Borders & the Budget

Originally appeared on the Daily FT, Daily Mirror

By Daniel Alphonsus

Visa reform will boost tourism and reverse brain drain

Three million tourists are set to visit our shores next year. We will issue nearly as many online visas - millions too many. ETAs are a tourist's bane: rather than dreamy sun, sea and sand, the weary salaryman’s getaway begins with the tedium of forms. 

The tourist’s ayubowan to Sri Lanka begins with ferreting for flight details and credit cards. Warm-up complete, the ordeal begins in earnest: 20 clicks to navigate through the ETA form and countless key strokes to fill out the 27 form fields. Each question brings forth its own miseries, and sometimes mind-reading feats: “They’re asking me for my address in Sri Lanka. Hmm, does this mean my first address, my last address…but I haven’t even booked my hotel..dear, dear maybe I should book the Maldives instead. They’ve got a visa-on-arrival.” Followed, naturally, by web-pages reloading with unsaved data and vindictive payment gateways rejecting credit cards for arcane and esoteric reasons. Rather than a Small Miracle, they experience So Sri Lanka. 

This charade costs us millions of dollars every year. We are losing tens of thousands of tourists to our competitors.

Based on the three scenarios below, switching from ETA to visa-on-arrival à la the Maldives or Singapore should generate between $24 million to $145 million in additional tourism revenue.

The precise number is not especially relevant. The point is that these roughly right numbers are substantial enough to generate a robust prima facie case for experimenting with opening up visa-on-arrival and optimising the ETA experience

For workings click here.

Visas-on-arrival

Sri Lanka already operates visa-on-arrival for Singapore, Maldives and Seychelles citizens. In light of the tens of millions of dollars we’re losing in the absence of visas-on-arrival, very compelling reasons must be provided for not opening-up visa-on-arrival for citizens of our main tourism markets (such as the EU, China, Russia and UK). Plus those who have passed extensive checks in the process of traveling to other countries. For example, travelers holding multiple entry visas to the US can visit about 51 countries visa free. 

The burden of proof is therefore on those who say we ought not have a visa-on-arrival regime. All the more so because it appears that, even though not advertised, in a pinch, obtaining a visa-on-arrival is possible at BIA. Also note that airlines share passenger records with governments 24 hours before arrival. It takes seconds for our border agencies to check the relevant blacklists as they already have API integrations in place. The response time of an Interpol database query is half a second.

In addition, immigration department annual reports show that almost all rejections and deportations are from a handful of countries, mainly India. Other than a German and an Australian, no UK, EU, ASEAN or Australian national was rejected or deported in 2022. This suggests a risk-based, optimized approach is very much possible, and prudent.

Many of us have experienced this personally. We are more likely to tour Singapore because Sri Lankans enjoy visa-on-arrival. In fact, on average it only takes us 10 minsto enter Singapore. As shown in the picture above, for passport holders of 50+ countries, the experience is even more smooth. Using automated immigration gates, they clear border control in less than two minutes.

Optimize the ETA process

Some tourists may still prefer to secure an ETA before arrival. Therefore, we should do our best to ensure the application is seamless. Currently it is not. Of the 27 fields requested on the ETA, about 20 can be found in passenger record details airlines share with immigration authorities. They are redundant. Questions on the ETA should be limited to around seven fields. The amount of information gathered should be commensurate with the risk: those from high risk countries could be subject to additional questions.

Eliminate the ETA fee

Credit card payments are often an even greater source of friction. Tourists need to pay $20 via credit card for an ETA. This deters potential tourists; it's another step in the journey and credit card payments often fail. So much so, the our embassy in Germany issued the following notice:

“On Arrival Visa at the Port of Entry to Sri Lanka: submit visa application and payment at Colombo International Airport. A fee of USD 60 will be charged for this service. Please observe that this option of obtaining a visa is available only for German passport holders, who have tried to obtain a visa via the ETA-system www.eta.gov.lk, but failed due to not being able to pay the fees with credit card.” 

It's not only card friction that is the problem. Many Chinese citizens no longer own cards and use Alipay instead.

Wiser countries like Singapore understand that reducing friction encourages more tourists to arrive, and thereby spend more. Which is why they don’t charge tourists a fee.

*Note the ETA fee is $20 for SAARC and $50 for other nationalities. $40 is a rough weighted average. For workings click here.

Based on the rough estimates above, if the ETA fee or friction puts off even three percent of tourists, then Sri Lanka stands to unequivocally benefit from eliminating the ETA fee. The exchequer will be worse off for now. But the Treasury still recoups some of the lost visa fees by higher VAT revenue directly, and indirectly via higher income tax from tourism sector firms and employees. (1)

Brain Gain

Since Independence Sri Lanka has lost or chased away lakhs of skilled workers. Many middle class families can proudly count at least one doctor, accountant and engineer (among many other species of the middle bourgeoisie) among their relations overseas. Between 2005 and 2015, the BOI estimated that around 20% of STEM graduates left the country every year. With COVID and the economic crisis, emigration was particularly acute the last few years. But it's not new. Skilled emigration is a chronic problem we’ve faced for decades.

(2 ) This report offers a rigorous treatment of the topic from the 1970s.

We desperately need to reverse brain drain. Of course, the central challenge is building a Sri Lanka in which Sri Lankans want to stay. But that is beyond the scope of this article. Here we shall only discuss how we can make it easier for skilled talents to come, and contribute. 

Some readers may be perplexed that even a handful of skilled non-Sri Lankans want to live and work on our island. But we live in a nomadic, connected and occasionally romantic age. These rare souls exist. 

