Interdependency, the framework for India-Sri Lanka relations

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

Governments on both sides have changed several times since work began 18 years ago on a comprehensive economic partnership agreement between Sri Lanka and India. One constant has been the failure to complete the agreement.

This is cause enough to step back and reassess strategy and tactics.

Is a legally-binding agreement necessary?

China’s investments and trading activities in Sri Lanka are growing rapidly, with no agreement in place. Perhaps this indicates that agreements are not necessary.

Because most economic actors in both India and Sri Lanka have a degree of autonomy from the state, companies will not simply invest as directed by political authorities to satisfy strategic objectives.

I recall the lack of enthusiasm on the part of India’s majority-State-owned IOC to take over the colonial-era oil tanks in Trincomalee in 2002, in the absence of a viable business plan. They obeyed their Government’s directions only when the tanks were bundled with a fuel-distribution business.

Private entities will take risks, but they would prefer reduced risks of administrative expropriation. What bilateral or other trade and investment agreements do is reduce risks flowing from state action.

Economic actors who are immersed in “deal culture” dislike legally binding trade and investment agreements. They prefer deals worked out through favorably disposed politicians and officials. Their opposition is not worded in this language, but is clothed in the rhetoric of national sovereignty.

In practice, the authorisations for employment of foreign professionals and for investment in the telecom and IT industries in Sri Lanka were GATS Plus, or more liberal than the legal commitments that had been made.

I pointed this out to a leading opponent of the IT sector commitments in the India-Sri Lanka agreement. His response was that unilateral liberalisation could be withdrawn, which was not the case with treaty-level bilateral agreements. The external investor or trader is thus exposed to risks of rule changes damaging to his business case. This can only be mitigated by partnering with a deal maker.

The deal maker gets fees and a share in the operating entity, in return for greasing palms. I recall a well-educated and connected Sri Lankan then residing in the US coming as part of a delegation to talk about a satellite telephony license when I served as Director-General of Telecommunication. As the group was leaving, he tells me quietly in Sinhala to mandate a local partner so he can get in the game. No licenses were given so the question of creating a legal requirement to pay fees and a share of earnings to the deal maker did not arise.

These rent-seekers must be marginalised in the national interest. But they draw their strength from the power of national-sovereignty rhetoric, especially in relation to India, the focus of atavistic fears going back to the depredations of Kalinga Magha in the 13th Century CE. The public and the politicians are persuaded more by these appeals to emotion and less by evidence-based claims about the benefits of trade and investment.

A new frame

What people fear is dependency. If the electric grid is connected to India, they fear it will be shut off or constricted. They see how Bhutan’s election was influenced by constrictions on fuel supplies and fear Sri Lanka’s internal decision making may be compromised because of dependence on India. India is 50 times the size of Sri Lanka. Dependency on India is feared.

These fears can be overcome by changing the frame to that of interdependency. India could have crippled the Bhutanese State if they stopped purchases of electricity, which constitutes 70% of Bhutan’s exports and makes up most of Government revenues. Yet, a halt in electricity purchases is unlikely because that would cause massive disruptions to the economies of West Bengal, Bihar, Odisha, and Jharkhand. Disruption of the relationship would cause damage to both sides. Keeping it going benefits both. This is interdependency.

The continued success of the Port of Colombo depends on its use for trans-shipment by India. If not for Indian volumes (over 70% of the total), Colombo would not be 25th largest container port in the world and would not be the 19th best-connected port according to UNCTAD. Especially before elections, Indian politicians talk up the need for a hub in South India to retain the trans-shipment payments now flowing to Colombo.

Recently, Prime Minister Modi announced a trans-shipment port in the Great Nicobar Island, which could damage Colombo’s position as a regional hub. If Indian containers are routed elsewhere, Colombo will soon lose its attractiveness to the shipping alliances. Sri Lankan exporters will lose direct and frequent sailings and the port would lose earnings from trans-shipment related services. India will have to invest massively in building up a new hub which may or may not have the proven efficiencies of Colombo. Definite loss for Sri Lanka; uncertain and costly outcome for India.

Addressing India’s concerns

India may be seeking to invest billions of dollars in a new port because they fear dependency on a foreign port with significant Chinese presence for vital freight movements. How can the India’s legitimate concerns be addressed?

One way is to allow India an equity stake in the Colombo Port. That was at the heart of the conversations with India about Sri Lankan ports since at least 2003, the latest manifestation being the tripartite agreement about Indian and Japanese investment in the East Container Terminal in the deep-draft South Harbour.

If this were completed as agreed, the incentives of India and Sri Lanka will be better aligned. In addition to enjoying the benefits of Colombo’s efficiencies and network economies, India would now also benefit as an equity investor. Security concerns would be assuaged.

India and Sri Lanka may also consider a bilateral agreement governing port services between the two countries. The 2003 report of the Joint Study Group on the India Sri Lanka Comprehensive Economic Partnership Agreement included negotiated language to this effect, wherein India would recognise the port of Colombo as a hub within the southern Indian maritime transportation system. The intention then was to include this as one element of the overall agreement covering trade in goods and services, in investment, and in cooperation and confidence building.

The two countries have failed to conclude a comprehensive agreement in 18 years. An interim solution would be narrow agreements wherever possible, one for maritime transportation, another for aviation, another for grid connectivity, and so on, each anchored on, and presented to stakeholders and the public in both countries framed in the language of, interdependency and win-win. In each case, concrete benefits will be gained, and confidence built. Objections based on fear of dependency and foreign stranglehold of key economic facilities may be refuted not just with arguments, but with ongoing experience of mutually-beneficial sectoral collaborations.

If a policy window opens for a comprehensive agreement, the opportunity can be taken. But even here, would it not be better to have ongoing “pilot projects” from which lessons can be learned? Pursuit of the comprehensive approach has been unproductive, so far. A different, incremental approach is worth trying.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Sri Lanka needs IMF even if it doesn’t want it

Originally appeared on The Morning

By Dhananath Fernando

With the visit of US Secretary of State Mike Pompeo, Sri Lanka’s national discourse shifted from the 20th Amendment to foreign relations. State Secretary Pompeo’s visit grabbed national attention for many reasons; one main reason being economic and diplomatic tensions between the world’s two largest economies, the US and China.  

Sri Lanka has transitioned through different phases of foreign policy, from the post-independence era to recent times. When the late Lakshman Kadirgamar was the Minister of Foreign Affairs, his main challenge was to stop the financing of the Liberation Tigers of Tamil Eelam (LTTE), while communicating to the international community the ground reality. With the tragic tsunami in 2004, the helping hand we received from our international friends cannot be forgotten. During the last stage of the civil war, we had to again seek assistance in terms of intelligence, supplies, diplomatic support, and military hardware from our neighbours and other economic powers. 

After the war, the next challenge was facing allegations of human rights violations at the United Nations Human Rights Council (UNHRC) and at the same time managing the development of our economy, in a post-war context. Therefore, we had to work tirelessly to regain the Generalised Scheme of Preferences Plus (GSP+) concession and to remove the fish export ban in order to strengthen our economy. 

Unfortunately, after gaining independence and secondly after the end of the war, Sri Lankan rulers have failed to carry out the necessary economic reforms to make our economy competitive. We have made gigantic investments in non-tradable goods by borrowing huge sums of money at high-interest rates on shorter-maturity in foreign currency and lived beyond our means. The investments we have made were not properly evaluated and have hardly generated adequate revenue to settle the loans we have taken. About 42% of the foreign debt portfolio is International Sovereign Bonds (ISBs) and our public finance management has been extremely poor. As a result, we are in a position today where 47% of our revenue has to be paid just to cover the interest of the loans we have taken.

In contrast to this, our overall average post-independence economic growth is about 4.2%, and it was just 2.3% in 2019. This year, it will be an economic contraction, not growth, which means we will be deep in negative territory. This crisis, coupled with the global Covid-19 pandemic, has resulted in our foreign exchange earnings being badly hit. The secondary bond market signals on yields and the rating downgrade by Moody’s has indicated that Sri Lanka’s finances are in a bad state.  

The foreign policy of a country is often connected to the country’s economy and trade. Most of the time, a policy stance has to be arrived at by considering the context of challenges of a country. Today, the importance of a good foreign policy has come to play again, especially in the context of servicing our debt. All the swap agreements and bilateral support are based on our relationship with our neighbours. However, the main questions remain: How do we get the assistance and from whom are we going to get it? 

On the one hand, during the visit by a high-level Chinese delegation led by Chinese Communist Party Political Bureau Member Yang Jiechi, it was reported in the media that we signed a credit facility agreement of $ 500 million and in July, the Reserve Bank of India (RBI) signed a currency swap facility of $ 400 million with the Central Bank of Sri Lanka. 

On the other hand, there is a $ 480 million Millennium Challenge Corporation (MCC) grant with zero interest – free money which is still hanging around the corner, and yet, the Government hasn’t communicated their stance to the donor agencies on whether we are going to take it or not. There were very sensitive political debates during the last presidential election, mainly on the land component of the MCC agreement on the basis of sovereignty and territorial integrity. Things have changed, now that the members of the then ruling party who believed that the MCC was a worthy agreement to sign with no impact on our sovereignty, are now opposing it. Similarly, members who vociferously opposed the agreement when in the opposition, are now turning a blind eye to it, while the Government provides general statements rather than a specific policy stance, such as “we will not sign any agreement that affects territorial integrity”. 

On our debt servicing obligations, we have to pay about $ 4 billion every year for the next three to four years just to roll over our debt. In this context, it is not only about getting money to roll over debt that matters. It has to be about financing through sources whom we could assure are fiscally disciplined and attempt to build investor confidence – this is what matters. Only then will markets take Sri Lanka seriously and we will be able to invest in foreign currency at somewhat lower interest rates. Otherwise, we will be caught up in the vicious cycle of taking more loans to pay the interest at even higher interest rates with a low growth trajectory. 

The question is, what could be the country or agency which ensures financial discipline and could build the confidence of investors worldwide? The only player in town that could do that is the International Monetary Fund (IMF). When a country is on an IMF programme, that respective country has to jointly agree to a programme on bringing the necessary structural reforms to secure the funding. So the respective government has a strings-attached relationship and pressure to perform well.

