How can affordable electricity be assured 24x7?

Originally appeared on the Daily FT

By Prof. Rohan Samarajiva

The best way to understand the value of something is to experience life without it. These days, the Government is giving us a crash course on the value of reliable electricity supply. An unpleasant lesson, but nonetheless a learning opportunity.

If we probe the causes of load shedding, the learning can be deeper. Load shedding can be eliminated but at a cost. When hydropower declines due to periodic drought, the difference can be made up with generators running on imported fuel, the dollar price of which is determined by world market conditions. We can have 24x7 electricity, but not at an affordable price.

The Government created the immediate conditions for unreliable electricity supply through mismanagement of the country’s external debt. Today’s problems are not caused by delays in building additional generating capacity; they are caused by the lack of dollars to provide fuel for the existing generating plants. But there were deeper weaknesses in the organically developed system that must be understood.

With benchmark crude oil prices going over $ 100 per barrel, we must rethink our dependence on imported fossil fuels.

Reducing dependence on fossil fuels

Examination of the composition of our imports (Figure 1) shows that refined petroleum and crude oil taken together is the largest or second largest category of what is imported. It follows then that reducing the import of petroleum products would be an action that would satisfy many: those concerned about global warming will be made happy; those who want self-sufficiency would also be pleased. 

Petroleum imports are not used solely for electricity generation. But the way to reduce the consumption of petroleum products for transportation also involves electricity generated by renewables: buses and trains that are powered by electricity; lorries, cars, three-wheelers, and two-wheelers that are powered by electricity. Promoting electric vehicles makes no sense unless electricity comes from renewable sources. 

The significant increase in expenditure for fossil fuels starting in 2011 (Figure 2) appears correlated with the massive increase in the vehicle stock after the end of the conflict, leading to a doubling by 2014. Luckily, the biggest increase was in two wheelers, which do not take up a lot of road space and consume less fuel. 

Generating electricity from renewables does require some imported elements such as low-cost, efficient turbines and photo-voltaic panels but the costs and dependence is nowhere near that which exists with imported oil and natural gas. In fact, it may be possible even to export electricity at certain times of the day or even for months on end. But this will require substantial investment in the transmission grid.

Preconditions for increasing use of renewables

An economics commentator whose work I follow had expressed puzzlement at “demand for electricity is higher than supply” being given as a reason for load shedding. Others had expressed outrage at some Facebook posts that I had shared, which stated that solar and wind could not provide a complete solution to our energy woes. These responses by well-meaning and intelligent commentators made me realise the need for a better understanding of how the electricity is generated, transmitted, and distributed.

For all practical purposes using currently affordable technology, electricity must be treated as something that cannot be stored (but see discussion of pumped storage below). That means that it must be generated at the same time as people consume electricity by activating lights or appliances. Peak consumption in Sri Lanka (in the evening hours starting from around 6:30 p.m.) is around 2 or 2.5 times that of lowest use which is around 1000 MW. 

That necessitates a cheap source of baseload electricity that can be drawn upon throughout the day. In addition, we must have other sources that can be mobilised as demand increases. One would think that the major hydroelectric plants that have been built on the main rivers which generate cheap electricity that is unaffected by world market prices and the value of the rupee could serve as the source of baseload power. But there are constraints, such as competing demands from agriculture. The weather affects hydropower, as we are experiencing now. 

Therefore, planners in the past argued for coal as the ideal baseload for Sri Lanka. If Norochcholai does not keep breaking down and operates optimally, it can give 900 MW continuously whether or not the rains come. But it does break down, and it appears there have been irregularities in coal purchases. Coal, even if procured on long-term contracts at the lowest possible price, still must be paid for in dollars.

There are those who argue that Sri Lanka has plenty of wind and sun, and we can solve all problems by shifting to wind and sun. But the simple fact is that these are intermittent sources. Solar does not produce electricity when the sun does not shine and produces less when clouds cover the sun. Wind can produce throughout the day and night, but there are times when the wind dies down. It requires complex system controls to blend these intermittent sources into a centralised system designed for large, stable and controllable generators. 

Countries have incorporated massive amounts of intermittent renewable sources. In 2019, 47% of Denmark’s electricity came from wind. But they have a very sophisticated grid that is capable of handling intermittent power sources, and they use interconnections with other national systems to help balance the system. So, for example, when excess power is generated by the Danish wind turbines, it is used to pump water back up into reservoirs in Norway and Sweden (a method of storing electricity in the form of water known as pumped storage), which can then be run through turbines again to produce more electricity when needed. Yet with all that, Danish consumers pay more for electricity than their neighbours.

Similarly, if Sri Lanka is to increase the use of intermittent power sources, we will have to upgrade the grid and the system control centre’s software. Given the difficulties of synchronising the frequencies to one big plant such as Victoria, it may even be necessary to gradually convert the grid to direct current. If the Sri Lankan grid is connected via a high voltage direct current cable to the Southern Indian grid, the much larger combined system can absorb a greater amount of wind and solar power. 

Interconnecting does not mean that a country gives up on generating its own electricity. It simply means that marginal amounts of electricity will flow in either direction when it is advantageous to two (or more) systems. The fact that the peaks are different in the two systems can also be used to reduce the high costs incurred at peak.

It may be necessary to directly link revenues derived from regulated prices to those who make the substantial investments needed for the grid. This will almost necessarily require a restructuring of the current ungainly, unresponsive, and money-losing CEB in a manner that allows the transmission unit to be run efficiently. 

All these options require careful study in terms of costs, benefits and energy security. The relations between Denmark and its neighbours are such that all the parties can be confident about the contracts being respected and any disputes that arise being settled in a fair manner. We must ensure that the interconnection agreements with India have all these safeguards. The precedent of India’s interconnections with Bhutan shows that mutual interdependence is achievable in South Asia. The experience in Europe where interconnection, including over long distances across water, is growing rapidly even after Brexit, will have to be studied. 

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.

Price controls worsen drug shortage

Originally appeared on The Morning

By Dhananath Fernando

Shortages have now become abundant and the new normal. We all know the reason: the foreign exchange shortage that is causing shortages of many essential and non-essential goods. Shortages have even affected our basic essentials, such as fuel and electricity.

We all know the solutions for the problems as well. Unfortunately, we have a shortage of policymakers who have the courage to enact the reforms to rescue our people from the commodity shortages. 

There are many contributing factors to potential shortages: supply chain disruptions, natural disasters, and many other externalities. However, in the Sri Lankan context, it is primarily price controls that are causing shortages. 

When there were price controls on tinned fish, there was a shortage of tinned fish. We had a controlled price for dhal, and dhal disappeared from the market. Cement prices were controlled and we experienced a cement shortage. The same has happened for US Dollars (USD). The Government controlled the price of USD, and the country has a shortage of USD. However, the USD problem is somewhat more complicated as price controls are just one of the reasons for the shortage. Controlling the price of the dollar has the worst effects of all the price controls as it has repercussions on all imports and exports.

As a result of the deteriorating situation, the Government removed price controls on most items which is commendable. It was clearly the right thing to do. Cement, milk powder, and many other commodities removed their price controls. But controls remained in a few very important categories: most significantly, USD and pharmaceuticals. The dollar shortage is worsening the shortages in all other industries and pharmaceutical shortages are creating a nightmare for many patients and their families. Even shortages of basic medicines such as the painkiller paracetamol have been reported. Although it was reported that the demand has increased by more than 200% due to Covid and Dengue, in a market system paracetamol cannot suffer shortages unless there is an economic issue (1).

One of my relatives has a rare type of pneumonia, and only one drug brand is effective in treating it. Since the disease is rare, only a small quantity of that particular drug was imported. Now with dollar shortages and delays in opening Letters of Credit (LCs), that particular drug is of less priority to the drug importer, as the same dollars could have been utilised to import more profitable drugs. 

On the other hand, there are price controls on some drugs and pharmaceuticals. As a result, when the prices have increased, no businesses would have the incentive to import them, as they would be engaging in a business where the cost is higher than the selling price (or where the profit margins are so razor-thin that investment is not justified).

Additionally, pharmaceutical prices and some active pharmaceutical ingredient prices have increased due to the pandemic and resulting supply chain interruptions. Simply maintaining rigid price controls doesn’t make economic sense and it only causes shortages in the market. It even makes the situation worse for local manufacturers, who find it difficult to source raw materials/ingredients. The State Pharmaceutical Corporation (SPC) can survive, because it’s a government institute, and it will receive preferential treatment from the State banks in opening LCs and will receive subsidies from the taxpayer. 

In the case of private companies, the importation of drugs and active pharmaceutical agents are conducted through long-term contracts. If LCs cannot be honoured or opened, both their professional business relationships and the reliability of supply will be affected. Sometimes with changes in credit periods, cost factors will change. This will occur particularly when there are doubts in the market on the exchange rate. In today’s Sri Lanka, where the kerb/black market rate is 20-30% higher than the rate offered by banks, the cost of imports is obviously going to be higher. 

Price controls on pharma are going to create shortages of the drugs that we depend on, as we have already experienced with products including tinned fish, dhal, milk powder, and cement. 

Due to shortages of USD and difficulties in opening LCs, even without price controls it will be difficult to avoid shortages. The main reason is that 2022’s entire global economy is connected through the dollar alone. In such a context, price controls are just going to make the problem worse. 

It is understandable from the Government’s point of view that allowing a sudden price increase of pharma products may not be politically feasible. But it may have a more significant political impact if the products are simply not available on the market. As with oil products, we could have aligned the prices slowly at regular intervals so that the price hikes would be more digestible for the average citizen and therefore less politically damaging. If we had enacted price revisions that aligned with global market prices we may not be where we are today. That is why the market system depends on the price mechanism – it is the thermometer which balances supply and demand. 

For a market system, competition comes before regulation. Imports and exports must work together at full capacity for prices to come down. Therefore, the regulatory framework has to be managed in a way that allows market forces to work. 

When the Board of Investment was positioned as a ‘One Stop Shop,’ there was a joke among the business community that “It’s one more stop” would be more apt. Similarly, the National Medicines Regulatory Authority (NMRA) – supposed to be the regulator of prices and quality of medicines and medical equipment – has simply added a severe burden to the process rather than making it easier. 

References:

• https://ceylontoday.lk/index.php/news/paracetamol-demand-up-275

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

Government must resign itself to reforms – now

Originally appeared on The Morning

By Dhananath Fernando

My school Advanced Level biology teacher used to tell me how to study for exams. Her main advice was that the first step was to ‘make a decision to study’. I would think to myself, ‘Haven’t we all decided that we need to study?’ 

But she would explain the power of decision making, which applied everytime we make a decision – be it consciously or unconsciously – and mention life every time we had to make a decision: “Not making a decision is a decision. Thinking to ourselves to study later is also a decision. Studying now is a decision. Not studying is also a decision.” 

I realised that it’s all about the thousands of decisions that we make everyday. All of our destinations will be determined by such small decisions. What we are today is based on the decisions that we made in the past; what we will be tomorrow is based on decisions we make today.

The same lesson applies to our economic policy as well. It appears that our policymakers have made a decision to not make any decisions on the public policy front. Since the initial stages of Covid-19, multiple reports have been submitted by experts and the Government has even called for multiple reports on the current economic situation. There was an initial report by the Pathfinder Foundation which focused solely on the pandemic. Then a ‘Road Map for Economic Recovery’ was launched by the Advocata Institute. 

In fact, the President called for a deregulation report, which was chaired by Krishan Balendran and Lalith Weeratunga. Suggestions were handed over by the Delegation of German Industry and Commerce (1) to the Deregulation Committee. There were many other suggestions and ideas by many other stakeholders, including the Chamber of Commerce, on the brewing economic crisis. It was recently reported that the Pathfinder Foundation submitted another report to the Minister of Finance based on the findings of a tripartite discussion between experts from Sri Lanka, Japan, and India. 

After all these suggestions, the decision to delay reforms may have multiple reasons, of which which we can only guess. But keeping assumptions aside, the more we delay, the closer we get pinned to the wall with limited choices to escape from the crisis.

Economic reforms must always be looked at in a political context. Whether the present political power balance supports the reforms is a key question. While many are of the view that with a two-thirds majority reforms can be done, it seems otherwise. Reforms are going to be quite painful so it seems that policymakers are reluctant to push hard reforms, as they are scared that the citizens’ frustration during the reform period may dilute the political capital they enjoy.  Further, this may even cause them to lose the super-majority. 

Even the Minister of Finance has admitted that the State sector and State-Owned Enterprises (SOEs) are a massive burden to Government coffers; yet no State sector reform programme is even on the table. Politics is obviously the concern of the Government and State sector employees and their families are a massive voter bloc. Some of them would lose their jobs or would be pushed into mandatory retirement which would not help politics at the ground level. So reforms are put on the back burner and the Government continues to procrastinate. 

On the other front, the more that we delay reforms, the more the people get frustrated with disturbances to their regular day-to-day activities and businesses, including shortages of essentials such as LP gas, fuel, milk powder, cement, etc. The Government is stuck between a rock and a hard place – whether it carries out reforms or not, its popular support and political capital will be diluted either way. Therefore, my view is that it is better to bite the bullet and carry out reforms, as procrastination is just going to make things worse in the long run.

Another reason that reforms are delayed could be that the energy and focus of policymakers and politicians is spent mainly on fire-fighting day-to-day micro-problems. The situation is such that everyday has become a challenge for the Government to find US Dollars for importing basics and debt repayments.

Weather conditions impacting hydropower generation and global crude oil prices reaching nearly $ 100 a barrel are making our crisis worse. So far our policymakers’ strategy has been to completely depend on swaps. 

Over the last few weeks, India provided us with swaps and credit lines worth $ 1.5 billion and China with another Yuan 10 billion (approximately $ 1.5 b), of which basic information such as interest rates and payment conditionality has yet to be published. Interestingly, the total amount of swaps and credit lines are equivalent to six times the value of the MCC Grant, which created an extensive social discussion on the attached binding conditions which caused the President to appoint a committee to evaluate the grant agreement.

But our economic crisis is such that we are extremely desperate for foreign exchange. We had a presidential commission for a mere $ 480 million grant at a time when people had a deeper sensitivity to the potential conditions, whereas now we have decided to borrow six times more than that without any political party, media, or public figure having voiced their concerns. 

The decisions available at hand for all political parties are limited and difficult. It has come down to simply having the courage to implement reforms. Politics or party lines have become irrelevant as the prescription will not change regardless of the person in the driver’s seat.

Since 1977 and 1990 there has been no effort for any hard economic reforms, so many policymakers think that hard reforms will dilute their popularity. As a result, procrastination on reforms has become the norm. At the same time, the practice and knowhow of driving reforms have not been common. But the truth is that reforms will have less damage on political capital, while not undertaking reforms will have far more serious consequences. Stagnation won’t take us anywhere, but reforms will. 

References

1 https://srilanka.ahk.de/aktuelles/news-details/handover-of-report-on-the-simplification-of-existing-laws-and-regulations-in-sri-lanka

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

The danger of being anchored in anti-competitive safety

Originally appeared on The Morning

By Dhananath Fernando

The ‘what not to do’ guide for Sri Lanka’s economy from its shipping sector

Once I met a businessman in one of the world’s largest waterproofing corporations, based in the United States. He spoke to me about his humble beginnings. I asked him what his secret for success was. He replied “market system and competition” with confidence. 

