Empowering Our SMEs

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

Originally appeared on The Morning

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By Sajani Ramanayake

In recent months, there has been extensive debate around the topic of making Sri Lanka a hub for technology and innovation. Across the globe, small and medium enterprises (SMEs), particularly start-ups, have been proven as critical to fostering a culture of disruption and innovation. In Sri Lanka, SMEs are already an integral part of the economy and hold significant potential for achieving our economic vision. Despite this, many of these businesses continue to face debilitating obstacles to growth due to an unfriendly regulatory environment.

Why are SMEs important?

Contributing to 45% of domestic employment and 52% of Sri Lanka’s gross domestic product (GDP), the role SMEs play in the Sri Lankan economy should not be underestimated. While these businesses do form the backbone of the economy, there is potential for growth that should be explored.

The National Export Strategy of Sri Lanka (2018-2022) 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 this would help increase the overall generation of income in the country. Currently, Sri Lanka lags behind other Asian countries in terms of export figures, and the expansion of SMEs is a good way to facilitate much-needed growth. If SMEs are provided with adequate resources and opportunity, they can plug into global value chains, capitalise on international markets, and drive innovation.

Currently, Sri Lanka’s export portfolio is relatively limited, with a small amount of companies accounting for a majority of export revenue, with SMEs providing a very minor contribution. This lack of export diversification in Sri Lanka’s portfolio thereby makes it particularly vulnerable to the external economic environment and reduces national economic stability. Strengthening SMEs and their access to the export market could thereby present a viable solution to reducing these risks, while improving export earnings, diversifying our export portfolio, and transitioning Sri Lanka into a more complex economy.

What is stopping SMEs from growing?

A lack of finance has been identified as a key constraint by 59% of SMEs in Sri Lanka. SMEs lack the collateral that many lending organisations insist on and often cannot afford to pay the high interest rates charged on loans. Unavailability of accounts and financial information due to the inability to maintain proper accounting records and lack of know-how on business plan creation, also makes it difficult for SMEs to be eligible for loans.

Another problem that SMEs face is the sheer number of regulatory barriers. The clearing of imports and exports through customs as well as high credit periods can be challenging to small businesses. Taxes on imported raw material and capital goods also increase costs and reduce profits. There are also many licenses and permits that need to be obtained before obtaining state lands for business purposes, such as clearances from the Central Environmental Authority, Forest Department, and Department of Archaeology, depending on the nature of the business. This makes obtaining land difficult for SMEs, and deters potential entrepreneurs.

The lack of information and guidance for entrepreneurs about how to set up and expand their businesses is also a major hurdle. In a study conducted by the Ministry of Industry and Commerce, in conjunction with Ernst & Young and GiZ, about the institutional and regulatory framework relating to the SME sector in Sri Lanka, SMEs expressed a lack of understanding about potential export markets and opportunities, a lack of clarity on the process to obtain grants and lease agreements for state-owned lands for business purposes, and low awareness on applicable taxes and the benefits of registering for taxes.

What is being done to help SMEs?

One initiative that has recently been put in place is the establishment of “Empower” by the Colombo Stock Exchange (CSE) and Securities and Exchange Commission of Sri Lanka (SEC). Empower is a board dedicated to attracting SMEs to the CSE and seeks to improve access to finance for SMEs while also providing them with the opportunity to build credibility through the disclosure of information and by making governance standards more balanced. This not only helps attract investors, but also helps improve business visibility for the SME. The board allows SMEs to sell equity in order to raise capital – a major obstacle to growth for a large number of SMEs – essentially functioning as a miniature stock market for these enterprises. Listed companies receive guidance both during and after the listing process, and have access to one-on-one meetings, awareness sessions, and public consultations.

There are also other initiatives like export credit facilities provided by several banks seeking to ease the burden of pre and post-shipment financing, the Enterprise Sri Lanka credit programme which offers a range of loan schemes to SMEs, and workshops carried out by private sector companies such as Microsoft to help address a myriad of barriers faced by these businesses. Despite these initiatives, which are a positive step in the right direction, more needs to be done to help Sri Lanka cultivate a holistic ecosystem for SME growth.

One way to do this is by improving infrastructure facilities such as roads and highways to improve connectivity. This would assist in reducing regional differences in the setting up and operation of SMEs, as people and capital become more mobile. Sri Lanka also needs to streamline its regulatory mechanisms if it wants to help SMEs reach their full potential. Currently, there are at least 43 different institutions affiliated with SME governance in Sri Lanka, resulting in a climate of fragmented governance and poor information. Other potential solutions could include the creation of a dedicated export-import bank to ease access to finance and the establishment of an advisory board comprising exporters, academic experts, bankers, and professionals to enhance the ability of SMEs to formulate strategies and products that meet client expectations and emerging market needs.

If Sri Lanka wants to improve economic growth in the country, it is crucial that concrete strategies to improve productivity and increase export volumes are implemented. If Sri Lanka is to remain competitive on the world stage, SME growth is crucial.

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Tilt toward China is at stake in Sri Lanka's presidential election

Originally appeared in Nikkei Asian Review

By Ravi Ratnasabapathy

Candidates' foreign policy platforms have sharply different economic consequences

Sri Lanka votes Saturday to elect a new president, yet the family names of the leading candidates are familiar. The top contenders are Gotabaya Rajapaksa, whose brother held the presidency from 2005 to 2015, and Sajith Premadasa, whose father led the country from 1989 to 1993.

In terms of foreign policy, the two candidates crudely represent a choice between the continuity of current policies under Maithripala Sirisena, who repaired strained relations with India and the West, and a return to a more China-centric policy.

Rajapaksa heralds the return to China. A former soldier who served as Secretary to the Ministry of Defence during his brother's regime, he oversaw the military strategy that resulted in the annihilation of the leadership of the Tamil Tigers and the ending of the long-running civil war in 2009.

His brother, Mahinda Rajapaksa, had got into office on the back of hostility to the West, which had underwritten a putative peace process in 2002. As a part of the peace settlement, in 2003 the U.S., EU, Japan and Norway pledged $4.5 billion in reconstruction aid, but emphasized that assistance was linked to progress in the peace process, which involved concessions to the Tamil Tigers.

In the election of 2005 Rajapaksa capitalized on public disquiet over violations of the current cease-fire and heavy foreign involvement to portray the peace deal as a sellout to the Tamil Tigers and the West. When the fighting resumed the next year, it was particularly brutal, earning the condemnation of Western nations.

Rajapaksa's foreign policy, which already viewed the West negatively, gravitated further toward countries which were less critical. Leaders such as Russia's Vladimir Putin who stood up to the West were seen as models, and China, carrying a large checkbook, was viewed as particularly useful.

Following the end of the conflict in 2009, Chinese companies became involved in infrastructure development, building ports, airports, power plants and much else. Relations with India soured over extensive Chinese involvement in what it regards as its own backyard. This is the legacy Gotabaya Rajapaksa bears.

The shock defeat of the Rajapaksa regime in 2015 by Sirisena saw a change in foreign policy. The victory was hailed as triumph of democracy and welcomed by the West and India. Relations with the West and India improved and China was effectively sidelined.

Large China-backed projects were put on hold and the government threatened to renege on Chinese contracts. Economic pressures have meant that some of these projects have now resumed but the attitude to China remains lukewarm. China itself is generally thought to view the current regime as unfriendly and welcomed an abortive constitutional coup in October 2018 that temporarily installed Mahinda Rajapaksa as prime minister.

Thanks to term and age limits placed by the new government, neither Mahinda Rajapaksa nor his son is qualified to run for president, so Gotabaya Rajapaksa, who had to give up his U.S. citizenship in order to run for office, is seen as proxy.

Mahinda Rajapaksa is likely to contest the parliamentary election due next year with a view to obtaining the now powerful office of prime minister, thus he would be influential in shaping policy in his brother's government.

In any case, both are believed to share a similar worldview. A change in regime now would lead to a foreign policy realignment more favorable to China, although for economic rather than political reasons.

Battered by war, Sri Lanka faces periodic balance of payments crises and in 2016 received a $1.5 billion bailout from the International Monetary Fund -- the fourth bailout since 2001. Election giveaways mean the current IMF program is unlikely to be completed.

A pivot to China does not necessarily mean upsetting the West. The Rajapaksas are shrewd politicians and, while critical of the West, have shied away from open confrontation, not least because several key members of the regime are either foreign citizens or have permanent residency there.

The international landscape today is also very different from the previous Rajapaksa era.

Trump's foreign policy is distrustful of U.S. allies, scornful of international institutions and indifferent, if not downright hostile, to the liberal international order. In the immediate aftermath of the war in 2009 questions over atrocities, accountability and reconciliation were dominant. Ten years on, in a new global landscape, this is no longer the case.

The Rajapaksas are likely to seek accommodation with Trump, pointing to the Isis-inspired attacks on churches in Sri Lanka to present a case for alliance against a common threat from Islamic terror. India's Narenda Modi is likely to be courted in similar terms.

A Europe distracted by Brexit may be less willing to pursue difficult questions on Sri Lanka unless some serious new problems arise.

The new foreign policy is therefore likely to be more nuanced than the previous Rajapaksa era, but China will remain the first friend. For a floundering, debt-ridden economy, China's deep pockets present a far more attractive partner than the strictures of an IMF bailout.

What do we know about the MCC agreement?

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

Late last month, in a major breakthrough, Sri Lanka’s Cabinet of Ministers approved the implementation of the $ 480 million Millennium Challenge Corporation (MCC) grant and released the final draft of the grant agreement to the public for review.

The agreement has indeed been at the heart of heated debate and political scuffle in recent months, with the President refusing to approve the agreement before the end of his term, a fundamental rights (FR) petition against the signing of the agreement being filed in the Supreme Court, and even a protest fast being staged earlier in the week.