We must do everything in our power to welcome and encourage them. Above all, by simply removing barriers to them legally working here. For the path to prosperity is paved by productivity growth. Therefore, it makes absolutely no sense for us to create barriers for skilled migration. It is the opposite of what smart countries do - especially via human capital theft aka points-based migration. There are three main ways foreign talent raises Sri Lanka’s productivity, growth and thereby prosperity. Foreign talent:

1. Adds human capital: whenever someone who has higher productivity than the average Sri lankan worker moves to Sri Lanka, they raise Sri Lanka’s average productivity directly. We already have huge talent shortages in key sectors like IT. 

2. Upgrades existing human capital: foreign talent, directly or by osmosis, teaches their skills to others.  

3. Increases existing human capital productivity: the whole is often greater than the sum of its parts. Skilled talent enables others to be more productive. For example, having access to a pediatric neurosurgeon makes all pediatricians more productive as knowledge is shared from expert to generalist. Alternatively, having a Japanese team-member makes the whole team more effective when working with Japanese clients. 

Per capita GDP is a good proxy for average worker productivity. Therefore, if someone from a richer country moves to a poorer country, then the average productivity of the poorer country will improve. How do we do this? The Harvard Centre for International Development has some ideas from which I borrow liberally. 

The fastest way for Sri Lanka to have brain gain to compensate for some of the brain drain is to:

Offer a two-year visa-on-arrival for those from countries that are 4x richer than Sri Lanka

1. Offer a two-year renewable visa-on-arrival for citizens or permanent residents of countries which have per capita incomes at least four times that of Sri Lanka. (3)

2. Amend the Citizenship Act such that any person who has at least two Sri Lankan grandparents is eligible for citizenship. ()4 

3. Regularize employment of all foreign spouses of Sri Lankan nationals, including a path to permanent residency and citizenship. (5) 

The first of these measures can be implemented by the stroke of the minister’s pen.(6) Sri Lanka’s immigration act provides for broad ministerial discretion. The minister is empowered to make entry regulations for visas upto five years in length. He or she can implement Point A above without requiring primary legislation.

We have little to lose, and all to gain. Try these measures for a year, try them for a few countries. Then roll-back or amend accordingly. Sri Lanka has a long history of policy-instability, but we should not confuse the many cases of foolish equivocation with genuine experimentation. That is what this budget should propose: bold measures to breakthrough our malaise and initiate the process of transitioning from stabilisation to recovery.

(1) As this article is solely on matters related to the immigration act, I’m not going to discuss this in detail. But it's worth noting that levying a flat (dis)embarkation levy is also a deterrent against short-haul traffic. Instead, the airports authority should price the levy based on the distance between Sri Lanka and the origin/destination airport.

 (2) Diaspora remittances do little to compensate: Sri Lankans remit more from the Maldives than Australia.

(3) For those that ask why a per capita GDP based criterion rather than points-based criteria, my answer is simple. A points-based system inherently involves discretion, and in the context of our state (in)capacity and corruption, will result in friction (countless people will not bother applying with all the documents that will be required), many false positives (as the assessors of points, e.g. a degree certificate’s legitimacy, will be corrupt) and false negatives (because those with skills we want may not have the right paper to demonstrate it). Considering this range of incentive problems and Type I/II errors, a very conservative threshold like the 4x per capita GDP one suggested is most optimal.

(4) For further details on this point and the next point, see page 14 of this study on Sri Lanka’s immigration framework.

(5) Reaching consensus in Parliament on this point should be easy. Sajith Premadasa’s manifesto promises dual citizenship after three years of residence for foreign spouses of Sri Lankans. See page 39.

 (6) Soon, one hopes, his or her digital signature. In fact, the President should announce that he will only sign documents via a digital signature from 31 December 2023 onward.

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.

Understanding the Gender Gap in the Workforce

Originally appeared on Groundviews, Daily Mirror and Lanka Business Online

By Thathsarani Siriwardana

The issue of female labor force participation in Sri Lanka has remained a subject of discussion for several decades, yet tangible progress in improving it has been elusive. As the country grapples with its most severe economic crisis since gaining independence,it is important to take a hard look at our labour force to maximize its potential in overcoming the economic crisis. 

Sri Lanka is approaching its last stages of its demographic dividend characterized by a significant proportion of its population falling within the working age bracket (typically aged 15-64) in relation to the dependent age categories,the aged and the children. According to the Asian Development Bank, Sri Lanka's working-age population is expected to reach its peak around 2027. This presents a unique opportunity for us to strengthen our economic prospects by using the right socioeconomic policy mix, similar to how the Tiger economies like Singapore, Hong Kong etc. have harnessed their demographic dividends to advance their economic growth. 

Importantly, a substantial portion of this working-age population comprises highly educated and women who are living longer. Hence necessary interventions must be made to harness their economic potential.

Current status of the labour market

According to the 2021 Labour Force Survey, Sri Lanka's total labor force comprises 8.5 million individuals, with 65% of them being male. The overall labor force participation rate (LFPR) in Sri Lanka hovers around 50%, revealing a significant gender gap that has persisted since the early 2000s. As of 2021, the male labor force participation rate in the country stands at 71%, whereas the female labor force participation rate is considerably lower at 31.8%. This enduringly low female labor force participation rate, spanning almost a decade, necessitates increased attention and intervention from the government. It represents an untapped potential within our economy that demands harnessing for the nation's benefit.

When examining the female labor force participation, it becomes evident that a significant proportion of females are employed in the estate sector, constituting 42.6% of the female workforce. In the year 2021, a substantial majority of the economically inactive population were females, accounting for approximately 73.3%. Interestingly, among these economically inactive women, 59.4% cited engagement in household work as their primary reason for not participating in the labor force. This sheds a light on household responsibilities as the main contributing factor, preventing women from entering the workforce.

