Advocata commends Govt.’s targeted support in purchasing school stationery for vulnerable families

Originally appeared in the Daily FT

Urges Govt. to consider similar targeted interventions over VAT exemptions on various goods and services

The Advocata Institute has applauded the recent policy action by the Government to provide a cash transfer of Rs. 6,000 to school children from vulnerable groups to assist them in purchasing school stationery for the upcoming 2025 academic year.

“This policy move reflects a thoughtful and impactful approach to addressing pressing social challenges without compromising Sri Lanka’s fiscal sustainability,” Advocata said in a statement.

The proposed cash transfer program through the Ministry of Education and the Welfare Benefits Board stands out as a more equitable alternative compared to measures such as reducing or exempting value-added tax (VAT) on school books and stationery. While VAT exemptions on education materials might seem appealing, they are not targeted and hence can disproportionately benefit high-income households. High-income households, with greater purchasing power are more likely to purchase larger quantities or more expensive educational materials, amplifying their benefit from such exemptions. In contrast, vulnerable groups, including low-income households, often prioritise essentials such as food, housing, and healthcare, leaving little capacity to purchase additional educational materials even with reduced tax rates.

Advocata said VAT exemptions or reductions, which lower the cost of selected items can also create distortionary effects on market prices by altering consumer behaviour. It can reduce demand for close substitutes that are not exempt, making it harder for businesses offering these alternatives to compete, creating inefficiencies in the market. Additionally, businesses may not always pass on the benefit of VAT removal to customers, choosing to keep the added margin to themselves. Targeted cash transfers, however, ensure that resources are allocated efficiently and directly to those who need them most, empowering vulnerable families to meet their specific educational needs without unintended market disruptions.

Advocata also opined that Sri Lanka’s economic crisis increased the cost of education material. A survey on the household impact of the economic crisis in 2023 conducted by the Department of Census and Statistics revealed that a large number of school children in rural and estate regions have faced significant setbacks in their education owing to the economic crisis, where 53.2% of affected children have reduced or stopped purchasing school stationary, while 26.1% have resorted to reusing old stationery. In light of this, the cash transfer to purchase education material will provide immediate relief to those struggling to meet their children’s immediate education needs, which can otherwise be a barrier to school attendance and performance.

Thus, it will help address socioeconomic disparities without disrupting the Government’s revenue flow to maintain essential public services, especially in light of the IMF’s stabilisation program’s requirements for the authorities to raise the tax to GDP ratio to 14% by 2026. Given that access to education is a fundamental right, the cash transfer will help ensure that no child is left behind due to financial difficulties.

With the exception of essential items like food, the Advocata Institute urges the Government to consider similar targeted interventions over VAT exemptions on various goods and services. Direct cash transfers effectively mitigate the regressive impact of VAT by directing assistance to those most in need, allowing them the flexibility to allocate funds according to their specific circumstances and priorities.

Press Release: Advocata Institute Applauds Economic Transformation Bill, Calls for Careful Implementation and Transparency

Originally appeared on Daily FT, Ada Derana

The Advocata Institute welcomes the government’s stated intention to move from an inward-oriented economy to a more open economy to boost international trade, foreign investment and productivity.

The Sri Lankan government has gazetted the Economic Transformation Bill to overhaul the country's economic landscape. This ambitious Bill aims to create a more competitive, export-oriented, and digitally-driven economy while achieving net-zero emissions by 2050- however, enshrining economic targets in law may prove to be problematic.

Some of the key reforms include the establishment of new institutions that are intended to address some important issues. The Bill proposes establishing an Economic Commission to streamline economic activity and trade, and splitting the role of the Board of Investments (BOI) between Zones SL, Invest Sri Lanka, and the Economic Commission. Additionally, the bill also sets up specialized bodies to focus on promoting foreign investment (Invest Sri Lanka), developing industrial zones (Zones SL) and international trade (Office for International Trade), boosting productivity (National Productivity Commission), and providing economic expertise (Sri Lanka Institute of Economics and International Trade).

The policy will address crucial areas like debt management, agricultural modernisation, import-export regulations, and economic governance.

The Economic Transformation Bill sets ambitious debt reduction targets, aiming to bring the public debt-to-GDP ratio below 95% by 2032 and significantly reduce annual government borrowing needs. This strategy is complemented by a Public Financial Management Bill, which will be introduced alongside the Economic Transformation Act, to ensure responsible management of public finances and prevent future economic crises.

The Bill requires the Cabinet of Ministers to submit a report to Parliament every five years, outlining the policy framework and strategies to achieve the National Economic Transformation goals (Section 5). This may be revised from time to time and presented to Parliament. The first report is to be presented in 2025.

