charindra chandrasena  00:07
Hi Dana. Hi

Dhananath Fernando  00:08
Jari.

charindra chandrasena  00:09
Hi Rami.

Speaker 1  00:10
Hello, hello Jari.

charindra chandrasena  00:11
Good to have you back on the show. Thank you.

charindra chandrasena  00:14
And Dana, you're always there. So today we are actually going to talk about something, but before any of that, how was your long weekend?

Dhananath Fernando  00:28
Vesak, Vesak. Yes, Vesak weekend. Nothing, nothing much happened. In yeah, I had to travel for a bit, but otherwise it was quite usual stuff. Did

charindra chandrasena  00:39
you get a except

Dhananath Fernando  00:40
except the full full price side.

charindra chandrasena  00:42
Yes, the full price side. Yes, that was a which we have been

Dhananath Fernando  00:46
endorsing. Yes, Advocata

charindra chandrasena  00:48
has been endorsing that. So, so with

Dhananath Fernando  00:50
with lot of blames and criticism. So you're happy

Speaker 2  00:52
now.

Dhananath Fernando  00:57
It was yeah in for Vezak. There's you know you have to think about meditation and like I was going through that because a lot of people are blaming. And have you got what you have been asked? Nama, you happy? So it was a good Visak season to yeah be patient, calm, and

charindra chandrasena  01:15
yeah, you don't respond. You you

Dhananath Fernando  01:17
respond. Yeah,

charindra chandrasena  01:18
even even even even the Buddha has said at one point that like if you don't take the criticism of others, the criticism belongs to them themselves. So I was practising that. Practising that. Ravi, how was your weekend?

Speaker 1  01:35
Well, confined to I was working on some things and with the heat and with visa crowds, I've always stayed at home to make sure that you don't get caught in traffic. Ravi,

Dhananath Fernando  01:47
Ravi only gets like you know busy during Christmas season. He's a good singer. He goes for the choir and you know ask that question during the yeah during the Christmas

Speaker 1  01:58
season. We

charindra chandrasena  02:00
will. I I hope to hear you sing one day.

Dhananath Fernando  02:03
Except the song on the economics and all that. Except

charindra chandrasena  02:07
that song. So we are today going to we are going to touch on the fuel price increase as well. But in a broader sense, there is currently a debate going on, which is still very much a simmering debate. But I feel it will come to the forefront a little later, which is about whether Sri Lanka will need to pursue another IMF programme once the current one ends, so the current one expires at the end of the first quarter of 2027, which means we have about 10 months or so left in this programme. After that period, Sri Lanka is pretty much on its own, in the sense we don't have that sort of principle, like the school principle, that you know disciplinarian, and it will come down to whether Sri Lanka has the maturity to manage its own finances, manage its own economy. As an initial point, and I would like to hear from both of you on this. But in in brief, as things stand now, because there is no end in sight to the war, because now Iran yesterday said that they are not going to be in discussions with the U.S. anymore unless the Lebanon attacks by Israel are halted. And since then, Israel has actually intensified its attacks. So as of recording, that is the situation. So there is no end in sight for the war. But assuming that the war goes on for a couple of months more. War meaning lack of peace. Would Sri Lanka require another IMF programme at the end of this one, Dana?