However, we have to understand that securing an IMF programme is not a thing to be proud of and it’s a signal that we have managed our finances very badly. It’s just a bailout programme. Our policy-makers have to conduct economic reforms in such a way that our economy can perform well, without seeking any help from the IMF. Sri Lanka often boasts that we have honoured all our debt commitments throughout our history. Unfortunately, this clean record is not due to our amazing financial management. We have run to the IMF 16 times so far for bailout programmes whenever we have had a balance of payment crisis and faced the risk of default. In fact, for almost half of Sri Lanka’s post-independence history, Sri Lanka has been under an IMF bailout programme.

The Government has lately maintained that they do not expect to seek IMF assistance and they are confident of managing the situation with the current financing strategies. However, I must highlight that we have to seek IMF assistance fast, without waiting any further, as we have a good story to sell on Covid-19 containment, despite the latest outbreak. The other reason for urgency is that there is a long line of countries waiting to get IMF assistance. The more we delay, the higher the intensity of the pain.

Interestingly, it was reported on The Sunday Morning under the headline “IMF still considering RFI request” that Sri Lanka had applied for the IMF’s Covid-centric Rapid Financing Instrument (RFI) earlier this year but that the application is still under review. The article goes on to say that the IMF had received just over 100 requests from countries seeking RFI support and as of mid-September, about 76 requests had been approved, meaning that Sri Lanka is among approximately 20 or 30 countries that have not been granted RFI support. If this is the case, it is likely that the Government is yet to agree to certain terms of the IMF and therefore, the application is still pending.

Ultimately, whether Sri Lanka has gone to the IMF and not been approved yet or Sri Lanka is not interested in an IMF programme, Sri Lanka needs an IMF programme now to ensure fiscal discipline and regain investor confidence. Going to the IMF often is not the solution, but it is probably the best option left for us to overcome the situation. Only time will tell how good or bad the strategies implemented are. My only hope is that whatever strategy that gets implemented persists for several years, at least. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Birth of the 20th Amendment and death of a basketball legend

Originally appeared on The Morning

By Dhananath Fernando

Why planes must have two pilots and warning systems

After much elaborate drama, vehement opposition, and toing and froing, the 20th Amendment to the Constitution has been passed with a resounding majority in Parliament. The contents of this amendment and the seismic shift it creates to our governance system reminds me of a story from early this year before global headlines had begun to be dominated by Covid-19 – namely, the tragic helicopter crash on 26 January in Los Angeles which caused the death of basketball legend Kobe Bryant and his daughter.

The National Transport Safety Board (NTSB) of the US has come up with a 1,700-page report on the crash. While it provides no final conclusion, many aviation experts believe the pilot got disoriented, confused the pitch altitude, and though he was ascending when he was descending. This is not a novel phenomenon in the field of aviation and is always a possibility as you are in the air without visual references. At least, that was the reasoning at surface level. But when we go a little in-depth, there are two main factors highlighted by experts and the report (1).

1. The helicopter Kobe Bryant flew (Sikorsky-S76B) is operationally a hi-tech machine with a sophisticated flight-deck for two pilots. However, on this unfortunate day, it was operated by only one pilot. According to NTSB guidelines, any helicopter that carries more than five passengers must be a dual pilot operation, but in this case, nine innocent passengers died in the crash. A guideline for dual pilot operations was imposed post the investigations of a similar crash in the Gulf of Mexico in 2004. The simple reason to have a dual pilot operation is simply a check and balance mechanism to minimise the probability of human error in decision-making in flight.

2. The second reason was that the helicopter that hit the ground did not have a Terrain Avoidance and Warning System (TAWS) installed.

A dual pilot operation and installing a TAWS are simply just guidelines. Operating a flight without following those guidelines were not illegal, but the cost of not following the guidelines was proven to be human life.

When I think about Sri Lanka’s Constitution and the proposed constitutional reforms which affect the economy and our structure of governance, I think of a helicopter operation and the tragic crash Kobe Bryant had to face.

Checks and balances and processes are in place for a reason, and till things go wrong, we may not see the importance of their presence. In Sri Lanka’s context, our pilot is the policymaking unit and the 21 million population are the passengers who have to be safe onboard and flown to the destination of prosperity in their own lives. So we have to have systems in place where the aeroplane can be landed safely, even if key decision-makers in the cockpit get disoriented.

The discussion on the 20th Amendment has been evaluated in that spirit, in particular from an economic perspective. That is why the checks and balances are vital and a mechanism has to be established to minimise the probability of human error, similar to the dual pilot model and the TAWS system. Otherwise, it is natural that in a cloud of “political power”, individuals may disconnect with the ground reality and make decisions to accelerate the momentum in the wrong direction.

Our economy is already at a critical stage where we can’t afford to make any miscalculations. For example, there has been a rise in bond yields in secondary market bonds of Sri Lanka following the announcement of the changes in the 20th Amendment. One possibility for this could be the uncertainties created by the 20th Amendment with regard to checks and balances for the broader economy.

The executive powers vested with the President have to be looked at in the spirit of “responsibility”. Political power provides the decision-making ability, and yet we should not underestimate the “responsibility” factor that is interconnected with power, which may impact millions of lives. What do we do with political power franchised by the people to develop their economies? This is the vital question. The three arms of the executive, legislature, and judiciary are the governance equivalents of a dual pilot and the TAWS safety net: The “executive” as the chief pilot and “legislature”, lead by the Prime Minister, as the core pilot have to work hand in hand in ensuring that there are measures to recheck whether we do the right thing. Then there has to be an independent judiciary to resolve any conflict. If Sri Lanka is to prosper, it is essential that we protect these checks and balances.

It has been proven multiple times in Sri Lanka and across the world that when citizens are empowered to make their own decisions and choices, the chances for success and prosperity are greater. A single government trying to understand the needs and aspirations, motivations, behaviours, lifestyles, etc. of 21 million people is simply impossible. That is why the structure has to be organised in a way where people are empowered to make their own economic decisions and competition has to be in place along with a level playing field in order to ensure that hard work is incentivised and rewarded.

All constitutional reforms have to be in the view of what is in it for people to make their own choices and how it affects the creation of a level playing field.

As highlighted in this column less than a month ago on 27 September, the importance of the Auditor General having the ability to audit state-owned enterprises (SOEs) has to be appreciated. However, just the powers for the Auditor General will not ensure SOE governance as the corruption in SOEs is systemic and incredibly pervasive. The Government has to consider greater reform and should consider steps such as listing strategic SOEs at the Colombo Stock Exchange (CSE) and establishing a “Temasek model” for the governance of all SOEs.

The general Sri Lankan sentiment is that merely appointing a political leader or moving a constitutional reform would provide solutions to all problems. When the amendments were brought to increase female representation at local government level, many were of the opinion that it would solve the problem of female underrepresentation. Unfortunately, what happened in reality was far different, with some women contesting elections simply to enable their husbands to effectively take over once elected. It is required that Sri Lankan political leadership initiates a comprehensive economic reform plan if we are to have any hope of development.

What we do with the “powers” we have in hand is more important than what “powers” we install in one single position. In exercising power, we need a system to make sure we exercise it in the right way.

Sri Lankans’ experience in the economic context over time is that the powers granted by people have not been utilised for the right objectives, and in many cases, the same power they have provided have limited people’s own right and freedom to enjoy a prosperous economic life.

After the 20th Amendment, with new powers installed, “economic freedom” is a concept that we can start building into our country. It has been shown that countries with higher economic freedom, where people are provided with the independence and opportunity to earn higher incomes, generally experience a higher quality of life. Poverty levels reduce and the most vulnerable sections of society are able to have economic security.

Per capita income and economic freedom quartile

Sri Lanka has been ranked 83rd on the Economic Freedom Index and we have a long way to go. Let’s hope that with checks and balances and executive powers, Sri Lanka will establish systems and guidelines such as dual pilot systems in aviation and TAWS in the form of institutions to incentivise people to work harder and become prosperous, so that we can prosper as a country.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Economic reforms before constitutional reforms, please

Originally appeared on The Morning

By Dhananath Fernando

Kumar Sangakkara in his famous Colin Cowdrey Lecture at London’s hallowed Marylebone Cricket Club (MCC) in 2011 said: “In cricket, timing is everything.” Not only in cricket but in economics and politics too, timing is everything.

Unfortunately, Sri Lanka’s track record on “economic reforms” has been very poor and completely devoid of timing. We have been completely ignorant of the need for economic reform and things are now at a dire stage. Across the board, even the Government has conceded that things are not easy!

Sri Lanka is experiencing a second wave of Covid-19 and the continued imposition of curfew in parts of an important district such Gampaha, which is a key economic centre, is a cause for concern. The recent lockdowns also cover a free trade zone, the country’s main international airport, and many export-oriented factories. Hence, one cannot simply ignore the economic impact of this health crisis.

Our economy contracted by 1.6% in the first quarter of 2019 and the second quarter data is yet to be released. On the positive side, our exports have exceeded the $ 1 billion mark in September and our remittances have increased by 28% YoY (year-on-year). While this increase in remittances is a good sign, this sudden increase may be due to workers sending home their final savings due to job losses. Another positive sign is that our stock market is performing well with about Rs. 5 billion turnover with more than 41,000 transactions, the highest since 2011. However, on the other hand, following Moody’s credit rating downgrade and even prior to that, the departure of foreign investors from the stock market can be observed, and our treasury bills have been undersubscribed as of late.

Unfortunately, with Covid-19 infections picking up again, it is unlikely that people will see further relief measures from the Government, as the Government’s finances are in a complicated situation; in fact, they are probably worse off than our household finances. Reopening the country for tourism will most likely be postponed, at least until the end of the first quarter of next year, and further moratoriums or government handouts may be unlikely, given that the budget deficit for 2021 is expected to be around 9% of GDP.

In this context, we have to admit that our economy cannot be fixed just by incremental reforms. Superficial changes or stopgap solutions will not help us reach where we aspire to be.