All policies, programmes, regulations, circulars, and directives of the Government shall conform to such National Policy on Economic Transformation. The government will also present a report each year on March 31st detailing progress made towards each target, and any corrective actions taken as and when needed (Section 7).

Limits for levels of debt and public expenditure are within the control of the government and are widely used in other countries. Targets such as Exports/GDP, FDI/GDP while clearly signaling the government's intent, belong more to the realm of policy than law. The bill makes provisions that where these targets have not been met, the Government shall inform Parliament of the measures being taken to remedy the situation and indicate when they will be met. While the remedial measures reflect a commitment to meeting these targets, the practicality of it may be questionable as many factors influencing these targets often extend beyond direct government control.

Key Aspects of Concern

• The composition of the Board of the Economic Commission, which proposes a ten member board with four ex officio members of the relevant line ministries while there will be six members appointed by the President. The chairperson of the Economic Commission Board will also be a Presidential appointment, while the Director General of the Economic Commission is a Ministerial appointment. The wide powers exercised by the President over these appointments leave room for questions of credibility and politicization of appointments which needs to be carefully considered. Independent appointments of these key officials is mandatory for effective national policy formulation.

• Advocata is concerned that certain provisions of the Bill do not apply to the Colombo Port City Special Economic Zone, established under section 2 of the Colombo Port City Economic Commission Act, No. 11 of 2021. This exclusion could lead to unfair competition.

• Another important point of concern is the incentives and exemptions offered to investors under this bill, which leaves room for ad-hoc short-term measures that can be changed from time to time under the prescription of the Minister.

• Setting targets on debt and primary balance is commonly found in laws, while targets for GDP growth, exports, and unemployment are often addressed as policy targets. By codifying these targets into law, they gain a degree of enforceability that is not typical for policy goals. This raises questions about the mechanisms for enforcement and the consequences for failing to meet these targets. The decision to legislate specific economic targets in Sri Lanka’s Economic Transformation Act is unusual but comes with potential challenges in terms of enforcement and practicality.

Media Coverage: SOE Losses Costing LKR 141,809 per Sri Lankan Household

Originally appeared on Daily FT, Lanka Business Online

The soft pedaling by the government to carry out crucial reforms of State Owned Enterprises is forcing taxpayer’s wallets to take the brunt of the hit, says Colombo based think tank, Advocata Institute.

Dhananath Fernando, the Chief Executive Officer of the Advocata Institute said, taking into account the upcoming election cycle, the Advocata Institute, urged the need to reform State Owned (SOE) Enterprises. Here it was said that irrespective of the government that comes into power, SOE reforms must continue.

The cumulative losses of key 52 SOE’s in 2022 amounted to LKR 744.6Bn, costing LKR 1.7Mn per registered taxpayer, LKR 33,949 per citizen and LKR 141,809 per household. Despite the sharp increase in tax collection, estimates of tax collection for 2024 cannot cover the losses incurred by these 52 SOE’s for the year 2022.

“The delay in restructuring is impacting ordinary Sri Lankans the most and the longer it takes and it’s going to make it worse for Sri Lankan citizens and taxpayers irrespective of who comes to power in the upcoming polls,” Fernando said. “There's a 1 in 3 who don’t make 30,000 rupees per month in Sri Lanka hence putting more burden on taxpayers makes no sense.”

It was brought to attention that despite the reforms that are underway, they have been running at a snail's pace. The current rate would be “just enough” for Sri Lanka to avoid another crisis but not enough to put Sri Lanka into a trajectory to be competitive in international markets.

Among the 16 recommendations highlighted by the International Monetary Fund, SOE reforms are reiterated to be of importance. Specifically the Holding Company as well as the need to include skilled and competent members for the advisory board.

The cyclical nature of the debt of SOE’s and the domino effect it has on the fiscal deficit on the Government was described through the example of Sri Lankan Airlines. The possibility of a second round of debt restructuring owing to an inability to deal with SOE’s and their losses was explained.

The need to divest Sri Lankan Airlines through transparent bidding process was implored as allowing this process to be politicized would lead to a zero sum game at the cost of the taxpayer.

Dhananath Fernando, CEO of the Advocata Institute, reiterated the nature of SOE’s being utilized as vehicles for corruption in light of the lack of transparency with regard to financial reports. Here he identified that only a mere 52 SOE’s have released their financial reports to the public. He noted that revenue from income tax barely covers the losses established by the SOE’s.

The losses sustained by Sri Lanka Airlines and the government expenditure on Samurdhi benefits was compared to conceptualize the enormous opportunity cost the people of Sri Lanka are subjected to.