Education status of the labour market
Sri Lankan women tend to achieve higher levels of education compared to men. However, this educational advantage hasn't  translated into higher levels of participation in the labor force. To illustrate this relationship between labor force participation and education, the chart below provides a clear visual representation of the situation.

This diagram highlights two important points. Firstly, it reveals that a significant majority of women who participate in the labor force (83.2%) possess degrees or higher levels of education. This suggests that women are more likely to apply for jobs that align with their skill set and education level. 

Secondly, it underscores a distinct contrast when it comes to men. Even if men have an education level of grade 5 or below, a substantial portion (65.7%) still actively contribute to the economy. This disparity suggests that women with lower levels of education face greater challenges or barriers when it comes to workforce participation compared to their male counterparts.

This statistic also serves as a clear illustration of the traditional societal norm of men being the breadwinner, which leads to men having higher labor force participation rates, irrespective of their educational levels. On the other hand, women, despite their advanced educational qualifications, may encounter societal pressures or constraints that discourage them from seeking or maintaining employment. Unemployment remains a significant challenge in Sri Lanka, with the highest rates observed among women holding education levels at Advanced Level and above. This represents a substantial untapped pool of potential in the Sri Lankan labor market.

Reasons for low Female Labour Force Participation despite having a high education level 

The low female labor force participation rate in Sri Lanka can be attributed to a range of socioeconomic factors. 

A primary factor that discourages women from actively contributing to the economy is the significant burden of care responsibilities they bear. This care work encompasses a broad range of household tasks, from cooking and cleaning to childcare and caring for the elderly. According to the 2017 Time Use Survey, women spent nearly four hours more per day on unpaid care work and domestic services compared to men. For many decades, there has been a prevailing societal stereotype that women are primarily responsible for managing households, while men are expected to be the breadwinners outside the household. This division of labor is a key reason why women with the qualifications and capabilities to pursue employment opportunities often choose to stay at home, while men even with lower levels of education enter the labor market.

Another significant factor is the existing legal barriers in Sri Lanka. The two prominent legal constraints are restrictions on night-time work and the absence of recognition for part-time employment. While these legal provisions may have initially aimed to protect women, they inadvertently discriminate by limiting their employment opportunities and earning potential. For example IT/BPM sector employment is affected by the 1954 Act which only permits women over the age of 18, to work till 8 pm. The current statutory regimes governing employee rights fail to recognize part time-work. This oversight leads to a reluctance by employers to hire part-time workers as they are entitled to the same benefits as full time workers.

Moreover, the absence of adequate social infrastructure, such as quality child care centers and comprehensive parental leave policies, contributes significantly to the low female labor force participation rate. Presently, in Sri Lanka, approximately 80% of child care centers are privately operated. This situation creates a barrier to accessing quality and affordable child care facilities, making it financially challenging for skilled women to participate in the labor force, as many opt to stay at home to care for their children due to these constraints.

As highlighted in an ILO report the presence of skill mismatch in Sri Lanka's labor market since the early 1970s contributes as another reason. This skill mismatch exists because the country's education system does not adequately prepare graduates with the skills required by the job market. There is a notable disconnect between the courses offered by universities and the competencies needed by the private sector. 

This mismatch also contributes as a reason for the high levels of youth unemployment and the prevalent issue of arts degree holders struggling to find employment. A staggering 43.9% of unemployed graduates possess degrees in the arts. Notably, the majority of arts degree holders are women. This situation underscores a disconnect between the demand and supply within the labor market. It suggests that the current education system is not adequately preparing graduates with the skills and qualifications needed to meet the demands of available job opportunities.

Addressing these barriers are vital to improving the labor force participation rates, especially among women.

Policy Recommendations

• Recognise part time work under the existing statutes and provide needed benefits such as annual leave and remove provisions which restricts women from working at night.

• Utilize local government mandates via by-laws to enact local legislation to set up standardized and regularized day care centers while encouraging Public-Private partnerships in providing care for children by utilizing existing infrastructure.   

• Introduce more courses and degrees which are required by the private sector. This should be specially done by focusing on arts graduates. 

The effectiveness of the aforementioned policies would be limited if we do not address the need for a shift in people's mindsets. While Sri Lanka has made progress in challenging gender stereotypes there is still much work to be done. Initiating change, particularly within the education system, presents a promising starting point. The prevailing patriarchal system can be challenged and dismantled through education, which has the power to instill in both men and women the belief that predefined gender roles are unnecessary.

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.

IPL and Sri Lankan economics

Originally appeared on the Morning

By Dhananath Fernando

For countries in the South Asian region, cricket is more of a religion than a sport. Sadly, in the same region, religion is more often a sport than an instrument for spiritual enlightenment. However, both scenarios can be understood using basic economic principles. The recent performance of Sri Lankan fast bowler Matheesha Pathirana, a member of the Chennai Super Kings, is a good example. 

Matheesha Pathirana, a 20-year-old youngster from Sri Lanka, has become one of the star players of the Chennai Super Kings, a finalist in this year’s Indian Premier League (IPL). Recently, however, Matheesha failed to secure a slot on Sri Lanka’s T20 cricket team. 

Meritocracy is nothing but being competitive and allowing a framework for competitive people to receive a good share of the incentives. The Indian Premier League and the story of Matheesha teaches us a good lesson on incentives, freedom of choice, and the role of a government. 

Freedom of choice 

The IPL’s model is such that each team builds its player base through an auction. Simply, players have an incentive to remain competitive and maintain their performance to earn a good income. On the other hand, the team or the franchise has an advantage too, as they can earn a good income through sponsors by forming a competitive team to win the tournament. 