Unfortunately what we are seeing at the moment are attempts to micromanage what is essentially a macroeconomic problem, while serious core economic concerns are reaching a boiling point. Measures such as the reduction of tariff lines on a few consumable goods and allowing the importation of some ingredients for the production of incense sticks are just a couple of examples of ad hoc micromanagement of the macroeconomy. When a senior minister has to engage himself in a micro-task such as creating a tiny tariff reduction on just one HS (Harmonised System) code, it prevents them from prioritising the broader issues to navigate the economy at a time where the country is facing the unprecedented crisis of Covid-19.

A similar situation was reported to have occurred during the 1970s where the Minister of Finance had to go through a file every morning to evaluate the licence requests for the importation of motor vehicles. When a Finance Minister has to sit and supervise such a micro issue, it is obvious that many other policy priorities will be either ignored or mismanaged.

The World Bank predicted an economic contraction of about 6.7% for 2020 even before the emergence of the new wave of Covid infections, but mainstream conversation has been focused on constitutional reforms, particularly the 20th Amendment. It is true that people have provided a clear mandate for a new constitution, but our policymakers have to think of the timing of the new constitution and other constitutional reforms. The country and people’s needs and expectations have shifted, especially as the entire world is grappling with a pandemic. New needs and lifestyles have been created. Consumer and citizen behaviour and priorities have undergone a massive transformation. This doesn’t mean that the mandate for a new constitution is no longer valid, but the timing and focus being given to a new constitution has to be reconsidered. This matter could just as easily be taken up whenever the current crisis has been dealt with.

There is no doubt that our constitution is far from our expectations, but the brewing economic crisis (not just in Sri Lanka but across the world) requires 100 times greater focus for the economy to be put back on the right track.

The previous Government too was spending its energy on a new constitution without focusing on much-needed economic reforms. After spending significant time and resources during its tenure on a proposed constitution, it was ultimately not even presented to Parliament. Much-needed economic reforms were postponed and we ended up with 2.3% economic growth with stagnation in exports and foreign direct investments.

It is a political reality that there is a trade-off between constitutional reform and economic reform. Ultimately, for both constitutional reforms and economic reforms, one needs to sacrifice some political capital as, naturally, there is opposition to any type of reform. It all comes down to prioritising what reforms are urgent considering the internal and external environments.

Serious legal reforms can be carried out to positively affect businesses and the business climate before these planned constitutional reforms. As I have highlighted before in this column, Sri Lanka’s land regulations, regulations on micro and small enterprises, and employment regulations can be easily reformed to bring faster results. Age-old laws, regulations, and bureaucratic practices continue to hamper investment. Therefore, instead of a heavily energy-consuming constitutional reform process, we can focus on getting our economic fundamentals right. Creating competition and competitiveness is the way to go.

Over the years, while we have been discussing constitutional reforms, our regional peers have moved ahead of us, especially on the economic front. For example, Vietnam increased its exports from $ 50 billion to $ 250 billion from 2008 to 2018, while Sri Lanka’s performance improved only from $ 7.5 billion to $ 10 billion in the same period.

National Budget 2021

Now the Government has a golden opportunity to bring in a series of economic reforms through the upcoming national budget. A clear direction through serious reforms will bring back credibility to the Government and the economy, and send a positive signal to investors locally and globally. Sri Lanka’s economic problems have gone far beyond ad hoc fixing. Now it can only be fixed through macro reforms.

Then comes the question of what sort of reforms. In the world of business and economics, it is incentives that drive growth and innovation. It is by expanding markets and access to markets that growth can be achieved. It is through competition and by creating a level playing field that growing economies, including our regional peers, have achieved growth. So, for a market of 21 million people, our reforms have to be based on setting up proper incentives, connecting with other markets, and improving productivity for those who work hard and value-free exchange of goods and services.

Bringing in these macro changes before micromanagement has to be at the forefront of government policy. Unfortunately, we have no other alternative if we are serious about creating a prosperous country. Let’s hope that Sri Lanka will get its timing right at least this time and establish the right fundamentals for a competitive economy.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Is Sri Lanka unlucky or unprepared?

Originally appeared on The Morning

By Dhananath Fernando

Some time back, a friend of mine died in a motorcycle accident. I consoled myself thinking it was pure misfortune. However, upon visiting the location of the accident, I discovered my friend had ridden his bike without a safety helmet. Needless to say, if he hadn’t met with the accident, regardless of whether he was wearing a helmet or not, he would’ve still been amongst us. However, if he had worn a helmet, it is likely that he would’ve survived the accident.

Most incidents in life, or even in the economy, can be seen through two lenses – of misfortune and mismanagement (in its positive variation, these can be interpreted as good fortune or as the results of hard work and smart decisions). It is embedded in Sri Lankan culture to interpret most unfavourable events in life through the lens of misfortune. However, a deeper dive into the root causes of unfortunate incidents often emphasises lapses of management.

A sudden uptick in Covid-19 cases can also be viewed by society through these two lenses. As individuals, isn’t it the appropriate time to question if we followed the simple steps of wearing a face mask, washing our hands, maintaining social distance, and taking precautionary measures to avoid greater misfortune?

On the broader picture of public policy; have we increased our testing capacity, have we followed the right testing strategy, and have we been conducting random testing? These are questions we should ask ourselves before jumping to any conclusions.

However, a combination of mismanagement and misfortune is deadly, and these two often complement each other. Whether it’s misfortune or mismanagement, the consequences for citizens would be very serious both from a public health perspective and from an economic angle.

One main lesson COVID-19 has taught us is that only self-control and self-discipline can contain the virus, not state control. The state can only play a facilitatory role, and the impact on public health and our economy worsens with each blanket policy decision.

When we look at the events over the last five to six years, an unaccounted cost of mismanagement is throwing away resources and opportunities that could have been utilised during hard times of misfortune.

For example, think of a cricket team which is chasing a total, and loses half their wickets due to the frontline batsmen playing careless shots. However, the team ends up losing only by two runs due to a brave fightback by the lower order batsmen, which took the team to the brink of an unlikely victory. Should we say the team was unlucky because it got agonisingly close and lost by only two runs, or should we blame the carelessness of the batsmen at the top, without whom the team would have presumably ended up winning the match?

When we look back at our recent history, in 2015-2016, the Central Bank bond fiasco affected our financial markets to an extent; in 2016, the drought greatly affected Sri Lanka’s economic prospects; in 2018, we had a constitutional crisis; this was followed by the 2019 Easter Sunday attacks which further shattered hopes of any economic recovery; we had the Digana riots and social media blockages in between; in 2020, we are still in the middle of a global pandemic. Some of these negative shocks are due to mismanagement, and some events are due to misfortune. But it is undeniable that we are hindered by the mismanagement of our misfortunes.

However, all the misfortune and mismanagement over the last few decades now appear to be funnelling down to a serious economic shock. The uncertainty of COVID-19 and its impact at the global scale have made it the right ingredient to stir up a storm for Sri Lanka.

Mismanagement and misfortune of exports

Covid-19 hit our exports badly on all fronts. As our export markets were affected by falling consumption, our supply chains for exports were interrupted during the first wave of COVID. Since then, however, our exports have been on the rise to reach pre-COVID levels. However, our apparel sector is one major industry that was badly hit by COVID-19 just at the start of this year – a time we need exports the most.

There is talk in society that the recent COVID-19 cluster is viewed as a result of both misfortune and mismanagement. However, we as a country cannot be forgiven for the mismanagement of our export sector over the years. Our mismanagement of exports backed by a system of unnecessary and excessive regulations on exports continues to handicap our export potential. According to a study conducted by Verite Research in 2018, registering as an exporter is an extensive process. The example they provided is of the coconut industry, where the process adds three to four weeks in the time taken to register, in addition to the time taken penetrating regulatory barriers that stand in the way of easy registration, only to prolong the process even further, continuing all the way to the point of customs.

The added unnecessary import restrictions further hurt Sri Lanka’s export potential with higher tariffs on imported raw materials for export processing making matters worse and Sri Lanka’s exports uncompetitive on the global stage.

The intention of protecting local industries by imposing tariffs has made our own local industries uncompetitive and has forced consumers to bear the cost of inefficiencies. As a result, local industries are neither productive for export nor competitive, and we are back at square one.

Our mismanagement has caused us to restrict our exports only to a few sectors and we have placed too many export eggs in the apparel basket.

Mismanagement and misfortune of our debt sustainability

COVID-19 has had a direct impact on our debt sustainability. As we have highlighted multiple times, servicing debt of nearly $ 4 billion till 2025 is a mammoth task. Our debt servicing cost has exploded to a whopping 107% of our annual revenue, and our annual revenue is declining as a percentage of GDP over the years.

The Government’s generous tax cut offered at the end of last year is expected to significantly reduce tax revenue for 2020. The Government assured us that we are in a position to service all our debts. However, that can be only done by borrowing money from other lenders and servicing the existing debt. Even if it is possible, it won’t provide a permanent solution due to the unsustainability of our debt.

If Sri Lanka had built the right economic foundations with proper social security safety nets and policies to boost competition and productivity with a firm understanding of economic fundamentals, we would never have reached this dangerous juncture.

By and large, we could also have navigated or totally avoided most of the misfortunes we are facing at the moment. Our mismanagement is what has made us believe that we are unfortunate. Unfortunately, the degree of mismanagement through which we have survived so far is more than we can afford. Therefore, we have now reached such a precarious position that we simply cannot afford to face any further misfortune!

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

How bad parenting leads to bad credit

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

Parenting a child is a difficult task. It is no doubt that educating and teaching a child takes a significant amount of time and effort for all parents. The bigger the pile of homework, the more it becomes an affair of the household, requiring the attention and time from either parents or caregivers.

Some parents take an easy route; instead of encouraging their child to get the work done, they do it themselves and bestow the child with all the credit. This may be owed to the fact that the assigned task is above and beyond the grasp of a child, or simply because parents can’t afford to allocate the time and effort required to assist their child. Undoubtedly, both reasons are not in the best interest of the child and will certainly hamper his or her learning curve and growth.

