to collect outstanding debts, and perpetrating political victimisation. Some explicit examples include:
•The Ceylon Petroleum Corporation was found to have wasted over $ 1.5 million on 11 urgent procurements that were undertaken while term agreements were still in place
Payments for the construction of the Sooriyawewa Stadium by the Sri Lanka Ports Authority amounting to Rs. 3.9 billion, were found to have been removed from the books of the Port Authority in 2017
An enquiry on the Football Federation of Sri Lanka revealed instances of financial fraud committed by the Manager – Finance, through tampering with the official audit reports of the Auditor General and fraudulently impersonating the President of the Federation on repeated occasions
A stocktake of the State Pharmaceuticals Corporation found Rs. 20.7 million worth of stocks missing, while Rs. 104.4 million was found to be spent on substandard and expired medicine in 2017 alone
The report thus records over 250 recommendations provided by the Committee to the public enterprises being examined. However, the findings of the Committee also reveal that approximately a third of these recommendations have either not been implemented or not been reported on.
Avenues for SOE reform
Sri Lanka’s total public debt currently amounts to 82.9% of GDP, with domestic debt amounting to 41.6% of GDP, making it one of the most debt-ridden economies in South Asia.
With slowing growth and increasing rollover risks, Sri Lanka’s Treasury cannot sustain annually bailing out loss-making enterprises. There is an urgent need for stronger regulation and tight reforms to stop SOEs from draining public funds.
During the presentation of the latest report to Parliament, COPE Chairman MP Sunil Handunetti requested the Speaker to allow the Attorney General’s Department representatives to observe the proceedings of the COPE, in an effort to expedite accountability procedures. This would certainly present a positive step towards strengthening the legal oversight of malpractice within SOEs and expediting the prosecution of this malpractice. Although the COPE is doing a relatively robust job at identifying incidences of malpractice, this process tends to be slow and lacks sufficient follow through to hold responsible individuals accountable.
The opening up of COPE proceedings to the media has already brought about substantial scrutiny of SOE conduct, however, a lack of enforceable, follow-up accountability mechanisms limits the capacity of this measure. As noted above, several of the SOEs being examined are yet to implement any of the regulatory measures recommended to them by the COPE.
Strengthened accountability mechanisms are thus essential to both holding corruption within SOEs to account, as well as ensuring that the recommendations of the COPE are adhered to. A mechanism needs to be established in order for individuals to be held personally liable for the damages that they are responsible for, beyond just the COPE proceedings. This should extend to all persons who perpetrate, assist, and become aware of malpractice, and do not report it through the appropriate channels.
The surcharge provision of the National Audit Act that allows for the recoupment of any loss caused to the Government by the responsible public servant(s) could prove a useful avenue to achieving this.
There is also an apparent need for industry experts to be further involved in the oversight process. Currently, the COPE reports offer little in the way of strategic enterprise reforms that go beyond merely identifying areas of issue, and look to improve the efficiency and profitability of public enterprises. Technical expertise could therefore prove extremely useful in not only identifying areas for further scrutiny and investigation, but also in creating more effective recommendations for management reforms.
The Commonwealth Association of Public Accounts Committees itself states that the appointment of non-parliamentarians is not without precedent, and given the importance of the Committee, is something that should be considered seriously.
Parliamentary members of the COPE often lack the time and capability to rigorously investigate instances of collusion and malpractice as they happen, and thus support committees of industry experts could prove a valuable resource in addressing this. Appointing non-parliamentarians to the COPE would thereby strengthen the Committee’s independence, increase diversity, and enhance its competency.
Moreover, if the Sri Lankan people are to truly act as the shareholders of public enterprises, they need to be provided with open access to COPE proceedings.
At present, inquiries must be raised by a member of Parliament in order for them to be addressed by the COPE. This distinctly undermines the ability of the public to hold SOE malpractice to account. The limits on non-parliamentarians for attending COPE hearings should be removed, and hearings should be made more accessible to all members of the public. Increased transparency is not something shareholders should have to ask for, especially not from their government.
The Organisation for Economic Co-operation (OECD) proposes a range of guidelines for the corporate governance of SOEs, including the equitable treatment of all shareholders, equal access to corporate information, transparency, and disclosure.
Perhaps a relatively simple way of achieving this would be to list all of Sri Lanka’s SOEs on the Colombo Stock Exchange, thereby making them subjected to the already robust Securities and Exchange Commission (SEC) regulations.
These avenues present achievable interim measures that Sri Lanka should capitalise on. The recent strides made by the COPE are certainly promising in their movement towards stronger regulation and increased public scrutiny, however, Sri Lanka still has a long way to go if it is to seriously mitigate the burden placed on its Treasury by the current state of SOEs. Implementing these reforms could serve as a strong start, but larger reforms will also be essential in achieving sustainable fiscal consolidation.