But with the agreement out in the public with continued avenues for negotiation, Cabinet appraisal, and the Attorney General’s (AG) stamp of approval, what does Sri Lanka have left to be concerned about?

Who is the MCC and what do they do?

The MCC was created by US Congress in 2004 and is an independent US foreign aid agency. Since its inception, the MCC has signed 37 compacts with 29 countries, with an expected benefit to approximately 175 million people. These countries have to meet stringent eligibility criteria in order to qualify for an MCC grant, as funding is dependent on governments demonstrating that they are committed to democracy, investing in their citizens, and economic freedom.

The MCC describes its selection process as “competitive”, with a clear selection process through which recipient countries are chosen. Using the World Bank’s classification of countries based on per capita income, candidate countries are selected. From here, country selection criteria and methodology are published, and performance on these indicators is assessed and published in a scorecard.

It is based on these country scorecards, the opportunity to reduce poverty and generate growth in a country, and the availability of funds that a final decision is taken.

Additionally, the MCC places emphasis on the work being country-led, meaning that the Government of Sri Lanka identifies its growth priorities and develops MCC proposals accordingly. Sri Lanka began negotiations with the MCC in 2004 and was selected by the organisation as eligible to develop a compact in 2016. Sri Lanka’s project proposals for the compact were submitted to the MCC Board in November 2017 and the Sri Lanka compact was approved by the MCC Board in April 2019.

However, the agreement has been on hold ever since. As the organisation traditionally only funds low and lower middle-income countries, Sri Lanka’s recent graduation to upper middle-income status has now put its eligibility for the MCC grant into jeopardy, unless the agreement is signed prior to 2020 as the country does not feature on the organisation’s 2020 scorecard.

What does the grant fund?

The main points of contention centre on the question: Where is the money going and what does this funding mean? According to the publicly available draft agreement, the MCC is providing this grant to address two of Sri Lanka’s “binding constraints” to economic growth: (a) inadequate transport logistics infrastructure and planning and (b) lack of access to land for agriculture, the services sector, and industrial investors.

These are constraints identified through a comprehensive constraints analysis conducted by the Government of Sri Lanka and the MCC, in partnership with Harvard University’s Centre for International Development.

To address these constraints, the MCC will be funding two main projects – the transport project focuses on improving traffic management, improving the road network along the Central Ring Road for better connectivity between the Western Province and peripheral provinces, and the modernisation of the public bus system.

The land project focuses on creating a parcel fabric map and inventory of state lands, digitising the deeds registry, facilitating the ongoing work to move Sri Lanka from a deed registration system to a title registration system, digitising key valuation information for properties in targeted districts, and establishing land policy councils to support the Government’s work on land policy and legislation.

The agreement states the projects are expected to benefit approximately 11 million individuals over a 20-year period – around half of Sri Lanka’s total population.

Why are people against the MCC agreement?

There have been two main arguments levelled against this agreement. The first is that the land project will mean that land owned by the Sri Lankan Government will be available for purchase to the American Government.

The second argument is that the MCC agreement is an attempt to undermine Sri Lanka’s national security. While both of these claims have been denied by MCC Resident Country Director Jenner Edelman, an air of suspicion still remains.

Indeed, Sri Lanka is commonly cited as a case study of debt-trap diplomacy in the region and there is merit to the argument that the Government should be vigilant in reviewing the terms and conditions of future development agreements.

However, upon review of the publicly available resources of information, the MCC grant does not involve the lease or transfer of ownership of any Sri Lankan land and does not require Sri Lanka to pay back any of the grant amount, as long as the agreement is not explicitly violated.

This is a standard safeguard that is characteristic of international aid agreements used to ensure that the grant money is used exclusively to achieve the goals of the compact and does not fall into the wrong hands.

Other concerns pertaining to the construction of a physical economic corridor, connections to SOFA and ACSA agreements, acquisition of Sri Lankan land by the US Government, undervalued land transactions, establishment of US colonies and/or army bases, construction of electric fences, and destruction of the local environment have also been confirmed as baseless upon review of the agreement.

The document clearly stipulates that the Sri Lankan Government has “principal responsibility for overseeing and managing the implementation” of the projects, and a signed legal opinion from the AG of Sri Lanka must be acquired before the agreement is entered into force.

Even after the agreement has been signed, Sri Lanka still has the option to modify the agreement, provided that these modifications do not exceed the allocated funding allowance or extend the grant term of five years.

The agreement will also not come into force until it has been submitted to and enacted by the Parliament of Sri Lanka, providing ample safeguards to ensure all relevant stakeholders are involved in the approval process. Concerns around the failure to submit the agreement to Parliament prior to its signing have been deemed unreasonable by Minister of Finance Mangala Samaraweera, who stated that Parliament cannot debate an unsigned document.

The argument of the Opposition that the agreement should be put on hold until after the election also presents serious risks of losing the grant altogether, due to Sri Lanka’s recent graduation into upper middle-income status.

While it is important for Sri Lanka to consider all of the implications associated with enforcing the MCC compact, it is equally important to consider the benefits that could be lost if the Government continues putting off approving the agreement any longer.

At no cost to Sri Lanka’s Treasury, the compact presents a rare opportunity for Sri Lanka to address some of its most prominent infrastructure issues and binding impediments to growth. With a current public debt-to-GDP ratio of 82.9%, the Treasury cannot afford to address these issues on its own, and grants like the MCC are only going to become harder to come by with Sri Lanka’s new income status. Regardless of which government comes into power over the next year, Sri Lanka should not let this opportunity slip away.

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Coping with latest COPE report

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

Originally appeared on The Morning

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By 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.

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Are We Finally Done Taxing Aunty Flo?

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.

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Figure 1: Breakdown of taxation structure (before September 2018)

General Duty     VAT     PAL     NBT     CESS    Total                                                

      30%        15%     7.5%     2%     30%    101.2%            

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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?

Cost of construction and controlled prices on cement

Originally published in Daily News

By Ravi Ratnsabapathy

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

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

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

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

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

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

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

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

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

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

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

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

Quality

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

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

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

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

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

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

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

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

Specialist licenses should be necessary for more complex work including:

(a) Piling works

(b) Ground support and stabilization works

(c) Site investigation work

(d) Structural steelwork

(e) Pre-cast concrete work

(f) In-situ post-tensioning work

Underinvestment

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

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

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

Overall construction costs

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

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

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

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

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

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

Is Sri Lanka keeping its small businesses small?

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

Originally appeared on The Morning

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By 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.

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Why SriLankan hasn’t aged well

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

Originally appeared on The Morning

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By 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.

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What good is a handbook that’s not followed?

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

State-owned enterprises (SOE) are infamous for their losses. According to the 2018 Ministry of Finance Annual Report, the main 54 SOEs made a net loss last year, amounting to Rs. 26,070 million. With the Committee on Public Enterprises being opened up to the media, coverage of both losses and mismanagement of SOEs has flooded newspapers.

It is abundantly clear that the plethora of SOEs in the Government are unable to function without a constant stream of funds from the Treasury. In 2018, budgetary support for recurrent expenditure of the main 54 SOEs came to a total of Rs. 58,519 million.

The chart below lists the five state-owned enterprises which receive the greatest quantity of Treasury Guarantees, just one example of the money that flows out of the Treasury to sustain these entities. When it is Sri Lankan taxpayers’ money that keeps these entities above board, the question of the hour is why isn’t there better management?

What is the Government’s approach to governing SOEs?

Extensive work has been done on international and regional case studies of good governance for SOEs. Restructuring and partial privatisation of inefficient SOEs have been proposed, while some SOEs could be lined up for complete privatisation. While organisations such as the Organisation for Economic Co-operation and Development (OECD) and World Bank have provided clear guidelines for governance and improved management of SOEs, so has the Sri Lankan Government.

The Committee on Public Enterprises (COPE) is a well-known government mechanism established to hold SOEs to account. The committee is empowered to publish reports which evaluate selected SOEs – investigating hiring irregularities and issues in procurement, and auditing their finances. The reports are usually a hair-raising read, speaking of special employment grades created with high-wage allocations of money that simply cannot be accounted for, and situations that can only be described as odd – for instance, why was the Sri Lanka Ports Authority building a cricket stadium in Sooriyawewa?

In 2018, the National Human Resources Development Council (NHRDC), with the Institute of Chartered Accountants (CA) launched a “Handbook on Good Governance for Chairmen and Directors of Public Enterprises”. This handbook was meant to act as a guide for Sri Lankan SOEs, placing emphasis on the fact that as SOEs run on the money and resources of the Sri Lankan people, and as such, it is important that there is proper management. The handbook is comprehensive – detailing the frequency of board meetings, responsibilities of key officials, and emphasising the need for regular financial reporting.

The handbook places responsibility for financial discipline in the public sector, including public enterprises, with the Minister of Finance, and the General Treasury is able to act on the Minister’s behalf. The duties of the boards of these SOEs are also detailed on, and ensuring proper accountability by maintaining records and books of accounts are one of the many responsibilities which fall on the board. The chief financial officers are responsible for accounting and budgetary control systems.

On the point of monitoring and evaluation, the handbook is clear. It calls for monthly reporting in the form of performance statements, operating statements, cash flow statements, liquidity position and borrowing, procurement of material value, statement on human resources, as well as a separate performance review if the entity is a commercial corporation or a government-owned company.

The reality: Turning a blind eye to good governance

While the COPE and the handbook on good governance are two mechanisms put in place by the Government to ensure good governance of SOEs, the reality of how our SOEs are run is vastly different. The Ministry of Finance has identified 54 “Strategic State-Owned Enterprises” – the profits and losses of these entities are monitored by the Ministry of Finance, and are published in its Annual Report. However, this is where any structured financial reporting from SOEs ends. In 2017, only 28 of the 54 strategic SOEs have submitted annual reports to the Ministry of Finance. Advocata’s report on the “State of State-Owned Enterprises: Systemic Misgovernance” identifies a total of 527 SOEs, including the plethora of subsidiaries and sub-subsidiaries that exist. On the other hand, the Ministry of Finance Annual Report 2018 only mentions a total of 422 enterprises, and does not publish their financial statements. In this context of minimal oversight, there is no wonder that the losses incurred by these entities are this high.