He explained that an average person like him was able to create such a large business and social impact which provides employment for thousands of people in just one generation solely because of the market system and competition. “The market system made me an innovative, hard working and a progressive person. I didn’t care about my background. Without competition I could have been the same person as I was 20 years ago,” he said.

In life, hard work and commitment are the basic requirements of prosperity. What we need is a system that rewards hard work and free exchange, so the market system can create progression and prosperity. In any sector when competition is restricted, stagnation is unavoidable. That is one of the main reasons why, in any advanced market system, institutions are built to promote competition and restrict anti-competitive practises such as monopolisation. 

In Sri Lanka our total factor productivity is very low compared to our regional players, due to lack of competition and anti-competitive business practises. Sri Lanka is ranked at 84th in the Global Competitiveness Index (out of 140 economies) while we were ranked 52 in the same index in 2012; clearly, the situation is only becoming more dire.

The shipping industry is just one prominent example of how the lack of competition and anti-competitive trade practises have made Sri Lankan industry stagnant over the decades. While Sri Lanka boasts of its strategic location, our growth has been far below potential for many decades now. We have not only failed at capitalising on our naturally-gifted location but we are mired in debate and friction due to anti-competitive trade practises and attempts to monopolise the shipping industry and supporting services.

Most protected industries and cartels practise  anti-competitive behaviour after a certain period of time, due to stagnation and poor productivity. In a competitive environment, businesses focus more on future opportunities and productivity improvement, than on defending their own interests even if it means resorting to anti-competitive practises. As the American sporting legend Tom Brady famously said: “While the winners are focused on winning, the losers focus on the winners.”

Sri Lanka is quite unfortunate as even shipping, a main sector where we have the opportunity to open up for competition, has fallen victim to protectionist and anti-competitive practises. Minister Vasudeva Nanayakkara filed a public litigation case on the monopolisation of the shipping industry when he was a member of the Joint Opposition during the last regime. However, the lack of regulation to avoid anti-competitive practises will provide very limited space for ordinary citizens to become aware of the extent of the problem. 

Attempts to eliminate minimum investment requirements on shipping industry and freight forwarding with the objective of bringing more competition has failed over the years due to industry resistance. 

The result is shown in the numbers: Sri Lanka has about 750 local shipping, freight forwarding, and clearing agents, whereas Singapore has about 5,000 – despite commencing on its journey to becoming a maritime hub several years after us. Even in the case of the X-Press Pearl environmental disaster, we really did not have the basic ecosystem in place to combat an emergency because of our anti-competitive, inward-looking approach. 

Of course, shipping is not the only industry closed for competition, with anti-competitive behaviour. The acquisition of two of the largest tile manufacturers in Sri Lanka, which operate in an industry that is already highly protected (at one point with 107% total tariff protection), has also been a concern. The result has been the continuous suffering of consumers and the construction industry over the years, with basic housing becoming almost a dream for aspirational Sri Lankans. 

According to the current regulation, the Consumer Affairs Authority (CAA) Act No. 09 of 2003 (which was brought after repealing the Fair Trading Commision [FTC] Act of 1987) is expected to promote competition. Unfortunately, the Act only sets price controls on selected consumer goods instead of truly promoting competition. They raid small mom-and-pop shops for selling goods at rates higher than the set prices, and cast a blind eye on all other anti-competitive behaviour. It should be noted, however, that the CAA is hindered by its limited purview on the Investigation of existence of monopolies, mergers and acquisitions, and anti-competitive practises. 

The previous FTC Act of 1987 had a broader purview to investigate anti-competitive trade practises (compared to current CAA) including agreements to limit production, refusal to prevent  predatory pricing, vertical agreements, and cartels. But the Fair Trade Commision Act lacked implementation guidelines and specific distinction between public and private sectors (1). Anti-competitive practises need to always be analysed with State-Owned Enterprises (SOEs) as most monopolies and anti-competitive practises are SOE driven.

Additionally, the provisions for the appointment and removal of members to the FTC, as well as the way the Act was implemented, raised concerns of the departure from competitive policy at the FTC (2).

A good example of the shortcomings of the FTC is the merger of Glaxo-Wellcome and SmithKline Beecham. FTC considered that it was beyond their purview as it was an international merger. In relation to unfair trade practises, the oft-cited case is that of Ceylon Oxygen Ltd. Ceylon Oxygen had held a dominant market position since 1936 in Sri Lanka. When a new firm named Industrial Gases (Pvt) Ltd. entered the market in 1993, it was alleged that Ceylon Oxygen behaved in predatory manner by reducing the deposit fee on canisters and decreasing maintenance charges, and made discriminatory discounts as well as discriminatory rebates. 

FTC identified  three anti-competitive practices of Ceylon Oxygen, namely, predatory pricing, discriminatory rebates, and excluding dealing. However, when the case went up to the Appeals Court, it was held that the FTC had no jurisdiction to investigate such practises over the case and therefore did not recognise these practises as preventing competition.

Though the FTC had its own shortcomings, the subsequent CAA Act has a far more limited purview. Simply put, Sri Lanka’s business environment and ecosystem are  set on all fronts to avoid competition and promote anti-competitive behaviour, while our prosperity completely depends on the opposite. 

Competition is very important to Micro-, Small- and Medium-Sized Enterprises. They are the first to adapt and grow due to flexibility and agility in a competitive environment. That is the reason the world-class waterproofing businessman whom I had met thanked competition and the market system for his success and the success of his business. 

If Sri Lanka is serious about achieving the status of a high income country, we can only get there by improving our productivity (total factor productivity) and certainly not through debt accumulation. Trade and competition policies play a pivotal role in this journey of reform and our policymakers should focus on implementing high-impact policies to promote competition and avoid anti-competitive behaviours. Unfortunately, the current focus has been on prices and market intervention.

Sri Lanka has a large number of talented young people who could become as successful as the waterproofing businessman I met. If we establish a market system and a competitive environment, then nothing will stand in the way of our youth reaching the top and Sri Lanka will become a far better and more prosperous nation than it is today.

References:

(1)  ​​Trade and Competition Policies: Their implications for productivity Growth in Sri Lanka by Dr.Sarath Rajapathirana

(2)  Thurairtnam (2006), Malathi Knight Jones (2002)

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.

No true independence without economic freedom?

Originally appeared on The Morning

By Dhananath Fernando

This is a story I’ve heard, the validity of which I am not too sure about. The story goes that post India’s independence in 1947 the then Indian Prime Minister Jawaharlal Nehru was visiting villages to celebrate the newly attained freedom. However, the Prime Minister was slapped by an old man who emerged from the crowd, stating that he had lost his three sons and wife to the war. “Is this the freedom you brought to India?’” he asked the Prime Minister. 

The old gentleman’s question contained a great deal of emotions and obviously it went beyond a matter of political freedom. Income and wealth wise it was not sustainable and India as a country was very poor then, even more than it is today, and quality of life was deteriorating. 

After thinking for a little while Prime Minister Nehru provided a thought-provoking answer: “Now a senior citizen of India like you can slap the Prime Minister. That’s the freedom we brought to Bharat.” 

While Nehru’s answer was more relevant in the context of political freedom, the same story remains valid even in the context of economic freedom. Every citizen prefers to live in a society and an economy where they are free to make their own choices and have the freedom of choice when it comes to economic matters. As a result, countries that experience a higher degree of economic freedom have a higher GDP per capita. 

Graph 1 – Per capita GDP of least free countries and most free countries 

Graph 2 – Economic freedom and the income share of poorest 10% 

Indeed, economic freedom and political freedom usually go hand in hand, especially in attracting investments, skills, and capital. 

Currently, Sri Lanka is celebrating its 74th Independence anniversary. We must ask ourselves, how economically free are we, really? 

According to the Economic Freedom of the World Index in 2019 Sri Lanka ranked 92nd out of 165 countries and in most of the indicators our performance has been constantly poor.

Economic Freedom of the World Index evaluates countries on five main parameters. Our performance is extremely poor in International Trade. Being an Island located in one of the main maritime routes, we have been ranked 146 out of 165 countries which really reflects our constant policy flaws over the years. Our inward looking anti-trade bias policies have brought Sri Lanka to where it is today. 

Our ranking is equally bad in Regulation. Our score is 6.9 out of 10 and our rank is 110. Sri Lanka has too many regulations for micro, small, and medium enterprises and a fairly large licensing system. In fact, in the inaugural 72nd speech on Independence Day, the President pledged to remove unnecessary regulation. He appointed a deregulation commission headed by Lalith Weerathunga and Krishan Balendran, and we are awaiting the implementation of the recommendations. 

Soundness of Money is another important parameter evaluated by the Economic Freedom of the World Index. This considers the standard deviation of inflation and how strong the currency will be. So, the property in cash form will not be diluted over sudden currency depreciation. Sri Lanka ranks 103 with a score of  8.2 on this measure. The above numbers are from 2019 when we had single digit inflation. Now our year-on-year (YoY) headline inflation is 14% and food inflation is 25%. Therefore, on a sound money front our ranking obviously cannot be performing well. 

In the pillar of Legal System and Property Rights our ranking is 85th out of 165 countries with a  score of 5.1. This is an area we need urgent attention, and some reforms such as digitising our judiciary system is commendable. However, we have a lot to improve, especially regarding the time taken to resolve a case. As the Minister of Justice once said, an average criminal case takes about 10 years and a land case takes more than 20 years, which is a serious bottleneck in our investment system. Investors impart extra attention in doing their due diligence on matters of the judiciary system, as rule of law and independence of the judiciary are one of the fundamentals of democracy. 

On the pillar of Size of the Government as per 2019 data we were doing reasonably well. We ranked 17th out of 165 countries with a score of 8.28. However, our scores seem to be skewed due to low taxes and not actually because the size of our government is limited. We have 1.5 million State workers and in most of the industries State Owned Enterprises have a fairly large footprint with government intervention. 

Ultimately, after celebrating independence for 74 years, our economic freedom is deteriorating overall. Most Sri Lankans apply for visas and make attempts to get permanent residency in countries that are economically free. Hong Kong, Singapore, New Zealand, Switzerland, Australia, the US, and Denmark are the countries at the top of the list. Rather than blaming Sri Lankans who plan to migrate permanently, we should focus on changing our policies to become a country with more economic freedom, and ensure that the same Sri Lankans who are looking to leave as well as others around the world will find Sri Lanka an attractive place to live and work. 

As Jawaharlal Nehru responded to the old gentleman on freedom in 1947, if we start our reforms and bring economic freedom to Sri Lanka, our leaders too can tell our youth and boast of how they made Sri lanka an economically attractive country. 

Reference:

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220131_inflation_in_january_2022_ccpi_e.pdf

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.

Cycling to work in Colombo is easier said than done

Originally appeared on The Morning

By Dhananath Fernando

A new proposal is under discussion to encourage travelling to work by bicycle. No doubt any policymaker who pays a trip to Europe may observe many people commuting to work by bicycle and on foot. So it is normal for anyone to think “if Europeans can do it, why can’t we?”

Some may even believe that countries in Europe have become developed nations because of behaviour involving “a healthier way of life”; commuting to work by bicycles and using electronic vehicles to reduce pollution.

That line of thought is no different to thinking that the work of Usain Bolt, the Olympic Gold Medallist is easy – running 100 metres in about 10 seconds while accumulating millions of dollars in wealth. All this while many other people cannot come close to accumulating the same amount of wealth even by working throughout their lifetime. 

But what many fail to realise is that Bolt had to put about 20 years or more of training to run that 100 metre in 10 seconds under Olympic game conditions. Similarly, most of the outcomes are a result of a series of policies which go hand in hand with culture, geography, and many other economic factors. 

There is no doubt that cycling is good for health and it will help reduce emissions as well. But if policymakers are deeply interested in encouraging people to cycle to work, it has a lot to do with Sri Lanka’s land, housing, and tariffs on construction materials policy rather than being purely based on cycling. 

You may ask how ‘cycling to work’ is connected to housing, construction tariffs, and land policy? 

It goes without saying that people can cycle to work when they reside at a reasonable distance from their workplaces. When many of the members of the workforce live far away from their workplace, they have to have a convenient mode of transportation not only for reporting to work but also for other personal needs. Given the poor public transportation and lack of interest in developing public transportation, the reasonable option available for the middle class is to have their own vehicle. 

As Sri Lanka became a middle-income country, many could afford a vehicle even at very high border taxes, which are as high as above 100%. So for the average middle class, the available reasonable choice is to reside far from the city limits (main cities such as Colombo, Gampaha, Kandy, and Galle) and commute in their personal vehicles.

The question is why people reside so far away from city limits. It is mainly because housing is not affordable within city limits. Unaffordability of housing is due to two main reasons. First, about 82% of the land in Sri Lanka is owned by the Government, including prime properties within city limits. So land prices are very high due to the Government holding land for completely unproductive enterprises. 

A simple walk around Colombo would bring to view a number of  single-storeyed State buildings where the space is utilised in a very unproductive manner due to poor city planning and excessive regulation. 

Secondly, our cost of construction is very high due to tariffs and paratariffs. Hence, the cost of productive land usage housing schemes such as apartments have become only affordable to the elite and not the middle class. Our floor tiles, wall tiles, cement, steel, construction, aluminium, electrical material and a long list of other materials are more expensive than the global market prices. This is due to very high tariff rates that do not generate much revenue for the Government but only benefit a few protectionist industries, which is called ‘rent’ in economic terms. On housing projects there is a regulation which stipulates that every apartment should have a parking space.

A young professional who uses mobile app-based taxi services or lives at a walking distance to their office does not necessarily need to pay for the land, bearing the construction cost for a 300 Sq.Ft. parking slot in an 800 Sq.Ft. apartment. It is such regulations that drive the housing prices within city limits and minimise choice for the consumer.

As a result we have very few vertical housing schemes that are affordable to the working middle class located within city limits. Young professionals who could easily settle in a two-bedroom apartment within walking or cycling distance to their workplace now have to buy unproductively utilised and expensive land far away from the city, along with a vehicle to commute to work.

If the middle class has housing options within city limits, they would be the happiest to settle in Colombo. They can save their hard-earned money on an apartment property which is a transferable asset rather than purchasing five-year-old low quality reconditioned vehicles which are subject to a tariff of more than 100% to commute to the workplace, burning fuel in the congested and traffic-riddled city streets. 

When middle-class aspirational Sri Lankans can afford to reside in the city where they will be able to use a bike instead of a reconditioned vehicle to commute to work, it is then that we will achieve the objective of saving fuel and minimising emissions and valuable foreign exchange, thus increasing productivity across the board. 

A few years ago the Colombo Mayor and Dutch Ambassador also promoted cycling on weekends. It just became a typical Colombo event and now we hardly see people cycling in Colombo. Often cyclists in Colombo are lottery sellers selling a dream of a fortune to the working middle class and aspirational Sri Lankans, where they can buy a house if they have the luck on a State-issued lottery ticket.

Additionally, we have to remember that there are regions in Europe where it’s less humid than Sri Lanka, so cycling to work is easier than in a tropical country.

If our policymakers really want to see a city of cyclists, they have to start working on our land policy, housing, and tariffs on construction. If we set those policies right, many more developments will be achieved rather than just producing cycling professionals within city limits. 

The Government will need to consider enforcing traffic laws and providing cycling space to enable safe and easy cycling to and from work. 

Reference:

• https://www.newswire.lk/2022/01/26/proposal-to-travel-by-bicycles-to-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.