Given the above phenomenon, I can’t help but notice similarities between common parenting mistakes and the Sri Lankan economy. Our economy has adopted a habit of conveniently ignoring hard reforms for political motives and instant gratification. This has resulted in long-term damage to the country’s economy.

Moody’s Analytics downgraded Sri Lanka’s credit rating from B2 to Caa1 last week with a “Stable” outlook. While the Government has made a statement expressing their disagreement with Moody’s credit rating downgrade. It is important to understand Moody’s rationale in depth. Long-term measures to correct these problems are vital, and hard reforms may be the only way out.

The effective containment of COVID-19 and the recent performance of the stock market has been reiterated by the Government as part of their success story. Additionally, the rebound of exports and foreign worker remittances are highlighted as positives. The Government has further provided a commitment to reduce the debt-to-GDP ratio, serve all external creditors without delays, and uphold a clean record of debt servicing.

However, Moody’s evaluation, which was in the works since April, highlighted concerns over-servicing debt of about $ 4 billion (between 2021 and 2025) with a reserve level of $ 7.4 billion, along with low growth predictions. Moody’s estimation of raising the debt-to-GDP ratio of 100% exceeding the median of 86% in the Caa1 category has been highlighted as a fundamental reason for the downgrade.

Moody’s downgrade forecasts the possibility of Sri Lanka’s credit rating being further downgraded by other rating agencies such as Fitch and S&P in the coming months. This will thrust Sri Lanka into the “Speculative Grade: Very High Risks” category, raising serious concerns over the possibility of acquiring money in international capital markets. The risk attached to this doubles as the coming years are burdened with heavy debt repayments.

How can this be managed?

Prevalent data highlights that consecutive governments have resorted to borrowing in international sovereign bonds at high-interest rates of about 6.6%, with an average repayment period of nine years. It is no doubt that our economic woes are deep-rooted in these poor policy solutions.

It is vital that we acknowledge the damage caused by these measures and formulate a strategy to overcome it.

The diagnosis is clear – our interest payments take 47% of our revenue and 30% of our expenditure.

The first step to manage this downgrade is to build credibility in financial markets. This is both painful and time-consuming. However, this is not an excuse to postpone much-needed reforms. Doing too little too late would lead to severe consequences, further hampering our debt sustainability.

To build credibility, the Government enjoys the benefit of two main strengths, a key strength being the successful management of the COVID-19 pandemic, which has also been praised by the World Health Organisation (WHO). At the international stage, this can be our ticket for a possible debt restructuring, giving the Government leverage to convince the International Monetary Fund (IMF) of a credible debt restructuring plan.

As per the below graphs, a greater portion of our foreign debt is in international sovereign bonds (ISBs). The IMF programme, of course, will come with conditions which are painful, but it will also bring credibility to Sri Lanka within international financial markets. This will require a commitment from the Government to maintain fiscal discipline. Sri Lanka has spent 42% of the last 70 years under an IMF facility. We have approached the IMF 16 times for bailout programmes. This isn’t a point of pride but indicates how irresponsibly our economy has been managed over the years.

An IMF restructuring programme will not uplift Sri Lanka’s credibility to the point where a credit rating downgrade can be reversed. However, it provides additional confidence for creditors and investors who are looking to invest in high-risk markets even at a premium rate.

The second strength is the Government’s opportunity to present a convincing budget with serious reforms in November. The budget needs to have a comprehensive strategy on improving government revenue and achieving a positive primary balance. (Primary balance is the difference between government revenue and government’s non-interest expenditure.)

Both measures are painful, but the Government has the political capital and political strength to pass through key essential reforms. Unfortunately, although we measure ourselves with what we intend to do, the markets and outsiders assess us with what we have done and continue to do.

Similar to parenting a child and encouraging the child to complete their assigned homework, the path to hard reforms is difficult and time-consuming. But we all need to support and help the Government to carry out these hard reforms, as it is ultimately being carried out for the betterment of our beloved motherland and ourselves.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lanka’s Auditor General and Steve Jobs’ Garden Fence

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

A few days ago, I read up on an interesting anecdote from the life of Steve Jobs. When Steve was a child, his father had asked him to paint the fence around his house. Steve took the task up and painted the outside of the fence. When he proudly presented his hard work to his father, the father questioned why only the outside of the fence was painted. Steve replied: “Dad, no one sees the other side of the fence!”

To that, his dad responded: “Steve, but we will see it.” Many years later, when Steve briefed his engineering team on the deliverables of the Macintosh computer, he said to them: “I want the outside of the computer’s aesthetics and design to be outstanding. But I also want the inside of the computer to be more outstanding than the outside.” To that, his team responded: “Why do we need to spend so much time, effort, and money on the inside of the computer? No one really sees the inside!”

Steve replied: “But we will see it.”

The ongoing debate on the dilution of the Auditor General’s powers has reminded us of the need to paint both sides of our fence if we want to see a developed and prosperous Sri Lanka.

The development, prosperity, and progress we see in any society or institution are a result of structural changes, self-discipline, and systematic advances of working on an in-depth value system. That is why self-control is always better than state control.

Audits and checks and balances are unseen on the inside. What we see on the outside is a reflection of our society on the inside. Therefore, Sri Lankans not reaching our full potential is interconnected to the absence of many systems of accountability and transparency. Audits and checks and balances should come from within. What we see outside is merely a reflection of who we truly are on the inside. Sri Lankan society lags behind for this very reason, as we lack the many systems of accountability and transparency necessary for growth.

Systematic misgovernance

If you ask any Sri Lankan why their country is still developing, they will give you three reasons: corruption, waste, and misgovernance. What we see on the outside as low productivity, inefficiency, and delays are a result of a lack of accountability, transparency, audits, and checks and balances. This is not only valid for our public sector but also for our private sector.

In the context of the 20th Amendment, the proposed Clause 31 repeals article 153 (1) of the Constitution which mandated that the Auditor General be a qualified auditor subject to the approval of the Constitutional Council (CC), following which, s/he would be appointed by the President. The removal of this by the 20th Amendment opens the risk of appointing an Auditor General who wouldn’t possess the qualifications required for the position.

The risk of providing constitutional leeway in appointing an unqualified Auditor General is multidimensional. A greater degree of Sri Lanka’s corruption and crime is white-collar crime, and given the legal structure of Sri Lanka, even qualified auditors are finding it difficult to audit.

The VAT (value-added tax) scandal reported many years ago and the more recent Central Bank bond fiasco all indicate the enormous cost of ignoring simple processes, which when multiplied can cripple our entire economy. Unfortunately, the need for such processes only come into the limelight when things go wrong, while the positive results of having due process usually don’t make it to newspaper headlines.

Accountability is key

Even under the 19th Amendment, the Auditor General’s powers did not include the ability to audit state-owned enterprises (SOEs) incorporated through the Companies Act in which the government has a stake of less than 50%. Maintaining accountability in most of our gigantic SOEs that the Treasury has supported with taxpayer money has failed! Most SOEs have failed to produce even a basic annual report over the years for the benefit of the public, even though the revenue of some public enterprises is nearly half a trillion.

There are more than 500 SOEs of different scales which waste a colossal amount of taxpayer money, and there is no excuse that can be provided for not producing annual accounts when earning half a trillion rupees in revenue.

The space created by the 20th Amendment for SOEs to not get audited by the Auditor General will set a bad example for all businesses. The collective losses of only 16 strategic SOEs in 2018 amounted to Rs. 156.73 billion, which is equivalent to more than thrice (Rs. 47 billion in 2017) the expenditure of the Samurdhi Programme.

One may ask why corruption levels were still high with the Auditor General having the power to audit under the 19th Amendment, and when there were additional checks such as having an Opposition member heading the Committee on Public Enterprises (COPE) and opening COPE meetings to the media; it is true that neither the Auditor General nor opening COPE meetings to the media will solve all corruption problems within SOEs.

If the level of corruption and misgovernance was high even with the Auditor General’s powers under the 19th Amendment, imagine how the situation would be without such supervision. We sincerely hope that at the committee stage, matters pertaining to the transparency and accountability of SOEs will be taken seriously.

Improving systems and doing things better than we did in the past must be the way forward if we are serious about a “system change”. In order to strengthen governance, we should at least list strategic SOEs at the Colombo Stock Exchange (CSE) so that these institutions will have no choice but to adhere to the governance structure of the CSE. One other measure is to provide the Auditor General with more power to investigate SOEs incorporated through the Companies Act in which the government has less than 50% stake, as most SOEs have the practice of incorporating subsidiaries and sub-subsidiaries under the main SOE with different stakeholder arrangements.

In public policy, dismantling an existing accountability measure without an alternative could be highly problematic, given the level of corruption rooted in Sri Lankan society. Sri Lanka has dropped from 89th to 93rd in the Corruption Perception Index for 2019 by Transparency International.

If you observe any successful private company or society, there are systems and procedures that have been refined over the years with the advancement of technology to reach where they are today. Our attitude towards accountability measures has to change as a way of painting the fence on the inside even though no one sees it. Ultimately, what we see on the outside is what we build inside.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Trade, deglobalization and the new mercantilism

Originally appeared on the Hinrich Foundation

By Prof. Razeen Sally

The COVID-19 pandemic is accelerating shifts underway since the last global financial crisis (GFC). It ushers in a new era of deglobalisation and protectionism, indeed a new mercantilist world order.

Three global shifts will shape international trade. They will probably last beyond the immediate crisis to the “post-vaccine” future. The first is an accelerated shift from Market to State: more government interventions will further restrict markets. The second is to national unilateralism – governments acting on their own, often against each other – at the expense of global cooperation. The third is to more contested and unstable geopolitics, centred on US-China rivalry. Taken together, they herald a new mercantilism, whose main precedents are Europe and its colonial expansion in the seventeenth and eighteenth centuries, and the period between the two world wars in the first half of the twentieth century.

Mercantilism – the exercise of state power to control markets domestically and internationally – existed after 1945, but was constrained by the expansion of markets: it was relatively benign. But malign mercantilism governed the preceding decades, shattering domestic economies, shrinking individual freedom, destroying the world economy, and so poisoning international politics as to culminate in global war. Today’s emerging mercantilism is still far from that reality, but it risks heading in that direction.