Originally published in Colombo Telegraph, Pulse, Economy Next, The Island, Daily FT, Ceylon Today, Kolomthota
By Nishtha Chadha
One of the most talked-about election promises this week has been Sajith Premadasa’s promise to distribute free sanitary hygiene products. Labelling himself as a #padman, Premadasa tweeted that “until sustainable cost-effective alternatives are found” he promises to provide sanitary hygiene products free of charge.
Indeed, access to menstrual hygiene products is a serious problem in Sri Lanka and has become a popular issue across political parties. In March this year, SLPP’s Namal Rajapaksa also tweeted about the issue, asking “What rationale could a Gov have to tax half it’s populace on a dire necessity? Is the Gov aware of studies on poor hygiene practices & cervical cancer?”
Taxing menstrual hygiene
Although 52% of Sri Lanka’s population is female, with approximately 4.2 million menstruating women, access to safe and affordable menstrual hygiene products remains somewhat of a luxury for many Sri Lankan women. A leading contributor to the unaffordability of menstrual hygiene products in Sri Lanka is the taxes levied on imported menstrual hygiene products. Sanitary napkins and tampons are taxed under the HS code HS 96190010 and the import tariff levied on these products is 62.6%. Until September 2018, the tax on sanitary napkins was 101.2%.
The components of this structure were Gen Duty (30%) + VAT (15%) + PAL (7.5%) + NBT (2%) and CESS (30% or Rs.300/kg). In September 2018, following social media outrage against the exorbitant tax, the CESS component of this tax was repealed by the Minister of Finance. Yet, despite the removal of the CESS levy, sanitary napkins and tampons continue to remain unaffordable and out of reach for the vast majority of Sri Lankan women.
Figure 1: Breakdown of taxation structure (before September 2018)
General Duty VAT PAL NBT CESS Total 30% 15% 7.5% 2% 30% 101.2% The average woman has her period for around 5 days and will use 4 pads a day. Under the previous taxation scheme, this would cost a woman LKR 520 a month. The estimated average monthly household income of the households in the poorest 20% in Sri Lanka is LKR 14,843. To these households, the monthly cost of menstrual hygiene products would therefore make up 3.5% of their expenses. In comparison, the percentage of expenditure for this income category on clothing is around 4.4%.
Internationally, repeals on menstrual hygiene product taxation are becoming increasingly common due to their proliferation of gender inequality and the resulting unaffordability of essential care items, commonly known as ‘period poverty’. Kenya was the first country to abolish sales tax for menstrual products in 2004 and countries including Australia, Canada, India, Ireland and Malaysia have all followed suit in recent years.
The impact of unaffordability
The current cost of menstrual hygiene products in Sri Lanka has direct implications on girls’ education, health and employment.
Source: Menstrual Hygiene Management In Schools In South Asia, Wash Matters, 2018.
According to a 2015 analysis of 720 adolescent girls and 282 female teachers in Kalutara district, 60% of parents refuse to send their girls to school during periods of menstruation. Moreover, in a survey of adolescent Sri Lankan girls, slightly more than a third claimed to miss school because of menstruation. When asked to explain why, 68% to 81% cited pain and physical discomfort and 23% to 40% cited fear of staining clothes.
Inaccessibility of menstrual hygiene products also results in the use of makeshift, unhygienic replacements, which have direct implications on menstrual hygiene management (MHM). Poor MHM can result in serious reproductive tract infections. A study on cervical cancer risk factors in India has found a direct link between the use of cloth during menstruation (a common substitute for sanitary napkins) and the development of cervical cancer; the second-most common type of cancer among Sri Lankan women today.
The unaffordability of menstrual hygiene products is also proven to have direct consequences on women’s participation in the labor force. A study on apparel sector workers in Bangladesh found that providing subsidized menstrual hygiene products resulted in a drop in absenteeism of female workers and an increase in overall productivity.
Towards a sustainable solution
If the Government is serious about finding sustainable solutions to the issues associated with unaffordability of menstrual hygiene products in Sri Lanka and promoting gender equality, it should be looking to slash the heavy import taxes currently levied on these products. Current taxation rates are keeping prices high and out of reach for a majority of Sri Lankan women. By reducing these rates, the cost of importing sanitary napkins and tampons will simultaneously decrease and stimulate competition in the industry, further driving prices down and encouraging innovation.
The conventional argument in favour of import tariffs is the protection of the local industry. However, in Sri Lanka, sanitary napkin exports only contribute a mere Rs. 25.16 million, or 0.001%, to total exports. Increased market competition would also incentivise local manufacturers to innovate better quality products and ensure their prices remain competitive for consumers.
Other common concerns pertaining to the issue of low-quality products potentially flooding the Sri Lankan market if taxation is reduced are unlikely to materialise since quality standards are already imposed by the Sri Lankan government on imported products under SLS 111.