Special Goods and Services Tax: Issues and Concerns

Originally appeared on Ceylon Today, Daily FT, The Island

By Dr Roshan Perera & Naqiya Shiraz

I. Background

The new bill titled ‘Special Goods and Services Tax’ was published by gazette dated 07 January 2022. (1) The Special Goods and Services Tax (SGST) was originally proposed in Budget speech 2021 but was not implemented. It has once again been presented in Budget 2022. The SGST aims to consolidate taxes on manufacturing and importing cigarettes, liquor, vehicles and assembly parts, while also consolidating taxes on telecommunication and betting and gaming (see table 1 for existing taxes on these products and table 2 for taxes consolidated into the SGST as per the schedule in the gazette). The rationale for this new tax as per the bill is “...to promote self-compliance in the payment of taxes in order to ensure greater efficiency in relation to the collection and administration on such taxes by avoiding the complexities associated with the application and administration of a multiple tax regime on specified goods and services.”

Given the multiplicity of taxes and the complexity of the current tax system as a whole, rationalising taxes is necessary to improve collection. However, whether the proposed SGST simplifies the tax system while ensuring revenue neutrality or even improving revenue collection, needs to be carefully examined.

The SGST Bill is silent on the treatment of the existing VAT on these goods and services. However, according to the Value Added Tax (Amendment) Bill also gazetted on 07 January 2022,(2) liquor, cigarettes and motor vehicles will be exempted from VAT while telecommunications and betting and gaming services will still be subject to VAT. 

While the gazetted Bill sets out some of the features of the proposed SGST there are many important areas not covered in the Bill.  These are expected to be gazetted as and when required by the Minister in charge. 

II. Issues & Concerns

The motivation behind SGST is the simplification of the tax system. Although the objective of introducing the SGST is to improve efficiency by reducing the complexity of the tax system there are many issues and concerns with this proposed tax.

1. Revenue

Tax revenue which was 13% of GDP in 2010, declined to 8% in 2020.  Ad hoc policy changes and weak administration contributed to the decline in tax revenue collection.  This continuous decline in tax revenue has led to widening fiscal deficits and increasing debt. One of the main reasons for the current macroeconomic crisis is low tax revenue collection. Hence, any change to the existing tax system should be with the primary objective of raising more revenue.  

According to the budget speech the SGST is estimated to bring in an additional Rs. 50 billion in revenue in 2022. (3) Revenue from taxes proposed to be consolidated under the SGST has significantly declined over the past 3 years. Given the already difficult macroeconomic environment, along with ad hoc tax policy changes raising the additional revenue estimated at Rs. 50 billion seems a difficult task. 

2. Tax Base and Rate

For the SGST to raise taxes in excess of what is already being collected through the existing taxes, the rate and the base for the SGST needs to be carefully and methodically calculated. Further, the existing taxes have different bases of taxation. For instance the basis of taxation of motor vehicles is both on an ad valorem (4) basis and a quantity basis while the basis of taxation of cigarettes and liquor is quantity. (5) In light of this, the basis of taxation on which SGST is applied becomes an issue. Having different bases and different rates for various goods and services would complicate the implementation of the tax These issues need to be carefully considered to ensure the new tax is revenue neutral or be able to enhance revenue collection.

3. Efficiency

One possible revenue benefit of this proposal is the inability to claim input tax credits on the sectors exempted from VAT. However, the issue is the cascading effect that would result where there would be a tax on tax with the end consumer paying taxes on already paid taxes. If the idea was to raise additional revenue by limiting tax credits, it would have been simpler to raise the tax rates on the existing taxes rather than introduce a new tax. 

4. Administration

According to the bill, SGST  will now be collected through a new unit set up under the General Treasury where a Designated Officer (DO) will be in charge of the administration, collection and accountability of the tax. The existing revenue collection agencies, such as the Inland Revenue Department (IRD) or the Excise Department will not be primarily responsible for the collection of this tax. By removing the  IRD and Excise Department, a parallel bureaucracy will be created, at a time when public spending needs to be carefully managed. The General Treasury also has no previous experience and expertise in direct revenue collection. Weak administration is one of the key reasons for the low tax collection and success of this tax would depend on the strength of its administration. 

In addition to the above-mentioned concerns, as per the Bill the minister in charge of the SGST has been vested with the power to set the rates, the base and grant exemptions. Accordingly, Parliamentary oversight over fiscal matters is weakened under this proposed Bill. 

It could also lead to a time lag between the gazetting and implementing of changes to the SGST (such as the rate, base etc) and obtaining Parliamentary approval for those changes.

5. Dispute resolution 

The SGST Bill also focuses on the dispute resolution mechanism. Under the present tax system,  with the enactment of the Tax Appeals Commission Act, No. 23 in 2011 the Tax Appeals Commission has the “responsibility of hearing all appeals in respect of matters relating to imposition of any tax, levy or duty”.(6) The most recent amendment to the Tax Appeal Commissions act (2013) (7)  seeks to address the large number (495) of cases pending before the Tax Appeals Commission (8) by increasing the number of panels to hear the appeals. 

Under the proposed SGST disputes will be handled through the court of appeal. However, the time period by which specific actions need to be taken is not provided in the bill. In addition, disputes have to be taken to the court of appeal.  Hence, the entire process will be more time consuming. This could result in revenue lags and difficulties in revenue estimation until disputes are resolved.

Additionally, in the case that no valid appeal has been lodged within 14 days, any remaining payments would be considered to be in default. Thereafter, the responsibility is shifted to the Commissioner-General of the IRD to recover the dues. Given the IRD is completely removed from the normal collection process, the rationale for bringing defaults under the IRD is not clear.

III. Policy Recommendations

As discussed, the SGST Bill has several limitations and much of this is due to the ambiguities in the Bill.  

• If the tax is implemented, the rate and basis of taxation need to be revenue-neutral to ensure tax collection is maximised and administrative costs minimised.

• The rates, basis of taxation, exemptions etc should be specified in the Bill, as done in most other Acts. This would avoid the power for discretionary changes to the tax being placed in the hands of the minister in charge. 

• Given the already weak tax administration, it would be more sensible to strengthen the existing revenue collecting agencies and address the weaknesses in the existing system without creating a parallel bureaucracy.

• In the case where VAT is consolidated into the proposed GST, the issue of cascading effect of input tax credits needs to be addressed. This is relevant particularly in the case of capital expenditure. 

Given the critical state of revenue collection in the country, the question to ask is whether this is the best time to introduce a new tax. Focus should be on fixing issues in the existing tax system to ensure revenue is maximised.  The VAT is the least distortionary tax and it is the easiest to administer. Given these features, it can be a very efficient revenue generator for a country. Therefore instead of introducing a new tax, capitalising on systems that are already in place and amending the VAT rate, threshold and exemptions may be a more practical solution to the revenue problem that the country is currently facing. 

Dr. Roshan Perera, Senior Research Fellow, Advocata Institute and former Director, Central Bank of Sri Lanka.

Naqiya Shiraz is a Research Analyst at the Advocata 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.

References:

1. http://documents.gov.lk/files/bill/2022/1/162-2022_E.pdf

2. http://documents.gov.lk/files/bill/2022/1/163-2022_E.pdf

3. https://www.treasury.gov.lk/api/file/0c3639d9-cb0a-4f9d-b4f9-5571c2d16a8b

4. A value based tax base of ad-valorem refers to a rate of tax, where revenue will increase if the value of tax base increases. 
   A quantity based tax base is a tax imposed on a per unit quantity of the product.

5. https://www.treasury.gov.lk/api/file/304e2f2f-f215-40ad-b613-4d7cc3427178

6. https://www.treasury.gov.lk/api/file/4028b5a0-f166-4f1d-a076-299e32200212
   http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=10210

Borrowing from Peter to pay Paul

Originally appeared on The Morning

By Dhananath Fernando

There’s a childhood memory engraved in my mind, of an incident with a fellow schoolmate concerning an act of borrowing. Back then, we borrowed money from each other constantly to eat sweets and junk food and buy video game gadgets. A particular friend of mine had the habit of borrowing a little money every week and settling the same again after a week’s time right on schedule. After a few weeks, I realised he borrowed the same amount of money from another friend as well. 

Like a well-planned roster, he proceeds to settle his debt with the other friend in a week’s time. One day my frequently borrowing friend did not settle my money as he promised. When I confronted him on the matter, he plainly stated that he settled the amount owed to me with the money he borrowed from my other friend and vice versa. At this one instance, the other friend had refused to lend money to my frequently borrowing friend so he was unable to settle with me. 

But what was particularly amusing was what he said after. “What I have been borrowing and settling for the past few weeks is money from the two of you to each other. So to resolve the matter, the two of you must settle with each other because it’s your money. Not mine.” 

Sri Lanka’s debt servicing is a much more complex version of what my classmate did; we settle our creditors by borrowing from someone else. Most sovereign countries do the same. However, this can only be done when someone agrees to give us money. Similar to the incident with my friend, the moment people refuse to lend us money, the cycle starts collapsing. That is exactly what happened to Sri Lanka. As a result, the country has lost its credit rating by international rating agencies and has thereby lost market access. 

The current strategy we follow is requesting lifelines from our bi-lateral partners as a form of assistance. As a result, in just five days, India threw in about $ 1.4 billion worth of credit lines and swaps to secure our fuel, medicine, essential supplies, and debt repayments. 

Initially, China provided us with a swap of 10 billion Yuan as a back-up, which the Central Bank absorbed as reserves according to their data. 

At the same time with some of the bi-lateral partners, our relationship has not been professional. We cancelled the LRT project with Japan, which is our main bilateral creditor as well as the main funder for one of our main multilateral partners, the Asian Development Bank (ADB). To make matters worse, we keep the trade channels such as vehicles and spare parts closed, which is precisely where the bilateral relationships can be strengthened. 

Our mismanagement of bilateral relations is reflected, even with China. Recent events, such as our shortsighted handling of diplomatic relations over the fertiliser issue, with China blacklisting a state bank for not honouring payments, illustrates this issue. 

Economically and geopolitically, we have lost market access for borrowing on one hand, and on the other, we have somewhat tarnished the relationship with our friends at a time when we need their assistance the most. So far, we have been very lucky to still have their continuous support regardless of the setbacks even though the fault is on our end entirely. As a recommendation, the Government should not take the silence of some bilateral partners lightly, but work double-time to restore trust and understanding in business and trade. 

The current strategy of paying our International Sovereign Bonds through bilateral swaps and depending on credit lines for essentials will eventually come at a geopolitical expense. We become more vulnerable with our past track record of working with our bilateral partners. 

In this context, the Central Bank increased policy rates by 50 basis points, a policy move in the right direction. However, this comes – unfortunately – too late to stop the inflationary pressure constantly building, probably due to the faulty use of Modern Monetary Theory, which we have been following for some time now. The policy rate revisions will encourage people to save more money instead of spending more. This will somewhat ease the pressure, but at the same time slow the economy down. But we can’t afford to accelerate the economy with a historic balance of payment crisis which was already exacerbated by a price control on US Dollars (USD) in an attempt to encourage imports and discourage exports. 

Surprisingly, policymakers have not taken any reforms to overcome the situation, believing that debt servicing through borrowed money will solve the problem. Very high hopes have been kept on tourism but the same thing that happened to remittances will happen to tourism when we try to keep the exchange rate very low. We encourage people to keep the USD in grey markets so people will become further reluctant to sell their hard-earned USD to the Central Bank. 

At the same time, we need to understand tourism also increases the consumption of the economy where, with USD inflows, there will be a fair share of USD outflows concurrently. Thus, keeping all our eggs in the basket of tourism would not be advisable at all. If policymakers recall, at the beginning of the pandemic, remittances were at a record high. With mounting debt, our policymakers replied that our solutions remained in our remittances, which today are in decline due to our own policy failures. In this context, there are certain areas for restructuring that policymakers have to consider if they were to come out of the crisis: 

1. Restructuring of our social security net. A market pricing-based digital cash transfer system with better targeting than Samurdhi is recommended to provide poor people the opportunity to keep their noses above the water to navigate through the economic reform period

2. Restructuring and Reforms on the State sector and State-owned enterprises are a must. Listing the debt of State-owned enterprises, privatisations, consolidations and outright sale of some of the assets owned by State-owned enterprises is required for the private sector, including land. Government care has to be limited through a reasonable voluntary retirement scheme

3. Restructuring and Reforming in our Central Bank .The current tools of excessive interventions by the Central Bank on interest rates, exchange rates and every part of monetary policy has to be refined

4. Restructuring and reforming our tax system and tariff system is a must. Currently, our income and corporate tax systems are too complicated and it has to be simplified if policy makers are interested in increasing revenue. The complicated tariff structure has to be simplified with three tariff bands. Bringing down tariffs will also help the Government increase the revenue and boost trade

5. Restructuring and reforming our production structures for it to be aligned with global production and supply chains is vital to increase export revenue. At the same time, a deregulation drive has to be initiated to ensure conducive business environment for locals and foreigners

6. If our debt is unsustainable, we have to consider a restructuring of debt, but with the above-mentioned reforms. Attempting to do a debt restructuring without a solid commitment to reform will worsen the problem and debt restructuring could become a frequent event causing us to lose our credibility and market access if we fail to do the necessary reforms

All these ideas are not new and not a first mention in this column. These have been repeatedly spoken of by countless economic experts. It is simply that the call to action rate is very low. Policymakers whose job is to change policies and get things done. Not to behave like my classmate – paying debts with borrowed money, wiping their hands clean, and shifting the responsibility elsewhere at the last minute.

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 Railway railed with strikes and losses; Time to reform?

Originally appeared on The Morning.

By Anuka Ratnayake and Aaditha Edirisinghe

On 13 January 2022, the Station Masters’ Union launched a 24-hour token strike cancelling over 200 scheduled trips. As a result, commuters heading back home from Colombo, long distance travellers, tourists (both local and foreign) were all inconvenienced and left stranded in stations partway through their journey. Angry commuters attacked the train bound to Batticaloa when it passed the Kekirawa Station. This public outrage at the services provided by Sri Lanka Railway (SLR) is nothing new. However, little has been done to reform or restructure amidst public disappointment and escalating losses.

Why should the Railway be reformed? 

Operating as a Government institution under the Ministry of Transport, SLR is the country’s primary alternative mode of public transport to the often congested road network. Underpricing of railway fares along with systemic issues including mismanagement and poor governance have led to recurring annual losses. Despite budgetary support, the railway has recorded an accumulated loss of Rs. 46.7 billion in the years 2015-20. 

As with many transportation networks globally, the impact of Covid-19 has made SLR’s financial position increasingly precarious; with revenues down, losses amounted to over Rs.10 billion in 2020 alone. The widening chasm between the revenue raised and expenditure incurred, stood at a staggering Rs. 22 billion in 2018, as per official records. This has led to the dependence on Government bailouts. The Treasury spent a grand total of Rs. 48.7 billion in 2020, of which around Rs. 14 billion was for recurrent expenditure such as salaries, subsidies and grants. 

Sri Lanka Railway has an exceedingly large workforce with very active trade unions and an extensive bureaucracy. According to the official statistics of 2019, SLR has 14,207 employees. The total personal emoluments incurred for the same year was Rs. 9.8 billion, which was up by Rs. 809 million compared to 2018.