The next step: Dissolution

A key recommendation that has been presented in response to the losses incurred by SOEs is privatisation, or at least partial privatisation. It could be implemented on a case-by-case basis, evaluating entities on both their performance and the type of service that is provided, which would be one way for the Government to stem the losses that pour out of the Treasury. While calls for privatisation have often elicited an unfavourable response, it is interesting that the handbook published jointly by the NHRDC and CA has a section on criteria for dissolution of SOEs. To quote from the handbook: “Dissolution of a public enterprise would arise under the following circumstances:

(a) When objectives for which the enterprise was created have been achieved and continuation is no longer required

(b) On the basis of policy directions of the Treasury/Government

(c) When the enterprise is faced with losses and liquidity problems or is not viable due to other reasons

(d) Merger or amalgamation with other enterprises.”

The question that remains is why is the Government continuing to run these enterprises, despite the losses that they incur? The losses, corruption, and clear practices of political patronage make it clear that by not taking action, the Government is actively choosing to mismanage the funds and resources of the people, for personal gain. It’s high time some of these recommendations, guidelines, and committee reports were actioned.

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What to look for in the presidential manifestos

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

Originally appeared on The Morning

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By 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.

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Are Sri Lanka’s agricultural policies starving our farmers?

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

Originally appeared on The Morning

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By 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?

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Where is the money behind our politicians from?

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

Originally appeared on The Morning

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By Thiloka Yapa and Aneetha Warusavitarana

Election campaigns tend to be one of the driving forces behind corrupt practices even after candidates are elected.

Therefore, with a monumentally significant presidential election just over a month away, conversations around the issue of campaign finance and corruption in public office should be gathering steam.

Running a campaign in Sri Lanka is a costly affair; an aspiring candidate needs to connect with people on a grassroots level as well as a policy level. This exercise requires a great deal of manpower, posters, social media engagement, travel, and lots of “buth packets” – none of which come cheap. As a result, adequate campaign finance is a prerequisite for a successful election bid.

The problem lies in the issue of who is providing this finance and whether there are strings attached. If money is being funnelled into an election campaign on the understanding that once the candidate is in power, the financier will be afforded special privileges and benefits, this is when citizens need to be concerned.

Of course, campaign finance is not the root of all evil in the world of corruption. Regulating campaign financing would not address blatant theft within the government, nepotism, irregular procurement procedures, and the handing out of government jobs to political supporters. However, it is a step in the right direction and, interestingly, is something that Sri Lankan law has addressed in the past.

Regulating campaign finance

The Ceylon (Parliamentary Elections) Order in Council of 1946 specifies that a candidate would have to appoint an agent known as the “election agent”. This agent is responsible for the accounting and reporting of all expenses spent on elections, along with a declaration by the candidate. These financial reports have to be submitted within 31 days of the result of the election being published in the gazette. If it is not conveyed within the stipulated time period, the candidate would not be given the chance to sit or vote as a member in the House of Representatives, until such a conveyance is made.

However, this was repealed by the Parliamentary Elections Act No. 1 of 1981. Under this law, the sources of campaign financing would have to be tracked and reported. The fact that non-compliance would prohibit an individual from taking their seat in Parliament provides a strong and effective incentive for candidates to ensure that reporting is completed in the stipulated time period. While this law did not provide caps on spending during campaigns, making these declarations open to the public would provide another avenue through which elected officials could be held accountable.

However, this accountability mechanism is no longer in place. Under the Parliamentary Elections Act No. 1 of 1981, the entire section on reporting campaign finance was repealed, thus removing this avenue of accountability.

Bringing regulations back

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC) has detailed the National Action Plan 2019-2023, aimed at tackling corruption in its various forms. The section on policy suggestions for proposed legislative amendments is all the more relevant in the context of elections. While the amendments proposed to the Bribery and Corruption Act aim to strengthen the powers of CIABOC and increase their ability to tackle corruption across the board, the proposals on campaign finance and asset declarations aim to curb opportunities for corruption in public office.

The proposed legislative framework for campaign finance puts in restrictions and accountability mechanisms on the finances of candidates. This ensures that when an individual comes into office, they do not bring with them the strings and influence of external parties, and are free to prioritise the needs and requirements of their electorate.

While the suggestions do include a cap on campaign financing, the amendments which prevent conflicts of interest and introduce accountability mechanisms may be more practical to enforce.

Restrictions on donations extend to donations made by government departments, companies registered under the Companies Act in which the government owns shares, donations from foreign governments, and organisations registered outside Sri Lanka. The proposed reform also includes a section on accounting and auditing of campaign finances, making this a prerequisite for an individual to come into power and acting as an accountability mechanism.

Beyond campaign financing

Through the proposed amendments to the Declaration of Assets and Liabilities Law, the checks on financing of elected officials continue once they enter office, expanding the scope of the law to encompass the President, private staff of elected officials, provincial council members, and members of local government authorities, to mention a few. The amendments specify that officials would have to submit asset declarations at the point of their initial appointment on a yearly basis while they hold office, at the point of retirement, and for two years post-retirement.

Additionally, asset declarations of the elected official’s spouse, dependent children, and other persons who live with the elected official or have similar ties are also required.

Tackling corruption is a mammoth task, but these reforms could form the backbone of a culture where citizens hold their representatives responsible and demand increased transparency and accountability.

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Dysfunctional Taxation

Originally published in Echelon

Much of Sri Lanka’s money problems can be traced to its weak income tax.

By Ravi Ratnasabapathy

It may seem paradoxical; the idea that higher taxes will spur economic growth. The theory goes that high taxes are a drag on growth by taking away resources from people and companies that can otherwise be productively deployed. However, in poor and middle- income countries, where tax collections relative to the size of the economy is low, the opposite is often true. Taxes help pay for critical infrastructure and social services; without roads, schools and hospitals, private sector wouldn’t invest.

Poor countries struggle to raise adequate tax revenue to pay for public infrastructure. This is the cost of being poor; most people are penniless, and much of the economic activity is in the informal sector, which puts it beyond the taxman’s reach.

Businesses and wealthy people who should pay tax on profit or income don’t feel compelled to do so because the government is usually corrupt, infrastructure derelict and nobody else is paying taxes anyway. Income tax that businesses and self-employed pay on their profit, and those with jobs pay on their income is relatively easy to dodge. Although tax dodging, also called evasion, is a criminal offense gathering evidence to prove this is impossible where cash transactions are the norm, and companies don’t keep detailed records.

The other primary tax source is consumption. A country with enough resources invested in the administration can successfully enforce consumption tax by requesting companies pay a portion of turnover as tax. Enforcement is easy because it’s a simple, efficient and difficult to evade tax.

Since, consumption tax has evolved into taxing just the value addition at a higher rate than the entire turnover at a relatively low rate. Poor countries, on average, collect the equivalent of 13% of GDP in taxes. In the rich world, this number is around 34%. Middle-income countries have tax collections that fall in between those collected in the poor and the rich.

Sri Lanka is not a poor country. In fact, in 2019, when per capita GDP crossed the $4,000 threshold, it was classified as an upper-middle-income country. It rose above abject poverty ranks following the economy’s opening to market forces in the late nineteen seventies.

During the years between 1950 to 1989, the government’s tax take averaged 21 percent collected in income tax, turnover tax and import levies, combined. (see Chart 1) Sri Lanka’s total tax income as a percentage of GDP has since fallen to 11.9% in 2018, lagging behind all its developing country peers in taxto- GDP: Georgia 24%, Samoa 23%, Ukraine 18%, Armenia 17.5% and Tunisia 21%, according to IMF data.

Tax collections as a percentage of GDP now are lower than those of even sub-Saharan Africa. The Center for Tax and Development estimated three years ago that the average tax take in sub-Saharan Africa rose from 12% of GDP in 1990 to 15.1% by 2018. The turnaround in sub-Saharan Africa is due to the implementation of value-added tax, and the creation of autonomous tax agencies. Sri Lanka’s main challenge is that at the equivalent of 2% of GDP, the income tax contribution to revenue is low. The government had set a goal in its medium-term economic plan to increase income tax contribution to total tax revenue from 20% to at least 40%. Income tax is paid by companies on profits, and individuals on their earnings.

However, in 2018, three years after that announcement, income tax-to-GDP stood at 2.1 percent. This is also a much lower rate of collection than Sri Lanka’s peers in the middle-income group: Georgia and Mongolia have 9%, Bhutan 7.7%, Samoa 5.6% and even troubled Egypt has 6%. If the income tax to consumption tax ratio is to improve from  regarded as a comfortable level for equitable growth, income tax-to GDP-must reach at least 6% assuming no taxes and rates are changed.

A tax-paying population will keep governments honest, since taxpayers will want to see that their money is not squandered or worse, stolen. Even the United Nations’ Millennium Development goals included an aspiration for all countries to at least raise tax income equivalent to 20% of GDP. Mick Moor, who is the founding Chief Executive of the International Centre for Tax and Development (ICTD) of UK, identified five factors that have led to the quarter-century-long revenue decline in Sri Lanka.

Some of the problems are clear. Income tax evasion here is widespread for an economy in Sri Lanka’s state of development, the tax code has too many loopholes making it easy to avoid taxes (which isn’t an offence), Sri Lanka’s revenue department not being an autonomous agency, and broadly because governments have failed to adapt to significant changes in economic structure, by modernising the revenue system.

