Election in the time of pandemic: Electronic voting offers no solution

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

At a time when people are being urged to maintain social distance to prevent transmission of COVID-19 and elections have been announced, it is natural to think of electronic voting from remote locations as a solution. 

Many reasons exist for modernising the way votes are cast, including the enfranchisement of our expatriate workers and the speeding up of the counting of votes. But what is most attractive at this time is the possibility of eliminating the need for people to congregate and thereby increase the risk of disease propagation. 

Electronic voting machines versus electronic voting
Most prominently, India, which conducts the world’s largest election, has used electronic voting machines (EVMs) over multiple elections. EVMs automate a single component of the voting process. Voters would still have to come to designated locations and have their eligibility to vote and their identities established in conventional ways. 

EVMs can be designed to allow persons with disabilities to exercise their right to vote. They can reduce errors in tabulation and speed up the release of results, but they do not eliminate the need for people to congregate. They are also not a solution to the problem of allowing expatriate workers to vote.

Properly validated EVMs are all that are required for this particular solution. There is no requirement even for data connectivity. The EVM can store the votes and can transmit them when connectivity is available. The concern is about whether the EVMs have been manipulated and whether there is an audit trail in case questions are raised at a later time. 

There are solutions to the identified problems. But given the tendency of our political actors to raise questions about jilmart for no reason other than unhappiness with the outcome, it is best that EVMs be approached with caution with primacy being given to trust issues. 

Voting from remote locations
Electronic voting, also described as internet voting, is a more radical solution in that it changes many elements of the voting process. Here, the need to bring voters to specific locations during specific time periods is reduced and possibly eliminated. Within a defined time period (which can be much longer than the usual few hours), persons can cast their votes from wherever they are, including from foreign countries. 

The verification of eligibility and identity will no longer be done by the examination of identity cards, the reading aloud of names, the checking of lists by observers and so on. The voter will be in a distant location not under observation by any official. There would have to be fool-proof technological methods to verify eligibility and identity. 

There is a country that conducts elections using electronic voting: Estonia. I have met Estonian citizens who have voted in national elections while they were travelling in foreign lands. Electronic voting depends on two preconditions: the existence of advanced digital identity authentication systems and the ability to connect to the election system using the Internet. Estonia, one of the most advanced nations in terms of ICTs, satisfies both criteria. 

Over the years, the number of persons voting remotely in Estonia increased to the highest proportion: 44% in 2019. That means that even with the remote voting option available, more than half the voters chose to go a polling booth to exercise the franchise. Electronic voting will not easily displace conventional voting. It is wrong to think that electronic voting is a quick fix to the problem of conducting an election amid a global pandemic.

An incremental approach
But we do need to work on technological solutions to the problems faced by Sri Lankan citizens temporarily resident in foreign countries and by those within Sri Lanka who are living or working in locations other than where they are registered to vote. Trust is of paramount value. Therefore, it would be best to start small and gradually expand. 

The most logical starting point is voting for the workers registered with the Sri Lanka Bureau of Foreign Employment. They are legally required to be registered. 

When they register, it would be possible to issue a smart card that is capable of authenticating identity in a manner like in Estonia. 

Remote internet-based voting is the only fair and comprehensive solution for citizens living in foreign countries. Putting polling booths in Sri Lankan embassies is not a feasible solution, because the distances voters would have to travel to cast their vote would be enormous in many cases. 

For example, the embassy in Saudi Arabia is in Riyadh. It would take over eight hours of driving to get there from Jeddah, for example. And Saudi law does not mandate granting of leave to vote in foreign elections. 

Once remote voting using electronic means has been tried out successfully, the solution can be extended to those in government who now use postal voting, and then to private-sector employees who now have to take time off to vote and so on. 

If the internecine squabbling among Government entities that has so far stymied efforts to introduce identification and authentication services for citizens can be brought under control, the process can be fast-tracked so that all citizens can exercise the right to vote at times and from places of their choosing. But none of this will help with holding an election in April 2020.

Stop ragging our economy

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

Originally appeared on The Morning

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By Dhananath Fernando

The issue of ragging dominates national conversation every time an unfortunate incident of such a nature takes place, such as the recent incident at the University of Sri Jayewardenepura. After a few weeks pass, a new topic takes over and the former conversation dies down, but ragging as an activity continues in universities…and so does the vicious cycle.

The tragedy of ragging is that students have died – some by committing suicide and some as a result of violence that is often part of the rag – while many more live with emotional wounds that cannot be cured. These are only the known, reported cases. The damage caused by ragging is probably more far-reaching than what we could imagine. Many students continue to have mental health issues, maybe not even realising that the rag is the reason behind what they go through.

The reason behind ragging is easy to explain, and it is the same reason behind many social issues. “The system has been politicised.” Let’s take a look at this statement – what does it mean to politicise a system? At a surface level, “politicisation” means that a political party or an affiliated organisation of a political party is taking control over things. But at a deeper level, it is far beyond that.

Within the university system, there have been many attempts to prevent ragging. For a while, military training was provided by the Government for all students. There exists a separate office in most universities called the “Marshal Office” to identify students involved in ragging and to maintain university security. All solutions are completely disconnected from the actual problem; if the solutions provided worked, we would not be having this discussion.

Our university system is disconnected from our economy and does not follow any incentive structure to produce dynamic graduates who would be in demand. That is the fundamental reason behind many unnecessary activities occuring within our university system. One of the reasons Sri Lanka is viewed as an uncompetitive location to set up a business is the lack of graduates who suit the demands of the labour market. Our universities are stagnant institutes and the flow of knowledge, ideas, and culture is restricted on several levels.

It is true that we have produced great scholars, academics, and scientists, but we should not concern ourselves with the handful of those who reach the top – they are the outliers in this scenario. We should focus our attention on what happens to the rest. Sri Lankans tend to focus on these outliers and brush the majority of the students under the rug; a case in point would be the students who successfully pass their Advanced Level (A/L) exams, qualify to enter university, but are not admitted. For the 2016/2017 academic year, only 19% of the students who qualified to enter university were admitted. It’s time we shifted our focus to the source of the problem. (See table)

Ragging is just reaping what has been sowed. Flaws within the university system have provided space and opportunity for certain political forces to step in and exert their influence. Lecturers, political appointees, and policymakers have to be held responsible for this. While I clearly stand against those who are behind ragging and believe that whoever is responsible should be brought before the law, we also need to fix the system as a whole. Unless our university system is overhauled and restructured in a manner that equips students with the skills demanded by the economy and provides a qualification that translates into skills and knowledge that can be leveraged for gainful employment, we are unlikely to see a solution.

I was a member of the Students’ Council of the Faculty of Science at the University of Colombo when I was a student there. I represented the Faculty Board as the Student Representative for more than two years. The Faculty of Science was considered to produce the cream of the crop, with graduates going on to study at the best universities abroad – but the reality was far from this. The faculty was decades behind the rest of the world.

Once one of my friends compared his father’s lecture notes with the notes given by our current lecturer, and the notes were exactly the same. Either the university has been teaching a subject which has not evolved in the modern day or the lecturer has not been evolving with the subject. Can we expect innovation to take place and to produce graduates in competitive industries to compete at a global scale if this is the situation in our lecture halls? How can the Government justify its expenditure on tertiary education when it funds an archaic educational system that clearly causes harm to its students?

In the Faculty of Science at the University of Colombo, there was no re-correction system after the exam. If a mark was given by the lecturer, that was it – you could not question the marks. I have come across many instances where some lecturers deliberately gave lower marks as a result of personal biases against students. One time, one of my batchmates asked the lecturer just to re-check whether the addition of the marks was correct as he was so sure about the answers he had provided. The lecturer said: “I can do that, but I have to demote your result from a C+ to a D- even if the marks were added wrong.”

If the university system does not promote transparency, how can we expect these students to be transparent when they join the labour force?

Selecting students for a special degree is another rat race. After the first two years, based on the student’s performance, they will be eligible for a subject stream in which they can specialise. In the Faculty of Science at the University of Colombo, the chemistry special degree is considered the most prestigious. Since the number of special degree opportunities is limited, it was common for students to hide some books in the library and even tear out pages in certain valuable books to make sure no one else gets the opportunity to study what they studied.

The competition varies based on the opportunities available in main universities in America. I recall an incident hat took place when I was enrolled where the Students’ Council President received a complaint from a molecular biology student that a mathematics student had been eligible for a molecular biology special degree as per the results of the Department of Examination. To put the issue in context, this is similar to an arts A/L student being accepted to the Faculty of Medicine. The subject streams are completely different. The impact was serious. Since this is a limited opportunity, the student who was next in the list lost the chance to do the molecular biology special degree. When we took this to the Dean and the heads of the Department, you would have been surprised at the solution they provided. They increased the special degree intake by one student and allowed the mathematics student to continue doing the molecular biology degree. I can provide 100 similar examples on the backwardness of the Faculty of Science.

There is no mechanism to evaluate the lecturers, their content, and whether they teach what is required by the industry and the modern-day world. When a system is stagnant and not based on proper incentives, the connected stakeholders become slaves and victims of the same system itself. And ragging is a byproduct of an outdated, unevolved system.

Identifying the reasons for government inefficiency is not that hard; 77% of our university graduates are employed in the public sector. This goes up the hierarchy from grama sewa niladaris to secretaries to key ministries and even to the Central Bank. So the people in senior positions in government institutions are coming from a background and culture of inconvenience and a system which is stagnant.

Imagine a similar incident taking place in a private university. The chances are very low because it is a competitive system. This doesn’t mean our private universities are part of a flawless, perfect system, but undoubtedly there are lessons we can learn. If you look at some private educational institutes, the students evaluate the lecturers and there is an incentive for the lecturer based on the student’s voting. To an extent, constant upgrading of content is included in the system.

The solution for ragging is beyond implementing strict punishments. While the importance of enforcing the law and ensuring the culprits are brought to justice cannot be understated, there is more that has to be done. Sri Lanka is in dire need of a university system that promotes transparency and an incentive system that updates the curriculum content to that of our economy. Just slapping a plaster on this issue will worsen the situation.

The cost of being a Sri Lankan woman

Originally appeared on Daily FT, Economy Next

By Nishtha Chadha

This year’s International Women’s Day theme is #EachforEqual - a concept grounded in the idea of ‘Collective Individualism’. Collective Individualism is the idea that each of us is part of one whole. Our individual actions, conversations, behaviours and mindsets go beyond the confines of our individual lives, and can have a significant impact on our larger society. Collectively, we have the capacity to create a gender equal world. 

Gender equality in Sri Lanka

Sri Lanka still has a significant way to go when it comes to gender equality. The Global Gender Gap Report 2020 ranks Sri Lanka 102 out of 153 countries in the gender equality index. Women’s economic participation and opportunity, educational attainment and political empowerment are major areas of concern, and only seem to be getting worse.

In 2006, Sri Lanka ranked 13th on the same gender gap index. In other words, over the last 14 years, the country has dropped 89 places on the index. Today, women are twice as likely as men to be unemployed, and barely 9% of Sri Lankan firms have women in top managerial positions. Only 5% of Sri Lanka’s parliament is made up of female representatives. 

Gender equality is not just a women’s issue, but a business issue. The World Bank Vice President for South Asia Region, Hartwig Schafer, has stated that Sri Lanka specifically could grow its economy by as much as 20 percent in the long-run by closing its gender gap in the workforce. Increasing women’s labour force participation can improve productivity by not only adding more people to the workforce, but also by enhancing diversity of thought in the workplace. 

So, why aren’t Sri Lankan women achieving their full potential?
A recent publication by the World Bank ‘Getting to Work : Unlocking Women’s Potential in Sri Lanka’s Labor Force (Vol. 2)’, cites that cultural norms continue to be a pervasive barrier to increasing women’s labour force participation in Sri Lanka. Entrenched with gender stereotypes, these cultural norms have direct implications on women’s educational pursuits, career longevity, and ability to participate in decision-making roles. What’s important to understand about cultural norms, however, is that they do not exist in a vacuum. Gender stereotypes which limit a woman’s ability to access education and economic opportunities. 

One example of these discriminatory policies are the exorbitant taxes on menstrual hygiene products in Sri Lanka. Access to safe and affordable menstrual hygiene products remains somewhat of a luxury for many Sri Lankan women. A leading contributor to the unaffordability of these products in Sri Lanka, is the taxes levied on imported items. 