As a result of the competitive process, freedom of choice is allowed and resources are distributed based on a price value. The auction of players is a good example of a level playing field – it is such that the best of the best players get the opportunity, ultimately benefiting the quality of the game.

No interventions by regulator

Secondly, the Board of Control for Cricket in India (BCCI) does not field a team, as simultaneously regulating and competing will not be effective and will lead to a higher chance of failing at both functions. However, in Sri Lanka and many parts of the world, the government is engaged in both business and regulation. 

In our country, the Government is involved in almost all key industries, so the system is not incentivised to be competitive. The credibility and competitiveness of the IPL tournament is driven by the rules-based system, which is organised strictly to promote this while ensuring that a reasonable attempt is made to maintain the code of conduct and ethics of the game. 

Even though intervention is presently limited, many years ago a regional government intervened when Sri Lankan champion off-spinner Muralidaran played in Chennai. Nuwan Kulasekara faced a similar incident. Both are good examples of what could happen to the spirit of the game when governments intervene and harmony and reconciliation between communities do not exist. 

Although a functional framework is in place, it does not mean that accusations of gambling and match-fixing are not present. We need to understand that markets are not always perfect and while there can be deviations, we need to always focus on the most reasonable solution. 

Knowledge transfer to maximise competitiveness 

Markets honour the skill set, regardless of age, ethnicity, or any other barrier. The Chennai Super Kings has an experienced player in the 41-year-old former Indian Captain Dhoni as well as in the 20-year-old Matheesha who are on the same team – a common feature in most of the teams in the tournament. The IPL also allows foreign players to compete side by side with local players. 

In economic terms, this transfers a significant expertise between teams and their players while top-notch coaching staff with years of experience ensure maximum productivity and efficiency of the teams. 

Internationally driven 

Today, the IPL is not merely a game – it has now expanded into an industry earning billions in income by attracting many investors and brands as sponsors. It is in itself a large ecosystem with spillover effects on the Indian tourism industry, massively contributing to building the national brand name of India. 

Whoever wins the 16th IPL finals held on Friday (26) – whether it is the players or the Board of Control for Cricket in India – the Indian economy is the real winner. When markets are allowed to work, miracles can happen. This is the lesson Sri Lanka needs to learn.

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.

Sexual harassment in the workplace: High time to address labour laws

Originally appeared on the Morning

By Akhila Randeniya and Chantal Dassanayake

In light of the economic crisis, increasing the female labour force participation is one way to unlock growth potential. We witnessed during the pandemic how economic conditions necessitated women to pursue additional means of income, from engaging in sex work to migrating in droves to engage in low-skilled labor.

There exist a multitude of reasons that prevent women from entering the workforce; the dual burden of care work and employment, harassment while travelling, and labour laws that discriminate based on gender are a few. Yet sexual harassment is something that is rarely discussed – let’s have the uncomfortable conversation that is usually brushed under the rug.

Multiple surveys highlight that a majority of women face sexual harassment in their workplaces, which could lead to a loss of working days, resulting in companies making massive losses. A survey conducted by International Finance Corporation (IFC) on nine Sri Lankan businesses show that almost 68% of the women who participated in the survey have experienced some form of workplace violence or harassment.

In addition, a survey conducted among garment factory workers highlights that almost 80% of women faced workplace harassment. A questionnaire administered by the International Labour Organization (ILO) in 2016 among 500 women, the majority of whom were unemployed, discovered that three-fifths of women would be willing to work if they were assured that they would not be vulnerable to sexual harassment in the workplace.

The survey conducted by the IFC on nine Sri Lankan companies stated that workplace violence and harassment towards men and women led to a loss of six working days each, resulting in a loss of $ 1.7 million in work hours. Given the present status of the economy, Sri Lankan businesses can no longer ignore this issue that disproportionately affects women.

Protections currently available to women

Unfortunately, sexual harassment in the workplace is not addressed under the existing labour laws in Sri Lanka. Several statutes do cover the offence indirectly, yet it seems to be insufficient as the cases only increase. The matter can be addressed either through criminal law or civil law proceedings in Sri Lanka.

Sexual harassment is criminalised under Section 345 of the Penal Code (Amendment) Act No.22 1995. It explains sexual harassment in the workplace to be words or actions used by a person in authority. The Penal Code requires victims to report cases of sexual harassment to the Police by way of a complaint. Such complaints are potentially followed by lengthy court proceedings, which require a high burden of proof.

It is estimated that the average time taken to conclude a High Court proceeding to be 10.2 years from the date of the crime. Untimely and lengthy procedures have been said to cause under-reporting of crimes, which suggests that realistically, the number of incidents could be worse than imagined. Hence why this is something that needs to be changed.

Addressing sexual harassment via criminal law alone is ineffective as the burden of proof is largely on the complainant. This is where civil law comes into play.

The Industrial Disputes Act No.43 of 1950 (IDA) allows for the private sector to take up cases of sexual harassment through civil law. The act provides swifter mechanisms to resolve work-related disputes which do not involve the Police and court proceedings. Under this act, work-related disputes can be expansively interpreted to include sexual harassment in the workplace, thereby allowing victims to seek justice.

Workers in the public sector have several avenues of redress when experiencing sexual harassment in the workplace. The courts have attempted to combat sexual harassment in the public sector in limited circumstances.

Pelaketiya v. Gunasekera ruled that sexual harassment within the public sector was a violation of the fundamental right to equality. Republic of Sri Lanka v. Abdul Rashak Kuthubdeen criminalised the demand of sexual activity as a bribe in exchange for public service.

Policy recommendations

The move to introduce a new bill criminalising sexual assault and all other forms of harassment by the Minister of Justice late last year was a commendable step, but the existence of laws was never the issue. It is the incredibly complicated and gendered mechanisms for reporting and redressing any sort of complaint that need to be changed.