In addition, making these products more affordable would align with Sri Lanka’s commitment to Article 12(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR), which promotes the right of all individuals to enjoy the highest attainable standard of physical and mental health. By keeping prices high, present taxation methods are contributing systematic obstruction of many women’s right to equal opportunity to enjoy the highest attainable level of health, and thereby do not meet the ratified standards of the ICESCR.
If menstrual hygiene products are made more affordable, it is likely that more Sri Lankan women will be able to uptake their use. Sri Lanka should thus remove the remaining import levies on menstrual hygiene products as soon as possible, via the means of an extraordinary gazette. Removing the PAL and General Duty components alone would bring taxation levels down by 43.9% to a total of 18.7%. This would remove a significant barrier to girls education, women’s health and labour force participation, and create a wide-scale positive impact on closing Sri Lanka’s present gender gap and facilitating more inclusive economic growth. There has been a lot of rhetoric around keeping women safe and making them a priority this election – so what better place to start than this?
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
By Nishtha Chadha
Small and medium enterprises (SMEs) have been a hot topic of this year’s presidential election candidates. Across the spectrum of political parties, SMEs have repeatedly been highlighted as avenues for sustainable economic growth and new innovation. There have been an array of promises to uplift the status and capabilities of SMEs through targeted assistance mechanisms that seek to bolster the role of SMEs in the Sri Lankan economy. However, if the Government truly intends to empower local SMEs, there needs to be a holistic approach to policy reforms and programme implementation.
There is no doubt that SMEs make up a crucial part of the national economy. Accounting for 52% of total GDP and 45% of national employment, these enterprises present a wealth of opportunity for domestic economic growth (1).
Generally, SMEs tend to be labour-intensive and require less establishment capital than larger firms. As such, growth in the SME sector poses significant potential to create new employment opportunities and facilitate wider distribution of wealth across rural and regional areas. They also hold the potential to increase tax bases at a quicker pace than larger enterprises, thereby contributing to government revenue.
However, Sri Lanka still lags behind regional neighbours when it comes to SMEs as a percentage of total enterprises.
In India, Malaysia, and Singapore, SMEs make up between 95-99% of total enterprises, while in Sri Lanka, they barely make up 80% (2018). Moreover, despite their significant contribution to the economy, SMEs in Sri Lanka only account for a marginal proportion of total national exports, suggesting a severe disconnect between the interest of the SME community in expanding their market base beyond the domestic sphere and their practical ability to do so.
The Government itself has acknowledged the need to strengthen the SME sector and increase its export potential.
The National Export Strategy of Sri Lanka (2018-2022) explicitly acknowledges the need to “strengthen Sri Lankan exporters’ market entry capacities” and support “the integration of SMEs from across Sri Lanka into the export value chain”. As a result, the Enterprise Sri Lanka credit programme has been launched by the Government in an attempt to improve awareness and access to finance for small and medium entrepreneurs through a variety of loan schemes. These include interest subsidy loan schemes, donor-funded refinance loan schemes, and financial and non-financial support programmes. Enterprise Sri Lanka seeks to make the Government’s vision of creating 100,000 entrepreneurs in Sri Lanka by 2020 a reality, and has already disbursed Rs. 88 billion through the loan schemes since its launch.
A band-aid approach
While access to finance has certainly been cited as a common barrier to SME growth, there needs to be a more holistic effort to address the various other obstacles that currently deter small and medium entrepreneurs from achieving their export potential. The development of e-commerce has created an era of new opportunity for SMEs to engage in international trade at a fraction of the cost, and Sri Lanka should capitalise on this window of opportunity to reboot its economic growth. The renewed focus of politicians on SMEs does indicate some positive posturing.
However, there is a pressing need to change the narrative on SME growth. Although SMEs are the backbone of the national economy, they need to be supported to grow beyond this classification.
Regulatory burdens and poor access to information continue to remain major impediments to SME expansion.
There are over 20 ministries that serve the business sector in Sri Lanka, with numerous departments, authorities, and councils established under each of them. This has resulted in a major fragmentation of governance mechanisms, critical information gaps, and poor private-public synergy. Thus, in addition to improving access to finance, the Government needs to streamline its SME strategy and make opportunities more accessible to entrepreneurs.
The ultimate goal of SMEs should be to grow into large enterprises that compete at an international scale, and SME-related reforms should reflect these aspirations. Band-aid approaches that target singular obstacles to growth without looking at the bigger picture cannot cultivate the effective ecosystem for entrepreneurship that Sri Lanka needs, if it is to achieve high income status. Present requirements such as the minimum capital contribution of $ 5 million from foreign shareholders in companies that engage in retail trade are not in line with this growth agenda. SMEs should be encouraged to grow faster through partnerships with overseas businesses to access capital and skills. However, restrictions like these hinder the growth of SMEs in the retail sector.