Sanitary napkins and tampons are taxed under the HS code 96190010 and the import tariff levied on these products is 52%. Until September 2018, the tax on sanitary napkins was 101.2%. The components of this structure were Gen Duty (30%) + VAT (15%) + PAL (7.5%) + NBT (2%) and CESS (30% or Rs.300/kg). In September 2018, following social media outrage against the exorbitant tax, the CESS component of this tax was repealed by the Minister of Finance. Yet, despite the removal of the CESS levy, sanitary napkins and tampons continue to remain unaffordable and out of reach for the vast majority of Sri Lankan women. 

The average woman has her period for around 5 days and will use 4 pads a day. Under the previous taxation scheme, this would cost her LKR 520 a month.  The estimated average monthly household income of the households in the poorest 20% in Sri Lanka is LKR 14,840. To these households, the monthly cost of menstrual hygiene products would therefore make up 3.5% of their expenses. In comparison, the percentage of expenditure of this income category on clothing is around 4.4%.

The impact of unaffordability

The high cost of menstrual hygiene products in Sri Lanka has direct implications on girls’ education, health and employment. 

According to a 2015 analysis of 720 adolescent girls and 282 female teachers in Kalutara district, 60% of parents refuse to send their girls to school during periods of menstruation. Moreover, in a survey of adolescent Sri Lankan girls, slightly more than a third claimed to miss school because of menstruation. When asked to explain why, 68% to 81% cited pain and physical discomfort and 23% to 40% cited fear of staining clothes. 

Inaccessibility of menstrual hygiene products also results in the use of makeshift, unhygienic replacements, which have direct implications on menstrual hygiene management (MHM). Poor MHM can result in serious reproductive tract infections. A study on cervical cancer risk factors in India, has found a direct link between the use of cloth during menstruation (a common substitute for sanitary napkins) and the development of cervical cancer; the second-most common type of cancer among Sri Lankan women today. 

The unaffordability of menstrual hygiene products is proven to have direct consequences on women’s participation in the labor force. A study on apparel sector workers in Bangladesh found that providing subsidized menstrual hygiene products resulted in a drop in absenteeism of female workers and an increase in overall productivity. 

Slashing taxes for gender equality

Internationally, repeals on menstrual hygiene product taxation are becoming increasingly common due to their proliferation of gender inequality and the resulting unaffordability of essential care items, commonly known as ‘period poverty’. Kenya was the first country to abolish sales tax for menstrual products in 2004 and countries including Australia, Canada, India, Ireland and Malaysia have all followed suit in recent years.

If Sri Lankans are serious about creating an equal platform for women and girls to achieve their full potential, ‘Collective Individualism’ is certainly the key. Gender equality can no longer be just a ‘women’s issue’. It’s an ‘everyone issue’. Each and every Sri Lankan has a responsibility to demand real action from their policymakers, to promote gender-sensitive policies and abolish taxes like this, which actively limit a woman’s ability to achieve her full potential. 

By reducing the rates of taxation, the cost of importing sanitary napkins and tampons will simultaneously decrease and stimulate competition in the industry, further driving prices down and encouraging innovation. The conventional argument in favour of import tariffs is the protection of the local industry. However, in Sri Lanka, sanitary napkin exports only contribute a mere Rs. 25.16 million, or 0.001%, to total exports. 

Increased market competition would also incentivise local manufacturers to innovate better quality products and ensure their prices remain competitive for consumers. Other common concerns pertaining to the issue of low quality products potentially flooding the Sri Lankan market if taxation is reduced are unlikely to materialise, since quality standards are already imposed by the Sri Lankan government on imported products under SLS 111.

If menstrual hygiene products are made more affordable it is likely that more Sri Lankan women will be able to uptake their use, allowing them to attend more school days, work more consistently and, by extension, access more opportunities. Moreover, with more products entering the market, women will have expanded consumer agency, allowing them to purchase products that address their specific needs without being economically burdened for it. This would remove a significant barrier to women's empowerment and create a wide-scale positive impact on closing Sri Lanka’s present gender gap. 

Gender equality can only be achieved when we begin dismantling the structures that disadvantage our most vulnerable counterparts. Abolishing Sri Lanka’s menstrual tax may just be one small step towards achieving this. The Advocata Institute has launched an online campaign titled ‘the costs of being a woman’, which highlights taxes that disproportionately affect women. With every discriminatory tax and policy that is abolished, the collective impact could be transformative. 

That is what #EachforEqual is about - sharing the responsibility to create a more equal world for each and every one of us. 

Are Sri Lanka’s women really free to work?

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

Around 20 years ago as I recollect, there was a discussion on Sri Lankan radio about whether it was fair for women to wear trousers or jeans. This was a topic of conversation that was raised at a time when a female president led the country; a country that had produced the first female Prime Minister in the world.

When I was at Colombo University, the topic “Should women wear trousers?” was assigned for a debate during the ragging period. Though we have seen some progress on this topic, the manner in which we, as a society, treat women has not changed drastically.

Walking in the shoes of women is a difficult concept to consider as a man. Today, we can see women voicing out multiple social and economic issues that they have faced. As men, we should be using our privilege to give women a wider platform and have them at the forefront in driving social and economic development.

Women in Sri Lanka are unfortunately often expected to carry the brunt of the care burden, regardless of whether they also engage in paid labour or not. However, what many do not realise is that this is a twofold struggle. Women not only have to balance all this work, but also endure the emotional toll that comes with it. Generally, they find themselves shouldering the logistical burden of co-ordinating and delegating any tasks that they do not take on themselves. This burden is already an unreasonable expectation. Women’s domestic labour should in fact be classified as an unpaid business. However, we are only adding to this problem via high tariffs on items such as LP gas cookers and washing machines. Most women are limited by their domestic labour, and the degree of freedom and choice that they have outside of this often depends completely on the affordability of tools that ease their burden.

The worrying fact is that our economic policy is what limits the freedom of women in many cases. At my previous office, my colleague used to celebrate her mother’s birthday for a week and her celebration was simple each year. She would bring home food for dinner for a week so that her mother would not have to cook dinner during that birthday week. I asked her: “How is not allowing your mom to cook for a week a treat?” She replied: “If you know how painful it is to run a kitchen every day you will realise what a good treat it is to take rest for a week.” I realised that she was absolutely right. Sri Lankan women are giving up their paid jobs in order to take on the domestic burden of their households.

It is no surprise that Sri Lanka’s female labour force participation declined from 41% to 36% from 2010 to 2016 when our economic policy is doing its part to keep women out of the labour force.

The fundamental question we have to ask here is whether our women have truly been given the freedom of choice, or whether this choice is hindered by our policy and social ecosystems. If women wish to choose a career outside of their home, do they actually have the ability to make that choice? This should be a basic right. The conversation on economic rights needs to go hand in hand with that of social rights. How have we set our economic parameters? Let’s take a look at our tariff policy and how it impacts the lives of Sri Lankan women.

High tariffs on household electronics

It was saddening to see the amount of household durables that most Sri Lankan women who work in the Middle East buy at airport duty-free shops. It is a clear indication of the high tax applied on daily household durables such as washing machines and cookers.

Are we not restricting women’s freedom by making these household durables unaffordable for them? According to data by the Department of Census and Statistics, only 20% of all Sri Lankan households use a washing machine. Washing machines might not be within budget for the rest of the 80% of households, but high tariffs are definitely a reason why the numbers of those using washing machines are so low. The time saved from washing clothes could have easily been used for paid external work, limiting the domestic burden that tends to fall on women. This same rationale applies to other household durables such as refrigerators and cookers.

High tariffs on sanitary and childcare products

Another category that is making life more difficult for a woman is unfair taxes on sanitary napkins and baby diapers. As childcare within a household generally falls on women, both of these goods are essential items that need to be purchased. Regarding taxation on sanitary napkins, Advocata’s strong punchline said it all: “‘I love having my period and paying tax on it,’ said no woman ever.” According to research by Advocata, a woman spends approximately Rs. 600 every month, and Sri Lanka has about 4.2 million menstruating women. While the tariffs on sanitary napkins have been reduced, they are still around 52%. It should not be hard for us to walk the talk of empowering women by bringing down the tariff rates on such simple matters. Can we be proud to say, as a country, that we have a 52% tariff rate on our menstruating women?

Surprisingly, baby diapers are also taxed at 52%. This is a double whammy on women. Caring for an infant requires spending a significant amount of time washing kids’ clothes and making them comfortable. Having diapers which are unaffordable is just another hindrance.

I do not have the luxury of space in this column to elaborate further on how we are making women’s basic needs expensive and limiting their freedom; we cannot be proud of the situation that the women in our country are in. They continue to be held to unreasonable expectations, including shouldering the domestic burden within a household. We need to work towards alleviating both the social and economic pressures that women are under. Women deserve the freedom of choice. Women have the ability to engage in paid work if they want to. We need to ensure that women also have an equal opportunity to choose paid work if they want to. So this will be yet another Women’s Day without true freedom for women.

Is Sri Lanka getting old before getting rich?

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

Life is often said to be a continuous battle between time, money, and energy. When we were kids, we had time and energy, but were limited by our lack of access to money. When we started working and earning money, time was difficult to find. As we walk the journey of life, we will come to a period where we may have time and money, but not energy.

Let’s apply the same variables to Sri Lanka as a country to see where we stand in terms of money, time, and energy. The picture is, unfortunately, shocking.

Our current gross domestic product (GDP) per capita is about $ 4,000. If our per capita GDP achieved a sustained growth of 4% (our 2018 economic growth is 3.2%), Sri Lanka would reach Malaysia’s current level of income per capita by 2038 and Singapore’s current level of income per capita by 2080. Even if we achieved a 6% real per capita growth, it will be 2031 before we reach Malaysia’s current level and it would take till 2060 to reach where Singapore is today. Even if we pull our act together right now, it will take close to a generation, about 30 years, to see the light at the end of the tunnel.

As a nation, we have an ageing population and 21% of our population will be over 60 in 2030. This percentage is said to increase to 28.6% by 2050. Compare that with the population over 60 in 2015 – it was just 13.9%.

If we keep political flags aside, our current mayhem is a result of bad policy choices that we have made and supported for the last 70 years. It is easy to point fingers at politicians and they surely must take accountability for their actions, but the deeper question is: Aren’t the politicians that we are electing and their policies a reflection of our choices?

The wealth of a country and its people is often considered over time. A person classified as “poor” by current standards still has a lifestyle better than an emperor would have had a few centuries ago. But this doesn’t mean the poor person is an emperor today. The world has moved in giant leaps and the real challenge is to be comparative with current standards. Unfortunately, us Sri Lankans live in a bubble of constant reflection of prosperity in past millennia and focus solely on recreating the glories of a bygone era. There is nothing wrong with tapping into knowledge in history and learning from it, but we need to recalibrate these lessons and understand that the context and the consequences are completely different now. Trying the same formula which worked for us millennia ago nowadays will not make us rich before we get old.

Every time a discussion on open trade and competition is started, most of our fellow Sri Lankans march to the streets demanding protectionism. The consequences are evident. Our trade openness has dropped to about 37% from 78% over the span of a few decades. We still believe having higher import tariffs will improve local production and competitiveness in the market. Hiding from competition in this way is the same as trying to win a Cricket World Cup without playing a single match with an international team.

The extent to which we have hidden from competition is at an absurd level. Would you believe me if I told you that most of our daily household products are protected by unreal custom duties and protectionist taxes which drive our cost of living through the roof? This is in a country where more than 50% of its population finds it difficult to earn even $ 3 a day.

Ravi Ratnasabapathy has highlighted the absurdity of taxes on commonly used household products in a column in the Echelon business magazine. The import taxes for cereal add up to 101%, fruit juices to 107%, noodles to 101%, aftershave to 120%, toothpaste to 107%, etc. The list is too long to continue.

The big question is what this Government could do to make our people rich before they get old. First, we have to understand that all the economic problems we face are interconnected and that there are no isolated solutions. A summary of problems is listed below:

1. Low GDP growth rate

2. Low export growth

3. Balance of Payment problems

4. Low transformation of export basket

5. Low foreign direct investment (FDI)

6. Low immigration

The Government has to take a combined approach and implement a rapid reform process if we are to have even the wildest chance to move an inch forward from where we are right now. At this point of time, the Government seems to churn its wheels through personality-driven power and dynamic individuals whose focus is on getting things done fast. In the first place, the Government needs to understand there is only so much development that can be sustained through a personality-driven approach.