On the other hand, slapping on a criminal offence rarely seems to prevent a social wrong. Perhaps rehabilitation and educating perpetrators and society to shift the narrative from blaming women should be considered.

While legal barriers do exist, the root of all this evil can be boiled down to power structures that allow perpetrators to continue their behaviour in the workplace. Clear and coherent communication channels need to be established for victims to voice out their truth.

Limiting this to the workplace however is not enough. Conversations on harassment cannot exist in the vacuum of the workplace. Women face it in all avenues of life, from walking home at night to worrying about taking public transport.

If we want the women of our country to take part in the workforce, the least we can do is ensure that they are protected while working. The current legislation is clearly insufficient to provide any form of protection that is meaningful.

It is imperative that the existing labour law regimes are improved upon to include avenues of complaint and timely resolution of such complaints. A unified system needs to be implemented so that victims from both private and public sectors can enjoy equal protection.

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.

Contemporary Issues in Agri-Food Supply Chain in Sri Lanka

Originally appeared on the Morning

By Thilini Bandara and Niumi Amarasekara

Introduction

In the current context of food insecurity, building a resilient agri-food supply chain is crucial for Sri Lanka. The agri-food supply chains are a set of activities involved in a “farm to fork'' sequence including farming, processing, testing, packaging, warehousing, transportation, distribution, and marketing. So far, the supply chains have been providing mass quantities of food for the country’s growing population. However, the supply chains are plagued by a number of issues stemming from within and outside the supply chain. Hence this article sheds light on various inefficiencies prevalent in the agri-food supply chain and  the way forward to establish a more resilient supply chain.

Overview of agri-food supply chain in Sri Lanka

Agri-food sector plays a major role in the Sri Lankan economy. It is a key source of food supplies which comprises a complex system of supply chains involving farmers, distributors, processing firms, wholesalers, retailers, and consumers.

Figure 01: Flow of agri-food supply chain

Issues in the agri-food supply chain sector

The country has been experiencing inefficiencies within its agriculture sector due to various issues stemming from within the supply chain.  For instance, Sri Lanka  annually loses 270,000 metric tons of fruits and vegetables along the supply chain, which are estimated to cost around Rs. 20 billion. This accounts for 30-40% of the total agri-food production in the country.One of the key causes of this is the lack of integration between supply and demand . For instance, farmers cultivate their lands without having a scientific understanding of future needs and in the absence of a national-level cultivation strategy to fulfill local demand. This leads to an overproduction of certain crops, which ultimately results in considerable losses for farmers.

Nevertheless, high food miles set along the supply chain also causes a high degree of inefficiency. For instance, when commodities from different parts of the country reach the main economic centers , only to be redistributed, it can cause high cost and further damage to the produce. Also maladaptation of post harvest handling practices at various stages of the supply chain further lead to high wastage and inefficiencies.

Apart from that, a number of additional factors (eg: information asymmetry, limited supply of inputs, lack of infrastructure and support facilities, poor agricultural policies, import restrictions, and price controls, etc.) also hinder the smooth operation of supply chains. Finally, these can lead to significant pricing disparities of the commodities across the island.

Source: Weekly prices, Hector Kobbekaduwa Research & Training Institute

In order to analyze the pricing disparities of Raw Rice (white) across the island, the average of weekly prices were obtained from the Hector Kobbekaduwa Agrarian Research and Training Institute for four weeks from 6th of January 2023 to 2nd of February 2023 of 10 districts across Sri Lanka. Colombo was taken as the base district and the percentage changes were calculated to identify whether there is a significant difference in the prices of each district against Colombo.

Due to lower average retail pricing than Colombo's average retail price, it can be seen from the calculations that in certain paddy production areas like Ampara, Hambantota, and Matara have greater percentage changes of 13.2%, 10.2%, and 9.97% against Colombo respectively. In comparison to Colombo; Anuradhapura, Polonnaruwa, and Kurunegala also have relatively lower average retail prices. The common reason behind this is that food supply to Colombo varies between types of commodities and does not depend on the closest production areas. The variations in distance and transport costs are reflected in the price disparities in Colombo. Apart from that, some other reasons for the price disparities across the island could be possibly due to complex interactions between supply and demand, income variation, uneven population distribution, price controls and the price of close substitutes.

Way forward

In light of the aforementioned issues, continuous development and tailor made policies should be introduced to establish a more resilient agri-food supply chain. Hence below are a few recommendations that can be introduced to the system.

• Establish post harvest handling hubs across main cities of the island to improve the efficiency of the sector

• Farmers/ supply chain actors to be more vigilant on proper post harvest handling techniques to minimize losses

• Utilize railway system as a cost effective source of transportation

• Promote the use of digital marketing platforms to connect different actors across the supply chain

• Integrate these platforms with financial services such as online payments, credit-based transactions, and loan facilities through banks 

• Enhance collaboration among different actors across the supply chain to reduce cost and increase efficiency (eg: promote forward and backward integration via business partnerships)

• Encourage private sector participants to invest in modern technologies along the supply chain to reduce losses

• Encourage innovations/processes that can improve the efficiency and reduce losses along the supply chain
  

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.

Government should walk the talk with transparency

Originally appeared on the The Morning

By Dhananath Fernando

One day, I was enjoying a cup of coffee at a coffee shop in the greater Colombo area located on prime property. A gentleman joined me and we began a conversation. As we spoke, he mentioned he was actually the landlord of the building and had rented it out to someone else.

I asked: “Why are you renting this place? Isn’t it better for you to run this shop so you can earn a better return?” His response was: “Actually, I tried for two years and made a profit too.” I was surprised that renting it was more profitable than running a business.