Moor, who published “The Political Economy of Long-Term Revenue Decline in Sri Lanka” in 2017, makes five main arguments. The first is the declining electoral pressure of large scale public spending on welfare.

Sri Lankan governments from the 1940s to 1970s undertook large scale spending on social welfare. Unusually high human development indicators were a result of mass state supply of health, education and subsidised food.

However, since the revenue was high during those decades, it was possible to sustain a ratio of government spending to government revenue of over 1.3 to 1.7 times, without too many adverse implications. (see Chart 2)

Tight budget deficit management has been a feature since the present government took office. As a result, the ratio of government spending to income has declined in the four years to 2018 to 1.4 times. By containing costs, domestic taxes now cover all recurrent expenses, excluding interest payments. The trend is impressive because its a feat previously only achieved a few times, since independence.

However, so far, it has not managed to improve overall revenue. Income tax revenue, the weakest component of the tax structure are rising, although, in the overall revenue, they are still too small to show an impact. Income taxes accounted for 18 percent of total revenue during the January – April 2019 period, after Value Added Tax, which contributed 27 percent and excise duty, which brought in 22 percent.

Total revenue from income tax increased by 9.6 percent to 104 billion rupees in the first four months of 2019, from a year ago, with revenue generated from corporate and non-corporate income tax up 10.2 percent to Rs43 billion. Revenue generated from Pay-As-You-Earn (PAYE) tax increased by 18.6 percent to Rs22.4 billion in the eight months to August 2017 from a year ago. This was because employee incomes rose and tax administration became more efficient, according to the finance ministry’s Fiscal Management Report – 2018.

The second reason for the declining revenue; is the availability of easy foreign aid. Following the 1977 general election aid flows increased rapidly. Suddenly governments were able to, without much pressure, run much larger budget deficits. During the 1970s and 80s, the demand and prices for Sri Lanka’s commodity exports began to decline impacting tax collections. Export taxes, now anathema, were a source of government revenue then. During the five years to 1975 export taxes contributed 11%, and in the five years to 1980, 23% of annual government revenue. By the late nineteen eighties, import taxes had all been eliminated.

Tax exemptions for foreign and local investments are the third factor in the steep tax revenue decline. By 1982 the Greater Colombo Economic Commission, the precursor to the Board of Investment, had both the authority to grant tax holidays, and took over the power of Customs in the management of the Export Processing Zones. Foreign investors, besides, received generous depreciation allowances and duty-free permits, for all investors and not just for those producing for export. Sri Lanka’s policy of the President holding also the job of the Finance Minister eroded the urgency for focusing on revenue, and adapting the tax department to significant changes in the economic structure. Except for 29 months between December 2001 and April 2004, when the government and the executive were from two parties, the president has also held office as Finance Minister.

Mick Moor suggests there is strong evidence that the absence of a powerful minister of finance has undermined revenue collection. An absentee finance minister is the fourth reason for ineffective revenue performance. The fifth challenge is its high reliance on taxing imports to make up for the poor tax revenue performance. Import duties have long been a significant source of revenue, because they are easy to collect. Compared to the late 1930s, Sri Lanka remains similarly reliant on taxing imports for revenue. (see Chart 3) World over governments revenue is earned mainly by taxing income and consumption. Because of the many economic growth impairing eff ects of taxing imports, many counties do so only sparingly.

Ignored so far but in Sri Lanka are property taxes. So far property tax implementation, including land tax, at municipal council level has been crude. It’s a tax that naturally falls on those who can afford to pay, and is an efficient tax since it does not discourage productive activity. It was only the relative ease with which the plantation economy could be taxed that generated a high tax rate in the mid-twentieth century. Income tax has raised significant revenue since 1932. Self-assessment was introduced as early as 1972 and a relatively sophisticated turnover tax introduced in 1963. This was replaced by VAT in 1998. That income tax success revered after 1990.

Now they generate about a third of the revenue it should be making. Instead of serving the population around a third of revenue is consumed by an exploding bill for civil servants, and another third of revenue for pensioners. Weeks ago the government announced pay and pension hikes and thousands of new state sector jobs. More tax will not disappear into an ever more bloated bureaucracy. Th ere is also light at the end of the tunnel.

Sri Lanka’s last constitutional amendments permit only members of parliament can be appointed ministers. Th e president will not be able to hold ministerial posts in the future. A powerful minister to manage finance can ensure revenue targets are met.

Improvement in revenue administration via a cloud-based application known as RAMIS of the Inland Revenue Department also helped improve the tax collection mechanism. Its already showing results in enhancing income tax collections. If indeed income tax collections do rise because the wealthier sections are paying their share of taxes on income, property values and other wealth, the underfunded public education, health and social protection systems can be fixed. The government implemented in 2015 new revenue-raising measures with some success. Taxes are never popular, and there are no easy ways to overcome such resistance.

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

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

Originally appeared on The Morning

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By Dhananath Fernando

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

1. Get a degree 

2. Build a house

3. Buy a car

4. Be a good citizen.

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

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

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

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

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

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

Why is this so challenging?

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

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

• Wall tiles and floor tiles: 107%

• Construction steel: 90%

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

Graph by JB Securities

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

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

Why do these high taxes persist?

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

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

High taxes at what price?

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

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

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

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

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

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

[3] Calculation by Advocata, using 2019 Tariff Guides 

Lotus Tower and the failure of governance

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

The President’s announcement at the opening of the iconic Colombo Lotus Tower, stating that approximately Rs. 2 billion is missing, caused a great deal of consternation. From its inception, the Lotus Tower has been a point of debate, with critics of the tower arguing that it is essentially an expensive political vanity project, which should not have been a priority given the ever-growing debt burden that the country has to bear. However, leaving the politics aside, a better question is why is everyone talking about missing money after the project was completed?

What are the checks and balances on the Govt. and enterprises it runs?

Apart from the accountability that can be exerted by citizens, the Auditor General’s (AG) Department, Committee on Public Accounts (COPA), and Committee on Public Enterprises (COPE) are three key entities that provide some measure of accountability to the Government, especially in cases where the Government is running an enterprise.

COPA focuses on the managerial efficiency and financial discipline of the Government, its ministries, departments, provincial councils, and local authorities by examining the sums voted by Parliament. On the other hand, COPE ensures financial discipline in public corporations and other semi-governmental bodies in which the Government has a financial stake. The accounts of these organisations are audited by the AG’s Department, and are often the backbone of COPE investigations. The AG’s reports provide an independent review of public sector institutions and reports to Parliament, with emphasis on both compliance with statutory and other regulatory requirements as well as an evaluation of the economy, and efficiency and effectiveness of Government operations.

It is clear that there is a fairly robust accountability mechanism in place, although there is still room for reform. The question that remains is was this mechanism in play during the construction of the Lotus Tower?

We need to start listening to the AG’s Department

As early as 2015, the AG’s Department had identified that there were irregularities in the construction of the Lotus Tower. The 2015 Annual Report of the AG highlighted three main points of concern. The first is that the construction contract was awarded to two Chinese companies whose business areas did not include the construction of multi-transmission towers or even large-scale construction. Secondly, even though the work should have been completed by 12 May 2015, the contract period was extended by two years to October 2017, without Cabinet approval. Finally, the borrowing and insurance cost of the project was grossly understated by Rs. 265 million and Rs. 682 million, respectively.

The 2017 Annual Report reiterated these concerns [5]. There was an additional delay of over 200 days as work was not completed even at 31 May 2018. With the tower being declared open only in September 2019, we are all aware that the delay was even greater. The demurrage of $ 10.43 million for this said delay had not been recovered at the point of publication of the Annual Report. Additionally, Cabinet approval had not been obtained to lease the Lotus Tower to a property management company or to construct a vehicle car park with an investment of Rs. 4 billion.

The Special Audit Report

In addition to the accounts included in their annual reports, the AG’s Department completed a special audit of Colombo Lotus Tower.

To give you a few of the key highlights; the issues brought up in the annual reports were expounded on in hair-raising detail, but there were also other major points of concern. For the sake of brevity, some of the key conclusions drawn in the Special Audit Report are listed below.

• There was no feasibility study done for this project, and a project proposal was unavailable

• The non-transferral of land from the Urban Development Authority and delays in construction has cost the Government an estimated Rs. 5.4 billion in revenue

• A 200-day contractual limit on the recovery of liquidated damages from the contractor means that it is unlikely that costs incurred due to delays will ever be recovered

How do we action these reports?

It is clear that the accountability mechanisms in government are able to adequately assess and evaluate government spending in its various forms. The issue lies in that there does not seem to be any follow-up action. For instance, in 2016, COPE raised issue with the lack of an internal audit of the Lotus Tower, and a directive was given for the Chief Accounting Officer to present a report on this, which never materialised.

Opening COPE and COPA to the media brought with it greater public scrutiny and accountability. Increased publicity to the reports published by the AG’s Department could be a starting point. Should there be a stronger link between the AG, COPE, COPA, and entities which can hold the Government to account, possibly the Bribery Commission and the AG’s Office?

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Economic freedom in free fall

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

Sri Lanka’s sharp drop in 2019 index should worry us all

This year’s report on the Economic Freedom of the World is out, and Sri Lanka is ranked 104th out of 162 countries.

This index of economic freedom is compiled on a yearly basis by the Fraser Institute, measuring the degree to which the policies and institutions in a country facilitate and support economic freedom.

The report quantifies economic freedom by looking at five key components which uphold personal choice, voluntary exchange, freedom to enter markets and compete, and the security of the person and private property. The five key components measured are the size of the government, legal systems and property rights, sound money, freedom to trade internationally, and levels of regulation.

Economic freedom, as measured in this index, is rooted in the concept of self-ownership, or whether individuals have the right to choose. In other words, the index can be thought of as a measure of the extent to which scarce resources are allocated by individual choices and free markets, as opposed to central government planning.