Sri Lanka is already at great risk of falling into the “middle-income trap”, with high debt burdens and slowing national growth. Having recently achieved upper middle-income status, the economy can no longer rely on foreign aid inflows to facilitate economic growth and development. As such, the country must find ways to improve productivity and increase export volumes if it is to remain competitive on the world stage. SMEs present a unique opportunity to facilitate this growth by plugging into global value chains, capitalising on international markets, and driving innovation – but only if they are provided with meaningful resources to do so.
SME success stories from the developed world have demonstrated the importance of public-private co-operation for sustainable growth, and Sri Lanka should look to emulate this if it intends to move beyond its current middle-income status. As noted by the OECD: “Start-ups and SMEs are typically more dependent than large companies on their business ecosystem and, due to their internal constraints, are more vulnerable to market failures, policy inefficiencies, and inconsistencies…a transparent regulatory environment, efficient bankruptcy regulation, and judicial system are essential to support the growth of start-ups and SMEs, especially in innovative, high-risk sectors.” (10)
Thus, to escape the middle-income trap, Sri Lanka needs to make a real commitment to implement all facets of the National Export Strategy and streamline transparent regulatory mechanisms. If Sri Lanka’s next government truly intends to achieve its entrepreneurial vision, it needs to do more than make conflated promises to emerging entrepreneurs and commit to real reforms that will create a fruitful business ecosystem for growth.
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
By Nishtha Chadha
A 2019 poll commissioned by the Advocata Institute found that 81% (Sparkwinn Opinion Poll April 2019. Sample size of 855 participants.) of surveyed Sri Lankans did not believe that the services provided by state-owned enterprises (SOEs) were worth the financial losses incurred by them. Spanning eight provinces and 18 districts, the poll revealed an overwhelming dissatisfaction amongst citizens of all ages and income demographics about the continued use of state funds to bail out loss-making SOEs.
SOEs such as SriLankan Airlines continue to remain some of the largest burdens on Sri Lanka’s already debt-ridden Treasury. While it is a no-brainer that public expenditure should be representative of public interests, there is a severe misalignment between public priorities and government expenditure in Sri Lanka. The above poll results show quite clearly that the public has no interest in bankrolling loss-making SOEs that offer minimal public benefit, but the Government continues to actively support them. Funds wasted on SOEs could easily be redirected to essential public services and institutions, such as healthcare and education, to make real improvements to the everyday lives of Sri Lankans. Instead, exorbitant taxes and low-quality public services have become a staple of Sri Lanka’s public sector, serving the personal interests of corrupt politicians over the legitimate needs of the wider public.
Siphoning taxpayer money
This week, SriLankan Airlines celebrated 40 years since its first flight in 1979. Hailed for its “service to the nation”, the airline has certainly become a hallmark of Sri Lanka’s tourism industry. With an impressive network of 109 cities in 48 countries, SriLankan Airlines Group CEO Vipula Gunatilleka states that the airline’s objective now is “to become the most customer-centric airline in Asia, both in the air and on the ground, building on our four decades of excellence in customer service for which we have won numerous international accolades with our emphasis on safety, punctuality, and service.”
Source: Ministry of Finance Annual Report, 2018
But with the accumulation of Rs. 17.2 billion in net losses for the year 2018, it has become prudent to ask the question: What part of the nation is this airline really serving?
Much like its other state-owned counterparts, the SriLankan Airlines enterprise has become a rampant vehicle for corruption in Sri Lanka’s public sector. A 2018 special report on the airline by the Auditor General’s Department found various accounts of malpractice across the enterprise, including:
Failure to follow procurement guidelines in the selection of consultative companies
Failure to introduce formal control systems for the implementation of plans
Lack of proper cost-benefit analysis in validating expansion of the fleet of aircrafts
Failure to conduct proper analysis on the method of selection for acquiring aircrafts
Failure to follow government procurement guidelines in the acquisition of aircraft
Simply put, this suggests a complete lack of accountability within the company. There are few, if any, checks and balances in place to monitor spending, and transparency is scarce. This makes it extremely difficult for the general public to hold managers and public officials to account, despite technically being the owners of the enterprise.
The airline has thus managed to squander a loss of Rs. 58.7 billion of public funds for the past three years. What seems most outrageous about the scale of public expenditure on SriLankan Airlines is the fact that most of the citizens funding these losses will never even get the chance to sit on a SriLankan Airlines flight in their lifetime. As the owners of the enterprise, the public deserves a much larger say in where their money is going.