Another set of historical precedents is also relevant. Increasingly, the US-China conflict today echoes that of the US and the Soviet Union in the “old” cold war. But China today, unlike the former Soviet Union, is an authoritarian (not totalitarian) power with a state-directed and partly globalised market economy (not a sealed-off command economy). China better resembles Germany and Japan as rising powers in the late nineteenth and early twentieth centuries. And US-China rivalry today better resembles that of the UK and Germany before the first world war: a contest between the established power, with a liberal-democratic political system and a free-market economy, and a rising power, with an authoritarian political system and a state-guided market economy.

Three eras of international trade preceded the present pandemic. The first – the quarter-century until the GFC – was an era of unprecedented liberalisation and globalisation. The second – the near-decade after the GFC – saw globalisation stall, though not reverse, and trade growth stagnate alongside “creeping” protectionism. The third, starting in early 2017, was triggered by President Trump, partly to retaliate against increasing Chinese protectionism. It centred on a US-China trade war but rippled out into copycatting protectionism by other countries. Protectionism went from creeping to galloping.

This pandemic has triggered the worst deglobalisation since 1945. International trade may shrink by up to a third, foreign direct investment by up to 40 per cent, and international remittances by 20 per cent, this year. The trade outlook is worse than it was during the GFC in two ways. Now economic contraction is synchronised around the world; during and after the GFC, fast growth in emerging markets, led by China, cushioned the fall in trade and enabled a recovery. Now services trade is suffering even more than goods trade; travel and tourism have collapsed. The GFC, in contrast, hit goods trade hard but services trade was more resilient, especially fast-growing travel and tourism. Now there are signs of a protectionist upsurge, starting with export bans on medical equipment, with new restrictions on foreign ownership in the pipeline.

What is the medium-term – post-vaccine – trade outlook?

First, protectionism is likely to increase as a spillover of domestic state – particularly industrial-policy – interventions that last beyond the present crisis. Crisis-induced subsidies will be difficult to reverse wholesale and will have trade-discriminating effects. New screening requirements might have a chilling effect on foreign investment. These and other interventions to protect domestic sectors and national champions have a home-production bias. The list of “strategic” sectors to protect on “national security” grounds against foreign competition will likely expand. There will probably be more restrictions on migration and the cross-border movement of workers.

Two precedents are relevant: the “new protectionism” of the 1970s and ‘80s, which partly resulted from bigger, more interventionist government in domestic markets; and, more perniciously, the expansion of government after the first world war, which empowered interest groups to lobby effectively for restricted imports, foreign investment and immigration.

Second, national unilateralism – this time “illiberal unilateralism” – will likely expand and make effective regional and global policy cooperation more difficult. It bodes ill for the WTO, APEC and the G20, also for regional organisations such as ASEAN, and will cramp the liberalising effects of stronger preferential trade agreements. This only increases the prospect of tit-for-tat retaliation, starting with the Big Three (the US, EU and China), and copycatting protectionism that will spread around the world.

Third, the reorientation of global value chains will accelerate. Western multinationals will relocate parts of their production from China to other countries on cost grounds, as they have been doing, but increasingly on political-risk and security grounds as well. There will be a combination of onshoring, near-shoring and regionalisation of value chains, which will vary widely by sector. But the overall effect will be to raise costs for producers and consumers.

Fourth, international trade will be hit harder by a more fractured and conflictual geopolitical environment, especially US-China rivalry, but not helped either by an inward-looking and divided EU. It will be squeezed between more unstable geopolitics and the recalibration of states and markets – more “state” and less “market” – domestically.

All the above points to a new mercantilist trade order that might be more malign than benign, echoing the “new protectionism” of the 1970s and early ‘80s, or, even more worryingly, the 1920s and ‘30s.

My ideal world is a classical-liberal one: limited government, free markets and free trade, underpinned by appropriate domestic and international rules. I would add political liberalism and legally protected individual freedoms. The post-1945 global order was some distance from this classical-liberal ideal, but it was liberal enough to deliver unprecedented freedom and prosperity. From this vantage point, the new mercantilist order, with emerging malign characteristics, is alarming – bad economics, politics and international relations; bad for individual freedoms and global prosperity. As a realist, however, I must take the world “as it is” rather than indulge in wishful thinking. To improve the world, principled liberalism must be combined with practical realism.

I believe the two biggest threats to global order are rising illiberal populism in the West, endangering the West’s adherence to its own liberal values, and the increasingly aggressive illiberalism of the Chinese party-state. Both have mercantilist features that spill over the border into protectionism and restricted globalisation. Both feed off each other in a global negative-sum game. Hence both must be resisted: naivety and complacency should apply to neither.

China under Xi Jinping, with its mix of authoritarianism, a state-directed market economy and external assertiveness, is becoming a classic mercantilist power, like Germany and Japan in the late nineteenth century and early twentieth century. Its external power projection, especially in the last decade, looks quite different to that of the US in the Pax Americana. Of course, at times, here and there, the US threw its weight about unilaterally and arbitrarily. But the essence of US leadership was to provide public goods for a stable, open and prosperous world order. It did so by organising concerts of international and regional cooperation. In international trade, that took the form of the GATT, later the WTO, and the multilateral rules it administers.

China, in contrast, prioritises a combination of unilateral and bilateral action to expand and entrench its power. That subsumes the expansion of the PLA Navy in the East China Sea, South China Sea and Indian Ocean; and tight, asymmetric bilateral relations with smaller, weaker states in a twenty-first-century recreation of the ancient tributary system. The Belt and Road Initiative should be seen in this frame: a network of hub-and-spoke bilateral relationships in which China wields power over-dependent states. This is classic mercantilism. It privileges discretionary power, exercised unilaterally and bilaterally, over plurilateral and multilateral rules that constrain such power.

China – meaning the Chinese Communist party-state – presents a pressing challenge to the liberal world order. Dealing with this challenge will require some trade, technological and investment restrictions, and limited supply-chain decoupling. But that could easily descend into an all-round mercantilist and deglobalisation spiral. Hence China must be engaged at the same time, not least to preserve existing links that are mutually beneficial. Engagement and strategic decoupling need not be mutually exclusive. Still, this will prove an incredibly difficult, perhaps elusive, balancing act.

Liberal or semi-liberal small states and middle powers in Asia, the West and elsewhere have a crucial role to combat malign mercantilism. In Asia, this group includes Japan, South Korea, Taiwan, Singapore, Australia and New Zealand. They need to keep their economies and societies open; demonstrate best policy and institutional practice (as they have done in this pandemic crisis); build coalitions of the willing on trade and other issues; strengthen alliances with the US and EU to nudge them to be more outward-looking and globally constructive, and finesse a mix of strategic decoupling and engagement on China. But doing all that in a global mercantilist environment will be an uphill struggle.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."

Why Sri Lankans aim low

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

Over the years, a lot of weight has been put on building “aspirational Sri Lankans”. Different terminologies have been used to define them; however, the core group of the so-called aspirational Sri Lankans remains the same – “intellectuals”, “business professionals”, “young professionals”, and “members of professional movements”. The key question then is what makes aspirational Sri Lankans aspirational, and why have they been unsuccessful in placing Sri Lanka back on the map?

Where are our aspirations?

Many Sri Lankans aspire to build a house, buy a vehicle, and probably have a grand wedding and proceed on to provide a good education for their children. Achieving these aspirations continues throughout their lifecycle. Then, the next generation takes the baton and runs the same race. This is the constant marathon run by our “aspirational Sri Lankans” for decades.

The serious question we need to ask ourselves is why basic needs such as housing and transportation have become aspirations for the average Sri Lankan in the 21st Century. Moreover, attention should be given to the opportunity costs of obsessing over housing and transportation by these “aspirational Sri Lankans” – what could be achieved if this was not the case?

Why people consume capital by building a house

While it is true that the financial literacy of Sri Lankans is low and that we have failed at the formation of capital due to excessive consumption from our initial capital instead of investing, we also need to investigate the economic rationale behind such behaviour. The reason as to why basic needs such as housing have become a distant dream to the average Sri Lankan is deeply rooted in the distortion of prices in the housing market due to the implementation of misguided economic policies. Most of the construction material in Sri Lanka is far more expensive than the prices of the said material in the entire region. The total tax Sri Lankans pay for imported steel ranges between 19% and 64%.

The tax on imported tiles ranges between 19% and 93%, and at present, the Government has imposed a temporary import restriction on tiles and sanitaryware, driving the prices of local goods up. Anyone who has attempted to build a house would know how ridiculous the prices for light fittings, curtains, aluminium, and other material are. Sri Lanka also has a shortage of skilled labour, and finding a mason or a furniture craftsman is not only difficult but also expensive. They have become expensive on the basis of productivity. If you are wondering why Chinese labour has expanded beyond large-scale construction to small-scale residential construction, the answer is rooted in productivity. Chinese labourers are five times more productive (according to an in-depth interview conducted by the author with an apartment builder) than the Sri Lankan labourer.

High import tariffs and import bans have led to skyrocketing domestic prices, and now the simple transaction of buying or building a house has become a lifetime dream of the aspirational Sri Lankan. If you ask a banker for their reason for remaining in that job, they will tell you that it is the concessionary “housing loan’” and “vehicle loan” that attracted them. While a fortune will be spent on building a house, there will be limited funds to explore better education opportunities, hereby pushing the tertiary education of young professionals to the grave due to extra prices paid for inefficiencies in housing.

The existing land issues, the inability to transfer properties, and lack of property rights have made the situation worse. So in real terms, the “aspirational Sri Lankan’s” capital that they couldn’t invest for returns was not invested in their house, but rather in the extra price they paid for construction. More importantly, potential aspirational Sri Lankans are expending valuable energy in trying to overcome the consequences of these misguided economic policies.

Where is the capital for the vehicle?

It is no secret that Sri Lanka’s vehicle market is one of the most distorted markets. Based on the usage of the vehicle, the value increases, and we pay exorbitant amounts of tax at the point of importing a vehicle. Making things worse is the vehicle permit system that is only available to VVIPS and few professions.