Does this index matter?

The value of this index lies in the impact economic freedom has on the lived experiences of people. Greater economic freedom has been linked to improved performance on indicators of human wellbeing, with freer countries reporting higher levels of income, happiness, and life expectancy. When looking at the dataset for the time period of 1995 to 2017, the report indicates that countries which rank highly on the Economic Freedom Index also rank highly on key indicators of human progress.

For instance, countries categorised as “most free” had an average per capita GDP of $ 36,770 in 2017, compared to $ 6,140 for those ranked as “least free”. Interestingly, the average income of the poorest 10% in the most economically free nations is two-thirds higher than the average per capita income in the least free nations. Countries that are highly ranked on economic freedom also have lower infant mortality and higher life expectancy. They also perform better on civil and political freedoms and enjoy greater gender equality.

These may appear to be rather sweeping statements – a concern echoed in the report. While the authors are hesitant to imply a direct causal relationship between economic freedom and these variables, they do acknowledge that it is possible that the factors that contribute to higher economic freedom also contribute to increased political and civil freedoms. Higher incomes could also result in greater investment in citizens, which is reflected in lower rates of infant mortality and higher life expectancy.

How has Sri Lanka performed?

Sri Lanka ranks 104th out of 162 countries for 2017 data. This is a drop from our previous position where we were ranked 90th in 2015. On the size of government, a component that focuses on lower levels of government spending, lower marginal tax rates, and limited state ownership of assets, we have barely improved with a rating of 7.63 (out of 10), compared to our rating of 7.62 in 2015. Given Sri Lanka’s expansive public sector and innumerous state-owned enterprises, perhaps this is to be expected. On legal systems, emphasis is placed on the protection of persons and their property and whether the rule of law, security of property rights, and an independent judiciary are present.

Here, Sri Lanka’s rating is a low 4.91, and looking at sub-indicators, we have performed poorly on impartiality of courts and legal enforcement of contracts.

On sound money, we fare comparatively better, with a rating of 7.58 and strong performance on sub-indicators of money growth and inflation. Unsurprisingly, our rating for freedom to trade internationally is 5.83, with low ratings on the sub-indicators for movement of capital and people, capital controls, and freedom of foreigners to visit. In comparison, we have a rather average rating on regulation, with 6.91 being a slight increase from 2015. While we perform well on most sub-indicators, hiring and firing regulations, administrative requirements, and bribes are low performers.

Looking forward

Sri Lanka’s drop in this index should be a cause for concern. Strong institutions form the foundation of meaningful economic growth; they are less vulnerable to political capture and ensure long-term protection of basic rights and freedoms. Presidential hopefuls have been quite vocal on the topic of economic growth and prosperity. However, if the kind of growth that is being envisioned is to become a reality, the country needs to shift trajectory. We need to put in place structural reform that will strengthen the independence of our judiciary, address the corruption that plagues our public sector, and rationalise the Government’s approach to economic policy.

ඩොලර් මිලියන 480ක එම්.සී.සී ප්‍රධානය ප්‍රතික්ෂේප කිරීමට තරම් සාධනීය හේතුවක් නොමැත

Originally appeared on Citizen.lk

එම්.සී.සී. ප්‍රදානය පිළිබඳ තීරණය කැබිනට් මණ්ඩලය විසින් ප්‍රමාද කළහොත් ප්‍රවාහන යටිතල පහසුකම් සංවර්ධනය කිරීම සහ ඉඩම් කළමනාකරණය වැඩිදියුණු කිරීම සඳහා ශ්‍රී ලංකාවට  ලැබීමට නියමිත පොලී රහිත ආධාර අහිමි විය හැකිය.

වැරදි තොරතුරු ප්‍රචාරය කරන්නන්ගේ උත්සහයන් සහ පාලක ‘සභාගය’ අතර දේශපාලන වෙනස්කම් හේතුවෙන් ශ්‍රී ලංකාවට ඇමරිකානු ඩොලර් මිලියන 480 ක මිලේනියම් චැලෙන්ජ් කෝපරේෂන් (එම්සීසී.) ප්‍රදානයක් අහිමි වීමේ අවදානමක් ඇත. එම්.සී.සී. ප්‍රදානය, ශ්‍රී ලංකාවට මෙතෙක් තනි මූලාශ්‍රයකින් සැපයෙන විශාලතම ප්‍රදානය වන අතර රටේ ආර්ථික වර්ධනයට ඇති සමහර සංරෝධකයන් නිරාකරණය කිරීමට වටිනා අවස්ථාවක් ලබා දේ.

ශ්‍රී ලංකා රජය විසින් ඉදිරිපත් කරන ලද යෝජනාවකට ප්‍රතිචාරයක් ලෙස මෙම ප්‍රදානය පිරිනැමීමට නියමිතව  තිබියදීත්, පවතින දේශපාලනික දුෂ්කෘතිය හේතුවෙන් රජය අවසන් ගිවිසුමට අත්සන් කිරීමට අපොහොසත් වී තිබේ. කැබිනට් අනුමැතිය නොලැබුනේ නම් සහ සැප්තැම්බර් 18 වන දින එම්.සී.සී. මණ්ඩල රැස්වීමට පෙර එකගතාවය අත්සන් කිරීමට අපොහොසත් වුවහොත් ශ්‍රී ලංකාවට මෙම ප්‍රදානය අහිමිවීමේ අවදානමට ලක්ව ඇත.

එම්සීසී එකගතාවය යනු කුමක්ද?

එම්සීසී එකගතාවය යනු එක්සත් ජනපද රජයේ විදේශ ආධාර ඒජන්සියක් වන මිලේනියම් චැලෙන්ජ් කෝපරේෂන් විසින් අරමුදල් සපයනු ලබන ප්‍රදානයකි. එක්සත් ජනපද රාජ්‍ය දෙපාර්තමේන්තුවේ සහ එක්සත් ජනපද භාණ්ඩාගාරයේ ප්‍රධානීන් එහි අධ්‍යක්ෂ මණ්ඩලයේ සිටියද, එම්.සී.සී. ස්වාධීනව වෙනම ආයතනයක් ලෙස ක්‍රියාත්මක වේ. යහපාලනය සඳහා කැපවීම, සෞඛ්‍ය සේවා, අධ්‍යාපනය සහ ආර්ථික නිදහස සඳහා ආයෝජනය කිරීම ඇතුළු විවිධ නිර්ණායකයන් මත රටවල් තෝරා ගැනීම සඳහා ආධාර ඒජන්සිය තරඟකාරී ක්‍රියාවලියක් භාවිතා කරයි. සුදුසුකම් ලත් රටවල්, ලෝක බැංකුවේ වර්ගීකරණයට අනුව ඉහළ මධ්‍යම ආදායම් ලබන රටවල් වලට පමණක් සීමා වේ.

2017 දී ශ්‍රී ලංකා රජය විසින් ඉදිරිපත් කරන ලද යෝජනාවකට ප්‍රතිචාර වශයෙන් ශ්‍රී ලංකාවට වසර 5 ක ඇමරිකානු ඩොලර් මිලියන 480ක් ප්‍රදානය කර තිබේ. තෝරාගත් රටවල් ආර්ථික වර්ධනය සඳහා ඇති බාධක හඳුනා ගැනීම සඳහා සංරෝධක විශ්ලේෂණ අධ්‍යයනයකට යටත් කෙරේ. ශ්‍රී ලංකාවේ අධ්‍යයනය මෙහෙයවනු ලැබුවේ හාවඩ් විශ්ව විද්‍යාලයේ ජාත්‍යන්තර සංවර්ධනය පිළිබඳ මධ්‍යස්ථානයේ සහ එම්.සී.සී හි සහය ඇතිව ශ්‍රී ලංකා රජය විසිනි. 

හඳුනාගත් සංරෝධක මත පදනම්ව, සංයුක්තය සිය අරමුදල් මගින් වර්ධනය සඳහා වන තීරණාත්මක බාධක දෙකක් විසඳීමට උත්සාහ කරයි: (1) ප්‍රමාණවත් නොවන ප්‍රවාහන යටිතල පහසුකම් සහ සැලසුම්; සහ (2) කෘෂිකර්මාන්තය, සේවා අංශය සහ කාර්මික ආයෝජකයින් සඳහා ඉඩම් සඳහා ප්‍රවේශය නොමැතිකම. 

ප්‍රවාහන ව්‍යාපෘතිය මගින් කොළඹ අගනගරයේ බස් පද්ධති නවීකරණය කිරීමට සහ වඩා හොඳ රථවාහන කළමනාකරණයක් තුළින් මාර්ග ජාලවල කාර්යක්ෂමතාව ඉහළ නැංවීමට අපේක්ෂා කරයි. ප්‍රවාහන වියදම් අඩු කිරීමට සහ රටේ මධ්‍යම කලාපය සහ දිවයිනේ සෙසු ප්‍රදේශවල වරාය සහ වෙළඳපොළවල් අතර සංචලතාව ඉහළ නැංවීමටද මෙම ව්‍යාපෘතිය මඟින් කටයුතු කරයි. ඉඩම් ව්‍යාපෘතිය ඉඩම් සඳහා ප්‍රවේශය වැඩි දියුණු කිරීමට සහ ඉඩම් තක්සේරුකරණ පද්ධති වැඩිදියුණු කිරීමට උත්සාහ කරයි. ජාතික ඔප්පු ලේඛනය ඩිජිටල්කරණය කිරීම සහ රටේ ඉඩම්වල නෛතික පාලනය ශක්තිමත් කිරීම කෙරෙහි ද මෙම ව්‍යාපෘතිය අවධානය යොමු කරනු ඇත.