Rehana Thowfeek, Research Consultant, Advocata Institute, expressed that the intervention of the State into markets has had a negative impact on consumer welfare. The cost of the inefficiencies are borne by the taxpayer to fill the pockets of politicians. Updates regarding the current reforms that are underway were highlighted; passing of SOE Reforms Act and a new Banking Act, the setting up of the SOERU (State Owned Enterprise Restructuring Unit) and the mandate of the Holding Company.

“So far SOE’s have served the employees and the politicians and not for the ordinary citizens of Sri Lanka,” Rehana Thowfeek said. “We are nearing two years to the default but the needle of reform hasn’t moved.”

The constant delays during the reforms process, in situations like Sri Lankan Airlines where the deadline for bids has been pushed back several times already only costs the taxpayer more money, said Shihar Aneez, an independent financial journalist.

Last week, the treasury absorbed USD 510Mn of accumulated debt owed to the state banks which is an additional burden of approximately LKR 347,000 per taxpayer and approximately LKR 98,000 per Sri Lankan household. Aneez further said SOE’s are used as a vehicle for corruption, especially during elections.

“SOE assets are primarily used for election purposes by politicians as SOE's are a popular destination to create jobs while running billions in losses, which taxpayers have to stomach,” Aneez said.

Taxpayer Burden & The Urgency of State-Owned Enterprise Reforms

In the wake of Sri Lanka's economic challenges, it is undeniable that State Owned Enterprises (SOEs) have had a substantial impact on the country's fiscal health. With the aim of creating further awareness and public debate on the urgency of implementing SOE reforms, the Advocata Institute hosted a press event on the on the 3rd of April,on the topic ‘Taxpayer Burden & The Urgency of State- Owned Enterprise Reforms’

This event addressed areas such as the burden that tax payer has to bare as a result of the loss making State owned enterprises (SOE), Transparency of SOEs and the status of the SOE law encapsulating the pivotal role of the holding company. Dhananth Fernando (CEO of Advocata Institute), Rehana Thowfeek (Research Consultant, Advocata Institute) and Shihar Aneez (Financial Journalist) provided their views at the press conference. 

For more infomation on SOE , visit  https://soe.lk.

The presentation can be accessed here

Watch the full discussion here

Media Coverage on Tax Free Periods: Call for the Removal of Taxes on Menstrual Products

Putting the period on ‘taxing’ the period

The imposition of taxes on menstrual hygiene products, needed by women and girls due to a biological process naturally occurring in their body, has been subjected to fair criticism from many parties. While there have been great demands for the Government to remove the taxes imposed on menstrual products and the raw materials needed to manufacture such, such items are currently subjected to a tax rate of 51.07%, and it continues to restrict the access of those menstruating to sanitary products.
Read the full article here

Half number of girls, women do not include sanitary napkins in household expenditures

Due to the affordability of sanitary napkins half the number of girls and women in Sri Lanka do not include sanitary napkins in their household expenditures, the Advocata Institute said. They said the affordability of sanitary napkins and its significant impact on the welfare of girls and women in Sri Lanka has become more pronounced in recent years. This is particularly evident due to the decline in their purchasing powers stemming from the Covid-19 pandemic and the economic crisis. .

Read the full article here

IMF & The Urgency of State-Owned Enterprise Reforms

In the wake of Sri Lanka's economic challenges, it is undeniable that State Owned Enterprises (SOEs) have had a substantial impact on the country's fiscal health. They squander resources, land, labour, and add to the debt burden. They monopolize markets limiting competitiveness and contribute to the inefficiency in the economy. At this economic juncture, the necessity for SOE reforms is not just a matter of economic prudence; it is a matter of national importance. Without swift and comprehensive SOE reforms, we risk prolonging our current economic downturn.

The Advocata Institute hosted a press briefing on IMF & The Urgency of State-Owned Enterprises Reforms, to create further awareness and public debate on the urgency of implementing reforms to State Owned Enterprises (SOE’s). This Press Brief was held at BMICH, Tulip Hall on October 10.

The Event commenced with a 15 minute presentation by Rehana Thowfeek, Research Associate at the Advocata Institute analysing the issues surrounding SOE’s and their link to broader macroeconomic issues. Following this, there will be introductory remarks by the main speakers for the evening:

• Professor Rohan Samarajiva - Advisor, Advocata Institute.

• Mr. Dhananath Fernando - Chief Executive Officer, Advocata Institute.

• Mr. Ravi Rathnasabapathy - Independent Consultant

The Presentation by Rehana Thowfeek can be found here

The Full video of the briefing can be found here

Sri Lanka Slips in Economic Freedom

Originally appeared in the The Island, Daily Mirror, Economy Next, Lanka Business online, NewsWire

Sri Lanka ranks 116 out of 165 jurisdictions included in the Economic Freedom of the World: 2023 Annual Report, released by Advocata Institute in conjunction with Canada’s Fraser Institute. The current ranking represents a decline in the economic freedom of the country which ranked 104th during 2020.