So what is the incentive to be an aspirational Sri Lankan? Is it to take the risk of investing the capital and trying to consume from the yield, allowing the capital to multiply, while lobby groups and politically connected pressure groups not only get a vehicle permit but also the legal blessing to sell despite tax losses to the government?

The permit culture is not only in buying vehicles, but it is also in the public transportation system where route permits for public transportation are more expensive than the bus itself, even though the cost of a bus is multiplied several times over when you factor in the tax.

Yet again in the real world, the aspirational hardworking Sri Lankan’s capital, which they never invested (which they did not have the knowledge to invest), gets gobbled down in distorted markets that are protected from competition. 

Even when looking at leisure and recreation, the cost of recovering capital invested in the construction of a hotel is passed on as room rates at prices that are higher than those of similar destinations in the region, because of our high cost of construction. At weddings, the costs of the food they serve, electrical appliances, storage, and prices of cutlery, liquor, etc. are added to the final cost of a plate at a wedding. Hence, there is no alternative but to eat away at the capital that belongs to the average aspirational Sri Lankan. 

It is true many Sri Lankans get into this trap by trying to live beyond their means, spending lavishly at weddings, building bigger houses than they require, and buying vehicles due to a lack of financial literacy. But the reasons why artificial value has been created for basics such as housing and commuting is misguided economic policies.

What young entrepreneurs chase as aspirations are not the real aspirations that could put Sri Lanka back on the map. The very reason for this is that our prices do not indicate the true value of the product or service and the real value it offers. The concept of “price” is of paramount importance. It is the single indicator of value, resource scarcity, productivity, supply, demand, and so many variables that are all encapsulated in that single number called “price”.

When governments and policies intervene in demarcating prices, the price set is a result of people chasing the wrong things and the entirety of society has to bear the cost and loss of it.

What we need is to set a culture of hard work and free exchange where young entrepreneurs are provided with a level playing field, right incentive structures, and motivation to be productive and innovative – that is the real expectation of the aspirational Sri Lankan which has now been shadowed by glittery basics such as housing and buying a vehicle. Until we work towards that, we will not be able to see a new Sri Lanka nor will aspirational Sri Lankans ever prosper.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why ‘banning culture’ is no solution

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

Last week, the Government proposed a ban on sachet packets as a measure to protect the environment. And now, another proposal has been tabled – banning the slaughter of cattle. This is not the first time such strict measures have been imposed by consecutive governments, but it is paramount that we understand the economics and unintended consequences behind “banning”.

Before we jump to any conclusions, let’s just take a look at the results of similar policies adopted in the past, to get a taste of this “banning strategy”.

Previously, we saw a proposal to ban polythene below 20 microns in thickness to protect the environment and it was not too long ago when the former President announced a ban on chainsaws and carpentry sheds. A simple visit to the market is sufficient to demonstrate the extent these banning mechanisms have been productive.

Earlier this year, the Government learned a bitter lesson on imposing “price controls” (which is sort of a ban on selling at high prices) on tin fish and dhal. The price controls had to be revoked due to obvious market disruptions. Prices shot up, and there were shortages in the market, which was the complete opposite of what the Government intended.

A common belief is that the “banning strategy” often fails or is less effective due to poor implementation. This is far from the truth. There is very much a market and an economic dimension that show the concept in itself is flawed, which we often fail to understand.

Emotional policymakers often get the art of public policy drastically wrong. They view it through an accounting lens due to a lack of knowledge on human behavioural economics and the presence of the concept called “markets”. As a result, all good intentions result in far worse consequences.

Ban on sachets

The concept of sachets was introduced by FMCG (fast-moving consumer goods) market players on the basis of affordability and as a measure of resource allocation. Someone who cannot afford a full bottle of shampoo or any other equivalent product can use a sachet as a one-time useable product, based on the requirement. This is easy on customers’ wallets and provides value for money.

A good reason why sachets are predominantly available in general trade and mom-and-pop shops as opposed to modern trade is its easy access and affordability for the poor. On the other hand, from the manufacturer’s end, sachets help to allocate raw materials effectively and allow them to reach the market.

According to a recent article by Dr. Rohantha Athukorala, a Neilson Survey revealed that people have reduced the usage of baby soap by 18% and adult soap consumption by 17%. This indicates how people who find it difficult to manage their finances resort to eliminating basic hygiene products like adult and baby soap due to unaffordability. Cutting down on baby soap indicates a booming cost of living problem which goes beyond soap usage.

The ban on sachets will be a double whammy for most vulnerable people in society who are voiceless. All FMCG companies spend an enormous amount of money before they launch any SKU (stock-keeping unit), and we need to understand this was a market demand.

A sudden decision without prior engagement with the industry and relevant stakeholders will push manufactures to an extremely difficult situation, which will demand them to realign their manufacturing and marketing strategies in an already challenged Covid-19 economic environment. We have often forgotten that polythene is a wonderful innovation, and where its hydrocarbons are recycled to produce electronic chips and fabric.

MAS Holdings manufactured a special fabric for our cricket World Cup team with marine plastic waste which received global recognition. This can be utilised as an effective example to understand that the prime need is for setting up proper recycling methods coupled with incentives and disincentives.

Already, the discussion is heated on serious environmental concerns such as that of the Anawilundawa Wetland Sanctuary and many other places across the island, as highlighted through this column last week. The Government has to keep an eye on more macro issues pertaining to environmental protection rather than obsessively focusing on micro issues. These “banning strategies” will dilute the Government’s well-earned political capital, which will make hard reforms difficult in the coming years.

Import controls

Import controls are another form of ban on a temporary basis. The Government’s urgent need to manage its Balance of Payment (BoP) crisis is understandable. However, this requires a series of different actions coupled with temporary solutions such as bailout programmes from the IMF (International Monetary Fund) and clear policy decisions to help make our exports competitive.

Import controls hurt exports as the prices of import substitutes rise, especially where the goods are used as an input for the production of exports. In addition, import substitutes become more profitable to produce than exports.

The result of the current import ban is highly likely to affect our existing exports, as we have indicated in this column multiple times. Already, people are struggling to buy phone chargers, repair washing machines, and purchase goods which are required on a daily basis. We are running on existing stocks which will expire soon and prices have already started going up.

On the other hand, in our import bill, the big-ticket item is fuel and essentials such as pharmaceuticals, which are very difficult to control. The General Hospital has already announced a shortage of 70 essential drugs. These drugs are used to treat diseases such as Thalassemia and heart-related conditions.

However, trying to cut corners of other imports carry the potential to distort various other markets, businesses, and value chains horizontally, vertically, upstream, and downstream due to price hikes.

Prices of vehicle tyres and spare parts have shot up, which will have an impact on all goods and services with a transportation cost component. At one point, the collective effect of the rising cost of multiple consumable goods and intermediary goods may go beyond people’s affordability.

Releasing import controls at this point would be too late, given the situation of our currency. The higher cost of living will impact labour prices and most of our value addition in exports which are in the form of labour will be uncompetitive over a period, which will affect our main exports such as apparels, tea, and rubber products. In economics, the need is to take a look at the market from a holistic perspective. Otherwise, similar issues will arise over and over again.

The best example is higher prices requested by the poultry industry and the bakery industry. Sri Lanka’s maize production is not at all sufficient for domestic consumption, which is the main source of food for poultry. As a result of higher prices of maize, the prices of poultry products have shot up, which will have an impact on the bakery industry. Now you have a happy maize farmer but an unhappy poultry farmer and a baker. Eventually, this will translate to an unhappy consumer and a very unhappy voter.

Ban on slaughtering cattle

Adding to the banning spree, the proposed ban on slaughtering cattle is the latest. This may cause more damage rather than being helpful for the protection of cattle in Sri Lanka. However, the Cabinet Spokesperson mentioned the proposal was postponed by one month so as to allow for discussions with the relevant stakeholders.

Though the proposal may have been put forward with good intentions in terms of animal cruelty, India is a good example of how such policies don’t work. Cattle owners in India are left with no option other than to resort to the creation of illegal and unsanitary slaughtering houses and illegal markets.

Keeping aside the logical fallacy of placing a ban only on the slaughter of cattle and not the entirety of the poultry and meat industry, and the justification of leaving domestic demand to only be met through the importation of beef, the matter goes far beyond that.

The beef industry does not exist in isolation; our leather industry, dairy industry, and leather exports are also dependent on it. According to the Export Development Board (EDB), in 2016, about 1% of total merchandise exports consisted of footwear and leather products, which has now dropped to 0.6% of our merchandise exports.

According to the EDB, there are about five large companies, 10 medium-scale companies, and more than 1,000 small enterprises and seven tanneries that produce 25 tonnes of leather every day.

If passed by Parliament, this proposed ban on cattle slaughter will prevail at the expense of 1,000 small enterprises and exports worth $ 550 million. While animal cruelty is of grave importance, sometimes in life we have to keep some markets for the greater good and to avoid much greater negative impacts.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Environment vs. development: It's all about land

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

Originally appeared on The Morning

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By Dhananath Fernando

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

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

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

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

What’s the real problem?

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

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

Let me explain why and how.

Forests are sacrificed due to the absence of property rights

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

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

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

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

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

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

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

Inability to maximise on lands and its utility

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

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

President received firsthand information

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

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

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

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

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Can industry-specific ministers fix this issue?

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

Originally appeared on The Morning

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By Dhananath Fernando

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

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

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

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

Common challenges

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

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

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

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

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

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

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

Daily survivors vs. entrepreneurs

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

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

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

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

Industry-specific challenges

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

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

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

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

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

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

How can Sri Lanka’s democracy be gender-inclusive?

Covered in the Ceylon Today, Colombo Telegraph, Lanka Business Online and Economy Next

By Sathya Karunarathne

Sri Lanka’s general election dawned at a crucial time of extreme uncertainty and precariousness. The island’s political, social, and economic spheres have been dismantled by an unexpected global pandemic that drove the country into a political limbo with the dissolving of the parliament. The task of untangling the island from its woes has now been handed over to a male-led parliament elected by the general public ostensibly upholding the true values of a  democracy. In contrast, Sri Lanka’s female demographic which constitutes 52% of the population is left underrepresented in parliament, forgotten, and deprived of positions of power and access to the national decision making and policy implementation process, yet again. 