විරෝධතාවයේ ස්වභාවය

ගිවිසුමට එරෙහි විරෝධතාවය වැඩි වශයෙන් කේන්ද්‍රගත වී ඇත්තේ බාහිර භූදේශපාලනික අභිප්‍රායන් පිළිබඳ  සහ ශ්‍රී ලංකාවේ ජාතික ස්වෛරීභාවයට ඇති තර්ජන කෙරෙහි පවතින බිය මතය. එම්.සී.සී පිළිබඳ අතිශයෝක්තිය, අත්පත් කර ගැනීම සහ හරස් සේවා ගිවිසුම (ඒසීඑස්ඒ) සහ බලකායන් ස්ථානගත කිරීමේ ගිවිසුම  (සෝෆා) අළුත් කිරීම සම්බන්ධ කතිකාව සමඟ ද බැඳී පවතියි. කෙසේ වෙතත්, එම්.සී.සී. ස්වාධීන සංවර්ධන නියෝජිතායතනයක් බවත්, ශ්‍රී ලංකා සංයුක්තය මිලිටරි ගිවිසුම් හා සම්බන්ධ නැති බවත් එම්.සී.සී ප්‍රකාශක වරුන් විසින් පැහැදිලිවම තහවුරු කර ඇත. ශ්‍රී ලංකා සංයුක්තයට ඔවුන් අතර ඇති සම්බන්ධතාවය අවම කිරීම සඳහා එක්සත් ජනපද රජය විසින් මෙම මිලිටරි ගිවිසුම් දෙක එතැන් සිට අත්හිටුවා ඇත.1

මෙම ව්‍යාපෘති හරහා එක්සත් ජනපද රජයට ඉඩම් අත්පත් කර ගැනීම සහ ශ්‍රී ලංකා භූමිය තුළ හමුදා කඳවුරු ඉදිකිරීම සඳහා වන රහසිගත මෙහෙයුම් පිළිබඳව ද බියක් මතු වී ඇති අතර, ඉදිරි මැතිවරණයට පෙර එකගතාවය අනුමත කිරීමට කැබිනට් මණ්ඩලයේ කැමැත්තට එය බාධාවක් වී ඇත. ඉඩම් ව්‍යාපෘතිය පිළිබඳ ප්‍රසිද්ධියේ ලබා ගත හැකි තොරතුරු වලට අනුව (එය මුළු ප්‍රදාන අයවැයෙන් 14% ක් පමණක් නියෝජනය කරයි), විධිනියෝගය අපේක්ෂා කරන්නේ හුදෙක් රජයේ පරිපාලන ධාරිතාවය ශක්තිමත් කිරීමට සහ තාක්‍ෂණික වැඩිදියුණු කිරීම්වලට සහාය වීමට ය. ප්‍රදානයේ විශාල කොටස (ඇමරිකානු ඩොලර් මිලියන 350 ක ප්‍රවාහන ව්‍යාපෘතිය) පොදු ප්‍රවාහන යටිතල පහසුකම්1 ප්‍රශස්තීකරණය කෙරෙහි අවධානය යොමු කර ඇත. මෙම ව්‍යාපෘති ශ්‍රී ලංකා රජය විසින් ක්‍රියාත්මක කිරීමට නියමිතය. මතු වී ඇති බිය පිළිබඳ කිසිදු යථාර්ථික පදනමක් ඇති බවක් නොපෙනේ.

රට මැතිවරණයකට ආසන්න බැවින්, නව ජනවරමක් ඇති ජනාධිපතිවරයෙකුට එම්.සී.සී. පිළිබඳ අවසන් තීරණය ගැනීමට ඉඩ දිය යුතුය යන තර්කය නිසැකවම යෝග්‍ය වේ. නමුත් සැප්තැම්බර් කාලසීමාව අනුව, මෙය ශ්‍රී ලංකාවට බලා සිටීමට කාලයක් නොමැති විය හැක.

බලය පවරන එක්සත් ජනපද ප්‍රඥප්තිය විසින් සංවර්ධන ව්‍යාපෘති1 සඳහා අඩු ආදායම්ලාභී සහ පහළ මධ්‍යම ආදායම් ලබන රටවලට අරමුදල් සැපයීමට පමණක් ඉඩ දී ඇති අතර, ශ්‍රී ලංකාව ඉහළ මධ්‍යම ආදායම් ලබන රටක් බවට පරිවර්තනය වී ඇති හෙයින් මෙම ඒම්.සී.සී ප්‍රදානය ප්‍රාග්ධනීකරණය කරගැනීමට ඇති අවස්ථාව අහිමි වී යා හැකිය. එම්.සී.සී. සැප්තැම්බර් මාසයේ දී මණ්ඩලය රැස්වූ විට, ඉහළ මධ්‍යම ආදායම් ලබන රටක් ලෙස රට වර්ගීකරණය කිරීමේ පදනම මත ප්‍රදානය සඳහා ශ්‍රී ලංකාව නුසුදුසු යැයි කල්පනය කළ හැකි බවට ඒම්.සී.සී.ය  ශ්‍රී ලංකා රජයට දැනුම් දී තිබේ.

මෙම කාලසීමාව සැලකිල්ලට ගෙන, සැප්තැම්බර් 18 වන දින මණ්ඩල රැස්වීමට පෙර කැබිනට් මණ්ඩලය විසින් ප්‍රදානය පිළිබඳ අවසන් කැඳවීමක් කිරීම හදිසි කාරණයකි.

අපට එය අවශ්‍ය වන්නේ ඇයි?

පසුගිය දශකය තුළ ශ්‍රී ලංකාවේ සංවර්ධනයට බොහෝ සෙයින් ධාවක වී ඇත්තේ රජය විසින් විශාල ලෙස වියදම් කිරීමෙනි. කෙසේ වෙතත්, දුර්වල බදු ආදායම (2018 දී දළ දේශීය නිෂ්පාදිතයෙන් 11.8%), ඉහළ අයවැය හිඟයන් (2018 දී දළ දේශීය නිෂ්පාදිතයෙන් 5.3%1) සහ දැවැන්ත ණය (සමස්ත රජයේ ණය 2018 දී දළ දේශීය නිෂ්පාදිතයෙන් 82.8% ක්2 විය) සමඟ වර්ධනය සඳහා රජයේ වියදම් මත දිගින් දිගටම යැපීම තිරසාර නොවන තත්වයට පත්වී තිබේ. ශ්‍රී ලංකාවේ මූල්‍ය මූලාශ්‍ර අතළොස්සක් වෙතින් ඉහළ ණය සංකේන්ද්‍රණයක් පැවතීම හේතුවෙන් බාහිර කම්පන සහ දුර්වල ජාතික සාර්ව ආර්ථික කළමනාකරණයට සහජයෙන්ම අවදානමට ලක්ව ඇත. 2018 දී, ශ්‍රී ලංකාවේ ණය ගැනීම් වලින් අඩක් පමණ පෞද්ගලික ප්‍රාග්ධන වෙළඳපොළවලින් ලබා ගත් අතර, 2018 දී ලබා ගත් මුළු ණය වලින් තුනෙන් එකක් පමණ චීනයෙන් පැමිණේ1. මෙය ශ්‍රී ලංකාවේ ආර්ථික වර්ධනය සහ විදේශ ප්‍රතිපත්ති ස්ථාවරය යන දෙකටම දැඩි අස්ථායී ඇඟවීම් දක්වයි. 

එම්.සී.සී. ප්‍රදානයට මෙම ගැටළු දෙකටම විසඳුම් සැපයිය හැකිය. ව්‍යාපෘති ක්‍රියාත්මක කිරීම, සංවර්ධන මූල්‍ය ප්‍රභවයන් විවිධාංගීකරණය කරන අතරම ඉඩම් පරිපාලනය සහ අභ්‍යන්තර සංචලතා විකල්පයන් වැඩිදියුණු කිරීම සඳහා අත්‍යවශ්‍ය යටිතල පහසුකම් නිර්මාණය කරයි. අසමාන සංවර්ධනය හා අවුල් සහගත ඉඩම් පරිපාලනය ශ්‍රී ලංකාවේ ආර්ථික වර්ධනය පවත්වාගෙන යාමට විශාල බාධාවක් වී තිබේ.

අවසන් පිරිවැය-ප්‍රතිලාභ විශ්ලේෂණයේ දී සහ ප්‍රසිද්ධියේ ලබා ගත හැකි තොරතුරු මත පදනම්ව, සංයුක්තය ආකර්ශනීය සංවර්ධන අවස්ථාවක් ඉදිරිපත් කරන බව පෙනේ. එම්.සී.සී. යනු ප්‍රදානයක් මිස ණයක් නොවන අතර එබැවින් ආපසු ගෙවීම අවශ්‍ය නොවන බව සැලකිල්ලට ගැනීම වැදගත්ය. නියමිත වේලාවට එකගතාවය අත්සන් කිරීමට රජය අපොහොසත් වුවහොත් සහ ව්‍යාපෘති තනියෙන් කිරීමට ගැනීමට උත්සාහ කරන්නේ නම්, එයට අවශ්‍ය අරමුදල් වෙනත් බාහිර ප්‍රභවයකින් ණයට ගැනීම අවශ්‍ය වේ. 

මේ වසර මුලදී රජය විසින් ඇමරිකානු ඩොලර් බිලියන 1 ක ජාත්‍යන්තර බැඳුම්කර වාර්ෂිකව 6.85% ක පොලී අනුපාතයකට නිකුත් කරන ලදී. අනාගත ණය ගැනීම් මෙයට සමාන තත්වයන් යටතේ සිදුවෙතැයි අපට උපකල්පනය කල හැක. මෙයින් අදහස් කරන්නේ රජය ණය මුදල ආපසු ගෙවීම පමණක් නොව, ශ්‍රී ලංකාවේ දැනටමත් වර්ධනය වෙමින් පවතින ණය තත්ත්වය වැඩි කරමින් ඒ සඳහා සැලකිය යුතු පොලියක් ද ගෙවීමට සිදුවන බවයි.