The airline has thus managed to squander a loss of Rs. 58.7 billion of public funds for the past three years. What seems most outrageous about the scale of public expenditure on SriLankan Airlines is the fact that most of the citizens funding these losses will never even get the chance to sit on a SriLankan Airlines flight in their lifetime
There have been various justifications for the State’s continued commitment to fund these losses, such as the need for capital expenditure to reverse losses and keep the airline internationally competitive. However, evidence suggests that even with the billions of rupees of taxpayer investment, the enterprise is actually becoming increasingly uncompetitive. In 2011, SriLankan Airlines was ranked 52nd globally in the Skytrax World Airline Awards, but today, it does not even rank within the top 100.
What’s the alternative?
Looking at recent years, 2008 stands out among the losses. In this year, SriLankan Airlines enjoyed a net profit of Rs. 4.4 billion. What was different? The airline was running in partnership with Emirates, which had a 40% stake in the company at the time. Emirates was contracted to manage the company for 10 years and completely overhauled the company’s infrastructure and operations to build it into a profit-making enterprise.
However, in 2008, the Government took back sole ownership of the airline after tensions broke out between the Chief Executive and the Sri Lankan Government over the refusal to bump 35 passengers from a full London-Colombo flight to make way for the Sri Lankan President and his entourage (10). From this point onwards, the losses incurred by the airline skyrocketed.
This is an explicit example of why the government should not be running state-owned enterprises. The endemic conflict of interest between players and regulators creates a dangerous breeding ground for malpractice, with taxpayers paying the ultimate price.
SriLankan Airlines’ experience with Emirates has shown the marked benefits of private management, and should serve as a model for future SOE reforms. While partial privatisation can certainly put an end to poor management practices and restore the profit-making capacity of enterprises, the risk of political interference remains pervasive.
Thus, if the Government is to put an end to the enormous burden that loss-making SOEs currently place on the Sri Lankan public sector, it needs to actively pursue avenues for full privatisation while bolstering its role as regulator.
Privatising SOEs will not only allow for better management and increased public expenditure on essential services, but also restore competitive neutrality to the airline business, making air travel more affordable for all Sri Lankans.
Taxpayers should not be spending their hard-earned money on rescuing failing government enterprises with poor management practices. It is high time the Government took a hard look at what the people want and fulfilled its mandate as a representative body. SOEs have become a vehicle for corruption in Sri Lanka’s public sector, and clearly, Sri Lankans are tired of paying for them.
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
By Nishtha Chadha
The 2019 presidential election campaigns are well and truly in full swing. As rallies pick up across the country, candidates have begun to announce a series of strategies to develop the country, improve living standards, and expand employment opportunities. While a range of promises have been bandied about, this week’s manifesto releases mark a critical juncture for candidates to inform citizens about where their priorities actually lie for the next four years.
Tax cuts, government subsidies, jobs, and social security have all been popular promises on each candidate’s list. The rhetoric is certainly attractive, especially as youth unemployment remains persistent at 21% and the national cost of living is on the rise, with inflation hitting 5% in September. Though there is undoubtedly a need for urgent reforms to improve the average Sri Lankan’s standard of living and access to prosperity, it is prudent to ask the question: How do these promises measure up to Sri Lanka’s current economic situation?
The economic landscape
A number of risk factors currently plague Sri Lanka’s growth trajectory. Although the economy has managed to recover relatively well from the Easter Sunday terrorist attacks, GDP growth is still expected to decelerate to 2.7% in 2019. This is well below the regional average, which is currently forecasted at 5.9% for the year.
The decline of economic growth is in line with global trends, as global GDP growth decelerates and trade and industrial production stagnates. South Asia’s performance is of particular concern, as it concedes its place as the fastest-growing region in the world to East Asia and the Pacific.
Sri Lanka’s economic landscape is reflective of this decline, as the nation’s budget deficit increased above 6% of GDP in the first half of 2019. Sri Lanka’s public debt-to-GDP ratio presently sits at 82.9%, and is expected to increase up to 83.6% in 2020 according to World Bank estimates. This is provided that the current approach to fiscal consolidation continues and no new, uncharacteristic debt is incurred. Even under this conservative estimate, forecasts suggest that Sri Lanka will be the second-most indebted country in South Asia by 2020, with its public debt-to-GDP ratio at more than 20% above the regional average.
Declining export growth and volatile investment across South Asia have further contracted revenues, leading to increased rollover risks. This slowdown in economic activity is likely to constrain job creation and income growth, as well as impede the pace of poverty reduction. Indeed, this is in stark contradiction to the promises currently being relayed by presidential hopefuls and raises serious concerns about what implications the implementation of these measures would have on Sri Lanka’s national economy. Citizens need to be wary of baseless promises that don’t have substantial, long-term priorities at their heart.
What to look for
Sri Lanka needs to consolidate its economic position if it intends to achieve the prosperity it desires, regardless of whose leadership it is under.