I inquired about the reasons. He mentioned that he was making a profit of about Rs. 50,000 per month by running his own business and he could not exceed it. But by renting out the same building, he earns about Rs. 350,000 as the rent income.

The rest is not rocket science; when you have the capacity to earn Rs. 350,000, it doesn’t make any sense to settle for 50,000.

But in national economic issues, people often get carried away with just the profit without considering the asset value which generates that revenue.

Divesting of SOE shares

A recent case is the argument against divesting the majority shares of a State-owned telecom company and a hospital. Often, the argument is: “Why should the Government be selling the profit-making entities while the loss-making entities are the problem?”

Of course, the loss-making ones are the main problem, but the Government making a profit doesn’t really reflect whether that profit is worth it or not – as with the case of the landlord of the coffee shop. If the Government makes just Rs. 50,000 when the actual capacity is making Rs. 350,000 with a better purpose, it is in fact a loss of Rs. 300,000.

Many people are not aware of the fact that the Return on Assets (ROA) of the profit-making entities owned by the State is far less than the industry standard. Some are making profits simply by being a monopoly or getting preferential treatment from the Government. The value of the business has to be based on the value of assets it owns. In other words, what matters more is the profitability of the company in relation to its assets.

Motivation for profits

So when we compare the ROA of a Sri Lankan State-owned telecommunications company with the private sector telecommunications companies, it is evident that the State-owned telecom company has a lower ROA compared to private companies. It is not surprising because the motivation for profits comes with ownership.

When there is no owner and when it runs on taxpayer money spent by political appointees, there is no intention of maximising profits. In that structure, the incentive is for longer survival and absorption is reduced as much as possible.

It is a classic case similar to a farmer encroaching on forest land to yield more harvest without considering productivity in the long run. It is not the size of the harvest that matters but the harvest that can be obtained per unit of land. Similarly, it is not the profit gained but the profit in relation to a unit of assets.

On the other hand, we need to realise these losses have to be borne by taxpayers. That is one reason why the Government should not run any business. Even the ones which make profits can easily drift to loss making when governance structures are not in place. It has happened multiple times.

When we restructure SOEs, of course the first preference would be for profit-making ones. It’s not rocket science, since no one wants a loss-making entity. When someone takes a loss-making entity and if the entity has a high level of liabilities, those liabilities have to be absorbed by the Government – meaning, the people.

That is one reason why the Government should not engage with commercial operations because losses are borne by the citizens while the benefits of profits are not necessarily shared among the citizens.

Transparency and accountability key

In the process of reforming or divesting the assets of the State, it is of paramount importance to proceed the transactions on a competitive basis. One reason why people have suspicion over State asset divestments and privatisation is because the previous transactions had a lot of grey areas. Thus, the suspicion is obvious.

If the Government is committed to reforming State-Owned Enterprises (SOEs) and attracting the right type of investors, the only tool it has is transparency. Any bad transaction will backfire on the rest of the reforms, extending to even debt restructuring and bilateral support. We can only advise and play the role of watchdog – the people who have power should walk the talk.

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.

IMF Programme #17: takes two to tango

Originally appeared on the Daily FT, Ada derana, Groundviews

By Daniel Alphonsus

On Sri Lanka’s reform-regress-run to the IMF crisis cycle

Countries never learn from others’ mistakes, they only learn from their own. Sri Lanka is an exception: we don’t even learn from our folly. Apparently neither does the IMF. Sri Lanka’s 17th IMF programme is set to be approved on March 20th. Is it welcome? Yes. Will it break Sri Lanka’s reform-regress-run to the IMF crisis cycle? Probably not. 

All reforms undertaken over the past half-year to win IMF board approval are reversible. None of them constitute entrenched changes in economic policy or governance. We are building our recovery on the shakiest of foundations. The fuel and electricity price ‘formulae’, tax plus interest rate increases and greater exchange rate flexibility can all be altered, more or less, at the stroke of a pen.  

This is not surprising. Sri Lanka has a chequered history of cosmetic compliance: ticking the boxes of virtue and sensibility via international undertakings during desperate times, and then reverting to business-as-usual once crisis abates. We have good reason to think that, this time too, the future will rhyme with this past. Undoubtedly, post IMF board approval, some reforms less easy to rewind will come to pass - the new Central Bank Act being the most notable. 

But the IMF’s bargaining power peaks prior to board approval. That is the decisive point in this process. It is the pivotal moment for any attempt to use this crisis to build the foundations required for breaking the crisis cycle and going from third-world to first. If the most contentious and critical reforms are not pushed through prior to board approval, there is good reason to think they will not come to pass. Remember that of its 16 programmes thus far, Sri Lanka’s has only completed two extended / structural programmes. The remainder are either relatively insignificant standby-facilities or derailed extended programmes

Considering the unprecedented nature of the current crisis, this is a colossal missed opportunity. As argued in a prequel article, Programme 17 could have and should have broken this cycle. Public opinion was desperate, the government commanded a super-majority in Parliament and the IMF held all the aces. The distinction between what is desirable and what is feasible had, almost overnight, dissolved. The cry for fuel and electricity was so piercing and loud that a comprehensive and deep programme permitting profound economic restructuring was possible for the first time since 1977. 

Moreover, even if some of the required reforms come to fruition over Programme 17’s next few reviews - it will still be a missed opportunity. Reform takes time, effort and energy. These are scarce resources. As major structural reforms - such as the central bank act, fiscal rules, privatisations and labour market reforms - were not completed as prior actions, it means the first few reviews will be focussed on them. This will leave little room for some of the more complex long-term reforms; especially in land, the public service and regulatory policy (e.g. competition policy). 