For example, trying to ease traffic congestion through the use of Military Police is a short-term solution. The long-term answer to this problem is the introduction of a high-quality public transport system. But to improve public transport, certain reforms are necessary, such as the introduction of competition to railway operations, easily obtainable route permits for luxury buses, and price openness in order to develop innovative transportation options and products.

Without an understanding of long-term solutions, government intervention in bringing more buses under the Ceylon Transport Board (CTB) and shuffling the train timetable will not bring sustainable results. Instead, this will burn the Government’s energy and precious time.

The same applies for all of the above economic issues. The Government should address low-hanging fruits such as the implementation of a proper visa regime for foreigners who wish to work in Sri Lanka, and allow for foreign spouses who are married to Sri Lankans to work here. Having diversity means introducing more innovativeness into the system.

The second step to addressing these economic issues is fiscal consolidation and the cutting of existing red tape which affect business. President Rajapaksa announced his support for eliminating unnecessary regulations during his Independence Day speech, and the time has come to walk the talk. The barriers for imports and exports are still enormous, ranging from obtaining a loan to getting a license.

These regulatory and legislative barriers need to be addressed. We are then left with no other option but further fiscal consolidation. Unnecessary political recruitments have to be frozen and government expenditure needs to be tightened. Very importantly, the Government has to start somewhere and look beyond rosy elections through to bitter deliverables. Things will only get darker as the clock ticks on.

To be honest, getting rich before we get old is only a dream for our generation. The question is: Do we want our kids to get old before they get rich too?

Sri Lanka: State control or self-control?

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

Originally appeared on The Morning

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By Dhananath Fernando

We Sri Lankans love when the State controls almost everything in life. It almost seems genetically coded for us to expect the State to control our education, jobs, electricity, prices of staple goods, prices of vehicles, religion, and whatnot. Our politicians take advantage of this inherent thinking and pretend they have the ability and competency to control everything. That is why every election has become a heavyweight competition on the free giveaway of jobs and commodities. From the day Sri Lankans are born, till the day they die, a bigger part of our lives is controlled by the State, and there is very little the individuals have to say about it.

As a result, Sri Lankans do not have any decision-making power in their lives and they really do not have a say in their own lives. Life as we know it is a series of making decisions. Decisions we’ve made in the past are the reason why we are who we are and where we are today. Decisions we make today will determine our tomorrow. The only way to navigate your life the way you want it is to take control of the decisions you make. In other words, this is the act of controlling one’s self and the factors one has a say in – “self-control”.

Mahatma Gandhi eloquently once said: “Be the change that you wish to see in the world.”

Even though we’re all very aware of this, our actions speak otherwise. Since the beginning of time, Sri Lankan society has constantly demanded for more “state control” as opposed to “self-control”. People’s expectations are such that the government must take care of their employment, provide for their children’s education, their healthcare, and needs, operate hotels, run airlines, telco companies, and media stations, and should be the sole provider of infrastructure development. Did you know that 77% of our university graduates are employed in the public sector? This is funny because a graduate employed in the private sector would earn 60% more than a graduate employed in the government sector.

Sadly, what people don’t see is the cost they have to pay for their demand of state control. The state salary bill itself is very expensive for a country like Sri Lanka where the state salary per annum per citizen is about Rs. 29,809. If we consider the state salary per household per annum, it is as high as Rs. 119,238.

Further complicating the state of affairs from what it is already, state control has reached its peak in Sri Lanka where even the prices of day-to-day goods and services are dictated by the government. Advocata’s report titled “Price Controls in Sri Lanka” and the accompanying documentary highlight how price ceilings on the sale of certain goods result in market shortages, and the sale of lower quality products resulting from producers having to cut down on the cost of production of these goods.

A recent price control on pharmaceutical products has created market shortages on 11 essential pharma products. The Government recently had price controls on masks due to the coronavirus outbreak as well as more price controls on vegetables and staple food, but nothing really worked on bringing the prices down. Instead, it was reported that some medical products were not on the shelves.

It is said that when you try to control one thing, you lose control of everything. And that’s exactly what’s taking place in Sri Lanka. If you recall, we had a price control on hoppers just after the previous Government came into power. The list was so long that even tea prices at small tea shops were controlled, and later they extended the list on imposing price controls on bottles of water too. These control measures are absolutely impractical to monitor and impose. Throughout history, it is evident that government price controls have not brought about any positive results and have only worsened the situation.

As a result of the controlling mentality, consecutive governments lost control of the things they should have focused on. Our judiciary system, which needs serious reforms, has not even been touched for decades. Someone who has a land case would understand how long and painful the process is. Rather than setting up systems for efficiency and having a level playing field, the governments have spent time on trying to control things that aren’t controlled and has micromanaged macro issues.

“The man who chases two rabbits catches neither” is a good reminder to all governments that try to control too many things instead of promoting and developing the culture of self-control.

The extreme ill-effects of “state control” are visible in our export sector. In the last 10 years, Sri Lanka has only had seven new Harmonised System (HS) Code additions to our export basket. During the same period, countries like China have added 76 codes to their basket, while Thailand added 70 and Vietnam added 48. The more we compromise on self-control for state control, the more we distance ourselves from prosperity.

The solution to all this is simple: Hard work and free exchange. Hard work, on the one hand, is a characteristic of self-control. Free exchange, on the other hand, helps foster a competitive business environment that encourages a nation and its citizens to strive for prosperity. If we can’t control how we work and strive for development, we’d be kidding ourselves to assume that a state could do it for us.

Like Pythagoras once put it, “no man is free who cannot command himself”.

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Back to the Basics: Achieving our FDI targets?

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

Originally appeared on The Morning

By Aneetha Warusavitarana

As we enter the middle of February, Sri Lanka does not appear to have a clear plan in place for foreign direct investment (FDI) for 2020. Last year, the Government set a target to attract Rs. 3 billion in FDI by the end of the year; this however did not come to pass. After the Easter Sunday attacks, the Government downgraded the target to Rs. 1.5 billion, reflecting the drop in investor confidence following the terror attacks.

Attracting FDI should be a priority for Sri Lanka right now. As a region, growth in South Asia has slowed down, and we are no longer the fastest growing region in the world. In Sri Lanka, we will have to face challenging economic realities; the tax cuts introduced as a stimulus for the economy may or may not pan out as expected, and it is likely that government expenditure will continue to rise in the lead-up to parliamentary elections.

Our recent graduation to upper middle-income status has also shed light on the living standards of many in the country. The poverty line for upper middle-income countries is far higher than the official poverty line used in Sri Lanka. When the country’s poverty numbers are recalculated for the new poverty line of $ 5.5 per day, our poverty rate skyrockets from a respectable 4% to a horrifying 40%. Of course, this number should not be taken at face value; a little under half of our population did not suddenly plunge into poverty at the point of our transition to upper middle-income, and living standards are similar to what they were last year. However, it is a good indicator of how far we have to go as a country for Sri Lankans to have economic realities associated with upper middle-income countries.

Economic growth

The solution to our woes is of course economic growth; the catch is that growth appears to be quite elusive at this point, with GDP growth for 2020 estimated to be 3.7%. The country is also a little strapped for cash with debt repayments and uncertainty as to what our tax revenue will look like. What Sri Lanka needs at this point is FDI.

Attracting FDI into Sri Lanka should be a priority for the Sri Lankan Government, not simply because it is a source of foreign exchange for the country, but because the benefits of FDI go far beyond that of increasing inward capital flows. FDI is a link to international markets that Sri Lanka would otherwise have limited access to, and with that link comes the transfer of knowledge, skills, and knowhow. Entry into global value chains through FDI forces firms to improve productivity and increase competitiveness. The World Bank succinctly captures the benefits of FDI for high-growth firms in developing countries by identifying two main channels: (a) Contractual linkages between foreign and local firms that promote the formal transmission of knowledge and practices that may help domestic suppliers upgrade their technical and quality standards, and (b) the demonstration effect, where domestic firms imitate foreign technologies or managerial practices.

The investors’ side

Sri Lanka has to go far beyond setting targets for FDI if we are to attract it in the numbers that we need. We need to understand what investors are looking for, and then ensure that Sri Lanka has met that criteria. The World Bank’s Global Investment Competitiveness Survey is a tool that can help governments design policy and prioritise reform that investors will recognise and value. The survey captures 754 interviews with executives of multinational corporations (MNCs) that have invested in developing countries, and identifies the determinants to attracting FDI.

When speaking about FDI in Sri Lanka, focus is often solely on attracting FDI, with great effort being expended to answer the question of how to get investors to see Sri Lanka as a lucrative destination for investment. This is of course important, but we need to go beyond this if we are to retain FDI, and see the investment grow. One of the top five findings from the survey was that more than a third of investors reinvest all of their profits into the host country. This means that investors will be looking for policies in the host country that will help them grow their business, and not just policies to facilitate their initial setup.

Another key finding from the survey was the importance of having economic stability and a transparent, predictable policy regime. Three-quarters of investors have experienced disruptions in their operations as a result of political turmoil. A quarter of these investors then either cancelled or withdrew their investment.

Next steps

Achieving long-term policy stability is not an easy task; it will require considerable political will and commitment to long-term growth over a quick short-term win. Focus has to move beyond quick-fix investment incentives. The report highlights that incentives are not the most important determinant for a potential investor, according to the survey. They rank fourth in importance, below transparent governance, investment protection guarantees, and ease of establishing a business. Of course, this is not to say that incentives should be removed wholesale. They are a criterion, but possibly not the most important one.

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Other people’s money: Lessons from the Airbus corruption case

Published in the Daily FT

By Prof. Rohan Samarajiva

An insightful writer I follow had written that the corruption revealed in the Airbus case, technically described as a deferred prosecution agreement, is intrinsic to capitalism or to the market system. The implication is that it may not be intrinsic to not-capitalism, usually described as socialism. But all one has to do is to read Kautilya’s Arthashasthra, from 321-298 BC, to understand that corruption transcends the market system.

Big purchases, big bribes

Within our memory, major aircraft purchases were made by the National Carrier of Sri Lanka on three occasions. The first was during the Premadasa presidency, when much was made over the pricing of Airbus aircraft procured for the National Carrier and the interest rates of the financing arrangements. 

Then Emirates made major purchases as part owners and managers, both before the 2001 airport attack that destroyed half the fleet. No controversy ensued. 

The third instance was in the waning days of the Mahinda Rajapaksa presidency, when contracts for multiple Airbus aircraft and a VIP kit were entered into. There was no controversy at the time, but questions were raised after 2015 when large penalties in excess of Rs. 17 billion had to be paid for not completing the purchases. The real controversy has erupted only now with admissions of specific acts of bribery by Airbus. 

Though the European court documents did not name the recipients of the bribes, the Attorney General sought the arrest of Kapila Chandrasena, the CEO at the time, and his wife. 

In a related development not much discussed in Sri Lanka, the private Malaysia-based budget carrier Air Asia announced that its Chief Executive Tony Fernandes and Executive Chairman Kamarudin Meranun would leave their positions immediately until investigations were completed on an Airbus sponsorship worth $ 50 million for a sports team owned by them. The Air Asia contracts were larger than SriLankan’s and so were the associated payments from Airbus.

Principal-agent problem

In both cases, executives (agents) entrusted with managing airlines on behalf of the owners (principals), the Sri Lankan State in one case and private shareholders in the other, are alleged to have acted to the detriment of the principals, for personal gain. This is a manifestation of the principal-agent problem. Agents always have more information than the principals and their interests are different from those of the principals. How to ensure agents act in the interests of the principals is the problem. 

The executives entrusted with prudent management of other people’s money are alleged to have breached that trust by not getting the best possible deal from Airbus. Airbus may have transferred the bribes, but the actual payers were the owners of SriLankan and of Air Asia. If not for the bribes, the airline owners would have obtained greater value for money from Airbus or its competitor.

Why did these actions occur? One must begin from the larger context of market structure.

Assume a workably competitive market with privately-owned firms. Here, if executives pay inflated prices or accept lower quality, their firm will be disadvantaged. The firm will lose market share and/or profits will be eroded by the higher costs. The owners will not keep pumping in capital because of they have hard-budget constraints. They will fire the executives and/or wind up the firm. Air Asia has chosen the former path even though Tony Fernandes was the visionary founder. 

In privately-owned firms, bribe-induced non-optimal procurements will be rare because the principals have strong incentives to set in place mechanisms to minimise bad behaviour by agents. One could ask why it took so long for the Air Asia board to act on Fernandes and Meranun. The explanation must lie in the complexity of the airline business which exacerbated the information asymmetry and allowed the agents to mask their less-than-optimal purchasing decisions. The principals suffered the consequences, earning lower returns than they would have if proper controls were in place.