This begins with increasing public revenue and tightening government expenditure. Years of ad hoc policies and fragmented government investment into largely unproductive sectors, has resulted in constrained growth and irrational spending across government departments. This has led to large-scale borrowing from international funding partners, and hence, the proliferation of the nation’s current debt crisis. If candidates want to mitigate the risk factors associated with Sri Lanka’s current fiscal position, they need to get Sri Lanka’s spending under control.
Continued fiscal consolidation measures need to be supplemented with long-term expenditure frameworks, which align public expenditure with national growth priorities. Long-term fiscal planning could also serve to increase foreign investment in Sri Lanka, by bolstering investor confidence and reducing the economic impact of political volatility. State-owned enterprises (SOEs) also need to be reformed to reduce their burden on an already debt-ridden Treasury. In 2018, SOE losses amounted to Rs. 156 billion, approximately 9% of total tax revenue, and this figure only seems to be on the increase. Stronger governance and accountability measures are essential to improving SOE performance, and should be a high priority on any candidate’s policy list.
In addition to this, any intended tax reforms must be informed by evidence-based policy and evaluation methods aligned with strategic priorities and fiscal consolidation measures. While there is an obvious need to expand Sri Lanka’s tax base, tax policy amendments must also address the needs of lower income households and ensure sufficient safeguards to limit the burden on Sri Lanka’s most poor and vulnerable. Shifting from indirect to direct taxation methods could be an avenue worthy of pursuit. An active effort must also be made to pre-emptively address the impact of an ageing workforce population. Pension payments currently account for 9% of recurrent expenditure, at Rs. 194.5 billion in 2018. With growth levels already in decline, there is a critical need for the government to encourage longer careers and increase labour force participation across all sectors of society.
Sri Lankans are certainly desperate for change in this election, but this will only happen when politics moves on from being a dinner table conversation to an informed, strategic decision. Citizens need to be informed about more than just the candidates they are electing, but also the policies and priorities they stand for.
Manifestos can present a good gauge of these priorities, but can also be leveraged to hold the incoming president to account. The responsibility here lies with the public, both to vote based on an informed decision, and to demand action on the policies they base their vote upon.
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
By Nishtha Chadha
Farmers have always been a critical voter base in Sri Lankan politics. The 2019 election seems no different. Presidential candidates have thrown around major election promises to improve the living standards of Sri Lanka’s agricultural producers, ranging from the redistribution of state lands to wiping off farmers’ debts. Yet, a stark contradiction exists between the alleged priorities of presidential hopefuls and Sri Lanka’s agriculture policies.
Agriculture employs 25.5% of Sri Lanka’s population, but only contributes to 7% of the nation’s GDP. While early post-independence agriculture policies focussed on food security and self-sufficiency through rice cultivation, these policies have failed to evolve with the rest of the country, resulting in low standards of living for farmers and high costs for consumers. In 1950, agriculture accounted for 46.3% of GDP and engaged around half the labour force. Clearly the principles that guided agricultural policy then, are unsuited to governing the agricultural sector of today.
A more sustainable approach to improving agriculture
While quick fixes like fertiliser subsidies and debt relief are undoubtedly appealing for struggling farmers, there is an urgent need for more sustainable and holistic policies to support workers in this sector. Farmers need to be provided with real opportunities to earn suitable wages if they are to avoid falling straight back into debilitating debt. This begins with accelerating their production capacity through schemes for diversification and modernisation.
The Ministry of Agriculture itself has identified the following issues in Sri Lanka’s present agricultural landscape.
Low productivity of crop and animal products for which demand is rising.
Poor match between food commodities that are promoted under agriculture development programs and those important for food security.
Inadequate attention to agricultural diversification in favour of crops that have better income prospects.
Heavy post-harvest losses, especially in the perishable products.
Failure to respond to growing concerns of food safety with appropriate
responses through the full value chain.
Low priority given to processed food products to cater to demand shaped by changing lifestyles.
Inadequate attention on producing/developing nutrition-rich food products.
These issues have serious consequences not only on the profitability of Sri Lanka’s agricultural industry, but also on national food security. Malnutrition is already a pervasive issue in Sri Lanka, with the 2016 Demographic and Health Survey revealing that 20.5% of Sri Lankan children are underweight. An explicit misdirection of agriculture policy, in its concentrated focus on low-nutrition cereals rather than diversification, has certainly contributed to this manifestation. Skewed government subsidies towards traditional crops such as paddy, mean that nutrition-rich foods are often imported, and thus fall victim to protectionist taxes that make them unaffordable for many lower-income households. Evidently, Sri Lanka’s current approach of self-sufficiency for food security is not working, and both farmers and consumers are paying the price.
Wasting our export potential
Sri Lanka is uniquely endowed with a high diversity of climatic zones which allows it to grow a range of crops all year-round. This suggests massive potential for the nation to grow and diversify its agricultural exports in fruits, vegetables and floricultural products. The floriculture industry itself has developed rapidly and now earns substantial foreign exchange, while generating direct and indirect employment. In 2018, these exports were valued at US $8.5 million, with 60% travelling to Europe, while Japan, Middle East, USA and Korea make up the other key markets. Sri Lanka is already known globally for its high quality of agricultural exports such as cinnamon and tea, and should capitalise on this to promote other competitive produce.