Of course, we are a sovereign state, so primary responsibility for this failure lies in our own polity. But we find little hope in ourselves. As weary and jaded citizens we tend to assume inertia, or worse, on our side as a given. Which is why this article is about the IMF’s failure. 

What could the IMF had done differently? Especially considering its familiarity with Buenos Aires, it should know that it takes two to tango. As Keynes famously said of the IMF and World Bank; the Bank’s a fund, and the Fund’s a bank. Considering the creditor-borrower relationship between the IMF and Sri Lanka; as a creditor the IMF should bear some responsibility for the failure of so many programmes over such a long period of time. The IMF’s own kapuralas have conceived of programme conditionality as a form of collateral. The IMF ought demand more conditionality as collateral prior to lending. This, of course, requires review of past country programmes and, as we all know, economic history and country expertise are not exactly first-rank priorities at the Fund. 

Anyone involved in economic policy-making in Sri Lanka, the IMF included of course, knows that much of the technical work was already done. When the staff-level agreement was signed in September last year, there was a great deal of reform that just required political will and nothing else. Cabinet had approved an earlier version of the new central bank bill during the last days of the Samaraweera ministry. Placing energy price formulas on a statutory footing shouldn’t take more than a day’s drafting. Fiscal rules legislation was already in a relatively advanced stage. Non-legislative measures could also have been mandated - the state could readily have divested its stakes in Sri Lanka Telecom and Lanka Hospitals. These firms are already listed with established valuations. Considering the 200 days between the staff-level agreement in September and board approval now, we had more than enough time to list the major state banks and Sri Lanka Insurance; maybe even privatize the East, Jaya and Unity container terminals. After all, for better or worse, remember the plantations were effectively privatized within fourty-eight hours. These delays are all the more astonishing due to the hypocrisy of asking for favours from our creditors while refusing to sell underperforming assets. 

Primary balance vs growth 

Considering the political cost of market pricing energy and increasing taxes, from a political point of view, there is tremendous incentive for the political leadership to undertake structural reform in return for less pain. Sri Lanka’s future debt sustainability (or lack thereof) is a function of current and future (a) government revenue, (b) government expenditure and (c) GDP growth. By raising Sri Lanka’s growth potential, both the IMF and long-term creditors could and should have been willing to trade-off revenue and expenditure targets for entrenched, high quality structural reform. The one percent rate hike - which the central bank opposed - just before placing Sri Lanka on the board agenda illustrates this well. Clearly, this temporary, one-off one percent increase in interest rates was considered decisive for obtaining board approval. Why then was not actually passing the central bank bill in Parliament - which is likely to shape inflation rates for decades? Note that in my view, the IMF’s bargaining power at this juncture could be so strong that a trade-off between primary balance linked targets and structural reforms may not exist. The IMF may have been able to demand both. That is the IMF could have had the cake, eaten the cake and called it a letter of intent. 

Primary balance today vs primary balance tomorrow

Even if one does not buy the argument of reducing the primary balance target today in exchange for growth tomorrow, two strategies superior to the status quo could have been pursued. 

First, instead of trading off the primary balance versus growth, we could have exchanged a primary balance improvement today for a larger primary balance improvement tomorrow. The IMF could have permitted reducing the primary balance target today in exchange for entrenched reforms that result in a paradigm shift in Sri Lanka’s primary balance trajectory for the future. For example, coming back to the central bank bill, through greater depoliticization and limitations on central bank funding of government deficits, this landmark reform is likely to change Sri Lanka’s medium to long term primary balance trajectory. The ‘net present value’ of this change in primary balance terms - even when discounted for the probability of it being unenforced - is likely to be greater than a few percentage point changes in the primary balance today. 

Optimizing this trade-off would also have the added benefit of placing less pain on the public and reducing the extent of contractionary policy amidst Sri Lanka’s worst economic crisis in decades. 

Second, there are some measures that can improve the primary balance today, and tomorrow. A good example is the sale of shares in state banks. The sale of minority stakes in BOC and People’s Bank will raise money for the exchequer, boosting the primary surplus. However, especially if the banks are listed, it will also make it more difficult for the state banks to permit the government to create enormous contingent liabilities via loans to the CEB and CPC, resulting in a healthier future primary balance. 

Overdiscounting the future

The argument often made in response is that the IMF cannot tradeoff the certainty of hitting quantitative targets today, in return for structural reforms whose fruits may not materialize tomorrow. This view is misguided. First, deep understanding of context enables a reasonably good assessment of the probabilities of a structural reform producing a desired outcome - enabling the computation of rough expected values. For example, we know that once a privatization takes place it is unlikely to be easily undone. Second, even after first discounting on the basis of probabilities, a second round of discounting can take place to compensate - to some degree - for the uncertainty inherent in structural reform.

Bailamos
There are two dancers in this toxic tango. They both need to take stock of the past, break with it and dance a new dance. Introspection is a good start. The IMF and our government should get together and commission a review of all past programmes to inform the design and implementation of the current programme. In the meantime, the priority should be to ensure as many structural reforms as possible are pushed through prior to the first review. If we are able to use entrenched, high-quality structural reform to credibly improve Sri Lanka’s medium term growth and primary balance trajectory, we should be able to avoid some of the short-term pain and contraction that we would otherwise experience. Then, maybe instead of toxic tango, we can look forward to a solid baila session. With the President, as he did with Iranganie Serasinghe, accompanying the IMF’s managing director for a round of kaffirhina. After all, compared to austerity, structural reform is a sumhiri pane.

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.