In SriLankan Airlines the true owners have no seat on its Board. They are the citizens of Sri Lanka, who have designated certain politicians as their agents. At one time, these politicians decided to operate a State-owned airline. Other politicians at various times appointed persons to the Board of the airline as their agents to efficiently manage it. These agents serve as the principals to the executives who actually manage the airline. So, it’s not a simple principal-agent relationship but a concatenated series of such relationships, ending in a principal who is incapable of exercising effective supervision. 

If the airline loses money, the Board members are not affected because the money at risk is not theirs. The politicians also do not have own funds at risk. The politicians, their agents the Board, and the Board’s agents the senior managers, all take decisions that affect other people’s money. Intrinsically, there will be fewer incentives to set up effective controls. The general public, whose is money is being mismanaged, are not part of the decision making. Their only recourse is voting out the politicians at the next election. But elections are not decided on single issues.

In the effort to find a third way between State ownership which was failing and markets which they were opposed to ideologically, the socialist rulers of the former Yugoslavia claimed that it would impose hard-budget constraints on State-Owned Enterprises (SOEs). 

In fact, the constraints were never hard. There were always reasons for exceptions: national security, welfare of consumers, avoidance of unrest that could be caused by layoffs, etc. All these reasons and more have been heard in the case of the endless infusions of public funds into SriLankan, the latest being the need to have the ability to evacuate citizens from foreign lands. 

What can be done?

The first-best solution is to avoid the use of taxpayer funds in firms such as airlines that operate in competitive markets. In other words, they should be privatised. These businesses are complex. If they are not operated efficiently, the risks of losing money are high, as evidenced by the demise of private airlines all over the world. 

The information asymmetries that must be managed to ensure effective control of agents are difficult enough even for private owners. But they have incentives to work at it because their money is at risk. When public funds are being used no such incentives exist. If owners fail to control their agents as was the case with fully private Air Asia, they suffer the consequences in the form of foregone profits and lower share prices. Their losses are of no concern to the public. 

Partial private ownership is a second-best option. There was no fuss when Emirates management bought aircraft for SriLankan. Some public funds were at risk but Emirates which owned 43% of the airline was the decision maker. If the CEO bought aircraft in return for bribes paid to his wife’s company, Emirates would lose money along with Treasury. It had incentives to create good controls. The proof was in the dividends paid to Treasury during the period of partial ownership and management by Emirates.

The last-best solution is continued State ownership. If this option is adopted, one would have to rely on procedures, not on self-interest. Honest, diligent individuals would have to be found as managers and as Board members. They would appoint tender board and technical evaluation committees that follow strict procurement rules designed to ensure financial probity. Just to ensure that all these actors were indeed honest and diligent, oversight bodies would be empowered. Parliamentary committees would exercise oversight of everything. 

Described above is how Government agencies are supposed to operate. Government procurement rules when implemented properly do work. But they are slow and cumbersome. They are unlikely to be optimal for the nimble operations needed in complex competitive businesses such the airline business. The money that is not lost to pilfering CEOs may be lost simply by the inability to meet the requirements of a competitive business. Air India’s accumulated losses in the past decade amounted to $ 9,730 million, despite there not yet being any evidence of bribes paid by Airbus.

The best course of action is to align the incentives of owners so that proper controls are implemented. That requires privatisation, complete or partial. It is simply not possible to run a fully State-owned airline in the competitive era without burdening the public.  

Presidential promises and business registrations

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

Originally appeared on The Morning

By Aneetha Warusavitarana

On Independence Day, the presidential address touched on several topics, ranging from public administration and corruption to eradicating poverty in the country. Reforming the current system in order to promote an environment where Sri Lankans could thrive and prosper was a promise made – a large part of which was economic freedom. While the President veered clear of more controversial topics, this focus on reform was promising.

“Outdated laws, regulations, taxes, and charges that prevent people from freely undertaking self-employment, traditional industries, or businesses need to be revised swiftly. We will work towards removing unnecessary restrictions imposed on the public to better ensure their right to live freely.”

If the Government follows through on this commitment, it would require a considerable amount of work. While significant changes were introduced to the tax system of the country with relative ease, legal and regulatory change will be more difficult to come by. We have a host of outdated laws, and one industry is often governed by several acts – creating considerable confusion.

For instance, the coconut industry is governed by the Coconut Products Ordinance, the Coconut Fibre Act, and the Coconut Development Act. Each of these Acts address different aspects of the coconut industry, from the export of products to land use. Legal reform is notoriously time and labour intensive, and we are unlikely to see legal reform, unless it is driven by clear political will. Regulatory change is easier to bring about, and is a good starting point for the improvement of Sri Lanka’s business environment.

Small businesses

Last October, the Advocata Institute commissioned an islandwide survey of micro and small entrepreneurs, covering 1,500 respondents. The aim was to better understand the legal and regulatory barriers that these enterprises face. Sri Lanka has seen successful reform in the area of business registration, with the country moving up on the Ease of Doing Business index. The impact these reforms have had on small businesses was reflected in the survey findings, with 67% of respondents stating that they had registered their businesses. When this number was broken down further, we found that rates of registration did not fluctuate drastically between micro and small enterprises, with 66% of micro and 76% of small enterprises having registered their business.

While these numbers are promising, there is still room for improvement. Bringing businesses into the formal sector gives them opportunity and access to finance, knowledge, and markets that they are excluded from when they exist in the informal sector.

However, businesses have good reasons for being hesitant to formalise. In cases where the cost and time associated with registration are too high, it may make more sense for businesses to postpone registration until they are more established. Excessive regulation is also a key factor; when numerous documents and approvals are required, the costs associated with registration rise and act as a deterrent to formalisation.

Barriers

Among the unregistered businesses, only around one-third had tried to register their business at any point. The survey results indicate that this group of individuals may not necessarily have prohibitive barriers that prevent them from registering their businesses, as they have rarely gone beyond getting information from a municipal council or divisional secretariat, have prepared documents halfway, or have simply asked friends about the process or checked the website. This could indicate that there needs to be better information provided at divisional secretariats or municipal councils, or assistance provided to help these individuals register their businesses. It could also simply be a lack of interest in pursuing registration at this point in time.

One reason provided as to why they have not registered their businesses, which appears to be a more concrete barrier, is the issue of space and the requirement for a rent agreement. When these unregistered enterprises were asked if they were aware of the documents required for registration, 65% of respondents were aware that a name registration certificate was required and 61% were aware that grama niladari approval was required. Only 48% were aware that a rent agreement was required for the premises.

Requirements

The need for a rent agreement or copy of a deed at the point of registering the name of the business, while appropriate for a larger business, is less so in the case of these small and micro enterprises. A majority of the micro and small enterprises interviewed in the survey do not have a designated office space. 42% of small enterprises and 48% of micro enterprises operate from residential premises. If they are the owners of the premises, then the process is slightly simpler – the original deed and a notarised copy are required. If not, the original rent agreement and a notarised copy are required. At face value, this requirement may seem inconsequential. However, it does appear to be unnecessary and poses another hurdle for entrepreneurs.

A rent agreement or a deed is not necessarily a requirement for registering a business across the world. Looking at the case of New Zealand, it is only required that a company director enters in a valid address which will be cross checked against the New Zealand Post Database to ensure that the address is accurate. In the case of Hong Kong, registering a business only requires an incorporation form, a copy of the articles of association, and a notice to the business registration office. New Zealand and Hong Kong are in the top three most economically free countries in the world, and set a precedent that we could all follow.

Way forward

97% of micro businesses and 85% of small businesses surveyed register their business as sole proprietorships, with only 3% of the businesses surveyed registering themselves as partnerships, and 2% registering themselves as private limited companies.

Given this, removing the requirement of a rent agreement or deed for this type of registration could be a viable solution. The process of registration of private limited companies has been eased through the Government’s e-RoC portal, and reform should now focus on easing the process for our smaller businesses.

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Post-independence reflections: Gaps in our freedoms

Originally published in Daily Mirror, and Daily FT.

By Erandi De Silva

Seventy two years ago, Sri Lanka gained independence from the shackles of British rule. This meant the autonomy to govern our people, the freedom to create and maintain our institutions and the ability to carve our own political narrative. Beyond political liberty, independence also restored our control over land, resources and Sri Lanka’s economy; we obtained the prerogative to our prosperity. 

Reflecting upon the speech delivered by President Gotabaya Rajapaksa on Independence Day, it is clear that the modernisation of restrictive and out-dated systems, ensuring the increase of efficiency within the local institutions and curbing corruption are well within the new government’s mandate for the country. Upon welcoming this anniversary and amid the dawn of a new decade, it is important that we do more than celebrate the past – it is time to reflect on the extent to which we have secured our future.

The most recent revision of the Economic Freedom of the World Index ranks Sri Lanka at 104, out of a total of 162 countries. While our ranking places us at the lower end of the spectrum, we fare exceptionally poorly on the ‘Legal System and Property Rights’ indicator with an overall score of 4.91 out of 10. It is clear that Sri Lanka has taken certain measures and improved our overall score for Economic Freedom throughout the past few decades and consistently increasing its ratings, apart from the slight deviation from 2015-2017. However, our pace towards such progress and reform has been sluggish compared to that of other countries and our regional competitors. This is reflected in our overall rankings on the index as they have consistently deteriorated from 1980 (ranked 68) to 2017 (ranked 104), even as our scores inched higher over time.  

Given the relative progress and prosperity of other nations that have scored and ranked higher on the index (such as Singapore, Malaysia, Thailand and India), it is evident that Sri Lanka has to prioritise similar reforms – starting with our most vulnerable areas – in order to improve our economic and political future.

 
Main problem areas
Under the ‘Legal System and Property Rights’ indicator, our lowest performances are for the sub-indicators ‘legal enforcement of contracts’ and ‘impartial courts’, where we score 3.61 and 3.74 out of 10, respectively. Sri Lanka’s legal system is notorious for being riddled with corruption, lack of transparency and inefficiency. 

In 2018, the Justice Ministry revealed that 697,370 court cases had been brought forward from 2017, in addition to the cases filed that year itself; at the end of 2018, a total of 775,620 cases that were due to be settled were still pending in court.  

Despite the effects of the 19th Amendment to the constitution that significantly curtailed the excessive control and influence of the executive, alleged corruption and manipulation of the judiciary has still been prevalent due to the persistence of political appointments and the intimidation and transfer of judges upon behaviour that is unfavourable to those in power.  
Therefore, the ability to hold politicians and officials accountable has remained challenging, especially in the lower courts, leaving civilians untrusting of and unsupported by the legal system. 

Furthermore, the time and cost required to enforce a contract through Sri Lankan courts is considered extremely arduous and time-consuming, compared to the processes of other economies within our region; we rank 164/190 with an overall score of 41.2/100 for ‘Enforcing Contracts’ under the Ease of Doing Business index published by the World Bank.

The state of property rights in the country is similarly complicated and ruptured. While there are many delays and inefficiencies in procedures such as registering property, some of these issues are often linked to issues within the legal system as well.

The inability to quickly settle minor disputes over land ownership and the struggle to find relevant records within out-dated systems of data collection further deteriorate our standing in terms property rights. Sri Lanka scores particularly low on the sub-indicator ‘Quality of the land administration index’ under ‘Registering Property’ for the Ease of Doing Business index 
(scoring 5.5/30).

Impacts of our weak systems
Apart from affecting the general security, autonomy and free-will of individuals within our country, Sri Lanka’s inability to maintain and improve the status of its legal systems and property rights has had significant impacts on the state of our economy and future prosperity as well.

The perceived instability and corruption within the legal system often lead potential investors and business away from the country due to their doubts about the strength of the rule of law and its enactment. The likelihood of commercial disputes being prolonged and unjustly handled by the courts further harms our prospects of attracting local and foreign commerce into Sri Lanka. The inefficiencies of the legal system also render it an unreliable solution to the woes of local entrepreneurs and small businesses, acting as a legal barrier to their growth and development.

Moreover, the disputes, bureaucracy and technicalities that convolute property ownership in Sri Lanka further deter the emergence and growth of new businesses and entrepreneurs that could enrich our economy. For example, the inability for many individuals, such as farmers, to secure titles to their land severely curbs their ability to invest and make full use of the property they cultivate within. 

It also inhibits the growing land markets and the potential to use land as collateral within the country. Such issues squander the potential of our youth, resources and skills and ultimately hinder the progress of our entire nation.