At present, Sri Lanka is ranked 182 out of 193 countries on the inter-parliamentary union of rankings which assesses the percentage share of women in national government. In the previous parliament 13 legislators, or rather a handful of 5.8% of 225 MPs represented the voice and needs of 52% of the population. Moreover, there was only one woman under the age of 40 in parliament that represented the needs of young women.  The newly elected parliament boasts a grand total of one cabinet and two-state female Ministers with five more female members of parliament being elected by popular vote. Moreover, SLPP, SJB, and NPP have collectively appointed four female representatives through their National Lists. 

The World Gender Gap Report published by the World Economic Forum ranked Sri Lanka amongst the top 20 countries in 2006. However, Sri Lanka has drastically slipped in the rankings and has descended to be ranked 102 out of 153 countries in the year 2020 despite performing well on other indicators such as health and education. In 2006 Sri Lanka ranked 84th on the economic participation and opportunity sub-index while in 2020 we ranked 126, slipping 42 places. Moreover, wage equality for similar work has degraded by 27 places since 2006 from being ranked 55 to being ranked 82. Further, Sri Lanka has performed poorly on the political empowerment sub-indicator ranking 7 in 2006 and 73 in the year 2020. Even though Sri Lanka has ranked 9 on “years with a female head of state” indicator it should be noted that the index takes into consideration countries with the most years of a female head of state in the past fifty years. As this is a large time frame it does not necessarily reflect consistency in female political empowerment, especially in the Sri Lankan context. 

Why does female representation matter?

The World Economic Forum states that women are underrepresented in the political sphere globally, with women only making up 23% of national parliamentarians. This severe underrepresentation has an empirical correlation with policy choices and adverse consequences in women’s and children’s welfare. A study by the World Economic Forum addressed this issue by analyzing gender representation in local municipalities and the provision of public childcare in Bavaria. To assess the effect female councillors would have on public childcare a study was carried out to compare the expansion of public childcare across municipalities that have similar characteristics but differ in their share of female councillors. Results emphasized that one additional woman in the local council accelerates the expansion of public childcare by 0.4 spots per 1,000 inhabitants or by 40%. Moreover, a comparison of over 7,700  minutes of council meetings displayed that one additional woman translates to child care being spoken of more frequently and that it creates the ambiance for other female councillors to voice their opinion confidently and to play a more active role in the process of policymaking and implementation.

These findings are relevant to Sri Lanka now more so than ever as Sri Lanka has seen a spike in the number of child abuse and violation of child rights reported in the year, highlighting the lack of female perspective in the policymaking process. 

Furthermore, Sri Lanka is no stranger to policies and laws that are excruciatingly gender discriminatory. Marital rape being legal under the penal code which dehumanizes the “role and duty of a wife”, the Muslim Marriage and Divorce Act (MMDA) of 1951 that has a multitude of discriminatory provisions with regard to marriage, divorce, maintenance, inheritance, property rights and access to justice for Muslim women, discriminatory principles in the Kandyan law on divorce and inheritance, limitations on property rights applicable to women in Jaffna under the Tesawalamai law, mammoth taxes on menstrual hygiene products that are considered a luxury despite 4.2 million menstruating women, 14 year justice struggle for victims of rape, lack of incentive provided for women to enter into the labour force resulting in only 34.3% of females being economically active , failure and delay of the government in midst of the COVID 19 pandemic to repatriate migrant workers that mostly comprise of women who are Sri Lanka’s highest foreign exchange earners, lack of a monitory body/mechanism to assist families and children of migrant workers are just a few amongst a host of gender insensitive and discriminatory laws and policies that haunt the quality of life, day-to-day activities, and even threaten the very lives of women across the island. It takes no expert to identify that much-needed reforms have been conveniently pushed under the rug over the years due to lack of female perspective and representation in positions of power and parliament where laws and policies are debated and solidified. 

Laments of local females aspiring to shatter the glass ceiling 

A glance at the number of female contestants from each major party in the recent general election depicts the difficulty female expectants face in being nominated as a candidate. With the motive of addressing these issues and ensuring women representation in local government, Local Authorities Elections (Amendment) Act, No. 1 of 2016 was introduced which presented a 25% mandatory quota for women. The practicality of abruptly coercing women into positions of power was lost in this attempt. Candidates were provided with zero training and preparation to enter into local government, despite years of convincing them that their expertise lies within the boundaries of a kitchen. Moreover, the lack of preparation in this regard resulted in priority being given to relatives and close associates of politicians overlooking qualified and competent candidates.  

Since Mrs. Bandaraniake’s debut, Sri Lanka’s lineage of female leaders has repeatedly painted a dramatic chronicle of the devoted woman, who steps out of their male counterpart’s shadow in the case of his demise to dutifully carry on the legacy of the deceased. This narrative does not only rob these females of an authentic career and individuality but also leaves a permanent imprint of pedigree that doesn’t necessarily reflect the aspirations of the average woman. Moreover, this phenomenon compromises the quality of leadership as overnight shifts to the political sphere has a certain degree of risk attached to it.

Women continue to be severely underrepresented due to the unequal access to finances and resources needed to successfully seek nominations and to participate in electoral campaigns. According to research conducted by UN Women in 2013, over 80% of respondents identified the lack of access to funding as one of the biggest obstacles for women to participate in a political competition (Ballington and Kahane, 2014). Politics and campaigning is a sphere dominated by big money and more often than not the economically disempowered woman is ruled out from this rich man’s club. According to Lihini Fernando, UNP’s municipal councillor from Moratuwa it costs Rs.25 million roughly to campaign throughout the district. Strong female candidates such as Rosi Senanayake too have stated that financial pressure is a huge burden carried by women that are less likely to have sponsors. Moreover, females employed in the corporate sector, activists, legislature experts, etc are disincentivized to enter into politics due to the high costs involved both financially and otherwise. 

Psychological, sexual, and physical violence against women swamps the arena of politics. Sexually provocative comments publicly directed on new media, abuse from traditional media, the pressure to conform to a subordinate, the stereotypical image of an ideal woman, threats, and physical violence scourges the day to day experiences of a woman contesting to enter into government.

Reform Recommendations

Despite Sri Lanka ratifying the Convention on Elimination of All Forms of Discrimination Against Women (CEDAW) and enshrined its commitment in the Women’s Charter of Sri Lanka (1993) and the National Plan of Action for Women (1996) reflecting constitutional and international commitments to securing the rights of the woman, the country is yet to implement progressive reforms that will increase women’s participation in the democratic process. 

While there are a multitude of reform recommendations that can assist in improving Sri Lanka’s female representation in government, a transparent and fair framework to finance election campaigns through the Election Finance Campaign Act takes precedence and can pave the way to level the playing field in electoral competition between genders. Introducing a cap for spending on election campaigning and amending election laws to include disclosure of information pertaining to the quantum and sources of campaign contributions can combat illicit campaign financing and high costs involved. Moreover, voluntary, non legislated practices such as internal fundraising mechanisms in-kind contributions can help address the gender funding gap within parties. Moreover, countries like Brazil have put in place provisions to ensure a certain airtime for female contestants from each political party.

Initiating training programmes and capacity building for women aspiring to run for office is crucial in increasing and solidifying effective female representation. These programmes can be targeted at grassroot level activists and even extend to local school levels to encourage and motivate young women to pursue a career in politics. Moreover, special attention should be given to proper selection criteria and conducting the said programmes trilingually. Within parties, training programmes and capacity building should be provided to women along with due recognition and equal opportunity. 

Moreover, introducing a mandatory quota for women in the national list for major parties is yet another step that can be taken in addressing gender underrepresentation. This can facilitate female expectants to avoid financial burdens and gender-based violence and aggression associated with campaigning.

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The first test of the President’s ‘power’

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

Originally appeared on The Morning

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By Dhananath Fernando

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

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

Understanding the context

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

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

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

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

The CEB monopoly

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

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

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

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

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

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

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

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

Possible solutions

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

Structural changes

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

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

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

Opening energy for trading

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

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

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

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

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

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

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

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lanka’s economy must follow Vietnam

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

Originally appeared on The Morning

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By Dhananath Fernando

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

Problems at hand

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

Reading the mandate

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

Role model Vietnam

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

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

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

How they did it

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

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

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

China Plus One strategy

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

Lessons and solutions

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Economic relations with India: What would a true patriot do about the Port?

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The East Container Terminal (ECT) in the South Harbour of the Port of Colombo has become a flashpoint of nationalist agitation. Agreement had been solemnly concluded to develop the ECT in collaboration with the governments of India and Japan. Some, fronted by trade unions, are agitating to scrap the agreement and make the terminal one that is fully owned and operated by the Sri Lanka Ports Authority (SLPA). Hoary arguments about selling national assets are being trotted out again.

What would a true patriot do?

True patriotism asks what advances the life chances of the people living on this island; it asks what reduces the harms that may befall them. A realistic assessment of the problem at hand must be the first step. The Port of Colombo comprises operations by three entities: the CICT which handles 40% of the business through one terminal is majority-owned by China’s CM Ports (SLPA has 15% ownership); the SAGT is 85% owned by a consortium including JKH, Maersk/APM Terminals and Evergreen Marine Co. (SLPA owns the rest); and JCT which is fully owned by the SLPA.

The ECT is the second terminal to be made operational in the South Harbour which remains the only deep-water port in the region capable of accommodating the largest ships. The Port of Colombo was the 25th largest in the world in 2018, in terms of container throughput, and showed rapid growth before the recent disruptions. An economy the size of Sri Lanka’s cannot support the world’s 25th largest port if all it handles is cargo originating from and terminating in the country. More than 70% of Colombo’s cargo is coming from or going to India. India’s two largest ports are JNPT in Maharashtra and Mundra in Gujarat. Colombo handles more Indian boxes than Mundra, arguably making it India’s second-largest port. If for some reason the Indian containers were not transshipped through Colombo, the losses to the Sri Lankan economy will be grave. The earnings from what is essentially an export of port services will cease. Colombo will no longer justify frequent liner service. Sri Lankan shippers will have to send their containers in small ships to a regional hub to be transshipped to the large vessels that no longer call at Colombo. Hub ports enjoy economies of networks.