Due to the overstaffing issue, work duplication is often seen at SLR and is a serious issue affecting efficiency. Union actions are a burden on the operations of SLR, as observed during the last week of December 2021 and on 13 January 2022. 

In an interview conducted in January 2022, the Station Masters’ Association Chairman Sumedha Someratne claimed that as a result of the strikes in December, SLR incurred a loss as high as Rs. 20 million per day although the Railway General Manager quoted a much lower figure. 

A major reason for SLR’s budgetary reliance is the lack of cost reflective pricing. As of now, for a trip between 51-100 km, the fare per kilometre is around Rs. 3.30 for first class seats and Rs. 1 for third class seats. This underpricing has led to a reduction in the availability of funds to cover operational costs, resulting in the lack of finance for maintenance and repairs; by 2017, 65% of SLR’s locomotives were over 30 years old. 

The Urban Transport Master Plan 2014 identified several irregularities of the condition of the railway. A few noteworthy issues were the malfunctionings in the signalling system along with the deformation of rails and irregularities in alignment, which caused delays and sudden cancellation of trains. This poses a threat to passenger safety and is increasingly dangerous during inclement weather conditions. 

Reform recommendations 

Given that Sri Lanka is facing an economic crisis, the treasury cannot afford to shield SLR from the adverse repercussions of its inefficient operations. Immediate reforms are needed to get SLR back on track. 

Since most of SLR’s issues stem from its inability to raise sufficient revenues, the implementation of a cost-reflective fare structure should be prioritised. However, standing in the way of such price reform are the cheap fares of public bus service, the primary substitute to rail transport.

Therefore, for the price revision to be viable SLR should look into improving the quality of service to justify higher prices while reducing costs to be more competitive. 

Furthermore, to offset some costs SLR can focus on the profitable use of its vast asset base, such as its 13,000 acres of land which can be capitalised for this purpose. In 2017, it was reported that nearly 15% of land owned by SLR was leased to 6,400 users. Yet it has been unable to collect Rs. 1.46 billion in lease revenue from the users of the land owned by the department. Better management of real estate would bring in massive revenues to the Railway Department, which can be used to finance repairs and maintenance. 

Moreover, the Railway Department can focus on improving freight transportation, a lucrative and profitable source of revenue generation. According to the Asian Development Bank, by 2017, the freight transportation service market share of Sri Lanka Railway had eroded to less than 1%. The lack of necessary transportation and containerisation equipment limits the freight business to goods such as cement and petroleum. In the interest of expanding the freight service with the available resources; tracks which are reserved for passenger transportation during the daytime can be utilised under a night schedule. 

Furthermore, portions of SLR’s underutilised land can be used profitably for freight-related logistics services which will also bring in much-needed revenue to the loss-making institution.  

To bridge the prevailing investment gap at SLR, public private partnerships (PPPs) should be encouraged for operations and maintenance. A major bottleneck in SLR’s ability to deliver a consistent service is the outdated and malfunctioning infrastructure it owns, such as signalling and tracks. Investments in this respect will allow SLR to provide the public a consistent service while accumulating a sustained influx of cash. 

Colossal losses of state-owned institutions such as the Sri Lanka Railway is a burden on the state coffers, and ultimately the taxpayer. The Government’s increasing reliance on debt to keep such institutions afloat is compromising the economic future of Sri Lanka. Thus it is the need of the hour to begin reforming and restructuring potential cash cows such as Sri Lanka Railway. If reformed, Sri Lanka Railway would undoubtedly be a pillar of Sri Lanka’s transport infrastructure, contributing to the overall productivity of the 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.

Debt restructuring: Between a rock and a hard place?

Originally appeared on The Morning

By Dhananath Fernando

According to news sources, the President has requested the Chinese Foreign Minister to assist Sri Lanka in restructuring our debt. The Finance Minister too has indicated to Japan and India, our long-standing bilateral partners, the need for more assistance to overcome the economic crisis Sri Lanka is going through. 

In a recent press conference, the Central Bank of Sri Lanka (CBSL) Governor also mentioned that discussions for a new loan from China to restructure our debt is underway. 

However, it seems that the President and the CBSL Governor have given the term ‘restructuring’ two different meanings. One as run by the Global Times, the Chinese Communist Party-run newspaper, which said: “After President Rajapaksa’s request to restructure debt, Song Wei, a research fellow at the Chinese Academy of International Trade and Economic Cooperation stated that interest-free loans offered by the Chinese Government are applicable for debt relief while the concessional loans raised through the market cannot be written off.” 

However, as measures for debt restructuring, the CBSL Governor suggested taking more swap agreements, paying International Sovereign Bonds (ISBs) and bilaterally skewing our debt profile from market borrowing. Considering all this, we are yet to know what would be the final decision.

In Sri Lanka’s external debt profile as at the end of 2020, about 57% was borrowed from financial markets (34% from ISBs and 8% from China Exim Bank). 

In my view, we cannot evaluate debt restructuring without really understanding the problem. The issue at hand is that Sri Lanka borrowed money in US Dollar terms with a short maturity at high-interest rates and invested in assets on non-revenue generating non-tradable assets. As a result, we had to borrow money at even higher interest rates to service the interest of previous debts which has snowballed to a point where Sri Lanka has lost access to capital markets.

So the choices are not between ‘good’ vs. ‘bad’. The choices are between ‘worse’ vs. still ‘worse’. That is why it is called an economic crisis. Either measure will result in a catastrophic impact on the people of Sri Lanka. So in this context let us evaluate debt restructuring. 

The objective of any debt restructuring is to avoid a similar situation in the future and ensure sovereign debt sustainability. So a debt restructuring plan without an economic reform plan to improve competition, trade, and efficiency of the economy will not bring us any sustainable solution. Rather, it will worsen the situation. 

Secondly, debt restructuring is also a very difficult process for a country like Sri Lanka with a limited resource base. Countries such as Argentina and Ecuador defaulted but they have large reserve bases including oil to get back on a path of recovery. But Sri Lanka is a small $ 82 billion economy with no experience on debt restructuring.

Debt restructuring is not an easy process given Sri Lanka’s debt profile. Usually, senior creditors such as the International Monetary Fund (IMF), the World Bank, and the Asian Development Bank (ADB) are unlikely to restructure debt as it is provided at a concessional rate and with a longer maturity period. In restructuring multilateral debt, generally, a new programme would be introduced to recover the previous debt. 

Restructuring bilateral debt is complicated. The debt of Paris Club members has to be negotiated at the Paris Club. Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, South Korea, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the UK, and the US are the members of Paris Club. So any bilateral debt restructuring from the above nations have to be at the Paris Club. According to data, 10% of our creditors are members of the Paris Club, with Japan being the main bilateral creditor for Sri Lanka.

Our debts with China and India, who are not Paris Club partners, have to be negotiated outside the Paris Club. Generally, any bilateral creditor would not agree to single-handedly bear the entire restructuring loss of one particular country. They will request other partners to assist. Even in the case of China, according to NewsIn Asia, Long Xingchun, a senior research fellow at the Academy of Regional and Global Governance of the Beijing Foreign Studies University, stated that restructuring loans with China alone is insufficient to help the island nation tide over its difficulty, which needs a package plan with other involved parties.

The geopolitical situation in Sri Lanka will give way to more geopolitical externalities in debt restructuring with bilateral partners. But it seems we have to move towards that direction as we have very limited alternatives at hand. 

Additionally, bilateral partners will also request to share the debt burden with commercial creditors including ISB holders. This is because in debt restructuring, the main objective is to distribute the loss as much as possible. 

Restructuring commercial debt has to be dealt with by international law and it is somewhat an expensive and time-consuming process to reach a consensus with all creditors. According to global debt restructuring expert Prof. Lee Buchheit, it can take about nine months to a few years based on the profile of the debt. 

In debt restructuring, there are four parameters generally considered. 

1. Reducing debt stock or principal amount commonly known as haircuts

2. Adjusting the interest rates to be paid or coupon rates commonly known as coupon adjustment

3. Extending the repayment or maturity period

4. Mix and match of all above

The general practice is creditors ask to conduct a debt sustainability study of the country before deciding the adjustment or deciding which parameters of restructuring are to be used. The only credible organisation to conduct an independent study is the IMF, and that is why in most of the debt restructuring processes, the countries are under the IMF programme. In Sri Lanka’s case, in the event of a restructuring as our President requested, we have to disclose all debt including the debt owed by the State-Owned Enterprises because the restructuring burden will be calculated across the board. 

Creditors are generally very reluctant to restructure debt especially when it is due to financial mismanagement. In case of a natural disaster or a negative externality, the negotiation would be easier compared to a situation concerning economic mismanagement. 

So the available choices for Sri Lanka are very limited and every choice may have its own set of consequences. Reserves are declining and people often complain about shortages of essentials and interruption of utilities. Businesses are complaining about the inconvenience of working with banks due to difficulties in opening Letters of Credit (LCs). Creditors and investors are embroiled in suspicion and confusion with constant credit rating downgrades. Debt restructuring will be complicated and an open Sri Lanka for geopolitical sensitivities will affect political stability. 

The choices at hand are difficult. This column has continuously highlighted the need for reforms since the beginning of the pandemic with full knowledge that delays will limit the alternatives. We need to shift gears and move forward with hard reforms before people become hard on reforms. 

References:

• https://newsin.asia/china-to-revise-lankan-loans-repayment-schedules/

• https://newsin.asia/china-to-revise-lankan-loans-repayment-schedules/

• https://www.youtube.com/watch?v=I1hezyj2YxA&list=WL&index=1&t=7182s

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

Government relief packages: Pros, cons, and criteria for perfecting

Originally appeared on The Morning

By Dhananath Fernando

Last Monday (3), Finance Minister Basil Rajapaksa announced a relief package worth Rs. 229 billion. This package consists of a Rs. 5,000 allowance for government workers, 500 g wheat flour for estate communities per day, an increase in the purchasing price of paddy by Rs. 25 to Rs. 75 a kilogramme to assist farmers, a Rs. 1,000 increase for Samurdhi beneficiaries and an incentive scheme for home gardening. When evaluating relief packages, a long list of factors should be considered. One such factor is inflation. It is no secret that there is creeping inflation affecting the livelihoods of all cross sections of society. This is openly being expressed to politicians. Food inflation is at 22% and headline inflation is at 12%. 

This column has always highlighted the grave dangers of high inflation. We have been closely following these developments and our prediction has now been admitted by the Government. The sources for financing the Rs. 229 billion was not specified. The Finance Minister only mentioned that it would be utilised from the 2022 Budget while also mentioning that no tax will be increased. Both the budget numbers and their justification in the text were problematic. Inflation is the worst tax which hurts the poor more than middle income families. 

Given these circumstances, the available options are to cut down some of the already allocated capital expenditure or to borrow money from the Central Bank to finance this new expense. The former is happening already, as when the Government made reductions in capital expenditure as per the budget speech. Some were manifested through policy decisions such as halting construction activities for the next two years. Therefore, if there is a reduction in capital expenditure, it will have to come through cutting down budget lines allocated to areas such as highways, road development, education, and health care. 

Alternatively, we may have to finance this by borrowing more money from the Central Bank, continuing the dangerous policy of believing in Modern Monetary Theory. It will have a very high risk of starting a wage spiral and contributing further to inflation and the depreciation of our currency faster than we expect. Most of this (extra) money will be spent on imported goods. This increase of demand on imports will continue to dry up our limited foriegn reserves. 

In my view, the announcement will confuse investors and businesses, putting the credibility of the Finance Minister at risk. Presenting the Appropriation Bill, the Finance Minister used an anecdote to express how our economy is trapped between three competing challenges. The proposals of the budget such as to cut down expenditure by cutting down the fuel quota and extending the pension entitlement for 10 years for parliamentarians, was a positive signal. However, announcing a relief package completely opposing this may cause further business uncertainty. 

An ideal relief package 

While a relief package has its own pros and cons in politics and economics, it is worthwhile to explore how the relief package should be structured. As this column expressed multiple times, the only solution to overcome this crisis is through structural reforms. Structural reforms will be initially painful across the board, specially for low income earners. Pressure is already upon them with high inflation, and this demographic is being forced to make sacrifices to their food basket. 

The long-term solution for this problem is establishing a digital cash transfer system based on market prices. For example, a fisherman may consume a fair share of fuel to generate income and to contribute to the economy. But the consumption of fuel of a daily wage earning labourer is limited. So the fuel subsidy has to be targeted more towards the fisherman and less towards the labourer. A digital cash transfer to the bank account based on market prices of fuel is the most efficient way of undertaking this. If we try to keep the entire fuel price low through a non-targeted system, consumers who consume more and can afford market prices will automatically benefit as well. At the same time it may be an incentive for low fuel economic machines to be used when fuel prices are low across the board. A cash transfer will not only provide dignity for a person to consume based on their needs, but also provides freedom of choice to shift to alternatives.

Making it a cash transfer avoids political interference where beneficiaries need not worry about their political opinion in order to be entitled for the scheme. Governments can also save resources and be more efficient by adhering to the market forces of demand and supply.

The Samurdhi programme which is the main safety net in Sri Lanka is very poorly targeted and about half our households have become entitled to it. Additionally, about 25% of the Samurdhi fund is spent on administration costs. Therefore, a direct cash transfer can be more efficient than Samurdhi by saving administration costs. 

India administers a system called Adhar with a colour-coded system, where the value of the cash transfer is determined based on the level of poverty. In addition to being based on the poverty level, the option of managing the cash transfer in subsidies often varies with global prices of fuel and liquid petroleum gas. 

Unfortunately, the relief package which was announced did not have the depth necessary, and the targeting could have been better. If we look at the public service, it is usually overstaffed and worker category cardres who are entitled for overtime are maintained by the Sri Lankan Government. As a result, in addition to the basic pay, people simply sign up for overtime work without really having the need to commit for overtime. On multiple occasions many board chairpersons and senior officers have mentioned that they sign off on overtime for their staff assistants and chauffeurs, where in most cases, the total take-home pay is higher than that of the chairman or the senior officer. As such, providing a Rs. 5,000 allowance with non-existing resources would not really help to overcome the crisis. 

Sri Lanka should move towards a digital cash transfer system to strengthen our safety net. But simply strengthening the safety net won’t help the poor. Making imports competitive, bringing down tariffs on essentials and connecting with global value chains is of paramount importance in order to help the poor out of poverty. 

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.

Repay Foreign Debt or Finance Essential Imports

Originally appeared on Daily FT, Lanka Business Online and Groundviews

By Dr Roshan Perera and Dr. Sarath Rajapatirana

The available foreign reserves of the country can be used to either repay foreign creditors or to finance imports of essential goods and services required by its citizens. This is the dilemma facing Sri Lanka today. Repaying the full value of the bond using the limited foreign reserves available would provide a windfall gain to those currently holding these bonds. But it will be at great cost to the citizens of the country who will face shortages of essentials like food, medicine, and fuel. 

In these circumstances, it is in the best interest of all its citizens, for the government to defer payment of the US dollar 500 million International Sovereign Bond (ISB) coming due on 18 January 2022, until the economy can fully recover and rebuild. 