However, this must also be supplemented with initiatives to boost productivity and access to export markets for Sri Lankan farmers. In 2018, agricultural exports accounted for 21.7% of total national exports, and were provisionally estimated to be worth USD 2,579 million. But, agricultural productivity measures show very low labour productivity indicators for Sri Lanka when compared to its other South Asian counterparts. Agricultural labour productivity, as measured by gross value added, is also the lowest of all 3 economic sectors - for example, one hour of work in agriculture amounts to Rs. 182.19 gross value added, whereas one hour worked in industry amounts to Rs. 528.27 and one hour worked in services amounts to Rs. 613.91.
Achieving growth without compromising food security
The Ministry of Agriculture in their Overarching Agricultural Policy 2019 (Draft) states that “Labour productivity is directly linked to farm incomes and therefore, increasing labour productivity will have positive impacts on standards of living.”. This can be achieved through mechanisation and by shifting to production of higher-value commodities. Small-scale farmers who produce most of the country’s agricultural output, though, tend to produce commodities with low economic value. These farmers face a host of barriers in accessing modern technology and plugging into agricultural value chains, which hold massive potential to accelerate production processes. Government assistance programs should therefore be streamlined to encourage the adoption of modern technology at all levels of the production process - from seeding to harvesting, post-harvest processing, value addition, food technology, storage, packaging and marketing. Current strategies of market protection, as well as direct and indirect input subsidies, have meant that governments have distorted incentives towards the production of staple food crops, which have locked subsistence farmers into poor revenues and reinforced their dependence on the state [14]. This has contributed to both a high cost of living for the average Sri Lankan, and low standards of living for small-scale agricultural producers.
Access to export markets must also be enhanced if farmer incomes are to increase, by removing barriers to trade and increasing intra-industry connectivity. A host of regulatory, procedural, and informational barriers currently plague Sri Lanka’s agricultural sector and obstruct small farmers' ability to access foreign markets. Rigorous stakeholder consultation and long-term planning need to become staples of the regulatory landscape if Sri Lanka is to capitalise on its agricultural export potential. The National Export Strategy of Sri Lanka 2018-2022 has already identified the distinct potential for value addition in the spice and processed food and beverage industries, as a means of increasing agriculture-based export incomes. However, without the right reforms in place to support farmers’ transition into these markets, it is unlikely that this will come to fruition.
Sri Lanka’s agriculture industry has consistently suffered from a patchwork of ad-hoc policies and fragmented priorities. This has largely been driven by the age-old rationale that self-sufficiency is the answer to food security. However, if the 2019 presidential candidates want to promise meaningful change to their agricultural voter bases, there needs to be a complete overhaul of the current regulatory landscape. Sri Lanka needs to let go of its outdated perceptions of food security and capitalise on its comparative advantage. Singapore boasts the highest food security ranking in the world, yet imports more than 90% of its produce. Global trade is a critical avenue for meeting increasing food demands, as well as changes in consumption and production patterns. Sri Lanka’s agricultural policy should thus focus on increasing cross-border flows and making it more competitive in global markets, not closing itself off from them. Political candidates are constantly touting their visions for Sri Lanka to become a ‘knowledge-based’ and ‘export-oriented economy’, so why doesn’t agriculture form part of this vision?
Originally published in Daily FT and Republic Next
By Nishtha Chadha
Today is International Youth Day; a day described as the United Nations as the “annual celebration of the role of young women and men as essential partners in change”. Everyday, we see young people across the globe emanating entrepreneurial drive and catalysing positive growth. ‘Millennials’ have become the symbol of a new world order, based on innovation and large-scale mutual exchange.
“How do we create jobs that young people feel dignified doing? ”
Yet, here in Sri Lanka, we see a very different story. Rather than catalysing growth, many of Sri Lanka’s talented youth languish in unemployment. Popular rhetoric often defines these young people as ‘lazy’ and ‘ungrateful’, unwilling to fill blue collar vacancies with low social repertoire and climb the ever-elusive career ‘ladder’. But with issues of unemployment pervading the youth demographic for over four decades now, despite having the highest literacy rate in the region, perhaps it is time for a new conversation. How do we create jobs that young people feel dignified doing?
Educated young people make up a third of Sri Lanka’s unemployed, while over 30% of the county’s total informal workers belong to the youth demographic. Often these numbers are attributed to the infamous ‘job-skill gap’, where tertiary-educated youth are left unequipped to acquire private sector vacancies, but over-educated to fill opportunities in labour-intensive industries. However, this hypothesis also ignores an entire socio-cultural dimension that underscores many young people’s unwillingness to settle for in-demand blue collar careers.