On the 75th Independence, time to re-plug to the world economy

Originally appeared on the Daily FT

By Anuka Rathnayake & Thilini Banadara

As Sri Lanka is inaugurating its political independence of 75 years on 4 February, the burning issue the public is struggling to grapple with, in the recent past, is the worst economic slump. Many factors have contributed to the current economic crisis but protectionism and trade barriers are main elements that have further depleted the economy, shaping it as uncompetitive and inward-looking.

Even though Sri Lanka was known as a fairly open economy, the dynamics of trade has changed since 2004. The planned reduction of tariffs into a single band had been abandoned by the end of 1990s.  Since about 2005, Sri Lankan trade policy has been characterised by a protectionist approach. 

The Government was involved in economic decision making and policies related to import substitution were much more prominent. As highlighted in the Trade Policy Review of Sri Lanka by the World Trade Organisation in 2010, the average tariff protection increased . In fact, it can be noted as frequent and ad hoc changes in tariff structure. The trend in protectionist policies resulted in a fall of exports as depicted by the ratio of exports to GDP . 

In 2009, by the time peace was restored, Sri Lanka had nine para tariffs applicable for imports  in addition to the standard customs duties, of which , five were ‘para-tariffs’: taxes which are only applied to imports and there is no domestic equivalent. Adding  to whatever protection is provided to domestic production by customs duties, with such para tariffs being in place, the protectionism became even more complicated. 

A systematic comparison of Sri Lanka’s tariff structure at November 2002, January 2004, 2009 and January 2011 suggests that the total protection rate notably increased between 2004 and 2009 . 

The ensuing years were followed by many ad hoc and duty exceptions and case-by-case adjustment of duties on many imports which directly compete with domestic production. By 2015, the average effective rate of protection for manufacturing production had increased by 16%.

This trend is well depicted through the Trade Openness indicator as given in Figure 1. The degree of openness is measured by the actual size of registered imports and exports of an economy. In other words, it suggests how free or restricted a country is in its relations with the rest of the world. 

Since 2004 onwards there has been a decline in the trade openness of Sri Lanka and this trend continued up until 2010. By 2015 with an increased rate of protection, the trade openness deteriorated to 36.6%. 

Since 2019, Sri Lanka has been pushing many import controls creating disruptions in the market. This tendency resulted in further decline of trade openness 32.2% in 2020. It is similar to the trade openness during 1970 - 1976 when the liberalisation policies were reversed and the economy had high regulations. The trade policy was more aligned towards import substitution.

Trade restrictions 

Sri Lankan businesses face a variety of trade restrictions exacerbated by the economic crisis. Accordingly, such conditions that impact the price, quality, quantity, or timeliness of product delivery but are outside the direct control of the exporter or importer. 

Both the importing country’s border and the border of the exporting country have been parallelly imposed with restrictions. Even though a number of Free Trade Agreements have reduced external trade barriers and expanded access to markets, Sri Lanka has kept its borders closed by enacting internal trade restrictions.

Internal trade restrictions can be identified in terms of broader categories such as; 

1. Monetary and regulatory barriers, 

2. Procedural barriers, 

3. Service barriers,

4. Technical barriers and 

5. Market barriers 

Currently a number of monetary and regulatory barriers exert pressure on Sri Lankan businesses, while lowering the country’s competitiveness on international trade. Such barriers include complex tariff structures, quotas, import restrictions, excessive duties or levies and export and import licenses. 

Both exporters and importers encounter ineffective, unpredictable, and less transparent procedures throughout the entire trade process. This is mostly the result of poor coordination between agencies and excessive bureaucracy (red tape) among Government employees.

Additionally, the distribution and financial services channels are two areas where existing enterprises face significant service obstacles, which slows down the final stage of clearance.  Shedding further light on the obstacles placed, the technological obstacles  have a negative impact on the export competitiveness of local enterprises because of their limited technical and financial resources. Besides the market constraints like price controls are a significant obstacle because they are unrealistic in a setting of shifting global markets and fluctuating currencies.

Impact of trade restrictions

Over the years, the country has experienced a number of adverse effects due to trade restrictions. Net economic losses in the wider economy have increased as this restricts competition. Shrinking volumes of exports and imports have negatively affected domestic production. Consumers are left with limited choice of products while they experience increased prices. 

Trade restrictions impact the macroeconomy with a fall in employment opportunities mainly due to the deterrents on domestic and foreign investment. Limitations on land, labour and capital have disincentivised investors from competitive export industries to protected industries and inefficient import substitution. Reduction in economic activity has increased the economic woes among people.  

Restrictions on trade have put a significant number of businesses in a precarious position.  Starting with street vendors, small and medium scale enterprises who depended on imported raw materials to the larger apparel and construction industries; all the businesses are finding it a challenge to continue their business. 

Way towards trade freedom

The way to greater freedom of trade is to reformulate the existing monetary policies and laws in order to enhance trade freedom and provide more opportunities for local enterprises to engage in trade. Also in the current context, easing import restrictions and reducing taxes or levies on imports and exports would be crucial.  Additionally, it is important to remove unnecessary Government red tape or bureaucracy wherever possible to make customs processes more simple, effective, clear, predictable and timely. This will help to cut down on processing times at the border and make the movement of goods cheaper, faster and more efficient.

Paving way to greater freedom to Trade - the ability to exchange goods and services openly, creates greater opportunities for Sri Lankans to achieve greater economic prosperity. It opens many avenues towards competition, innovation and economies of scale. The beneficiaries of open trade are the Sri Lankan citizens and businesses who will benefit from lower prices and greater choice.  

Freedom to trade will ensure the economic freedom by which the fundamental rights of an individual to make their economic decisions will enhance. The true meaning of independence will only be assured through greater economic freedom. 

Source : Central Bank of Sri Lanka 

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.