Pathway to reform
Given the above problems and their precarious effects on our economy, it is clear that Sri Lanka needs to prioritise reform for its two most vulnerable areas that have long been neglected by politicians and those in power. 

Readdressing the promises brought out by the former Digital Infrastructure and Information Technology Minister Ajith P. Perera, in September 2019, one major leap in streamlining and reforming our legal system would be looking towards digitisation. While it would be a long-term investment and a difficult step for Sri Lanka, it would be a crucial step that may concurrently curb the corruption, manipulation and inefficiency of our current system as well as improve upon the system’s transparency and accessibility to the public.

As Dr. Laksiri Fernando presented in 2019, digitisation of the court system “could not only expedite legal proceedings, crime control and civic justice” but also “ensure common standards throughout the country” in terms of how proceedings take place and how all citizens are treated within the court system. Human errors and language barriers may also be overcome while reducing the time and cost of legal proceedings for both the government and civilians.

Furthermore, the digitisation of legal records, including those related to land ownership, could prevent the misplacement and damage of relevant documents in the case of necessity. The ‘e-land’ initiative by the Registrar General’s Department to enable the digital protection and registration of legal documents pertaining to movable and immovable properties may be considered a good first step. 

In his speech, the president acknowledged the importance of an independent judiciary “for the well-being and advancement of any democratic society” as well as affirmed the need to revise systems that prevent people from freely undertaking self-employment or engaging with businesses.  While this admission on the need for reform is commendable, it is necessary that we ensure it more than mere rhetoric that placates us as weak institutions persist over time. 

A completely functional digital court system may still be quite a challenge that will require constant dedication and fruitful efforts in order to be successfully implemented. In the meantime, it is crucial that the government takes all possible measures to focus on the improvement of our legal sector and the fortification of our property rights as they are fundamentals to ensuring the protection of individual liberty as well as the state of our economy. 

Free from the limitations of our colonial past, land and time are priceless resources that are well in our hands; Sri Lanka’s progress is now contingent upon our prioritisation. Ultimately, a nation is only as independent and free as its people are; if Sri Lankans cannot be promised security through law and access to land, it appears the fight for freedom is still ongoing. 

Achieving export target through National Export Strategy

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

Originally appeared on The Morning

By Aneetha Warusavitarana

After a series of tax cuts and promises of expenditure tightening, the Government has now turned its focus onto export growth. It is perhaps about time this area was given some attention, especially as it presents the Government with an avenue from which much-needed foreign exchange can enter the economy.

Minister of Industrial Export and Investment Promotion, and Tourism and Civil Aviation Prasanna Ranatunga has emphasised on the Government’s target of $ 18.5 billion in export revenue. In a welcome move, and breaking precedence, the Government has decided to continue with the National Export Strategy (NES) created during the tenure of the previous Government, a step that bodes well for policy consistency in the country.

The export narrative presented in the Government’s manifesto was one that focused on boosting domestic production for exports and carrying out import substitution. It identified that high tariffs on the imported inputs to stifle domestic production and economic growth, and committed to reduce tariffs on raw materials and intermediate goods.

Achievable targets?

Even though the policy consistency is promising, we still need to meet this target of $ 18.5 billion in export revenue. The question that remains is whether the Government has taken the steps to make this target a reality. The NES has a clearly laid out plan of action for the six key focus areas identified. However, we cannot think of creating export growth without a holistic look at the country’s trade position. Our location is often the first thing that comes to mind when one thinks of international trade, but we have done little to reap any benefits from being the “Pearl of the Indian Ocean”. The recently released (human) Freedom in the World report tracks countries’ freedom to trade, among several other indicators. While Sri Lanka is still fairly low in overall rankings for human freedom, placing at 110/162, we perform poorly on the indicator “Freedom to Trade Internationally”, especially on the sub-indicators on tariffs and regulatory trade barriers, where we score 6.3 and 5.2 out of 10, respectively .

Some of the recent tax reforms have reduced taxes at the border as well, but Sri Lanka’s tariff system remains convoluted and opaque; even once this hurdle is cleared, the bureaucracy has to be contended with. Speaking of export growth is all well and good, but exports are simply one component of a strong international trade regime. If Sri Lanka does not have a foundation that supports and incentivises international trade, we are unlikely to witness export growth of this nature. Implementing some reforms mentioned in the Government’s manifesto, especially those on the lowering of tariffs, would be a strong first step.

A quick-fix solution?

While the NES has identified six focus areas for innovation and export diversification, it also places emphasis on easing regulations and improving Sri Lankan exporters’ ability to diversify, innovate, and comply with international standards. The Government would have to commit to creating a predictable and transparent environment for exporters, bringing down the costs of conducting business in Sri Lanka, improving the export competitiveness of domestic firms, and reforming some of our more archaic laws. Reform in the Customs Department is at the heart of this. There have been some preliminary steps in this direction, notably the launch of the Automated System for Customs Data (ASYCUDA), but there is much more to be done. Reforming the Customs Ordinance is vital; the NES states that a new Customs Act, which is in line with international standards for trade facilitation, has been drafted. However, it has not progressed beyond this stage.

These are not easy reforms to implement, and they are far from a quick-fix solution. They do, however, promise to create meaningful change that can translate into the export growth the Government is targeting.

Sri Lanka, left out of South Asia?

Apart from addressing these ground-level barriers to export growth, another avenue that can be explored is free trade agreements, and the Sri Lanka Export Development Board (SLEDB) has brought its attention here. Under the India-Sri Lanka Free Trade Agreement (FTA), we have seen the country reaping the benefits of international trade. Sri Lanka’s exports to India have grown faster than India’s exports to Sri Lanka, and Sri Lanka has experienced diversification in the goods it exports to India, with a shift from agricultural products like cloves and areca nuts to boats and ships.

The case is the same when considering the impact GSP+ (Generalised Scheme of Preferences) has created on the economy. Trade agreements are far from a “quick fix”, with trade negotiations being notoriously drawn out, and a source of strong opposition in Sri Lanka. The last agreement we signed was the first one in a decade, and the Government should take care to ensure a lapse of that length does not repeat itself.

Even though South Asia has been replaced by East Asia and the Pacific as the fastest-growing region in the world, the potential in this region is significant and should be leveraged for our benefit. While the world watches on as Brexit takes place, the Asian region is heading in a more promising direction. The Regional Comprehensive Economic Partnership (RCEP) has 15 participating countries in the Asia-Pacific region and includes almost one-third of the world’s population and global domestic product. This is an ambitious target, but we should at the very least explore bilateral trade agreements with our neighbours, and give our export industries easier access to these markets.

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Reducing govt. spending with 100,000 new jobs?

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

Originally appeared on The Morning

By Aneetha Warusavitarana

From unannounced inspections of government offices to broader commitments to bring the public service to its former glory, the catchphrase for our new Government is efficiency. In the case of some policy measures, the Government has stood by their statements,and has taken steps to curtail the excesses and inefficiencies of the State. The most recent step towards achieving this was highlighted by a presidential circular which limited the allowances and official vehicles of chairpersons, while also directing state entities to reduce unnecessary expenditure, and create a 25% saving from their approved budgets. While it remains to be seen if these cuts in state expenditure will materialise, the sentiment can be applauded.

Efficiency in the public sector combined with a reduction of government spending plays a bigger role for the Government, and goes beyond the objective of providing quality services to the public. It is common knowledge that while we are now upper middle-income, the country has to face some challenging economic realities. There are significant debt repayments that have to be made, and the projected growth rate for the economy is not promising at 3.5%.

Recent tax cuts have raised concerns that the drop in government revenue will exacerbate the problem rather than improve it. Sri Lanka has been downgraded by two major credit rating agencies; Standard and Poor’s (S&P) and Fitch Ratings, both of which have stated the tax cuts and an expectation that fiscal consolidation will be left on the wayside as one of their rationales behind the downgrading.

Countering these claims, the Government has argued that the tax cuts will provide a much-needed stimulus to the economy, and will trigger economic growth. It also argues that the loss in revenue will be offset by a reduction in public expenditure as excesses of the State are curtailed and spending is prioritised. Efficiency is a key component in the Government’s argument that the country’s macroeconomic status will be a promising one in the coming years.

100,000 jobs we can’t afford

With parliamentary elections around the corner, the pressure to secure a majority is mounting, and the Government has announced that it will provide 100,000 jobs in the government sector – a surefire way to secure votes. This increase in government jobs is in contradiction to its aim to reduce government expenditure; these new entrants into the government service have been promised a salary of Rs. 35,000, creating an increase in government expenditure that we can ill afford. Salaries already constitute the second largest source of government expenditure, and this has long-term implications as pension commitments grow.

The provision of these jobs is part of the work carried out by the Multi-Purpose Development Task Force. The objective of this task force is to empower families that are eligible for Samurdhi benefits, but do not receive it. The programme will absorb unskilled individuals who have either low levels of formal education or no formal education at all. These individuals will be recruited to fill vacancies that do not require specific qualifications at schools, hospitals, and other state institutions. Candidates will also be absorbed into sectors of masonry, carpentry, agriculture, fisheries, and forest conservation, with training provided.

Confusingly, the Government expects to reduce annual expenditure on agri-product imports by Rs. 2 billion through this employment scheme. Even if this increase in employment will boost agricultural productivity to a level in which the country saves on imports, this saving will not entirely offset the increase in expenditure on salaries.

Even though the objective of economic empowerment is commendable, there are once again questions that need to be raised. Targeting of families for Samurdhi benefits is notoriously poor, and there is no guarantee that the Government will be able to target individuals for this scheme any better. There are better and more effective ways to create meaningful economic empowerment – investing in vocational training programmes tailored to labour market gaps in the private sector would, for instance, be a workable alternative to handing out jobs.

Bloated government service and corruption

While this increase in government jobs is not in line with promises to continue fiscal consolidation, there are also more worrying consequences to this decision. The Government has promised to crackdown on the corruption that runs rampant in the government sector, but beyond that by increasing the size of the state sector, the Government is increasing opportunity for corruption. In instances where a country’s institutions are weak, self-interested individuals have greater opportunities to engage in rent-seeking behaviour.

Additionally, at this point in time, the Government should be focused on placing limits on the government service – greater numbers most rarely result in increased efficiency, and leaving efficiency aside, this is a step that the Treasury can ill afford.

Given that efficiency in the public sector and limited government expenditure are part of the Government’s plan to turn around the economy, as well as ensure economic stability if not growth, these hires are not only short-sighted, but are also economically damaging.

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An island of potential?

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

Micro, small, and medium-sized enterprises (MSMEs)are constantly a part of policy discussions. They are described as the backbone of the economy, an important source of employment, and drivers of innovation and change. Successive governments have identified these enterprises as a focus for government help and have acted on this. We have seen a variety of loan schemes especially targeted at these enterprises under a variety of different names. More recently, we have witnessed the Government introducing a credit support scheme for small and medium enterprises (SMEs) in an attempt to assist struggling businesses.

But what do we know about our micro and small enterprises?

When one thinks of a micro or small entrepreneur, what comes to mind is the grocery at the corner of your road the vadai cart at Galle Face or the small tailoring business you run to for a last-minute adjustment. While Sri Lanka’s “start-up” ecosystem is growing, and we are witnessing an increase in tech start-ups and other innovative microenterprises, this is a fairly accurate description of what Sri Lanka’s micro and small entrepreneurs look like.

In October 2019, as part of a larger research project, the Advocata Institute commissioned an islandwide survey of 1,500 micro and small entrepreneurs across the sectors of industry, services, and trade. The purpose of the study was to understand and identify the barriers that these enterprises face during the course of setting up and running their businesses. Apart from the focus on barriers and obstacles, the survey also looked into the motivations and expectations of these entrepreneurs to understand why they decided to strike out on their own and where they see their business in the future.

Why do Sri Lankans start their own businesses?

A majority of these entrepreneurs were motivated by a desire to run their own business and try out a new idea, a need to support their family, or a belief that they could make more money working for themselves than for someone else. When asked, 43% of women cited a need to support their family as a driving factor behind their decision, compared with 28% of men. Among men, a desire to run their own business was the most common reason provided, with 40% stating so. Only 12% of the respondents started their own business because they couldn’t find employment elsewhere and only 11% because they had no other means of survival.

While this paints a picture of people driven by a desire to strike out on their own and take risks, those in lower socioeconomic classes were more likely to start a business for reasons of survival – because they lost a previous job, couldn’t find work elsewhere, or simply needed to support their family.