Just as an individual with co-morbidities is more vulnerable to develop severe illness if infected with COVID-19 and more to likely require hospitalisation and even treatment in an ICU, Sri Lanka was vulnerable to economic shocks long before COVID-19 struck. The country was already facing several macroeconomic challenges. Muted economic growth. An untenable fiscal position. Although a tough consolidation programme was put in place to bring government finances to a more sustainable path, sweeping tax changes implemented at the end of 2019 reversed this process, with adverse consequences to government revenue collection. Weak external sector due to high foreign debt repayments and inadequate foreign reserves to service these debts. COVID-19 only exacerbated these macroeconomic challenges. And like a patient who gets over the worst of COVID-19 has a long road to recovery; the economy of Sri Lanka faces many challenges to get back on track. 

The onset of COVID-19 in early 2020, only worsened an already grim macroeconomic situation. The country lost the confidence of international markets, and the ability of the sovereign to rollover its external debt became difficult if not impossible. In these circumstances, there was a solid argument for a sovereign debt restructuring. But the response from the government and the Central Bank of Sri Lanka (CBSL) was a firm “No”. The argument was that Sri Lanka never defaulted on its debt and it was not going to do so now. The official position was also that the government had a ‘plan’ to repay its debt and hence there was no reason to engage in a debt restructuring exercise. However, Sri Lanka faced high debt sustainability risks: the debt to GDP ratio at 110% was one of the highest historically and interest payments to government revenue at over 70% was one of the highest in the world. 

Table 1: Summary of External Sector Performance Q1 – 2017 to 2021 ($mn)

Therefore, it is in the best interest of the country and its citizens for the government to defer payment on its debt and use its limited foreign reserves to ensure uninterrupted supply of essential imports. But this requires a plan. To minimise the cost to the economy, the government must immediately engage its creditors in a debt restructuring exercise. This will require a debt sustainability analysis (DSA) by a credible agency to identify the resources required for debt relief and the economic adjustment needed to put the country back on a sustainable path. This will be critical to bring creditors to the negotiating table and provide them comfort that the country is able and willing to repay its debt obligations in the future. 

The cost of not restructuring is much higher. A non-negotiated default (if and when the country runs out of options to service its debt) would lead to a greater loss of output, loss of access to financing or high cost of future borrowing for the sovereign. It could even spill over to the domestic banking sector, triggering a banking or financial crisis. 

The consequences are clear. What will we choose?

Dr. Roshan Perera, Senior Research Fellow, Advocata Institute and former Director, Central Bank of Sri Lanka.

Dr. Sarath Rajapatirana, Chair, Academic Programme, Advocata Institute and former Economic Adviser at the World Bank. He was the Director and the main author of the 1987 World Development Report on Trade and Industrialisation.

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.

National Single Window: Paving the way for paperless trade

Originally appeared on Daily FT, The Morning, the Island, and Lanka Business Online

By Mithara Fonseka and Kavishka Indraratna

In 2016, Sri Lanka ratified its Trade Facilitation Agreement (TFA) with the WTO and in 2017 a Secretariat was established for the National Trade Facilitation Committee to drive much needed trade reforms in the country. Currently, the rate of Sri Lanka’s implementation commitments under TFA stands at 34.9% with a timeframe ranging from 2017-2030. Reforms include the Trade Information Portal, streamlining customs processes and revamping the systems for post-clearance audit. However, progress of one of the key reforms, the National Single Window (NSW), has been stalled. Deviating from the initial time frame of completing the Single Window in December 2022, the target date has been delayed to 2030. The NSW, a globally recognised trading portal, acts as a one-stop shop for exporters and importers where customs documents, permits, registrations and other information can be submitted online at once. The definition of a Single Window, as provided by the UN/CEFACT Recommendation No. 33, is as follows: “A Single Window is defined as a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfil all import, export, and transit-related regulatory requirements. If information is electronic, then individual data elements should only be submitted once”. Putting such a reform on the back-burner will only delay Sri Lanka’s transition to a system of streamlined, paperless trade processes and therefore acts as an impediment to local and foreign investment.

Why should Sri Lanka implement a NSW?
Sri Lanka has been underperforming in global trade rankings, where we sometimes rank in the bottom 50 countries. According to the Ease of Doing Business in 2020, in the trading across borders pillar, Sri Lanka ranks 96 out of 190 economies. While several of Sri Lanka’s indicators perform better than the South Asian average, there is significant room for improvement. When comparing with OECD standards, Sri Lanka takes 72 hours for border compliance regarding imports and 48 hours for export documentary compliance whereas the OECD average stands at 8.5 and 2.3 hours respectively. Lengthy customs procedures and multiple inspections impede efficiency. Meanwhile, we ranked 94 out of 160 countries under World’s Bank 2018 Logistics Performance index and 103 out of 136 for the World Economic Forum’s 2016 Enabling Trade index. Notably, one of the indicators from the Enabling Trade Index, the customs services index, which considers factors such as clearance of shipments via electronic data interchange and the separation of physical release of goods from fiscal control, we rank 116 out of 117 countries. A lack of transparency, inter-agency coordination and lengthy cumbersome processes contribute to Sri Lanka’s poor trade environment. An average trade transaction can involve over 30 different agencies and upto 200 data elements, a lot of which have to be repeated. There is thus an evident need to streamline trade processes through digitisation, creating a business friendly environment that supports small businesses as well as foreign investors.

A Background into the National Single Window

In 1989, the Government of Singapore introduced the world’s first NSW, known as Tradenet. It took two years for the model to become operational and has now become one of the most advanced models in the world. Since then, many countries have adopted similar models and a NSW has become a critical tool in facilitating efficient and paperless trade. The annual survey conducted by The United Nations on trade facilitation identified that almost 74% of countries surveyed in the Asia Pacific region have to some extent engaged in creating a NSW (this includes countries which are only in the pilot stage). While a NSW is universally known for promoting the transition from paper-based to electronic customs processing, each window developed by a country is unique and varies according to the context of the country. For example, in Chile and Malaysia, the NSW enables traders to submit their export and import declarations, manifests and their trade-related documents to customs authorities electronically. In Korea and Hong Kong, private sector participants including banks, customs brokers, insurance companies and freight forwarders are also connected through the portal.

Single entry, single submission, standardized documents and data, sharing of information (information dissemination), centralised risk management, coordination of agencies and stakeholders, analytical capability and electronic payment facilities are some of the key functions included in a Single Window. In Sri Lanka, the World Bank did several studies on the NSW, identifying different operational models, best practices and a final blueprint document was given to the government and Sri Lanka Customs (SLC) in July 2019. However, since then, there has been no news of progress. While many countries including Sri Lanka are keen to emulate Singapore’s pioneering model, a lack of clear targets and timelines deteriorate the chances of implementing such a system.

The Mutual Benefits of a NSW

Businesses in countries without an integrated trade system find it difficult to compete in the international arena given the time and money spent to simply get clearance. Streamlining the entire process from start to finish in a manner that’s comprehensive and transparent, sans bureaucracy has a number of positive effects for traders. It was estimated that Singapore’s TradeNet saved its traders around US$1 billion per year. Korea’s uTradeHub allowed its business community to save approximately US$ 818.9 million. These were savings from the use of e-documents, automated administrative work and information storage and retrieval with the use of ICT. A Single Window automatically simplifies the compliance requirements traders face. In Mozambique traders benefited from faster clearance times, where through the NSW, the time was reduced from 3 days to a few hours. Meanwhile, Thailand’s NSW transformed the customs clearance turnaround time (measured as per declaration) to 95% in 5 minutes. Using a single portal has enabled traders to avoid visiting multiple agencies and simply submit an application at their convenience from any location. NSW has supported businesses through the removal of unnecessary costs, time and red tape, factors which tend to act as key deterrents to small businesses as well as foreign enterprises. 

The NSW system has similarly provided noteworthy cost-savings for government entities involved in trade. Singapore Customs, has claimed that for every US$1 earned in customs revenue, it only spends 1 cent, implying a profit margin of 9,900%.  In Hong Kong, trade facilitation measures have provided them with HK$1.3 billion in annual savings. The NSW has also reduced revenue leakages which may arise through transit. For example, Mozambique is a transit country to Swaziland, South Africa, Zimbabwe, Zambia and Malawi. By expanding their NSW to include value added services such as GPS tracking of consignments in transit, automatic detection of breaches in consignment and deviation from assigned transit corridors the NSW prevents revenue leakages and the opportunity for corruption, maximising revenue collection. The NSW has further led to productivity and efficiency improvements. A Single Window has enabled authorities to handle a larger volume of applications with much more ease. Mozambique, which used to face infrastructural weaknesses, through the implementation of its single window, is able to handle roughly 1,500 custom declarations per day.  Shifting to paperless customs processes would reduce costs for inventory and assist in improved resource allocation as personnel would not be required for trivial and mundane tasks such as preparation and cross checking of numerous documents. In totality, a fully digitised system provides government agencies with the means to do away with inefficiencies that hold back the speed of document processing, approval, communication and inspection stages. Further contributing to efficency, a NSW has also facilitated the dissemination of data through multiple agencies ranging from border control authorities, freight forwarders, customs brokers, shipping agents, banks and so on. As a result, there is improved inter-agency coordination and increased transparency.

Apart from a substantial increase in government revenue, the NSW will contribute to an improved business environment in Sri Lanka. The domino effects include an upward movement in the country’s global rankings, incentives for FDI and local business as well as a global recognition. 

Driving forces for implementation

While the NSW on the surface seems like an IT-based innovation, it is rather a platform for inter-agency and private sector collaboration. As the NSW is a system which requires involvement from government, the private sector and the transport community, it is crucial to ensure inter-agency collaboration. Ensuring public-private sector participation, introducing mandates and a steering committee to oversee implementation is crucial in developing such a system. The system as a whole is one that constantly evolves with no end stage. It requires continuous maintenance, support, and enhancement. This should be supplemented by the appropriate legislation, disclosure and publishing, backed by training and airtight data security policies. Thus governance of the NSW needs to be executed appropriately so that new technologies, techniques and new modes of trade can be leveraged. In best performing nations, a Single Window is not considered a single system but rather “a combination of trade-related platforms that serve various trade communities and modalities”. This has enabled leading countries such as Singapore and Hong Kong to facilitate seamless trade by building an environment of interoperable trade systems.

1. WTO, Trade facilitation Agreement Database, https://tfadatabase.org/members/sri-lanka , Accessed January 6, 2022.

2. WTO, Trade facilitation Agreement Database,10.4-Single Window, https://tfadatabase.org/members/sri-lanka/technical-assistance-projects/article-10-4

3. United Nations, UN/CEFACT, ‘Recommendation and Guidelines on establishing a Single Window: to enhance the efficient exchange of information between trade and government, Recommendation No.33, (2005), https://unece.org/fileadmin/DAM/cefact/recommendations/rec33/rec33_trd352e.pdf Accessed January 6, 2022.

4. World Bank Group, ‘Doing Business 2020’, Economy Profile Sri Lanka, Comparing Business Regulation in 190 Economies,(2020), https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf Accessed January 6, 2022.

5. World Bank Group, ‘Doing Business 2020’, Economy Profile Sri Lanka, Comparing Business Regulation in 190 Economies,(2020), https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf Accessed January 6, 2022.

6. World Bank Group, ‘Logistics Performance Index 2018’, (2018), https://lpi.worldbank.org/international/scorecard/radar/254/C/LKA/2018#chartarea Accessed January 6, 2022.

7. World Economic Forum,’The Global Enabling Trade Report 2016, Enabling Trade Rankings’, (2016) https://reports.weforum.org/global-enabling-trade-report-2016/enabling-trade-rankings/#series=CUSTSERVIND

8. World Economic Forum, ‘Enabling Trade Index 2016’, (2016) https://www3.weforum.org/docs/WEF_GETR_2016_report.pdf Accessed January 6, 2022.

9. World Economic Forum, ‘The Global Enabling Trade Report 2016, Enabling Trade Rankings’, https://reports.weforum.org/global-enabling-trade-report-2016/enabling-trade-rankings/#series=CUSTSERVIND Accessed January 6, 2022.

10. Johns, M. “Trade facilitation reform in Sri Lanka can drive a change in culture”, World Bank Blogs, 2017

    https://blogs.worldbank.org/endpovertyinsouthasia/trade-facilitation-reform-sri-lanka-can-drive-change-culture Accessed January 6, 2022.

11. UN ESCAP,’Digital and Sustainable Trade Facilitation in Asia and the Pacific 2021’, (2021)
      https://www.unescap.org/sites/default/d8files/knowledge-products/UNTF%20Report.pdf Accessed January 6, 2022.

12. UN ESCAP,’Single Window Planning and Implementation Guide’,

    https://www.unescap.org/sites/default/d8files/5%20-%201.%20Introduction_0.pdf Accessed January 6, 2022.

13. UN ESCAP, ’Single Window Planning and Implementation Guide’

     https://www.unescap.org/sites/default/d8files/5%20-%201.%20Introduction_0.pdf Accessed January 6, 2022.

14. UN ESCAP, ‘Single Window for Trade Facilitation: Regional Best Practices and Future Development’ https://www.unescap.org/sites/default/files/Regional%20Best%20Practices%20of%20Single%20Windows_updated.pdf, Accessed January 6, 2022.

15.  UNECE, ‘Trade Facilitation Implementation Guide, Singapore case study’, https://unece.org/fileadmin/DAM/cefact/single_window/sw_cases/Download/Singapore.pdf Accessed January 6, 2022.

16. United Nations ESCAP, ‘Single Window Implementation: Benefits and Key Success Factors’, (2012), https://unnext.unescap.org/sites/default/files/switajik-sangwon.pdf Accessed January 6, 2022.

17. UNECE, ‘Trade Facilitation Guide, Single Window Implementation in Mozambique’,
    https://tfig.unece.org/cases/Mozambique.pdf Accessed January 6, 2022.

18. UNECE,Trade Facilitation Implementation Guide, Interagency Collaboration for Single Window    Implementation:Thailand’s Experience, https://tfig.unece.org/cases/Thailand.pdf Accessed January 6, 2022.

19. United Nations, Single Window Planning and Implementation Guide, (2012) https://www.unescap.org/sites/default/files/0%20-%20Full%20Report_5.pdf Accessed January 6, 2022.

20. United Nations, ESCAP, Single Window Implementation: Benefits and Key Success Factors

     https://unnext.unescap.org/sites/default/files/switajik-sangwon.pdf Accessed January 6, 2022.

21. UNECE, ‘Trade Facilitation Guide, Single Window Implementation in Mozambique’,   
        https://tfig.unece.org/cases/Mozambique.pdf Accessed January 6, 2022.

22. United Nations, ESCAP, Single Window for Trade Facilitation:Regional Best Practices and Future  
    Development, (2018),  https://www.unescap.org/sites/default/files/Regional%20Best%20Practices%20of%20Single%20Windows_updated.pdf Accessed January 6, 2022.
    

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.

State-owned enterprises: A major crisis in the making

Originally appeared on Daily FT, The Island, Ada Derana Biz, Ground Views and The Morning

By Migara Rodrigo

Sri Lankan State-Owned Enterprises: A Major Crisis in the Making

Sri Lanka has a whopping 527 state-owned enterprises (1) (SOEs). The 55 SOEs classified as “strategically important” alone employ 10% of the public sector workforce (2) or about 1.9% of all workers. Such a large number of SOEs are not the norm globally(3); many other countries (such as India) have been reducing their stakes in SOEs and, in some cases (e.g. Air India), have been privatizing them entirely. SOEs - particularly many in Sri Lanka - tend to be grossly inefficient, loss-making, and a burden on the taxpayer. The time is ripe for major SOE reforms. 