ප්‍රදානයට එරෙහිව තර්ක කිරීමට බලාපොරොත්තු වන්නන්, ඔවුන්ගේ තර්ක අප විසින් බැරෑරුම් ලෙස සැලකිය යුතු යයි සිතනවා නම් අදාළ ලියකියවිලි කියවා බලා නිසි සාක්ෂි සැපයිය යුතුය. මෙම අවස්ථාවෙහිදී, රජය විසින් සැප්තැම්බර් 18 ට පෙර එකගතාවය අත්සන් නොකිරීමට තීරණය කරන්නේ නම්, එය ජාතික ණය බර වැඩි කිරීමට මෙන්ම අත්‍යවශ්‍ය සංවර්ධනය ප්‍රමාද කිරීම තෝරා ගැනීමේ අවදානම දරා සිටී. එවැනි තේරීමක් පදනම් විය යුත්තේ හොඳ තර්කනයන් සහ සාක්ෂි මත ය. එය පුද්ගල ගැටුම්, නිරර්ථක බිය පතුවන්නන් හෝ සුළු දේශපාලනය නිසාවෙන්  නොවිය යුතුය.

View this article in English here.

No good reason to back out of the $480 million MCC grant

Originally published in the Daily FT, Daily News, Sunday Observer, Colombo Telegraph and Economy Next

Sri Lanka could lose out on interest-free aid to develop transportation infrastructure and improve land management, if the Cabinet delays decision on the MCC grant.  

Sri Lanka is at risk of losing a US $480 million Millennium Challenge Corporation (MCC) grant due to a campaign of misinformation and political differences among the ruling ‘coalition’. The MCC grant represents the largest grant from a single source Sri Lanka has ever received and presents a valuable opportunity to fix some of the country’s constraints to economic growth.  

Despite the fact that this grant is being offered as a response to a proposal submitted by the Sri Lankan Government, rampant political dysfunction has resulted in the Government failing to sign the final agreement. Sri Lanka is now at risk of losing the grant, if it does not receive Cabinet approval and fails to sign the agreement prior to the September 18th MCC Board meeting.

What is the MCC Compact?

The MCC Compact is a grant funded by the Millennium Challenge Corporation, a foreign assistance agency of the U.S. Government. Although heads of the U.S. State Department and U.S. Treasury sits on its board, the MCC operates independently as a separate entity. The aid agency uses a competitive process to select countries on a variety of criteria that include a commitment to good governance, investing in healthcare, education and economic freedom [1] . The pool of eligible countries is also limited to those falling under the threshold for the World Bank’s classification for upper-middle income countries.

Sri Lanka has been awarded a $ 480 million five-year Compact in response to a proposal submitted by the Sri Lankan Government in 2017. Selected countries then go through a constraints analysis study to identify the bottlenecks for economic growth. Sri Lanka’s study was led by the Sri Lankan Government with the assistance of Harvard University’s Centre for International Development and the MCC.  

Based on the constraints identified, the Compact seeks to address two critical impediments to growth through its funding: (1) inadequate transport logistics infrastructure and planning; and (2) lack of access to land for agriculture, the services sector, and industrial investors. 

The Transport Project seeks to modernise bus systems in the Colombo Metropolitan Region and optimise efficiency of road networks through better traffic management. The project will also work to reduce transport costs and increase mobility between the central region of the country, and ports and markets in the rest of the country. The Land Project seeks to improve access to land, and improve land valuation systems. The project will also focus on digitising the national deeds registry and strengthening legal governance of land in the country. 

The nature of opposition 

Much of the opposition towards the agreement has centred on fears about ulterior geopolitical motives and threats to Sri Lanka’s national sovereignty. Hype surrounding the MCC has also become intertwined with discourse surrounding the renewal of the Acquisition and Cross Servicing Agreement (ACSA) and the Status of Forces Agreement (SOFA). However, MCC spokespersons have categorically confirmed that the MCC is an independent development agency and the Sri Lanka Compact is not linked the military agreements. These two military agreements have since been placed on hold by the U.S. Government to mitigate concerns about their connection to the Sri Lanka Compact. 

Fears have also been raised about covert operations for the U.S. government to acquire land and build military bases on Sri Lankan territory through the projects, hindering the willingness of Cabinet to approve the agreement prior to the upcoming elections. According to publicly available details on the Land Project (which represents only 14% of the total grant budget), the mandate seeks to merely strengthen government administration capacity and assist with technological improvements. The larger part of the Compact (the USD 350 million Transport Project), is focused on optimising public transportation infrastructure.  The projects are to be implemented by the Sri Lankan government. The fears raised don’t seem to have any basis in reality.

There is certainly merit to the argument that given the country is so close to an election, a President with a fresh mandate should be allowed to make the final decision on the MCC. Yet given the September deadline, this may not be a luxury that Sri Lanka has.  

The authorizing U.S. statute only allows the MCC to fund low income and lower-middle income countries for development projects, and as Sri Lanka has transitioned into an upper-middle-income country, its window of opportunity to capitalise on the MCC could be closing. The MCC has communicated to the Sri Lankan Government that there is a possibility that when the Board meets in September, Sri Lanka may be deemed ineligible for the grant on the basis of the country’s classification as an upper-middle income country.

Given this looming deadline, it is a matter of urgency that the Cabinet makes a final call on the grant before the September 18th Board meeting. 

Why do we need it?

Much of Sri Lanka’s development over the last decade has been driven by high levels of government spending. However, with weak tax revenues (11.8% of GDP in 2018), high budget deficits (5.3% of GDP in 2018) and enormous debt (total government debt was 82.8% of GDP in 2018), it has become unsustainable to continue relying on government spending to drive growth. Sri Lanka’s high concentration of borrowing from a handful of financing sources, has also made it inherently vulnerable to external shocks and poor national macroeconomic management. In 2018, approximately half of Sri Lanka’s borrowing was from private capital markets, with nearly a third of total borrowing in 2018 coming from China. This has severely destabilising implications for both Sri Lanka’s economic growth and it’s foreign policy position.  

The MCC Compact could go a long way in addressing both of these issues. Implementation of the projects would diversify sources of development finance while creating essential infrastructure to improve land administration and internal mobility options. Uneven development and chaotic land administration have become major obstacles to Sri Lanka’s sustenance of economic growth.

In the final cost-benefit analysis, and based on the publicly available information, the compact seems to present an attractive development opportunity. It is important to note that the MCC compact is a grant, not a loan and therefore is not required to be repaid. In the event that Government fails to sign the agreement in time and seeks to undertake the projects on its own accord, it would need to borrow the funds from another external source. 

Earlier this year the government issued international bonds of US$1bn at an annual interest rate of 6.85%. It would be safe to assume that future borrowings are likely to reflect similar conditions. This means that the Government would not just be paying back the loan amount, but also a significant amount of interest on top of it - adding to Sri Lanka’s already debilitating debt status. 

Those who wish to argue against the compact need to refer to the relevant documents and provide evidence if their case is to be taken seriously. At this stage, if the Government chooses not to sign the agreement prior to September 18th, it runs the risk of choosing to increase the national debt burden as well as delay essential development.  Such a choice should be based on sound reasoning and evidence. It shouldn’t be due to personality conflicts, absurd fear mongering or petty politics.

View this article in Sinhala here.

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[1] Congressional Research Service (2018). Millennium Challenge Corporation.

[2] Wettasinghe, C (2019). ‘Sri Lanka at risk of losing US$480mn Millennium Challenge grant’. Economy Next [Online, accessed 30 Aug. 2019]

[3] Ibid

[4] Congressional Notification (2019). Millennium Challenge Corporation. April 25. [Online, accessed 30 Aug. 2019]

[5] Principles into Practice: Country Selectivity (2014). Millennium Challenge Corporation. [Online, accessed 30 Aug. 2019]

[6] Ministry of Finance, Sri Lanka (2019). Annual Report 2018. [Online, accessed 29 Aug. 2019]

[7] Ibid

[8] Ibid

[9] Wignaraja, G (2019). ‘Making the MCC Compact Work for Sri Lanka’. Lakshman Kadirgamar Institute. 16 August. [Online, accessed 30 Aug. 2019]

[10] Aneez, S & Fioretti, J (2019). ‘UPDATE 4-Sri Lanka raises $2.4 bln in dollar bond sale - term sheet’. Reuters. March 7. [Online, accessed 30 Aug. 2019]

Officially ‘upper-middle income’ - Now what?

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

Sri Lanka is now an upper-middle-income country, with a per capita gross national income (GNI) that surpasses that of regional competitors like Indonesia and Vietnam. The threshold for eligibility as an upper-middle-income country is a per capita GNI of $ 3,996, and as at July 2019, Sri Lanka crossed that threshold with a per capita GNI of $ 4,060. While this appears to be a positive development, it should be taken in context. The eligibility criteria to be classed as an upper-middle-income country begin at $ 3,996 per capita GNI; however, all countries within the range of $ 3,996-$ 12,375 per capita GNI are categorised as upper-middle income. It’s glaringly obvious that we just about made the cut, and if we are to see the kind of growth and economic prosperity associated with upper-middle-income countries, we have a long way to go.

Middle-income trap

The fear is that the growth required to push our per capita GNI up by roughly another $ 8,000 will be elusive – the notorious “middle-income trap” could possibly impede upward mobility and economic prosperity. As a country leaves its demographic dividend, economic growth tends to slow. The growth that is seen in most developing countries is created by the shifting of labour from low-productive employment like agriculture to more productive sectors such as manufacturing. However, this is not a source of long-term growth. As labour flows into manufacturing, real wages will rise and productivity gains will reduce. As a result, a developing country will be unable to compete internationally with labour-intensive manufacturing. Low-productivity also means that competing with higher value-added goods will also be challenging.