Across the island, entrepreneurs were overwhelmingly positive about the future of their business, with 91% certain that they can make their business a success. Interestingly, when asked if offered a salaried position as an alternative, only 15% said they would close their business and take up the position, while 67% stated that they would not take up the position and the remaining 18% were uncertain. Given the opportunity, only 15% would leave Sri Lanka to work abroad, with 60% disagreeing with that statement. It is clear that our entrepreneurs have a rosier outlook on the business climate than most economic pundits, and have a determination to make their business a success.

What stands in their way?

When asked how their business has performed over the last two years, although their outlook was positive, 40% of entrepreneurs said performance has been alright, but could do better. 32% ranked their performance as either poor or very poor, while only 28% perceived their business performance to be good or very good.

The reasons they provided ranged from high competition, unsupportive government policies, and the Easter Sunday terror attacks to a lack of market access and business networks and an excess of regulations and restrictions. The question of what is holding our small and micro entrepreneurs back is one we tried to explore in greater depth through the survey. Sourcing finance, low sales, and difficulties in finding space were the most common problems cited.

How do we help these businesses?

Finance is often where governments intervene, with an aim to help or assist these enterprises. Under the credit support scheme introduced by the Government, performing and non-performing loans of up to Rs. 300 million are eligible for a capital moratorium, but interest payments will continue to be charged.

While this scheme provides relief for small and medium entrepreneurs, it does address the issue that these entities struggle to find access to finance. Focusing on how this problem could be eased, and how information could be better disseminated on options available, may be a better angle to take.

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Stimulus could add to perilous public finances: Dr. Sally

Published in The Daily FT.

By Chandani Kirinde

The stimulus packages put in place by the new Government for various sectors are not sustainable, with the extra layer of spending adding to the already perilous state of the country’s public finances, well known economist Dr. Razeen Sally said.

“The budget deficit and the current account deficit required an IMF bailout. The IMF conditions are being broken, which means another crisis is in the works. There is ever more spending with ever more entitlements. The tax concessions mean there is probably going to be even less revenue coming into the exchequer and all these problems in the macroeconomic front are going to be prevent Sri Lanka getting out of its rut, however well certain projects may get done, Dr. Sally said in an interview with Daily FT.

He said some of the welfare measures announced by the Government may be election gimmickry with the upcoming Parliamentary Election in mind but reversing them after securing a victory was going to be difficult.

“This is an extra layer of spending entitlements which are going to be difficult to reverse because your vote banks are there.”

Dr. Sally said those in power don’t understand this going up to the very top. “The best of them, on a good day, understand projects but not these complicated policy issues and the importance of building up institutions to get the job done over a period,” he said.

Asked about the appointment of more technocrats to some key Government bodies since taking office, Dr. Sally said while having better technocrats was good, there were no easy technical fixes.

“However good an appointment maybe, whether it’s the head of the Tourist Board or the Board of Investment (BOI), without other things changing, the outcomes are not really going to change. If you have an economy that is on the brink or spills over into a macro economic crisis where a new bailout is required, if you have continuing corruption, if you have as part of the bargaining game within the family some bad appointments made somewhere, say two or three bad appointments in return for one good appointment, that’s still not going to change the problem of SriLankan Airlines or the Ceylon Electricity Board (CEB) or the Ceylon Petroleum Corporation (CPC) where you have the really big losses,” he said.

On the plus side, he said the new Government would get some projects done which the last Government could not do whereas the Rajapaksas and particularly Gotabaya Rajapaksa had a track record of getting big projects. 

“But what I think they don’t understand are policies and institutions because they have been making things so personalised,” he pointed out.

Dr. Sally also said that with the return to power of the Rajapaksas, he feared the country would be back to illiberal democracy and authoritarian populism.

“Our institutions are so fragile the little that was accomplished by the last Government was not on the economy certainly, where they did a worse job than the Rajapaksas; it was more on a liberal political space, so I think that’s going to go,” he said.

He said the new man in charge, President Gotabaya Rajapaksa, was different from his brother Mahinda Rajapaksa in his style of governance and it would certainly resonate with a big portion of the population.

“The big man culture in Sinhala society in particular, which probably exists in other parts of Sri Lankan society too, is strongly rooted in Sinhala hierarchy. Every so often there is this yearning for this big man to come in and cleanse society, sweep things clean, and sort out all the big problems. We’ve seen it happen from the day after the election and not only among the Sinhala Buddhists but also among some Muslims, who, having being arch opponents of the Rajapaksas before the elections, have now become enthusiastic supporters because he is different from Mahinda,” he said.

He said this yearning for the big man propelled J.R. Jayewardene and then Ranasinghe Premadasa to high office too.

“If any person takes a step away from these events, we know this is not a good permanent solution because big men have their own flaws and they abuse power and most importantly they don’t nurture institutions, they destroy them, they make things worse, they make society worse and disputes within society worse.”

Asked if the preference for big man politics was a global phenomenon given Modi in India and Trump in the USA, Dr. Sally said that while it was happening in many places, there were reasons to fear it more in Sri Lanka than in many other places.

“In the West, where institutions are stronger, there are checks and balances. In the USA there is the Trump phenomenon, but the institutions have survived Donald Trump reasonably well. The media, the Supreme Court, strong state governments, vibrant civil society – we don’t have that as such or are much weaker.”

On developments in India, Dr. Sally said that what differentiated Sri Lanka from its closest neighbour is that India was big and diverse. 

“Even though Modi and the present incarnation of the BJP is getting more of a Hindu agenda through than before, it is a too big and a complicated place whereas 20 million people in a small space, two-thirds of them Sinhala Buddhists, it means you can take over the institutions and wreak damage much more and much more quickly; that is my fear.”

He said there was a difference between Lee Kuan Yew and Singapore and the Modis and the Rajapaksas of this world or even the Putins in Russia. 

“Lee Kuan Yew was populist, he was charismatic, he was ruthless and in his prime he was a dictator of sorts, but he was highly unusual in that he built institutions to outlast him. He had that farsighted vision that Singapore wasn’t going to really turn the corner by him ordering this, this and this. That’s a city, it’s not a complicated country. It was about attracting the talent in his generation, delegating, saying ‘you do this, you do this, and we have a division of labour among us’ and gradually building up the institutions over three generations to survive his death, which is the story of Singapore. But as a big man politician he is exceptional.”

Dr. Sally, who is a visiting Associate Professor of the Lee Kuan Yew School of Public Policy of the National University of Singapore and worked briefly as an Advisor to the Finance Ministry, said he found working with the last Government a “complete waste of time” because it was “so spectacularly bad”.

He said they came in without any kind of plan as they didn’t expect to win that Presidential Election and what eventually materialised, more than halfway into their term, was a Christmas tree wish list.

“These are all the good things that are going to happen by waving a magic wand in in 2020 and 2025. So, there was never a credible plan with maybe a list of two or three priorities on which they really focused as opposed to 100 or 200 priorities.”

He also said that the last Government made some terrible appointments starting with Ravi Karunanayake (Finance Minister) and the then Prime Minister (Ranil Wickremesinghe) appointing his Royal College classmates and by the time there was some realisation about these bad appointments it was too late.

“We know that the JVP and the LTTE combined did a very good job of assassinating the best of Sri Lankans. What’s left is the dregs, particularly in the UNP, so there is very little talent left even if the party acquires some kind of democracy.”

He said the last Government went to the IMF and were told to do this or that. “This was again part of the problem. The IMF wrote the blueprint, the Government half adopted it and then it was easy for the other side to point to them as a way of selling out. It was never homegrown and then came the bomb blasts which showed the last Government was a genuine national security threat.”

Asked what reforms should be put in place by the new Government, Dr. Sally said public finances must be made sustainable which means reining in public expenditure, and simplifying the tax systems, not higher taxes but simpler taxes with a much bigger incentive for everybody to pay taxes other than get around it.

“We need a medium-term fiscal sustainability program going beyond the IMF program to rein in these twin deficits, to keep the currency stable and prevent going for another bailout. I think we still need another big deregulation agenda.”

He also said Sri Lanka would remain fairly entrenched in the China camp even though the President had declared his Government would remain neutral in its foreign relations, particularly given the geopolitics in the Indian Ocean region.

“Maybe more than his brother, Gotabaya Rajapaksa will try to be on friendly terms with India and maybe the West I am not sure, but I think the direction of movement is still towards China. It was the same under the last Government. They repaired relations with the last Government very quickly. That I think will continue but what will accelerate the momentum is that the Chinese have personal connection with the Rajapaksas which they didn’t have with the previous Government and they’ll be all too ready to bail out.”

He said the Rajapaksas come with baggage, vis-à-vis India and the West, on human rights issues and on minority issues which is inevitably going to complicate relations with the West and India while there were no complications seemingly in their relationship with China.

“We will be going further in the Chinese direction which of course means that whatever the rhetoric, Sri Lanka is not going to remain natural. Sri Lanka is in the China camp is far as politics/geopolitics in the Indian Ocean is concerned and thinking anything else is wishful thinking.”

Dr. Sally said he remained pessimistic. “I don’t follow the conventional wisdom of some people who are very bullish on the Rajapaksas.”

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Price controls no solution to rice crisis

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

Rice farmers and the price of their rice have always been a political football. For a long time, our politicians and policymakers sold their grief, tears, fertiliser subsidies, and debt-ridden suicides for votes. Government intervention, without first identifying the unique complications of the rice market, has made the rice farmer poorer for decades. Because of such reasons, people engaged in farming have not been able to move out of the low-income rut and better their lives as long as they remain within the farming industry.

Simply put, have you ever heard of a rice farmer who managed to escape these issues and thrive within the last 20 years? The solutions that successive governments have provided for farmers over the years have been very shallow, and their intention to control the market appears to have gradually ruined it.

Here are a few of the solutions promised and provided by consecutive governments:

• Imposing price controls on retail prices of rice

• Pointing fingers at rice millers and all intermediates for imposing massive mark-ups

• Promising fertiliser subsidies or just free fertiliser

• Absorbing farmers’ debt through taxpayers’ money

• Providing a certified farm gate price for farmers and government buying paddy

• Building and implementing irrigation projects with taxpayers’ money

None of the solutions above really fit the nature or shape of the problem. While all these solutions have aspects that are attractive to the Government, imposing price controls on retail prices has been the most popular strategy by far. Conducting raids under the Consumer Affairs Authority (CAA) and filing cases against retailers who sell above the government-set price has also been a prevalent practice. Consecutive governments tend to drift towards imposing price controls as it can be easily enacted, even overnight, and can be marketed to consumers and voter bases as a tool that lowers prices. However, the reality is that price controls do almost nothing to bring prices down while ignoring a multitude of deeper problems that lie below the surface.

From the farmers’ point of view, the primary issue is the absence of an incentive to increase their crop. If the crop is increased, the price of rice in the market would come down, bringing them low incomes as supply grows; if the crop is low, the prices will go up, but due to price controls and low volumes, their income will still be meagre. These issues are exacerbated as any surplus production cannot be exported or turned into a value addition. Therefore, whether the crop is good or bad, the farmer is perpetually perched on the losing end. During bad crop seasons, the inclement climate, water supply issues, and fertiliser issues come into the limelight. Farmers often complain about the low prices offered by the mills during good crop seasons due to these larger problems.

The consumption of rice amongst Sri Lankans is approximately 108 kg per person every year, which is two times the global average rice consumption of 54 kg. However, our rice consumption has been stagnant over the years, which means that people have not been increasing their rice consumption and the population growth margin is the only way to increase aggregate consumption.

Although most Sri Lankans use rice as their main source of carbohydrates, if the rice crop is increased, the local market would be unable to absorb any excess supply, resulting in prices dropping very low in the market and making life more difficult for farmers. A potential solution for excess rice production is the use of rice as an industrial input, such as in the production of rice wine, but this would require industrial co-operation.

The only other option left would be to export rice, but the short-grain varieties that we cultivate locally have very little demand in the world market as demand is currently directed towards long-grain Thai rice varieties.

Additionally, our farming methods are those learnt and exchanged among peers and families such that most of the techniques utilised are extremely outdated and inefficient. In order to increase the crop, farmers continuously engage in the overuse of weedicides and fertiliser. Although it appears like the correct strategy to most farmers, this causes the total expenses of farming to shoot up, often leaving individuals trapped in debt. Sri Lanka has constantly bragged about our rice cultivation over a few millennia, but the harsh reality is that we use unsystematic and wasteful methods to produce an incredibly basic form of rice that accrues very little demand.