What is an SOE?

An SOE is traditionally defined as a commercial entity that has majority ownership/control by a nation’s government – in Sri Lanka, this can include statutory bodies, regulatory agencies, promotional institutions, educational institutions, public and limited companies. While Sri Lankan SOEs have traditionally been incorporated by an Act of Parliament, in recent years these entities have also been incorporated under the Companies Act instead. 

Sri Lankan SOEs can be divided into three categories: 55 Strategic SOEs, 287 SOEs with commercial interests, and 185 SOEs with non-commercial interests. Unlike nations such as India which mandate internal audits of their SOE’s business activities and publish an annual overview with a balance sheet of each individual business, the majority of Sri Lankan SOEs do not reveal this pertinent information to the public; financial information is available for just 10.4% of SOEs. 

Fundamental problems with Sri Lankan SOEs

Contrary to what some believe, low quality of talent is not the most significant issue with SOEs; many employees are eminently qualified and capable. Unfortunately, these organisations fall victim to government mismanagement and corruption. In addition to excessive employment to fulfil their political ambitions, there have been allegations that some SOEs have been formed purely to facilitate corruption – for example, the Lanka Coal Company engaged in fraudulent deals to purchase coal causing a loss of over Rs. 4 billion (allegedly with the knowledge of the minister in charge)(4). 

SOE financials are late and few obtain ‘clean’ audit reports. Investigations have revealed repeated instances of fraud, mismanagement, corruption and negligence. Furthermore, the internal control, monitoring and governance frameworks seem inadequate to deal with these problems – of over 500 SOEs, regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Public access to information is limited – the Department of Public Enterprises has not released an annual report since 2018, and right-to-information requests often go unanswered.

Figure 1 Source: Ginting, Edimon et al, 2020, Reforms, Opportunities, and Challenges for State-Owned Enterprises, Asian Development Bank

Moreover, SOEs have few budget constraints and shareholder (public) accountability and therefore have limited incentive to control costs. Unlike with private sector enterprises, which have a need to make a profit, many SOEs (particularly in Sri Lanka) can simply borrow from other state organisations/banks or the government when they require additional funds, which undermines the threat of bankruptcy as a source of discipline(5). Some recently established SOEs have found a new way of bypassing budgets and oversight: by incorporating as companies rather than through an act of Parliament, they are excluded from Parliamentary accountability and allowed to rack up unsustainable debts and surpass budgets more easily. This has led to SOEs burning through taxpayer rupees: the cumulative losses of the 55 strategic SOEs from 2006-20 amounts to Rs. 1.2 trillion.

Finally, while some SOEs do manage to make a profit this is, more often than not, due to the advantage that these companies have in an uneven playing field. In addition to lax budgetary requirements and the ability to rack up unsustainable debts, these companies are supported by the government through direct subsidies and state-backed guarantees; by regulators through exemptions from antitrust policies and preferential treatment; and by the justice system through an ability to sidestep parliament. This has led to private sector organisations being crowded out of the industries that SOEs operate in. Instead of having private firms in the marketplace with efficient and high-quality services, the Sri Lankan taxpayer is beset with SOEs with total liabilities of 4-5% of GDP(6).

Potential reforms 

Given that the nation has reached an economic tipping point, with serious questions about debt sustainability and government solvency, it is clear that immediate action must be taken. Advocata proposes a short-term policy solution consisting of privatisation, restructuring and disinvestment, and listing on the Colombo Stock Exchange. None of these solutions are particularly radical in the global or local context. According to Lankan Angel Network Director Anarkali Moonesinghe, the two main policies of both Western and Eastern governments when reforming SOEs are to reduce subsidies and increase efficiency, forcing SOEs to compete more equitably with private enterprises.

Alternatively, full or partial privatisation is a possible solution: SLT-Mobitel’s service has markedly improved following its 1997 privatisation and the entrance of competitors such as Dialog Axiata, all held accountable by the broadly competent Telecommunications Regulatory Commission. Listing on the CSE would allow these firms to have broad-based direct ownership, while also improving the growth of the CSE and capital markets. Importantly, these firms would have to be ‘corporatised’ before listing, an opportunity to improve productivity and eliminate bloat. 

There are, unfortunately, firms that will essentially have to be given away due to their huge debts and poor reputations. A prime example of this is SriLankan Airlines, which has racked up Rs. 316 billion in losses (7) since control was taken from Emirates in 2008. While some will regard this as a blow to our national pride, Sri Lanka would not be alone in taking such a pragmatic step to improve government finances and customer experience; Air India, the Indian national carrier, is currently in the process of being sold to the Tata Group for the relatively small sum of INR 18,000 crore. This would also inspire confidence in Sri Lanka amongst foreign investors as it would show the country’s commitment to meeting its upcoming debt servicing obligations.

Furthermore, long-term solutions include strengthening governance/limiting corruption and influence, improving efficiency, enacting cost-reflective pricing, and finally unbundling key sectors. This applies particularly to firms like the Ceylon Electricity Board which, as a natural monopoly, cannot be broken up and privatised without losing efficiency. A 2006 study by the Japan International Cooperation Agency recommended breaking up CEB into three parts: “making the generation, transmission, and distribution divisions…independent” (8). Despite the 15 years and multiple nationwide blackouts that have occurred since, GoSL continues to drag their feet on the issue, as it is politically unpopular. 

Cost-reflective pricing (also prevented due to political unpopularity) is another essential reform. The existing system of having electricity tariffs priced below cost is a public subsidy whose cost will be borne by future generations. It is also inequitable, as the Government could provide low-cost services to those who need it by giving them direct cash transfers, instead of subsidising the wealthy who can afford to pay. A similar situation is evident with the Ceylon Petroleum Corporation, which currently makes a loss of Rs. 23-38 per litre of fuel (9); again, a public subsidy to those who can often afford to pay the market price. Finally, greater accountability, by means of annual internal audits and the availability of SOEs’ financial information to the public, is also important to ensure these firms stick to the targets they are given.

A successful and thriving market, in most industries, will only occur with the presence of three crucial factors: competition, a good framework, and competent regulation. By reforming Sri Lanka’s SOEs to meet these criteria, we will ensure a good customer experience, a reduction in the government deficit, and general prosperity for all key stakeholders. 

References:

1 Ratnsabapathy, Ravi et al, 2019, The State of State Enterprises in Sri Lanka, Advocata Institute

2 Dissanayake, Imesha, 2021, SOE Reforms; the Impetus for Post Pandemic Economic Revival, Ceylon Chamber of Commerce

3 Büge, Max et al, State-owned enterprises in the global economy: Reason for concern? Last modified: May 2nd, 2013 

4 ColomboPage.com, President to take action against removal of head of Lanka Coal Company, Last modified: January 21st, 2017, http://www.colombopage.com/archive_17A/Jan21_1484983651CH.php

5 Ratnsabapathy, et al, The State of State Enterprises in Sri Lanka

6 WorldBank.org, South Asia Must Reform Debt-Accumulating State-Owned Banks and Enterprises to Avert Next Financial Crisis, Last modified: June 29th, 2021, https://www.worldbank.org/en/news/press-release/2021/06/24/south-asia-must-reform-debt-accumulating-state-owned-banks-and-enterprises

7 PublicFinance.lk, Sri Lankan Airlines: Annual and Accumulated Loss to the Public, Last modified: 24th August 2021, https://publicfinance.lk/en/topics/Sri-Lankan-Airlines:-Annual-and-Accumulated-Loss-to-the-Public-1629789830

8 Saito, Yoshitaka et al, 2006, Master Plan Study on the Development of Power Generation and Transmission System in Sri Lanka, Japan International Cooperation Agency Economic Development Department

9 EconomyNext.com, Sri Lanka’s CPC says petrol, diesel losses rise as LIOC hikes prices, Last modified: 25th October 2021, https://economynext.com/sri-lankas-cpc-says-petrol-diesel-losses-rise-as-lioc-hikes-prices-87276/#modal-one

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.

It’s not about reserves – it’s about reforms

Originally appeared on The Morning

By Dhananath Fernando

We spent another year just debating so many economic issues without really getting anything substantial done. 

During the last few days, the debate has been around the official reserves position of the Central Bank of Sri Lanka (CBSL). So many questions have been raised on whether it can be used to service our debt or whether this is just a double account entry of the Chinese Yuan worth of $ 1.5 billion, which we secured many months ago. The reasonable answer is “we don’t know” until the CBSL makes the data available. The CBSL now says that our reserves are currently at $ 3.1 billion, but refuses to reveal the breakdown of how the country doubled its reserves. So much for transparency!

However, we all have to admit that the economic solutions implemented to overcome the crisis haven’t really worked. Rather, they have thrown the lower and middle-class Sri Lankans from the frying pans to the fire. 

A self-sufficient economic model was proposed at the initial stages. Many economic experts including this column highlighted why a self-sufficient economic model is an expired concept in the 21st Century. Therefore, we must reiterate that the pursuit of self-sufficiency can completely isolate Sri Lanka from global supply chains. As a result, our trade balance will be adversely affected and will continue to be so, due to our lack of understanding of the simple balance of payments and the dependency of exports on imports. Further, there is the absence of incentive reforms.  

A policy of strict import controls and price controls was imposed with the objective of boosting local production, sidelining the market forces. The result was shortages and long lines even for essentials such as liquid petroleum gas and milk powder. Another argument was brought in that the import controls can create a trade surplus. The past two years have proven fair and square that the direction of our policies is completely wrong. In the period of January-October 2021 imports rose by 26.5% and the overall trade balance grew by 34% to $ 6,498 million. This is while the strong performance of exports increased by 22%. All this happened against the backdrop of attempting to keep the interest rates artificially low and keeping the US dollar artificially fixed at around Rs. 200. This is one main reason for our US dollar shortage. Simply, the excess demand created by a loose monetary policy is the reason for there being excess demand for imports. 

Afterwards, Modern Monetary Theory (MMT) was introduced as a panacea for all forex problems, claiming there is no connection between inflation and money supply. Today, inflation has risen to 11.5% fueling the balance of payment crisis to a boiling point. Instead of resolving the problem at its root, shortsighted measures were proposed such as tax amnesties and incentives for some US dollar savings without realising the basics – which is that investments are driven by the perception of trust, credibility, and policy consistency instead of ad hoc factors. People who believe in the efficacy of MMT for a small country with a non-international currency could be believing in the tooth fairy. 

Meanwhile, some considerable effort was also made by the Government in the right direction, but it was not adequate. Someone may call it a half-hearted attempt to overcome the scale of the crisis we are facing. The Deregulation Commission, appointed by His Excellency the President, proposed to do some land reforms and improve ease of doing business. Further price controls have been removed, except the price control on the US dollar and interest rates. 

With our inability to provide a clear direction, rating agencies questioned Sri Lanka’s debt sustainability multiple times and requested a credible plan which failed on many occasions. 

The new Governor presented a six-month roadmap, but in my view, the damage of the MMT, the self-sufficient economic model, and industrial policy logic had already been done by then. 

A discussion has always been up in the air regarding whether we should go to the International Monetary Fund (IMF). At the same time, the discussion was underway on whether we should re-profile and restructure our debt. 

In simple terms, that was the summary of economic policy in 2021. We were optimistic that tourism numbers will pick up and it’s a relief that the numbers indicate a positive trend. However, higher tourism increases our import components as well. Expansions, maintenance, and consumption by tourists result in a fair share of imports, so expecting the tourism revival as a panacea for our forex shortages is just another shortsighted dream similar to the MMT. 

In 2022, the outlook will remain the same or it will worsen unless we undertake economic reforms. Expecting a different result without reforms is mere wishful thinking. 

Whether we go to the IMF or not, the economic reforms have to be the starting point. The Government should initiate the reform agenda without waiting for anyone else. However, an IMF programme (always with the agreement of the Government), would be more credible to our lenders and potential FDI partners. Our present situation is not credible to both foreign and domestic investors. 

Below are a few suggestions we have to think through:

1. Establish independence of the CBSL and make sure that the exchange rate is competitive

2. Privatise loss-making state-owned enterprises and consolidate and privatise non-strategic SOE’s

3. A cash transfer system for poor people based on market prices to face the high cost of living during the reform period

4. A grand-scale deregulation of business regulations as per the report submitted to the President (by the Lalith Weerathunga and Krishan Balendra committee)

5. Lower tariff rates with Sri Lanka customs reforms to increase global trade and increase competitiveness

6. Freeze government sector recruitment and offer voluntary retirement schemes and minimise the government cadre

We have to provide a rapid response for this economic crisis without waiting until the last minute to come up with solutions. 

The reality is we are already too late – not by months but by a few decades. 

Rather than focusing on the official reserves position, we have to shift our gears towards reforms. No country ever overcame an economic crisis without any economic reforms.  

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.

Reform or Regress

Originally appeared on The Morning

By K D Vimanga

The Sri Lankan economy’s crossroads

The great South African Statesman Nelson Mandela once said: “It always seems impossible until it is done.” Well, in our case, the time to get things done is already here. If we keep calling the act of reforming our economy impossible, then this country for sure will continue on a very dangerous path. So the longer we postpone the possibility of reforms, the more painful the process is going to be. So, we all, both policy makers and citizens alike, need to realise that the only way we can get out of this crisis is by implementing immediate and hard reforms, which this column has over and over again expounded on. 

Implementing reforms remains impossible for the sole reason that there remains very little political will to do so. However, what history teaches us is that the only way for nations to emerge from a crisis is by implementing bold reforms, even if they are politically unpopular. Such bold policy decisions, taken for the greater good of the nation, have been instrumental in releasing millions out of poverty. The best example is the economic reforms in India, which commenced from the 1991 economic crisis. The bold decisions taken by Prime Minister Narasimha Rao and Finance Minister Manmohan Singh were taken during compelling times. India was facing a similar situation, where the country was finding it hard to meet external debt obligations along with a serious balance of payment crisis. India was almost bankrupt as a result of the post-independence command and control-driven economy that brought the nation to the brink. However, amidst all odds, at the height of the crisis, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh opened its economy to be driven by market forces, while dismantling the license quota raj. This also involved the devaluation of the rupee at the height of the crisis. It were these hard reforms that laid the foundation of India emerging out from the depths of bankruptcy. As a result of these reforms from 1992 to 2005, foreign investment increased by 316.9%, and India’s gross domestic product (GDP) grew from $266 billion in 1991 to $2.3 trillion in 2018 (1). 

Sri Lanka is facing a similar or far worse crisis. It is public knowledge that the economy has reached a boiling point, with the country’s reserves falling to $ 1.57 billion, while Sri Lanka has debt payment commitments of $ 4.5 billion (2) for 2022. Inflation has been rising to 9.9% (3). Advocata’s Bath Curry Indicator, which tracks the price of essential food items, records that since 2019, prices have increased by 44%. This means that an average family who spent Rs. 960 weekly on the BCI basket of food items in November 2019 now has to pay Rs. 1,390 for the same basket of goods just two years later. Continued printing of money, along with the implementation of policies without foresight – such as the overnight move to organic fertiliser – have all significantly added to this present rise in food prices. Therefore one cannot deny the existence of the crisis anymore. 

So what needs to be done? 