The more ships call at a port that provides transshipment and related services, the more attractive that port becomes to other ships. It provides a degree of stickiness to a hub, but hub status is not permanent. If the quality of the services provided declines or prices are higher than those in competing ports, a big shipping alliance (three alliances are responsible for 80% of the container traffic) may pull back leading to the unravelling of hub status. One of the reasons Colombo is a preferred port for shipping alliances is its turnaround time: how quickly can a ship leave the port after unloading/loading. It is behind Singapore and other leading ports, but quite a bit ahead of Indian and Bangladeshi ports. However, the strikes that were launched before the elections on political matters unrelated to working conditions may be putting Colombo’s reputation at risk.

Alternatively, a government decision based on geo-political considerations may trigger the process. Especially before elections, Indian politicians come up with plans to build ports in the south of India that will create new employment and business opportunities and ‘save’ the $ 100 per container they claim goes to Colombo for transshipment. But the more real danger is the significant Chinese stake in Colombo Port which may be seen as a strategic vulnerability in the context of the simmering tensions between India and China. The Port of Colombo, which is dependent on transshipment business from a single country, is especially vulnerable in this regard.

Geopolitics

Even if one focuses solely on the Port of Colombo, the geo-political factors loom large. The largest terminal is owned and operated by a Chinese company. The refuelling of Chinese submarines in the port in 2014 was source of serious friction. The tensions between India and China are at a historical high currently. In this context, a decision to give an Indian company a stake in the ECT, and thereby in the success of the Port of Colombo, would give comfort to the securitywallas in New Delhi. It makes eminent sense in terms of safeguarding Colombo’s hub status and revenue stream. Whatever decision is taken about ECT will be interpreted in a larger context. Prime Minister Mahinda Rajapaksa has asked India to withdraw its interest in the under-utilised and money-losing eponymous Airport located in Mattala. The government is also reported to have asked India to give back the rights to the unused but controversial oil tanks in Trincomalee. The Indian government is likely to connect the dots in ways that reinforce the perception that the Rajapaksas are tilting toward China.

But what about not selling national assets?

The land and the location are not sold. The port continues to be owned by the SLPA. It is simply one section of the south harbour that is to be concessioned out for a defined period for a specified purpose to a consortium that will also include the SLPA. The land by itself does not produce value. Value is produced when the right kinds of investments (including the right kinds of gantry cranes, not what were ordered for a different location) are made and the right kinds of services at appropriate levels of quality are supplied. Because of the relative power of shipping interests, it is now common practice to allow shippers to have stakes in terminals. This is the case even in the highly efficient state-owned Port of Singapore.

For over two decades, parts of the Port of Colombo have been privately operated based on long-term contracts. Some of the members of the consortium that invested in SAGT in 1999 are foreign. CICT, the terminal showed the best performance, is at $ 600 million, one of the largest Chinese investments. It has been operational since 2013. The relationships leveraged by those companies and the efficiencies they have introduced have contributed to the Port of Colombo flourishing even when the Indian economy slowed down.

This experience alone should give comfort to those concerned about foreign investment in Sri Lanka’s infrastructure. The land is here, the millions of dollars in investment is fixed to that land and cannot be taken away, and the market relationships and skills the investors have brought have caused the entire port to improve. Sri Lanka earns from the export of port services, those who work for the partially foreign-owned companies make a good living, they all pay taxes, and the national economy benefits by having the 25th largest port in the world with direct sailings to key markets. A true patriot will understand that foreign investments in commercial enterprises are superior to foreign loans. In the former, the risks are shared. If the investment does not make profits, the foreign investor too is out of pocket. Thus, the investor has the incentive to make the business succeed. This is not the case when loans are taken to build and operate infrastructure on our own to satisfy some atavistic yearning. With loans, the risks are all on our side. Whether the business succeeds or not, the loan must be repaid. If something goes wrong, as has been repeatedly the case with the Norochcholai electricity generators built with Chinese loans, The China Ex-Im Bank does not suffer. Only we do.

So, a true patriot will not only understand the nature of modern port operations and the difference between loans and investment. She will also understand the geopolitical context and support the taking of precautionary measures to build the confidence of major actors such as India who can easily stymie efforts to advance the well-being of our citizens and reduce the harms that may befall them. A true patriot will support the government in its efforts to honour legal commitments and strengthen Sri Lanka’s most important relationship, that with our giant and proximate neighbour.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Sri Lanka's Rajapaksa restoration is complete. What comes next?

Originally appeared on Nikkei Asia

By Prof. Razeen Sally

Government may have to rely on new Chinese loans to avert a macroeconomic crisis

Sri Lanka's parliamentary election on August 5 delivered a thumping victory for President Gotabaya Rajapaksa and his older brother Prime Minister Mahinda Rajapaksa's Sri Lanka Podujana Peramuna, or SLPP, party. Following Gotabaya Rajapaksa's decisive victory in the presidential election last November, what does the Rajapaksa family's unlimited rule portend for Sri Lanka and its external relations?

Illiberal democracy, a state-led economy, Sinhala-Buddhist supremacy -- Sinhala Buddhists are about 70% of the population, and a China-centric foreign policy were the hallmarks of Mahinda Rajapaksa's rule when he served as president until 2015. His surprise election defeat opened a window for liberal democracy, a more internationally open, private sector-led economy, reconciliation with ethno-religious minorities, and a more balanced foreign policy to reengage with the West and India.

But the coalition government that followed was a total disaster, crippled by no reform strategy, venomous internal warfare, corruption scandals and rank incompetence. The Rajapaksa restoration last November revived the core features of the previous Rajapaksa rule. But now Gotabaya Rajapaksa is in the driving seat, and Sri Lanka faces a COVID-19 plagued world.

With a handful of allies, the SLPP will have a two-thirds parliamentary majority, which will allow it to change the constitution at will. First will come the repeal of the Nineteenth Amendment, which limits presidential powers and strengthens parliament and the judiciary.

Optimists argue that Sri Lanka now has the political stability and decisive governance it lacked under the previous government. President Rajapaksa has centralized power in his small circle, crowded with retired senior military officers. Even more than his brother Mahinda, he favours Big Man rule, exercising untrammelled power, issuing orders and expecting them to be executed without dissent or delay. That has worked, so far, to limit the spread of COVID-19 in Sri Lanka. But will it work to tackle more complex and long-standing problems concerning the economy, interethnic relations, public administration and much else besides?

Countries become stable and prosperous by nurturing effective institutions and social trust over time, not with Big Man politics with its never-ending command-and-control, short-term, ad hoc fixes. That is something the Rajapaksas -- and all but a tiny minority of Sri Lankans -- don't seem to understand. Sri Lanka is now hurtling back to illiberal democracy. It may provide short-term political stability, but I doubt it will lead to better governance.

This Rajapaksa government, like the last one, espouses a collectivist economic ideology. Its first budget was full of tax cuts and expenditure entitlements, guaranteed to increase the fiscal deficit and public debt. The policy consists of diktats and constantly changing regulations on taxes, monetary expansion and import controls.

Sri Lanka was already in a debt trap when this government came to power. Total public debt is about 90% of gross domestic product, and total external debt, at over $50 billion, is about 60% of GDP. Then COVID-19 struck. The budget deficit may go up to 10% of GDP this year, and the economy may shrink by up to 5%. There is no fiscal space for tax cuts and extra public expenditure. The government desperately needs to negotiate debt moratoria, extra loans and possible debt restructuring with the International Monetary Fund and others. But, for now, it has no plan.

The Rajapaksas are unapologetic Sinhala-Buddhist nationalists. President Rajapaksa and the SLPP were elected with a huge majority of Sinhala votes but only a tiny percentage of ethnic-minority votes.

The Sinhala-Tamil cleavage is long-standing. The Easter Sunday blasts last year, perpetrated by Islamic radicals, opened a new cleavage between Sinhala Buddhists and Christians, on the one hand, and Muslims, on the other. The Rajapaksa Sinhala-Buddhist supremacist agenda is guaranteed to keep ethnic tensions on the boil. Muslims will be most at risk if that gets out of control.

President Rajapaksa has largely ignored the West, the IMF and other international organizations, but he is friendly with Narendra Modi, a fellow strongman and ethno-religious nationalist. China, however, remains "first friend." Money talks: Chinese state-backed investment is the only big game in town. There is a real possibility that Sri Lanka will rely on new Chinese loans to avert a macroeconomic crisis, especially if it does not come to a new agreement with the IMF.

Sri Lanka increasingly resembles a Chinese tributary state -- rather like a brief interlude in the fifteenth century, when Admiral Zheng He abducted a local king and took him to Beijing to pay obeisance to the emperor, after which an annual tribute was sent to China.

Sri Lanka is a bewitchingly beautiful country. Since ancient times, it has won the hearts of many a visitor. I would know since I grew up there -- I am half Sri Lankan, half British -- and have spent the past decade travelling all over the island to write a travel memoir.

But Sri Lanka is a little country with layer upon layer of complexity and paradox, and a dark side that has benighted its post-independence politics and institutions. As an adviser to the last government, I saw up close its shambolic disintegration. Understandably, Sri Lankans voted for the only realistic alternative: the Rajapaksas. The prospect of another decade of Rajapaksa hegemony does not fill me with optimism.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."

New government must ‘unlearn’

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

Originally appeared on The Morning

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By Dhananath Fernando

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

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

Challenge 1: A severe economic recession 

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

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

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

Challenge 2: Trust, cohesiveness, and diversity

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

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

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

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

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

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

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

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

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

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

Challenge 3: Establishing competitiveness

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

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

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

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

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

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why Sri Lanka cannot be developed?

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

Originally appeared on The Morning

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By Dhananath Fernando

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No strategy will work until we work!  

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Two ways the private sector has failed Sri Lanka

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

Originally appeared on The Morning

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By Dhananath Fernando

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

The state sector

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

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

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

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

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

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

The private sector

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

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

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

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

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

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

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

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

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

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.