Furthermore, we contribute very little value addition to the original product and squander land and water, our most precious resources, in the process. Recent research has revealed that 1 kg of rice requires about 2,500 litres of water to be produced, but half of this is lost through seepage and percolation. As a result, only about 1,400 litres of water is actually used to produce 1 kg of rice. Even if we factor in a low cost of five cents per litre of water, producing 1 kg of rice appears no longer economically viable. All stakeholders seem to be working at multiple levels to increase productivity through regulations brought in with good intentions. However, these regulations have ended in disastrous consequences (Sri Lanka is at the 93rd position in rice productivity out of 119. Nepal is 67th and Thailand, 68th).

Another primary issue is that farmers have not been given the titles to the lands they cultivate in. This essentially means they do not have ownership rights over the land, blocking them from investing in establishing greenhouses, climate-resistant cultivation methods, or other innovative establishments within the space.

Many paddy lands have already been abandoned as farmers realise that it doesn’t make financial sense to cultivate rice anymore, and the labour market offers better options – especially for the youth. The downside of this trajectory is that it leaves land that could have been transformed into a useful income generator completely forsaken.

Simply imposing price controls and ordering the CAA to carry out raids and fine retailers is not the right approach for this complicated problem. In fact, price controls only bring further market distortion instead of taking prices down. Price is meant to function like a thermometer in a market, measuring the temperature of demand and supply to provide an accurate rate. If your child has an infection, as a result of his or her immune system, the temperature will rise. Instead of treating the infection, what would happen if you manipulated the thermometer, reset it at normal body temperature, and attempted to convince yourself and others that your kid has magically recovered?

Artificially controlling the price is the same as manipulating the thermometer – it perverts and misrepresents the market while failing to address the problem at its root.

Price controls also create black markets and increase corruption. More rice may be stocked in stores in order to bribe and create a black market for rice. Another possibility is the release of inferior quality products into the market as producers attempt to lower their costs to match the regulated price. In certain cases, the product may go completely off the shelf as no retailer wants to sell it at a loss. The best way to get an estimation of the myth of price controls is to compare controlled prices on the CAA website and the Department of Census and Statistics’ weekly prices.

In conclusion, the idea that price controls imposed by the Government will benefit the farmer is nothing but a myth to please the crowd within our political theatre. However, in managing this political theatre, it is important to remember that behind the curtain, these policies are far from the solutions we need, and they will have dire consequences that affect many connected industries and consumers into the foreseeable future.

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New year, same Sri Lanka?

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

Originally appeared on The Morning

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By Aneetha Warusavitarana

We entered 2019 on the back of a constitutional crisis, with the anticipation and uncertainty that accompanies any year which entails a presidential election. It is safe to say that a lot has happened in the year 2019. The country was devastated by the Easter Sunday bombings and had to slowly piece itself back together. The presidential election came and went and the country has a new President and Prime Minister. In a few short months, the general election will be held and the new Parliament will be voted in. It is a difficult year to take stock of and summarise, but looking forward, what can we expect for 2020? More importantly, what should we be expecting and how do we hold our Government to account?

Are we going to see an economic turnaround?

The country has witnessed quite a drastic turnaround with the introduction of a slew of tax cuts by the President within days of being appointed. The intention of these tax cuts is to ease tax burdens and provide a stimulus to the economy. However, the resulting drop in revenue has been estimated to be 2% of GDP. The Government has taken a few steps to counter this by raising excise duties and the Ports and Airports Development Levy. It has also committed to tightening government spending in the upcoming months, as it aims to maintain the budget deficit below 4%. Regardless, the Government appears quite ambitious in its goals for 2020, with economic growth targeted to double this year. The outlook presented by the Government is one that is fiercely positive.

Others are more sceptical. Sri Lanka’s sovereign credit rating has been downgraded to “negative” by Fitch Ratings, with the tax cuts cited as one reason for this drop. They also expect to see government debt increase in the medium term and argue that the tax increases will not be sufficient to counter the cuts that have been made. The increase in excise duty, for instance, will only cover 10% of the revenue lost by the VAT reduction. They do acknowledge that future policy steps could mitigate these concerns and while they expect the budget deficit to widen by 1.5% of GDP, they expect to see an increase in GDP growth by 3.5% in 2020 as well.

What does all of this mean to the individual?

Projections and policy statements are all well and good, but these numbers and percentages take time to translate into anything meaningful to an individual. The recent increase in the prices of vegetables has a greater impact to the voter than what is outlined in the paragraphs above. Sri Lanka’s graduation to upper middle-income status has not necessarily been felt by all Sri Lankans. According to the Household Income and Expenditure Survey (HIES), the mean household income per month is Rs. 52,979. An individual’s mean income per month is Rs. 33,894. An increase in these numbers would be something meaningful. The opportunity to work in decent employment and see an increase in wages is probably what would improve the living standards in this country.

The Government has however tried a different tack with this problem. Following in the steps of innumerous governments before them, they have promised to increase hires into the government service. In a novel twist, the Government has promised to employ 100,000 individuals, selected from families that are recipients of the Samurdhi benefit. The rationale appears to be to give jobs to those most vulnerable. While this is a worthy sentiment, the implications of this policy should be seriously considered. Despite the change in Samurdhi allowance from Rs. 3,500 to a salary worth Rs. 35,000 for each individual, this policy measure further expands the state which already accounts for roughly 14% of the labour force in the country. Salary payments are a substantial component of government expenditure, only coming second to interest payments on our loans.

As the Government appears to embed itself deeper into our economy and takes on such significant policies, it is important to remember that the brunt of their oversight increases the burden on taxpayers. Although it may not feel like it, macroeconomics do shape our everyday lives and if the Government is unable to continue on a path of fiscal consolidation with careful expenditure management, the impact will be borne by us.

New Year’s resolutions

At this point, it is difficult to predict where the country is headed. Given that the parliamentary elections are around the corner, it is possible that some ambitious policies like the moratorium on small and medium enterprise loans and the increase in government hires are simply to garner public favour. Policy direction may change towards the middle of the year. Regardless, there are a few things to consider and a few facts that are unlikely to change: We have debt repayments to make, and unless the Government wishes to default, there should be careful fiscal management to ensure that we are able to meet these commitments. The country is in dire need of economic growth. We need to attract investment and kickstart the economy. Sri Lanka needs to plan beyond four years if we are to escape the dreaded economic boogeyman: The middle-income trap.

A big part of achieving this is holding the Government accountable. In present times more than ever, this is vital. Sri Lankans, like all people, are not fond of paying taxes – a fact reflected in our low rates of collection. We do however pay them, in various forms and in varying degrees. This money that we hand over to the Government is what partly funds policy decisions, giving us the right to demand accountability and transparency. As we close off an action-packed decade and open this new chapter, it is crucial that we stay committed to ensuring that we get the future we were promised, and the future we deserve.

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Partial privatisation: A happy middle ground?

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 Sumhiya Sallay

Reforming Sri Lanka’s state-owned enterprises has been part of the new Government’s policy agenda. With 527 SOEs, Sri Lanka has an excessive number of state-owned enterprises. Financial reporting of these enterprises has been low, and the Ministry of Finance has published the financials of only 54 of these state-owned enterprises, which have been classified as “strategic”. The losses of these 54 are staggering enough; in 2018, they made a net loss of Rs. 26 billion, thus making it clear that reform in this sector is badly needed.

The Government has committed itself to transforming them into profitable entities; a committee has been appointed to hire technocrats onto the boards of these state enterprises, and the committee has called for applications. While this is commendable, the reform agenda appears to end here; the next step of privatising some of the loss-making, non-strategic state enterprises has been taken off the table. This is made abundantly clear in the Government’s National Policy Framework, which states that it will enact laws to stop the privatisation of state enterprises.

If privatisation is off the table, what can be done?

The three main state enterprises – Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), and SriLankan Airlines – recorded a combined loss of 1.3% of GDP in 2018, compared to 0.5% of GDP in 2017. Given that the expected revenue loss from the recent tax cuts is an estimated 2% of GDP, it is clear that turning our state enterprises around would go a long way towards achieving the fiscal targets set by the Government.

If the Government has taken the option of privatisation off the table, but wants to actively transform state enterprises into profit-making entities, the option of private management should not be dismissed in the same breath as privatisation. Private management of state enterprises would essentially be partial privatisation. In this scenario, the Government would share ownership of the enterprise with a private company, and the management of the enterprise would be transferred to the private company. In the case of strategic enterprises, the Government could retain majority shareholding.

A government’s primary responsibilities towards its country and people should not be the management of business enterprises; the government has a responsibility to uphold the rule of law, ensure national security, and protect the rights of its citizens, and the management – or in this case the mismanagement – of state enterprises should not make the list. A government is the entity that sets the rules of the game; it details out the laws and regulations that govern businesses. When a government also enters the playing field, there is an inherent conflict of interest that occurs. Even if the government remains impartial, it does not have the necessary incentives in place to run a business successfully.

However, when a private entity manages a business, they would look at increased profits as the business is under their sole control, and any losses they make or issues they face would be their responsibility. The incentive is to minimise losses and make the business more productive. A private entity managing state enterprises would absolve the Government of having to invest in loss-making public enterprises and reduce government borrowing.

Further, private management would bring down fiscal and administrative pressure of state-owned entities and remove the huge weight of having to manage state enterprises off the Government’s shoulders. This encourages the Government to work towards providing increased quality of living for the people through effective governance, rather than spending so much of its time and money on managing businesses.

The idea of partial privatisation, initially, may be a challenge to implement, but in the long run, it would result in highly effective results. This would also mean that there would be less political influence on the management of state enterprises.

It has worked before, so why dismiss it?

Looking back at partial privatisation in Sri Lanka, a significant achievement has been the liberalisation of the telecommunications industry. This was implemented in order to provide better services for customers through competition and industry development through private sector participation. Both customers and society as a whole benefited from it as there was a reduction in call charges (tariffs), improved telecommunications in rural areas, decrease in equipment costs, industry profit growth, increased government revenue, etc. This example of partial privatisation shows us the benefits not only the Government but also the people would gain. Taking into account these loss-making state entities and the debt repayments the Treasury will have to make over the next few years, the option of partial privatisation by the Government should be seriously considered.

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Trouble at our borders

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 Erandi de Silva

Sri Lanka’s long-standing system of “para tariffs” is a regressive institution that is fairly unknown to the everyday Sri Lankan. A para tariff refers to a type of tariff that is levied on top of the regular Customs Duty that all our imports are subjected to. It is surprising to learn that most of our imports endure not only the regular Customs Duty, but also the Port and Airport Development Levy, “CESS” (Export Development Board levy), and VAT (Value-Added Tax).

Effects of our current tariff system

These taxes stem from revenue concerns and protectionist motives to protect specific local businesses and reduce imports. However, the unsavoury reality is that it deters international trade while making imported goods incredibly expensive for all Sri Lankans. Despite the Customs Duty that already amounts to 30%, once the para tariffs come in, the total tax on most goods – from food to personal care items – can increase anywhere from 50% up to 100%. This severely limits our ability to choose the products we want to consume and puts even basic items almost out of reach in terms of the price point for most people.

Another primary issue with the prevalence of para tariffs is the lack of transparency for the general public. While most are simply unaware of the complexity of these taxes and their effect on the cost of our goods, the current system makes it exceptionally tedious and confusing for ordinary citizens who wish to access and understand our tariffs, as the method used to calculate the total tariff of a good is unclear.

Moreover, as this convoluted system is incredibly difficult to grasp and manoeuvre, locals who attempt to ship in products or factor inputs for their own businesses or personal needs will be slapped with massive fees that they did not anticipate for their shipments. This increases their costs, making growth unlikely for local businesses that need imported inputs as well. This is highlighted in a 2019 study by Asian Development Bank (ABD), which reports that local exporters cited inadequate access to imported inputs at competitive prices as one of their top challenges.

Local producers who are not import-dependent also lack the incentive to improve their products and lower their prices as they have no foreign competition; they can price higher as imported products are artificially more expensive. This means our local products remain internationally uncompetitive and our imports are unnecessarily expensive, while producers increasingly rely on the Government to protect their profits. In short, this system is counterproductive – it both hinders affordable imports and the growth of many local businesses.

Guides for positive reform

If the Government truly cares about the quality of life of Sri Lankans, it would take steps to increase consumer choice and affordability as well as improve our local businesses. Trade liberalisation is by far one of the most effective methods of achieving these outcomes. Replacing our confusing system with a uniform tariff rate could be the first important step in this journey.