The report measures the economic freedom of individuals—their ability to make their own economic decisions—by analyzing the policies and institutions of 165 jurisdictions. The policies examined include regulation, freedom to trade internationally, size of government, legal system and property rights, and sound monetary policy. The 2023 report is based on data from 2021, the last year with available comparable statistics across jurisdictions.

Sri Lanka’s decline in score was driven by 4 out of the 5 sub indicators of economic freedom registering declines in their respective individual scores. These indicators are the size of government, access to sound money, freedom to trade internationally, and the regulation of credit, labour, and business. The only indicators that registered an improvement in its score is the indicator of legal system and property rights.

“The report captured a stark warning: Sri Lanka's economic freedom declined prior to the economic crisis of 2022, a testament to the vulnerability of nations with limited economic freedom in the face of economic turmoil. If the country is to recover, Sri Lanka must prioritize economic growth within the framework of maximising economic freedom for its citizens to trade, work, and transact freely in a stable monetary and fiscal environment” said Dhananath Fernando, Chief Executive Officer at the Advocata Institute.

The number one spot is now occupied by Singapore, followed by Hong Kong, Switzerland, New Zealand, the United States, Ireland, Denmark, Australia, the United Kingdom, and Canada. Other notable countries include Japan (20th), Germany (23th), France (47th) and Russia (104th).

Venezuela once again ranks last. Some countries such as North Korea and Cuba can’t be ranked due to lack of data.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories. It’s the world’s premier measure of economic freedom.

The report was prepared by Professor James Gwartney of Florida State University and Professors Robert A. Lawson and Ryan Murphy of Southern Methodist University.

According to research in top peer-reviewed academic journals, people living in countries with high levels of economic freedom enjoy greater prosperity, more political and civil liberties, and longer lives.

For example, countries in the top quartile of economic freedom had an average per-capita GDP of US$48,569, compared to US$6,324 for bottom quartile countries. Poverty rates are lower. In the top quartile, less than one per cent of the population experienced extreme poverty (US$1.90 a day) compared to 32 per cent in the lowest quartile. Finally, life expectancy is 81.1 years in the top quartile of countries compared to 65 years in the bottom quartile.

“Where people are free to pursue their own opportunities and make their own choices, they lead more prosperous, happier and healthier lives,” Fred McMahon, Dr. Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute said.

See the full report at www.fraserinstitute.org/economic-freedom.

About the Economic Freedom Index

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories.

Economic Freedom of the World measures how policies and institutions of countries support economic freedom. This year’s publication ranks 165 countries and territories. The report also updates data in earlier reports where data has been revised.

For more information on the Economic Freedom Network, datasets, and previous Economic Freedom of the World reports, go to www.fraserinstitute.org/economic-freedom.

Sri Lankan Economic Crisis: Experts vs Central Bank

Covered by The Week.

There is an argument to be made for a direct link between the decline in the island country’s foreign exchange reserves and the empty aisles in shops—the ban on the import of chemical fertilisers. It was reportedly part of Sri Lanka’s effort to be more judicious with its forex reserves. Going forward, the ban is expected to cause serious problems for Sri Lanka’s tea industry. Plantation owners fear their crop could fail as early as October, without chemical fertilisers. This would have a severe economic impact on the three million labourers who pick leaves. In fact, central Sri Lanka—Kandy and the hilly country—rely completely on income from tea and rubber.

While the shortage of food and other essentials is more easily noticeable, experts said there are other signs of trouble, too. The central bank had recently put restrictions on banks, preventing them from declaring profits until accounts had been audited. Economists assert that this is indicative of a looming banking crisis.

K.D.D.B. Vimanga, policy analyst at the Advocata Institute, a think-tank based in Colombo, said: “If reforms are brought in immediately at the macroeconomic level, the crisis will not worsen. It is high time we reform or perish.” He told THE WEEK that the economic crisis was caused by two factors—persistent fiscal deficit and external current account deficit.

Sri Lanka’s new finance minister, Basil Rajapaksa, had, on September 8, addressed the “severe foreign exchange crisis”. He informed parliament: “The data from the central bank shows the country’s net foreign exchange reserves are close to zero.” He added that the government’s revenue had fallen “between 1,500 and 1,600 billion rupees” from the estimate, because of Covid-19. “We are facing a severe external crisis as well as a domestic crisis with revenues falling and expenses continuing to rise,” he said.

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