The World Bank’s case study of the Middle East and North Africa (MENA) region and the challenges they face have some parallels with the Sri Lankan situation. The World Bank highlights the damage caused to the economy by a social contract where the state is expected to provide jobs in government and hand out universal subsidies, in exchange for a lack of accountability. The result is that entrepreneurship and innovation are stifled, public service delivery is poor, and there is widespread mistrust of the government. In addition, considerable debt burdens are forcing governments to cut public spending, which has long been the main driver of growth in the region.

The situation in Sri Lanka is quite similar. While we are now an upper-middle-income country, the description of the public service in MENA regions is apt, and could very easily describe the government service in Sri Lanka. As each election cycle begins, the incumbent government doles out an additional few thousand jobs, while the opposition promises to give more jobs and better wages in the government sector if they are voted in. A rigid labour market, where innovation is not encouraged, and productivity is not rewarded is just one factor that is likely to hold us back.

Maneuvering the minefield

The general solution presented is that middle-income countries need to shift gears – policy decisions now need to be taken with the objective of moving into a high-income country classification. Focusing on innovation, a strong export base, and creating decent jobs are just a few policy solutions that are presented on the topic. While this is challenging, our newfound title is also an indicator of the potential in the country. With the right policies in place, there is a lot that can be achieved, and with presidential elections coming up, now is the ideal time to bring up this topic of policy reform.

While the middle-income trap is a pervasive problem in the region, there are success stories of countries that have “escaped” the trap. The Asian Development Bank (ADB) has identified some common economic factors that these success-story countries have in common. The four key factors identified are as follows: (i) the country had a rapid transition from agriculture to industry, (ii) higher export shares, (iii) lower inflation, and (iv) decreases in inequality and dependency ratios. The ADB has also found that when looking at the drivers of growth for upper-middle-income countries, total factor productivity should not be underestimated – in other words, education, research and innovation, and structural reforms are vital.

Realising potential

Transforming the Sri Lankan economy will require a drastic shift in mentality. As a small island nation of only 21 million people, we need to open our borders for free movement of labour, technology, and investment. Sri Lankans require a shift in mindset, where the gains of free trade and integration into global value chains are not summarily dismissed. The risks of these actions are often over-exaggerated, or given sole focus, feeding into a larger protectionist mindset.

The positive is that Sri Lanka now has an idea of the challenges that lie ahead, and key policy reforms which would set the stage for the kind of economic growth that we aspire for. The hurdle lies in implementation. With presidential elections coming up, there is scope and policy room for new reforms to be brought in, and ideally, these reforms should be tailored to achieve the four success-story characteristics – a shift away from agriculture, a focus on exports, low inflation, and decreases in inequality and dependency ratios.

The Millennium Challenge Corporation Compact Addressing constraints to growth

Originally published in Daily News

By Ravi Ratnasabapathy

On April 25, 2019, the board of the MCC (Millennium Challenge Corporation) approved a Sri Lanka Compact - a five-year, US $480 million grant. The grant seeks to assist the Government to address two of the country’s binding constraints to economic growth:

1. inadequate transport logistics infrastructure and planning; and

2. lack of access to land for agriculture, the services sector, and industrial investors.

Controversy has surrounded foreign loans taken by the government, which now faces difficulty in repaying them. The MCC compact, however, is a grant, so it does not need to be repaid which is a plus.

What does the MCC Compact involve?

The idea is to stimulate growth by addressing two critical areas that are constraining it. The two areas were identified by a study conducted by the Center for International Development at Harvard University. The study which took almost a year was conducted throughout 2016 and based on “Growth Diagnostics” a methodology developed by Ricardo Hausmann, Dani Rodrik and Andrés Velasco to determine the obstacles to a country’s capacity to grow.

“The main idea is that each country may be bumping against different potential constraints but each constellation of constraints must be giving off a different collection of symptoms or signals. By using Growth Diagnostics, policymakers can develop a clearer theory of change by designing policies that can take the country out of (or workaround) its current syndrome and relax its most binding constraints.” (Harvard CID)

High levels of government spending have helped drive growth over the past decade- services comprise 62% of GDP and are dominated by government spending. Manufacturing makes up only 29% of GDP and agriculture makes up the rest. It is not feasible to rely on government spending to drive growth any longer because:

• Tax revenues are very weak (only 11.9% of GDP in 2018)

• Budget deficits are high (5.3% of GDP in 2018) and

• Debt is high (central government debt was 82.9% of GDP in 2018)

If government spending is to increase (eg: by hiring new people to the public service or embarking on infrastructure spending) it requires either increased tax revenues or increased debt. The current regime has increased taxes across the board (VAT, PAL, income tax etc.,) to try and increase government revenue. Naturally, this has proved highly unpopular. If tax revenues are not available the government can borrow and spend, but with debt levels already high this is not an option either. People must also understand that debt is not “free” money – it must be repaid-out of future taxes. In effect debt is simply taxation postponed - we can spend today but taxes must go up tomorrow to repay the debt.

Simply put, the current basis of growth, driven by public sector spending is not sustainable. Therefore new avenues of growth must be found.

A key driver of growth in successful East Asian economies was exports. It was also an important driver of Sri Lanka’s growth in the 1980s and 1990s. Exports of manufactured goods grew very rapidly, at around 20% annually between 1976 and 1984. Following the outbreak of the civil war, growth slowed drastically during the next five years, but then accelerated to an average rate of 16% between 1989 and 2000. Since then, however, growth stagnated and exports have declined in importance. As a % of GDP exports have fallen steadily from a high of 33.3% of GDP 2000 to about 12.7% of GDP in 2016.

Export growth

One of the problems to growth in exports faced by Sri Lanka is the lack of diversification. Exports grow not only because of volumes but also because new products being added to the basket. Between 2000-2015 Sri Lanka added just 7 new products (worth US$ 0.1bn) to its export basket. In contrast, Thailand added 70 new products (worth US$ 21.8bn) and Vietnam 48 (worth US$ 50.4bn).

The possibilities of exporting related products within Sri Lanka’s existing export basket seem exhausted so completely new sectors must be attracted, which is not easy.

Reinvigorating the export sector is thus a priority. Bringing in new investment (local and foreign) to export industries, particularly in new sectors can create a new path to growth. What is holding back investment? The Harvard study identified the following:

1. policy uncertainty (especially tax and tariff policy);

2. inadequate access to land; and

3. poor transportation and logistics

The most important is policy uncertainty. As the study points out:

“policy uncertainty as it relates to taxes is characterized by an accumulation of contradictory announcements from various government officials on a range of taxes, including trade-related taxes….policy uncertainty is higher in Sri Lanka than in comparator countries and that investor optimism deteriorated as contradictory statements mounted.”

Unfortunately little can be done to address the policy uncertainty (the government needs to get its act in order) but the MCC grant addresses the other two.

As per the analysis:

“The potential new industries and services that will drive Sri Lanka’s future growth need high-quality industrial land with integrated infrastructure, including access to wastewater services, stable electricity supply and the ability to move goods reasonably quickly. Currently, such a combination (i) is hard to obtain in the congested Western province, (ii) is located in areas that are not sufficiently connected to other parts of the island, a fully-functioning port or airport, or people with adequate skills, or (iii) does not yet exist.”

Specifically with respect to land:

“Consultations with the private sector reveal that transaction costs to access industrial land are very high for domestic investors and foreign investors alike, but that domestic investors are advantaged by a more intimate knowledge of the system. The inability to secure land for planned investment activities has been the most common cause of investment plans being dropped or relocated to other countries in the last several years according to continuous consultations with the private sector by CID and government teams that it has worked alongside.”

A partial solution to this would be to develop industrial zones with adequate facilities. The country currently has 12 zones but most are already filled- itself is a testament to the problem. While more industrial zones will help, it does have the limitation that growth will tend to cluster in pockets around the zones, rather than being more widely spread.

Lack of transport infrastructure

The lack of transport infrastructure-critically access to the port and airport means that the majority of industries are crowded around the Western province.

“The Western Province also hosts the major logistics centres upon which other regions of the island are currently dependent in varying degrees. Consequently, the movement of goods and people within the province is increasingly problematic, imposing mounting costs and physical limitations on growth prospects in that part of the country. This, in turn, hurts the growth prospects for other regions to the extent that these regions depend upon access to logistic centres and markets concentrated in the Western Province.”

This leads to problems of congestion, high prices and uneven development, as other parts of the country get left behind. Building transport infrastructure to link up other parts of the country is therefore important.

“Connectivity concerns are also relevant in other regions of the country. The current state of transport infrastructure generally frustrates the development of inter-regional economic activity and arguably the suitability of locating investments outside the western region and near other concentrations of the population on the island. Economic development in other regions would help reduce the constraints that congestion (as it affects travel time costs, labour availability, and access to land) imposes upon growth in the western region as well as promote more inclusive and geographically widespread growth.”

It is also important to try and ease the congestion within the Western province by the efficient provision of public transport and improved traffic management. “Problems associated with congestion are expected to worsen with a high degree of certainty. Daily average road speeds in Sri Lanka (Colombo District) are estimated to decrease from 26 km/hour to 19 km/hour (22 km/hour to 14 km/hour) between 2011 and 2031. Peak hour speeds are forecast to be as low as 11 km/hour and 9 km/hour in Sri Lanka and Colombo District, respectively.”

The concept of evidence-based policymaking is unknown in Sri Lanka. Interventions are made overnight by politicians succumbing to pressure from special interest groups or their own whims and fancies. The MCC Compact is a result of careful analysis and addresses some important issues. The detailed studies on which it is based are available on the Harvard CID and MCC websites. It would be a pity if this were to fall victim to uninformed fear-mongering and petty politics.