Given the issues elaborated above, it is clear that our current reliance on the overcomplicated para tariff system is detrimental to the country’s economic interests and future growth. It is time for a different approach, and to some extent, the Government has come to this conclusion. The National Policy Framework includes the point “reducing import taxes on raw materials and intermediate goods to promote domestic production” under its macroeconomic policy framework. While tariff reform has to be much broader for the country to reap real economic benefits, this is one component.

Chile, which is often championed for its move towards trade liberalisation after a long history of protectionism, experienced significant growth subsequent to the introduction of a flat tariff for imports. This reform to simplify border tariffs led to a better allocation of local resources as it prevented preferential treatment of particular industries and local producers. Therefore, the market evolved to be more competitive and local businesses found it easier to access the necessary imported inputs they needed. This helped steer growth in the export sector as well, causing the volume of total exports to rise at an annual rate of 8.1% from 1990 to 2003. Despite the initial flat tariff rate being relatively high, the implementation of a uniform rate itself stirred positive effects while also inspiring further liberalisation. The rate of the flat tariff was gradually reduced over time up until the year 2003, and Chile now boasts a uniform tariff as low as 6% along with multiple free trade agreements (FTA) that completely eliminate tariffs for the countries involved.

Even though Sri Lanka’s case may not be identical, it is evident that simplifying and integrating tariffs will reduce confusion, increase transparency, and remove red tape that stands in the way of better trade, which in turn bring more opportunities for economic growth. Although it is not necessarily the desired endpoint, if Sri Lanka wants to maintain its tariffs at a relatively high level, the Government could still eliminate the para tariff system and impose a single, uniform rate that encompasses the same level of protection for all local industries.

At the very least, this could still facilitate much better exchange at the border by bringing more clarity to the system and eliminating the current uncertainty about the total tariff value for a product. This reform could then improve our local businesses and export sector by increasing accessibility to imported inputs for local companies, as it did in Chile. In the long run, however, a uniform tariff will not single-handedly improve much if the rate of tax is still incredibly high; Sri Lanka would also have to gradually reduce the overall tariff rate and engage in other strategies to ease trade for the benefits of a more comprehensible tariff system to truly materialise.

If the Government takes the right actions, this could be the beginning of a positive trajectory towards a more functional and effective tariff system. The question is: “Are we ready to break down some walls?”

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Will Gotanomics reform our SOEs?

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 a country, Sri Lanka has seen its fair share of challenges. Since Independence, apart from the 1977 economic reforms, our economic reform agenda has been mediocre. Instead of taking bold decisions to improve competitiveness and keep pace with global trends, we adopted an inward-looking approach. We boast about our natural resources and claim that we are the pearl of the Indian Ocean but have not introduced the reforms needed to convert those resources into economic gain. Sri Lanka’s debt is a little over 82% of GDP (1), and rises to a 100% of GDP if one includes private sector loans. In other words, our borrowings exceed what we produce as a country each year. Poor economic growth, averaging 2.6% exacerbates the problem.

In this economic backdrop, Sri Lanka has decided to place its trust in a President who promised significant economic reforms, a mix of tax reforms, governance reforms, and some subsidies with the objective of bringing relief to the people.

The President has walked the talk during the last few weeks. A board has been appointed to select the heads for Sri Lanka’s loss-making state enterprises, and sweeping tax cuts have been provided to encourage all businesses and individuals to boost economic growth. Public conversation centres on whether these reforms are practical and the question of the day is: “Will this work or is it just a political gimmick for the upcoming parliamentary election?”

At surface level, hiring professionals based on merit will improve fiscal discipline and accountability in our state-owned enterprises (SOEs). The tax cuts will drive the supply side of the economy to boost growth, at least in the short run. However, this article discusses a few challenges to SOE reform in particular.

1. Challenge of recruiting the right people to SOEs

The appointment of a well-experienced board to appoint members to head SOEs and opening calls for applicants to include Sri Lankans living overseas is a step in the right direction. But the question that remains is whether our labour market has the capacity to fill positions for a very long list of SOEs. Turning loss-making SOEs around would require substantial reform. According to Advocata, the number of SOEs including subsidiaries and sub-subsidiaries, amount to 527. Even if you take a good 250 which are the critical institutes and appoint a minimum of three members to a board, this brings us to a total of 750 senior-level appointments. This is nearly a factory of people with a decent level of business acumen who are able to take some hard calls. Even paying market rates and finding people will be a mammoth task given the soft skill shortages we have in the country. Even starting with the 54 strategic SOEs would be a challenge.

Converting loss-making institutes which have strong links to trade unions is a harder job than getting a start-up off the ground. On the flip side, the Ceylon Electricity Board, SriLankan Airlines, Ceylon Petroleum Corporation, and Sri Lanka Transport Board account for the largest losses annually. The boards of these gigantic loss-making institutes will be crucial. The Government would have to leave political capital aside and support the reform process of these institutions if they are truly committed to turning them around. These four SOEs should be at the top of the reform agenda and the Government should not dilute its focus just because they will be challenging to reform. In the appointment process, the next step is to avoid hiring unqualified people who will continue the system of interference. To ensure this does not happen, it is key that the selection process is transparent.

2. Challenge of converting some loss-making SOEs which are beyond efficiency and the performance of senior management performance

Some of these SOEs are clearly beyond just the capacity of the management team. Some require further investment if they are to be turned around and the Treasury’s ability to do so is questionable. These entities have been bleeding out money at the expense of the Treasury and given the expected drop in revenue, further investment seems increasingly unlikely. Some SOEs need to cut down the cadre drastically if they are to even breakeven, and Voluntary Retirement Schemes (VRSs) should be considered in the restructuring process.

The manifesto of President Gotabaya Rajapaksa is clear – privatisation is off the table but the consolidation of certain nonstrategic SOEs is still a viable option. However, most of the SOEs will not be able to turn around solely on efficiency increments. The multitude of organisational layers and market drawbacks mean that effective reform will require time, investment, technological expertise, and serious revamping.

3. Overcoming corruption in the bureaucracy and poor level of knowledge in subject content by senior government officers

It is true we have genuine, knowledgeable civil servants but undoubtedly the numbers are few. In SOEs the symbiotic ecosystem of corruption of bureaucracy and board-level appointees is no secret. The effectiveness of the board depends on whether or not the bureaucracy supports the reform. Simply, they can make or break it. The ability for boards to intervene in the bureaucracy is uncertain. The pervasiveness of corruption is clearly a result of political appointments provided by consecutive governments for party supporters and henchmen. Given this, it is not only difficult to find clean bureaucrats, it is almost impossible for those individuals to navigate a system that is geared against them.

4. Challenge of ensuring fair competition with SOEs

Some SOEs are simply monopolies run by the Government. Sri Lanka Ports Authority is one example and there is no reason for them to make losses. It is important to re-evaluate the actual profit-making capacity in Government monopolies. In realistic terms only, the profits really do not showcase their economic gains since they do not operate in a competitive market place. At the same time, there could be some areas where the Government needs to operate even at a loss due to public interest and the absence of the private sector. Operation of buses in rural areas is one such example. The challenge would be transforming and maximising the profits of SOEs which are already in a competitive market place while ensuring a level playing field for the private sector.

For example, there are many players including small and medium-sized enterprises (SMEs) in the modern retail market due to urbanisation and the growing middle class. Government-owned Sathosa is also competing with them and the past record shows that some concessions are provided only to Sathosa, which are not provided to private businesses. If the state procurement process shifts to get supplies only from Government institutions, just the numbers of higher profits or lower losses, it will be a number gimmick and will not create meaningful growth. The same request has come multiple times by some parliamentarians due to lack of knowledge on the overall economy to get the supplies only from Government entities for Government institutes. Such measures will lead to higher corruption and discourage the private sector.

In other words, the board, to appoint new members for SOEs should follow up with a series of guidelines to ensure that principles of fair competition are upheld, that key performance indicators (KPIs) are monitored, performance contracts put in place, and that an effective incentive structure is put in place.

The President and the new Government should equally focus on continuing the investigations on corruption and misallocation of money so the new appointees will take it as a “responsibility than a reward” as per the President’s line of thinking.

In summary, the President’s decision to appoint a committee for the board appointments is a step in the right direction but is just an entry to the complicated problem. To convert the organisations, another series of reforms should follow at the earliest, as time is running out with an anticipated revenue loss, tax reforms, and our SOEs; an ICU patient constantly bleeding for few decades.

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Tax cuts: Could Sri Lanka pull off a Georgia?

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

Originally appeared on The Morning

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By Dhananath Fernando

The tax concessions announced last week have taken our economic landscape by storm. There are conflicting opinions on this decision. While some businesses and experts commend the sweeping tax cuts, the revenue loss is a point of concern to others. Experts in the field have estimated that revenue losses could be as high as one-third of total revenue. A diverse range of headlines covering the issue question the practicality of these cuts, given Sri Lanka’s economic and fiscal situation.

While national conversation is currently centred on the tax cuts, there are also demands being made of the Government. An example would be the headline: “All Ceylon Transport Union writes to Prime Minister asking for a bonus.”

This is indicative of the balance the Government needs to strike. The rationale for these tax cuts by the Government was to broaden the tax base and spur economic growth. This reform is expected to result in revenue loss in the initial years, which leaves the Government with no option but to curtail expenditure before considering further borrowing. But the All Ceylon Transport Union (ACTU) has indicated that they are not ready to tighten their belts. In fact, they have very high hopes for further benefits from the Government.

The Government could be compared to an entertainer juggling too many balls while the audience watches on. While everyone is enjoying the show, they shoot questions at the entertainer. How are you doing this? How long can you do this for? Is it a gimmick or is it real?

This article is a commentary on the potential challenges a government will face when having to juggle too many magic balls. At one point in time, Georgia found itself in a very similar position.

How did Georgia manage this magic act?

Georgia, a country with a population of 4.4 million people, made serious tax reforms from 2004 after reformist leader Mikheil Saakashvili came into power.

The categories of taxes were reduced to six from 22. Instead of a complicated tax system, a simple tax system was introduced. Value Added Tax (VAT), which was at 20% was brought down to 18% and Corporate Tax, which was also at 20%, was brought down to 15%. Dividend and Interest Income tax was also reduced to 5% from 10%. Income, VAT Corporate, Excise, Customs, and Property Tax were the only taxes applicable. All the other taxes were abolished. Ultimately, the result was that tax revenues increased by tenfold between 2003 and 2008. The country witnessed an increased inflow of foreign direct investment and real economic growth averaged 8%.

The caveat here is that above results were achieved not just by bringing the tax rates down. Their entire system went through a complete clean-up. An electronic tax payment system was introduced and strict laws were passed for tax evasion. In parallel to ongoing tax reform, the country also undertook regulatory reform in order to sustain tax income. For instance, 800 licenses were abolished and a digital property registry was introduced. The Government relaxed visa regulations for tourists to boost tourism numbers. Anyone who had a Schengen visa or was a tourist from a country which had a GDP per capita twice that of Georgia’s could freely enter Georgia, thereby boosting revenues.

Georgia expanded their reform agenda by adopting international standards which simplified and consolidated regulations. The Organisation for Economic Co-operation and Development’s (OECD) standards for pharmaceuticals, food, consumer products, and services were fully adopted and welcomed; special permits were not required for the OECD-approved goods and services to enter Georgia and the banking sector benefited from easier operations as a result of adopting these standards. In seven years, Georgia improved dramatically on its “Ease of Doing Business” ranking. In 2003, it was ranked 111th and by 2011 was 12th in the world.

Can Sri Lanka be the next Georgia?

Now, the big question is whether Sri Lanka could be Georgia in 2008, and in magicians’ language: Can we juggle these competing interests and achieve economic growth? The reform prescription Georgia followed was not rocket science. Reduced regulation, a low and simplified tax regime, proper contract enforcement, and the rule of law drive economic growth and businesses.

The newly introduced tax cuts may spur economic growth, but it has to be managed carefully. Sri Lanka is at risk of seeing its credit rating dropping, and given the expected rise in the budget deficit, the Government would also have to renegotiate the terms of the IMF bailout.

The next few years will be difficult, given the series of large loan repayments due till 2022. Widening the country’s tax base will take at least two to three years, and this should be supported with further reforms in the economy in order to stimulate business and trade. Whether we started juggling an extra ball at the right time is the question of the hour. The Government will have to commit to further reform and focus on limiting expenditure if these tax cuts are to be successful.

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