According to the Department of Census and Statistics [DCS] (2017), the most difficult vacancies to fill in the job market were as follows:
Sewing Machine Operators
Security Guards
Commercial and Sales Representatives
Other Manufacturing Labourers
Cleaners and Helpers in Offices, Hotels and Other Establishments
When one reviews this data it is hardly surprising that after spending 16 years in education, young people are unwilling to forego their intellectual capital and fill these vacancies. Instead, many wait in line for public sector opportunities, characterised by high social status, lifetime employment and funded by taxpayer money. The government often uses this as a vote-securing scheme, having offered 16,000 graduate roles just last month in preparation for the forthcoming election. But with an already inflated public sector, slowing growth rates and a growing toll of non-contributory pensions, this strategy has become both unsustainable and unreliable.
Closing the gap
“DCS data suggests that only 7.2% of private sector vacancies are in high-skill occupations.”
While the private sector does account for the majority share of youth employment, DCS data suggests that only 7.2% of private sector vacancies are in high-skill occupations. Slow job creation has become a persistent characteristic of the Sri Lankan economy, with highly restrictive employment protection legislation and skewed bargaining power of trade unions significantly raising labour costs and impeding job creation.
“Roughly 1.5 million Sri Lankans migrate internationally for work”
As a result, roughly 1.5 million Sri Lankans migrate internationally for work (approximately one fifth of the domestic workforce). Over 40% of these migrants belong to the “skilled” labour category, suggesting a worrying trend of missed opportunity. Certainly, the fact that home-grown skilled labour has no place in a growing upper-middle economy is a cause for serious concern in itself.
As Sri Lanka faces up to the growing challenge of an ageing population, the country needs to create more and better jobs to sustain growth and make optimal use of its working-age population. This suggests an urgent need for structural reforms to increase competitiveness and openness to FDI, which will create more productive and higher-paying jobs as foreign firms bring in new technology and better management practices to the Sri Lankan market. Trade liberalisation can also play a critical role in producing large-scale opportunities for educated workers, particularly by plugging into regional and global supply chains. Indeed, with the right reforms in place, active engagement with foreign economies could present unparalleled opportunity to kickstart high-quality job creation in Sri Lanka and give many unemployed skilled graduates the opportunity to pursue fulfilling careers that positively contribute to the national economy.
Moreover, as the global economy shifts increasingly towards services, personal consumption and trade in digital goods, there needs to be a concerted effort towards promoting innovation and entrepreneurship amongst the youth population and moving people away from traditional public sector careers. Sri Lankan investment in research and development (R&D) only amounts 0.07 percent of total Government expenditure (2017). As such, there is a pressing need to improve public and private funding of R&D, whilst simultaneously addressing the current fragmentation of R&D institutions, in order to create tangible outcomes within the innovation space. Improving the intellectual property rights regime and creating an ecosystem of early-stage finance and incubation facilities will be instrumental in mobilising young people and facilitating entrepreneurial growth.
Entrepreneurship and opening up
Growing entrepreneurship can not only transition Sri Lanka into a more innovative and complex economy, but simultaneously create a broad range of high-quality jobs in a variety of competitive industries across domestic and international markets. Small nations such as Israel and Singapore have shown the scale of returns that investment into innovation can provide, attracting Silicon Valley’s largest players to set up incubators and accelerators in their countries. Indeed, at the heart of both nations’ technological success has been the cultivation of a targeted public-private ecosystem for innovation, as well as an absolute openness to diverse participation.
If Sri Lanka is to make the most of its youth potential, it needs to reform the very fabric of its workforce. Promotion of unconventional career paths and greater cooperation between the public and private sectors are a must. Current barriers to foreign participation must also be removed. Diversity of thought and exchange of ideas have been proven as key drivers of innovation, and these need to be promoted through people-friendly policies and the removal of burdensome mobility and investment regulations. Sri Lanka’s youth need to be given opportunities to access foreign capital and learn from global leaders in entrepreneurship if they are to form the basis of a new Sri Lankan economy.
Moreover, by opening up migration policies and flows of labour, Sri Lanka will be able to fill its wealth of low-skill vacancies that currently plague the private sector, without foregoing its local talent. India has been enjoying the fruits of an open border policy with Nepal for over half a century, producing a mutually beneficial arrangement for both parties. Resisting globalisation is merely slowing productivity and resigning educated Sri Lankan youth to careers that they do not feel dignified doing. Youth potential should be harnessed to translate into economic growth and productivity, not heavier burdens on an already struggling economy.
So, this International Youth Day, let’s have a new conversation about young people. Let’s remove the weight of heavy expectations, and replace it with rigorous strategies for empowerment. Young people are the future of the Sri Lankan economy – so what are we doing to help them shape it?