The answer is simply, implement a comprehensive programme of reforms now. For this week’s column, I would like to discuss the role of privatisation in the most immediate and short term. Implementing such a programme of privatisation which releases commercial activities carried out by the state can bring in significant cost savings for the Government while also bringing in short term liquidity. More importantly, such a programme can become a much needed productivity boost to the economy while opening up for private sector participation. Closing down non-viable state-owned entities is another key requirement of such a programme. 

The country is also currently in desperate need for Foreign Direct Investment (FDI). The Finance Minister admitted in Parliament that Sri Lanka is not getting FDIs as fast as expected. Therefore privatisation can be the fastest route to capture foreign direct investment. FDIs jumped in the 1990s mainly due to their ambitious privatisation programme. Out of the total privatisation proceeds realised during 1989-2005, 59% was financed by foreign investors as illustrated by the Central Bank (4). Privatisation served as a significant channel for FDI entry. Privatisation-related FDI accounted for at least one-third of FDI in the 1990s. The largest 20 foreign investors in Sri Lanka all arrived in the 1990s and made significant contributions in telecommunications, power, ports, and other areas of services and manufacturing. However, to be effective, it is critical that privatisations are carried out through open and transparent processes.

One way to maintain this transparency is maintaining oversight. The Public Enterprises Reform Commission (PERC) was established under an Act of Parliament in 1996 to be solely responsible for ensuring that the privatisation process occurred in a transparent and structured manner. Although not entirely free of controversy, PERC increased transparency and public information about the privatisation process. The PERC was shut down, and it is now necessary to revive PERC and put in place measures to ensure transparent and competitive processes.

Successful privatisation, if done right, can reduce the drain of government resources, especially at a time when government expenditure and mismanagement of state-owned enterprises are a serious burden on the fast draining government coffers. A second benefit is the generation of new sources of government revenue through receipt of proceeds, at a time where the Government is in desperate need for government revenue. The improvement of infrastructure and delivery of public services by the involvement of private capital and expertise is another important benefit. Other merits of privatisation include the improvement of the efficiency of the economy by making it more responsive to market forces, the broadening of the base of ownership in the economy; and the enhancement of the capital markets. 

A programme of privatisation can be the center point of the reform programme. However, macro-economic stabilisation, which we have discussed over and over again, must be carried in tandem. What is crystal clear is that time to implement these is running out if we continue to be blindly critical of these painful reforms and be complacent of its merits. Unlike at any other point in time, policy makers also need to be ready to make bold reforms and this will be the ultimate test of the resilience of our economy. The tipping point has been reached, we have no choice but to get these reforms done. Bold policy making is the need of the hour!

References

• Dutta, M. K. and Sarma, Gopal Kumar, Foreign Direct Investment in India Since 1991: Trends, Challenges and Prospects (1 January 2008).

  Ministry of Finance Annual Report 2020

  https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20211130_inflation_in_november_2021_ccpi_e.pdf

  https://www.cbsl.gov.lk/sites/default/files/cbslweb_docu-ments/publications/annual_report/archives/en/2007_17_Appendix.pdf

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 unwieldy state sector: A growing burden?

Originally appeared on The Morning

By Dhananath Fernando

Recently a minister proudly proclaimed that the Government, for the last two years, has recruited approximately 45,000 new civil servants who have failed their Ordinary Level (O/L) examinations (of those who have studied up to the O/Ls). Comparing this to government recruitment of about 22,145 workers during the 2015-2019 Yahapalanaya regime, he explained that the present Government has recruited about 60,000 new workers for the state sector. 

While most ministers and parliamentarians see the recruitment numbers for the Government as an achievement from a business and economic point of view, the tail-heavy government cadre is one of the key reasons for Sri Lanka’s poor economic performance. 

We have more than 1.5 million state sector employees – a figure which has doubled since 2005. Their burden on the taxpayer is not a one-off expense, but one that is long term, as their pensions accumulate throughout the state sector and sometimes are even transferable to their spouses. 

The reasoning for increasing the size of the government cadre is part of a popular yet vicious cycle. For most politicians and political parties, job offers in the state sector are one way of establishing their political brand image for the next election – a priority over effectively managing taxpayer money. On the flip-side, for most of the unqualified voters the carrot for supporting the uneducated politicians is a government job opportunity with low work/productivity requirements and a tidy pension. 

When looking at the structure of the cadre, it is mostly chauffeurs, clerks, office assistants, and other unskilled/menial workers who have been recruited. Skilled jobs are very limited in the Government. As a result of high expenditure on the bottom-heavy structure of the Government, skilled job openings at the top cannot offer competitive salaries compared to the private sector. The outcome of this is that top-level jobs in the state are occupied by poorly skilled officers with low intellectual capacity. Furthermore, as a result of poor pay, top-level public officers have a significant incentive to engage in corrupt practices to remunerate themselves. One of the main reasons for white collar corruption across all ministries is the twin problem of offering non-competitive salaries and their natural result: poor leaders in top positions. Many ministry secretaries earn a salary that amounts to less than Rs. 100,000 per month. By contrast, it is likely that a high-skilled junior executive with an undergraduate degree would earn a better salary and enjoy a better work-life balance in the private sector. 

The recent statement by one of the ministers of the Government proves that the view inside the Government on state sector employment is divided. The Minister of Finance has stated that the state sector is becoming a significant burden for the Government (particularly due to mounting debt repayment concerns), and went on to propose an increase of the retirement age in the state sector to 65. 

Over-staffing of state workers is not inherent to one government. A viral social media video released during the last regime drew great controversy for that government, as it showed the then Minister of Housing (now Leader of the Opposition) interviewing candidates and directing his subordinates to choose workers for security and labourer jobs based on height. The aforementioned statement by a present minister about the Government hiring 45,000 candidates who failed their O/L examinations is purely an indicator that all governments subscribe to the same, flawed ideology – that expanding the state sector is a pathway to development. 

The salary scale for unskilled staff in government offices are in the range of Rs. 30,000-45,000 per month; as a result many of them simply stay in their offices needlessly (burning electricity generated on imported fuel) to claim a very high overtime income. Once, a chairman of a state authority mentioned (during a personal conversation) that he has to approve overtime pay for many drivers that is higher than the entire take-home salary package of the Chairman himself.

The situation is similar in many government institutions. Executive level state workers – who are not entitled to overtime pay – simply block every file and proposal and try to extort money out of the applicants. Alternatively, they may try to claim bills which are not spent on their other perks (e.g. travel expenses, fuel, etc.) and earn some extra money. 

This has always been the vicious cycle of state jobs. Now, the situation has deteriorated to the point that the Government is finding it difficult to keep even extremely important employees such as the directors and chairman of the Board of Investments (BOI), due to the pressure mounting from unskilled workers and trade unions over the salary hikes of the board. When the employment structure is unbalanced and too bottom-heavy, the final outcome is that the tail end takes control – with trade union activities and strikes completely disrupting all activities of citizens and the government alike. 

Attracting billion dollar investments is a highly skilled job which requires a specific sales mindset, credibility, intellectual power, and a business network to perform. Throughout the world, the work of investment bankers and high-level sales executives is very well compensated. Hence, it is doubtless that for investment promotions, Sri Lanka will require very highly skilled individuals. However, investors will not be attracted to Sri Lanka by merit of our talent alone; a regulatory framework that is conducive to business activities is also necessary to attract foreign direct investment inflows. In a bottom-heavy organisational structure, when salary increments are taken by the senior level staff or when top executives are recruited, bottom-level employees get concerned that their salaries will be affected by higher resource absorption by the senior level. This is the case in many institutions and public enterprises in Sri Lanka.  

Sri Lanka’s state sector is, without a doubt, too large and expensive for us to maintain. It’s exploding to a level beyond our control. If we fail to implement reforms as fast as possible, the situation would be disastrous for both the state sector as well as the private sector. The best solution for our current problems is economic reforms. The idea that the state can maintain its public capital by simply hiring more workers is a myth. Without reform, we will soon lose both our solvent economy and our politicians’ credibility and political capital. 

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.

Lessons from Singapore

Originally appeared on The Morning

By Dhananath Fernando

Where Sri Lanka went wrong and pathways to recovery

Too many comparisons have been made between Sri Lanka and Singapore. Once upon a time, becoming Sri Lanka was Singapore’s dream. Today, Singapore has been Sri Lanka’s dream for quite some time. Many credit the success of Singapore to the charismatic leadership given by Lee Kuan Yew. However, little is known about the work done by Dr. Goh Keng Swee on setting up the right architecture for a series of market-oriented policies in Singapore.

Relatively, Sri Lanka’s economy must grow at about 6% per annum for the next 40 years without failure in order to reach where Singapore is today, by 2061. In order to reach the kind of growth Malaysia has reached, Sri Lanka needs to grow at a steady rate of 6% until 2031.

Visionary Singaporean leaders realised that a country the size of Singapore cannot be self-reliant. With a minimum stock of resources, the country has to depend on imports to maintain the overall wellbeing of the people.

Policy consistency as well as establishing the right economic fundamentals set the country in the right direction. Consequently, the currency and monetary system became stable. Having a monetary system which focused on open market policies brought certainty and increased investor confidence. Special emphasis was placed by Singaporean policy makers to ensure that the wealth of the people was not eroded by unnecessary inflationary pressure.

Embracing open market policies attracted global multinationals and regional players to move their headquarters to Singapore, making Singapore a global hub for strategic industries in the region. Many multinational oil companies which left Sri Lankan shores due to nationalisation were welcomed with open arms to operate in Singapore. Even today, without a drop of oil, Singapore is a key player in the fossil fuel trade. They became competitive, efficient, and productive as they embraced the global market with an open mind and attitude geared towards development and prosperity.

Singapore also realised the role of the government. In fact, the world class Singapore AirLines and public housing is still state owned. Many Sri Lankans take these two examples to showcase why a state sector should engage in business like Singapore does with their airline. Many who put forth this argument conveniently forget that the management of some of the state entities are done on a Temasek Model on a competitive basis, where the government has no intervention in business. The professionals running the business earn the same as in a private company and the work culture is set right from the beginning to be competitive.

Unfortunately, Sri Lanka did not make any effort to create an open system. Instead, we closed ourselves from the world of trade and from connecting with global supply chains. In fact, many Sri Lankans once thought that Singaporeans would take over the jobs of Sri Lankans through the Singapore-Sri Lanka Free Trade Agreement. We missed an opportunity of a grand scale due to the pressure from trade unions and some professional groups to showcase to the world that we are trading with countries such as Singapore, and are ready for business and investment. As a result of shortsighted, irrational policies, our financial system became very fragile.

Another issue that holds back our potential is central bank intervention. Our Central Bank continues to intervene in market activity. “Price” can be looked at as being the same as body temperature. There has to be constant diagnosis by a physician. This monitoring without intervening is the role of a central bank in achieving efficient resource allocation. Therefore, intervening in the price signaling function has caused Sri Lanka damage beyond recovery.

Recently released data by the Central Bank indicated about 9.9% Year-on-Year (YoY) inflation compared to November 2020. YoY food inflation is 17.5%. There are many contributory factors behind the price rises such as global commodity price hikes, fertiliser ban, and continuous rains. However, one key reason which cannot be ignored is that over the last few weeks, a money supply of about Rs. 1.48 trillion has been injected from July 2019 to September 2021. This is a primary reason for the uptick in inflation .

Poor people will be the most affected, and as per the Advocata Bath Curry Indicator, the cost of rice and curry for a family of four members has gone up by 35% compared to last year. The poorest sections of society, who spend a greater amount of their money on food, now have to either receive a pay hike or cut down on their regular food intake.

This could also add pressure on private sector businesses, with employees requesting more wages and driving an increase in the cost of production. The high cost of production would impact existing investments, and with inflation Sri Lanka would not be an attractive investor destination.

On the Government front, the 1.5 million state workers will add more pressure by requesting further pay hikes with the new election circle. Making this more complicated, we have now accelerated a dual exchange rate offering, with an additional Rs. 10 for remittances as a measure to incentivise the usage of legal channels.

Singapore avoided most of the above problems we face by setting up a framework on a market based system, understanding the role of the government. As a result, they have developed a strong monetary system. This is a testament to getting macroeconomic policies right.

We can’t simply copy Singaporean policies blindly. Often policies have to be evaluated based on culture and dynamics, from a socio-economic context. However, the principles behind the policies remain the same. It has to be based on price signals and driven by the private sector, with the government only taking the role related to essential public goods such as the judiciary system.

An easy point to begin with is making our Central Bank an independent institution and moving away from ad hoc interventions. Moreover, we should let the markets work rather than having central bank intervention in foreign exchange through different strategies from time to time. Simply, our Central Bank has to work similarly to a currency board and the structure has to be made to facilitate this requirement.

At the same time, the structure has to be revised to ensure the independence of the Central Bank as the monetary policy can erode the hard earned money of poor citizens.

If Sri Lanka is serious about economic growth, it is of paramount importance to have a stable financial system which is an outcome of an implementation of a market based economic policy package. As Karl Schiller famously said: “Stability is not everything, but without stability, everything is nothing”.

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.

Urgent need for justice reforms: Digitalisation can lead the way

Originally appeared on The Morning and Daily FT

By Tiffahny Hoole and Sumhiya Sallay

The Supreme Court, in the 1994 case of Jayasinghe v. AG, correctly asserted that “justice delayed is justice denied” (1). While the very apex of the justice system recognised that delays in court proceedings hinder litigants’ access to justice, there is a major backlog of cases in Sri Lanka. The entire court process, from the point where a case is taken up to court until its final verdict, is an extremely time-consuming process.

The operation of a country’s legal system significantly influences several components of its economic development such as the optimal allocation of resources and the increase in total factor productivity (2).

In 2021, a three-year plan targeting digitisation of courts was implemented to make the judicial system more efficient. Digitisation of the courts would mean a more streamlined process of court hearings.

Shortcomings of the Sri Lankan legal system

By the end of 2019, there were 4,767 pending cases to be heard in the Supreme Court, while 6,813 were to be heard in the Commercial High Court (3). In the speech delivered by the incumbent Minister of Justice at the Bar Association’s 47th Annual Convocation, it was stated that a total of 766,784 cases were pending by the end of 2019, with approximately 350 judges to hear those cases (4). The situation was only exacerbated in the wake of the Covid-19 pandemic. With periodic lockdowns consequent to seasonal outbreaks of Covid-19 cases, both the Supreme Court and Court of Appeal suspended proceedings (5).

The increased backlog of cases prior to and during the pandemic is attributable to the very nature in which the justice system operates. Sri Lanka’s court procedure and practice has been heavily reliant on in-person proceedings, physical filings, and production of documents and evidence respectively (6); a system too archaic to withstand any external shocks such as natural disasters, fires, or more specifically, a pandemic.

Ease of doing business: A point of discussion

The continuous delay in court proceedings over the years is one of the key factors which contributed to Sri Lanka’s low rank in the World Bank’s “Ease of Doing Business” index (7). Contract enforcement is one of Sri Lanka’s worst performing pillars in the index, as it ranked 164 out of 190 countries in 2020 (8). The average time period required to enforce a contract stands at 1,318 days (3.61 years) (9). In comparison, New Zealand, which topped the index, takes 216 days (0.6 years) (10). In his speech, the Minister of Justice further stated that market research prior to any investment would result in flocking towards countries with higher indexes, concluding that we would be losing “big” (11).

With the data highlighted by the index, in conjunction with prolonged lockdowns, the Minister of Justice soon realised that the backlog in cases had reached saturation. Speedy resolution in litigation is a prerequisite on foreign investments (12). Thus, with the aim of administering the public’s access to justice, major reforms are finally underway.

Reforms: Future of court procedures in Sri Lanka

Upon comprehensive studies conducted in 2017 with the assistance of the Information and Communication Technology Agency (ICTA) in Sri Lanka, the Ministry of Justice embarked on a court automation and digitisation project (13). In the recent Budget 2022 speech, the urgent need for reform was highlighted by Minister of Finance Basil Rajapaksa. Following this, a proposal to allocate a further Rs. 5,000 million towards this cause was presented (14).

The Covid-19 pandemic brought to light how far behind Sri Lanka is in terms of judicial digitised systems. Many countries were able to quickly recover post-Covid, as they already had systems in place to shift to virtual court hearings. However, courts, and other dispute resolution mechanisms such as mediation and arbitration in Sri Lanka, were far behind.

Prior to the commencement of this project, digitisation in court proceedings was being experimented in selected courts on an incremental basis. In November 2020, the “Virtual Courthouse Programme” was pioneered by the Commercial High Court in partnership with Sri Lanka Telecom and the Colombo Law Library (15). Similarly, a key person interview conducted by the Advocata Institute brought to light the efforts made by the lawyers in the courts of Mount Lavinia to transform court proceedings to an entirely virtual platform. In response to the pandemic, reformation was witnessed on an incremental basis. Finally, operations of virtual court hearings were formerly recognised by the Coronavirus Disease 2019 (Temporary Provisions), Act No. 17 of 2021, subject to the condition that physical hearings cannot be held (16).

Nevertheless, by taking into account the complexity and gravity of court procedure, it was understood that reform needed to be holistic. Accordingly, digitisation is not limited to virtual court hearings but also envisions the registration component of the judicial system. This includes scheduling, managing documents, recording proceedings, etc. Furthermore, payment of court filing fees will be shifted to an online platform. In respect of court hearings, reformation is twofold; the first phase is a pilot project which covers 18 courthouses within the Colombo District (17). The second phase is expected to implement court automation procedures across 100 courthouses in Sri Lanka (18). In the interim, existing online platforms such as Zoom and Google Meet will be utilised for this purpose.

A major challenge going forward will be data security and privacy. However, the issue of security already exists even with physical documents and in-person court hearings. Documents are tampered with, stolen, or even damaged. Witnesses may be coerced to perjure in or outside court. Thus, moving towards an online platform will circumvent the damages caused to case documents such as a fire, similar to the recent incident in the Supreme Court Complex (19). In order to minimise the concerns raised, the Ministry of Justice has partnered with professional experts in the ICT sector to build a data protection and data security plan and develop remote data storage facilities (20).

The long-term benefits of digitisation

In the long term, digitisation and automation will make the litigation process far cheaper. Litigation in Sri Lanka is known to be a very expensive procedure. Instead of requiring a 100-page document to be submitted to each judge on a panel prior to the case hearing, litigants would now be able to send a pdf through an online portal. Electronic delivery of paper documents would also speed up the filing procedures (21). Rather than having to commute all the way to a district court that is outside one’s residence, litigants are able to participate in court hearings through Zoom.

Reforms in the justice system play an essential role in restoring the confidence of investors. A representative of the World Bank in the Legal Department highlighted that encouragement of foreign direct investment is at the forefront of government thinking behind legal reform (22). In the wake of the pandemic, it is pivotal that the State prioritises and ensures such essential reforms do take place so as to attract foreign investors. Justice is only delivered in the absence of delay.

References

• ayasinghe v. AG [1994] 2 SLLR, https://www.lawnet.gov.lk/wp-content/uploads/2016/11/005-SLLR-SLLR-1994-V2-JAYASINGHE-V.-THE-ATTORNEY-GENERAL-AND-OTHERS.pdf, last accessed 1 December 2021

• Marilene Lorizio, “Efficiency of Justice and Economic Systems”, Innovation and Society 2013 Conference, IES 2013, ScienceDirect. Procedia Economics and Finance (accessed 5 May 2020)

• Ministry of Justice, “Case Statistics of Sri Lanka – 2019”, https://www.moj.gov.lk/images/pdf/Statistics/Case-Statistics-2019.pdf, last accessed 1 December 2021

• “Rolling out holistic solution to perennial problem of laws’ delays”, The Island Online, 29 March 29 2021, https://island.lk/rolling-out-holistic-solution-to-perennial-problem-of-laws-delays/ (accessed 1 December 2021)

• “Due Process and Preparedness for Public Emergencies”, (Verite, June 2021), https://www.veriteresearch.org/wp-content/uploads/2021/07/VR_ENG_RB_Jun2021_Due-Process-and-Preparedness-for-Public-Crises.pdf (accessed 1 December 2021)

• Ibid.

• “Economy Profile: Sri Lanka | Doing Business 2020”, (World Bank Group, 2020) https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf (accessed 1 December 2021)

• Ibid.

• Ibid.

• “Economy Profile: New Zealand | Doing Business 2020”, (World Bank Group, 2020) https://www.doingbusiness.org/content/dam/doingBusiness/country/n/new-zealand/NZL.pdf (accessed 2 December 2021)

• “Rolling out holistic solution to perennial problem of laws’ delays”, The Island Online, 29 March 29 2021, https://island.lk/rolling-out-holistic-solution-to-perennial-problem-of-laws-delays/ (accessed 1 December 2021)

• Sarath Wijesinghe, “Laws delays, lawyers’ delays or system delays?” Sunday Observer, 3 January 2021, http://www.sundayobserver.lk/2021/01/03/impact/laws-delays-lawyers%E2%80%99-delays-or-system-delays (accessed 1 December 2021)

• Rohan Samarajiva, “Failure in the Core Business: Administration of Justice”, Echelon, 7 May 2021, https://www.echelon.lk/failure-in-the-core-business-administration-of-justice/ (accessed 1 December 2021)

• Ministry of Finance “Budget Speech 2022” https://www.treasury.gov.lk/api/file/91c69189-9b2f-4ab2-8e90-53213a60cddd (accessed 1 December 2021)

• “Due Process and Preparedness for Public Emergencies”, (Verite, June 2021), https://www.veriteresearch.org/wp-content/uploads/2021/07/VR_ENG_RB_Jun2021_Due-Process-and-Preparedness-for-Public-Crises.pdf (accessed 1 December 2021)

• Coronavirus Disease 2019 (COVID-19) (Temporary Provisions) Bill, 8 June 2021, https://www.parliament.lk/uploads/acts/gbills/english/6219.pdf (accessed 1 December 2021)

• Ministry of Justice, “Pre-Qualification for Design, Supply, Implementation and Maintenance of a Court Automation System for Judicial System of Sri Lanka”, https://www.moj.gov.lk/images/pdf/2021/Prequalification_Document_Final.pdf (accessed 1 December 2021)

• Ministry of Justice, “Pre-Qualification for Design, Supply, Implementation and Maintenance of a Court Automation System for Judicial System of Sri Lanka”, https://www.moj.gov.lk/images/pdf/2021/Prequalification_Document_Final.pdf (accessed 1 December 2021)

• Ifham Nizam, “Scary fire in Supreme Court complex ground floor, but no big harm” (2020), https://island.lk/scary-fire-in-supreme-court-complex-ground-floor-but-no-big-harm/ (accessed 1 December 2021)

• Ibid.

• “Technology For Court Efficiency”, OECD Library, https://www.oecd-ilibrary.org//sites/40c8c1fb-en/index.html?itemId=/content/component/40c8c1fb-en#boxsection-d1e5561 (accessed 1 December 2021)

• Amanda Perry, “An Ideal Legal System for Attracting Foreign Direct Investment? Some Theory and Reality”, American University International Law Review, Volume 15, Issue 06, https://core.ac.uk/download/pdf/235401967.pdf (accessed 1 December 2021)

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.

Cattle Slaughter Ban: It’s Not Intentions But Consequences That Matter

Originally appeared on Daily FT, Daily Mirror and The Island

By Sathya Karunarathne and Pravena Yogendra

The Cabinet of Ministers approved the Bill to amend laws to ban cattle slaughter in the third week of October. While this is a contentious policy measure, it did not come as a surprise as the Prime Minister proposed the same policy just over a year ago in September of 2020. 

From the outset, it may seem that the policy is well-intended. Alleviating animal suffering is a noble cause that many Sri Lankans would identify with. Unfortunately, even well-intended policies have unintended consequences. In the case of a cattle slaughter ban, the consequences can be dire for the livelihoods of thousands of people. As stated by the Department of Census and Statistics, 117,033 farmers raised cattle and/or buffalo locally and 56,984 farmers raised improved cattle and/or buffalo in 2020.1 Further, as reported by the Livestock Statistical Bulletin there were 296,111 cattle farms and 26,284 Buffalo farms registered in 2020.

The cattle rearing industry does not exist in isolation, nor is it sustained to nurture the beef industry alone. Cattle are an integral part of the dairy industry, leather tanning industry and footwear and leather goods industry. The dairy industry sells unproductive cattle, where 50% of the animal is salvaged as beef (3) and other parts are sold as raw material to other industries such as the leather tanning industry, etc. Therefore, a cattle slaughter ban would have consequences on all these sectors.

The Government’s intention in banning cattle slaughter is to increase dairy production and local agriculture as reported by the media. According to Central Bank data in 2020, the annual milk production from cattle was 414 m litres and 78 m litres were produced by buffalos. In the same year, Sri Lanka imported 102,355,524 Kgs of milk and milk products, and exported 1,057,079 Kgs of the same.

To keep this dairy industry running, milk producers need to get rid of unproductive cattle. Eranga Nihal Perera, the Chief of the Ceylon Cattle Farmers Association, put this into perspective speaking to the Sunday Times a few weeks ago. He stated that a bull or milch cow requires 10% of its body weight in food daily. For example, an adult stud bull weighs about 400 kgs. That is approximately 40 Kgs of feed per bull, every day. Therefore, a bull would require a monthly cost of around Rs. 26,000 to be maintained. It makes limited economic sense to sustain unproductive cattle incurring such costs as it will increase costs of maintenance with no return on investment. 

A total of 162,000 cattle were legally slaughtered in 2020. Key person interviews with leading industry stakeholders revealed that the cattle population which amounted to 1,628,771 in 2020 can grow up to three times within 10 years with the implementation of a slaughter ban with 75% of them counting to be unproductive.(10) The costs of maintenance will therefore evidently be unbearable. These cost increases, if they can be sustained at all, will be passed on to consumers as price increases in milk. A further stress to an industry already reeling with shortages and high prices. 

Beef is sourced from cattle deemed as unproductive by the dairy industry. Male cattle or bull calves are used to identify female animals in heat and to serve stud purposes, aiding the artificial insemination process. They are slaughtered for beef when they reach about three months of age. Milch cows are slaughtered after completing four calving cycles as they are considered aged, unproductive and unprofitable to maintain at this juncture. Unproductive animals must be culled to maintain the overall productivity of the herd as unproductive stud animals could mate with productive cows, producing low yielding calves. 

The latest available data shows that beef production in 2019 amounted to 29.87 metric tons.

Smallholder dairy farmers contribute to this as smallholders dominate the livestock industry. For example, a 2019 study by the University of Peradeniya revealed that among private dairy farms in the country about 95% are small scale producers. While cattle farming in Sri Lanka is running on narrow margins, a significant contribution of the marginal profits comes from the sale of these animals to the beef industry. 

Dairy farmers make an annual lifetime profit of ~30% from the sale of an animal. Therefore, small farmers who raise cattle individually for an additional income will be severely impacted by the ban. They will not be able to afford the additional maintenance costs of unproductive cattle and will have to halt their small scale business operations.

Banning cattle slaughter with the intention of increasing dairy production therefore is contradictory as it proves to be counterproductive. As illustrated above the milk industry can barely sustain itself without the beef industry. 

A slaughterer purchases an animal for ~LKR 300 per Kg live weight. Live weight ranges from 300-500kg. Thereafter, 50% of the animal is salvaged as beef and the remaining is sold to other industries.(14) The leather tanning industry is one such industry that sources raw material from cattle slaughter. A slaughtered cow yields 15-16 sq ft of rawhide. Rawhide is sourced from the slaughterer by the leather tanning industry at Rs. 45 per Kg. Domestically tanned leather is sold to the footwear and leather goods industry as raw material at Rs. 175 per Kg as opposed to imported tanned leather priced at Rs. 250 per kg ($1- 1.20).(15) 

Moreover, discussions with the industry revealed that about 60% of leather needed to produce affordable footwear is produced domestically and banning cattle slaughter will directly impact the accessibility of affordable footwear by the middle and lower-income earners of the country. Further, more than 60% of the footwear and leather goods industry consists of micro and small businesses.(16) Therefore, this policy measure will indeed hamper their access to affordable raw material and their very sustenance.

Implications of cattle slaughter 

As stated by the Buddhasasana, Religious, and Cultural Affairs Ministry Secretary, Prof. Kapila Gunawardana the Government is discussing the possibility of exporting ageing cows that will not be slaughtered in Sri Lanka with the implementation of the ban. However, exporting aged live cattle is challenging as there is a high probability of international markets being reluctant to purchase cattle exposed to infections in the process of transportation. 

With the increase of idling cattle, the Government will have to invest to build new cattle salvage farms, ensuring adequate veterinary facilities and daily feed. The NLDB has only two salvage farms in Kurunegala and Anuradhapura with a combined capacity of 1,000 animals at a time. About 400 cows are legally slaughtered per day.(19) As aged cattle require high maintenance costs with no return on investment, this will be an added strain on Government expenditure given Sri Lanka’s current limited fiscal space and precarious economic conditions. This will also clash with limited agricultural land available in the country leading to a serious threat to crops. 

Moreover, with the local beef industry coming to a complete halt, the domestic production and importation of alternative sources of protein such as chicken and fish will have to increase, meeting domestic demand and ensuring affordability for the average consumer. It is important to note that the prices of these alternatives have experienced a steep increase. According to the Department of Census and Statistics weekly retail prices, one kg of fresh chicken that cost Rs. 558.93 in November of 2020 costs Rs. 727.27 now. Further, one kg of salaya that cost Rs. 252.67 in November of 2020 is now priced at Rs. 291.67.

Moreover, a flat-out ban on cattle slaughter will breed an underground economy of illegal slaughter and trade. This will foster animal cruelty as the industry will not come under the purview of welfare authorities, creating the environment for low-cost slaughtering techniques defeating the very moral grounds of a cattle slaughter ban.

Further, banning cattle slaughter with no ban on beef consumption allowing for beef imports will only shift the burden of slaughter elsewhere. This is hypocritical as cattle will still have to be slaughtered abroad, for the consumption of Sri Lankan people. It is worthy to note that India is the fifth largest carabeef exporter in the world earning 2.8 billion dollars in exports in 2020 despite the country’s religious veneration of cattle. 

It is evident that even though a slaughter ban may sound ideal in theory, it springs a chain of unintended economic consequences hampering the dairy, beef and other related industries, paving the way for further price increases and posing a threat to business operations. 

Therefore, it is clear that when making economic decisions it is paramount to look at policies in terms of incentives they create rather than blindly pursuing a goal. This simply means that immediate and long term consequences matter more than intentions. Economic policies therefore must strive to go beyond intentions crafted by hopes and inspiration. Failure to do this will certainly lead to disastrous outcomes for the whole nation. 

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.