Dhananath Fernando  04:11
Yeah. So, Chari, the main eligibility criteria for the IMF programme is whether we have a balance of payment crisis. That's where you basically reach out to IMF, or for some other reasons when their external finances are not secured and all that. So what I see is the global context is going to be uncertain anyway with with a vulnerable economy. While we have been recovering, we are still not out of the woods. So as a result, any main shock it could be geopolitical, it could be a climate issue, or it could be a any other event that can basically drift Sri Lanka. I mean, completely back to sort of a crisis. So, in that sense, okay. I think that I'm not really decided on whether we really need an IMF programme or not. To be very honest. What I can do is only evaluate the pros and cons of this. So as as far as I see, we actually do not need an IMF programme, but that comes with a condition because we haven't really done the growth reforms because IMF is all about stability. They can only bring a patient out of from the ICU to to the normal ward, but not from normal ward out of the hospital. So in there, you don't need an IMA programme, in my view. But provided that we have to quickly accelerate our reform programme, no growth reforms have been done. Then the challenge is even if you start growth reforms today, it will take about two three years to materialise it, and then you are hitting a political cycle. We don't know what's going to happen with the provincial council elections, presidential elections, and all that is basically falling under when you really see the results. So when someone really take a risk of, you know, doing the growth reforms now and waiting till to see the results for three years, I do not know, and we also having a history of not having proper financial discipline. And what I am bringing is credibility and financial discipline. So whether we really need that external discipline or like external policeman or like a tying our own hand by someone else to really move in that direction, I think that's the new way. But I'm sure everyone is worried, worried in the sense if something goes wrong after next first quarter, then what is going to happen for everyone else's businesses, personal lives, their aspirations, dreams? It's a question mark. So I think that's where we have to evaluate. As far as I see, I do not see because you can't also, in my view, you can't also depend for a long time on an IMF programme. We have to take responsibility by ourselves, but again, whether it's like kicking the can down the road approach, you go for another MF programme, just kick the can down the road, then what is going to happen is a question. So I'm actually not, to be honest, I'm not decided. As at now, I don't see that we need one, but I rather saying I'm not saying we don't need one because we are doing perfectly well, I am saying we should not consider that option. You

charindra chandrasena  07:04
are adopting a wait and see approach. Exactly, I'm

Dhananath Fernando  07:06
I'm saying let's get us act together and do it. Because even what is going to happen after the MA programme? We at one point we have to face the reality. So rather better to face it now and do whatever the things that we have to do internally rather than just an approach of kicking the can down the road,

charindra chandrasena  07:22
right? But Robin Ali has a

Dhananath Fernando  07:23
different view. You have a different view, is

Speaker 1  07:26
it? Well, then I write that you call the IMF in if you have a problem with your balance of payments. Or generally, there are two things. If there's a if a country is in crisis, there are two things you need to do. You have to fix the budget, and you need to fix the money, right? If you fix fixing the budget means the government has to balance its budget, right? You can't be city can spending and borrowing money for which you don't have revenues, right? So that has to happen. The currency means you have to basically fix your central bank to make sure that you don't destabilise on the monetary side. The big weakness that I see is that the central bank, which will be the subject of a there's a new essay that I've written that we launch properly next week. But but that's where your weakness lies now. At the moment, you've had some wobbles, and the interest rates have been raised, so that might hold things for the moment. But you have to see how things develop, especially if your revenues start to drop from the in terms of remittances, in terms of tourists so far, your inflows have been okay, right? It was just that some of your outflows have started to increase, but your inflows are all right. Your inflows start getting hit. You will have you are going to have to tighten local policy to compensate, right? So that if that doesn't happen, then the chances of of of your currency problems continuing is greater, right? So, so I mean, there are quick

Dhananath Fernando  09:10
intervention. So one point that you brought out was important that the revenue, I mean the the the budget government managing the budget. Yes. From the data that I see, actually the the the budget deficit is coming. I mean, narrower and narrower. Of course, it has been done through revenue increases rather than expenditure curtailment.

Speaker 1  09:31
Yeah, expenditure has gone up.

Dhananath Fernando  09:32
Expenditure has gone up. Yeah, tax revenue is basically catching up the expenditure as well. So that's why the main complaint also for IMF. They are more moving with a fiscal fiscal consolidation, they are not recommending not on lot of expenditure curtailment, but to increase taxes. No,

Speaker 1  09:48
in fact, they are asking you to spend more money also. I am asking you why. So the one reason we have not been our budget also on the fixing the budget. It's in a much healthier condition than it was earlier. The entire positive side of it has come from taxes. People have had been forced to cough up. The reason people are putting up with it is because they believe that this is necessary to avoid another crisis, but you have forgotten the most important thing, which is your which is your problem will come from the monetary side. So at the moment, your fiscal side is fine, right? It can decrease your rate because your exporters are facing difficulties, your remittances slow, your your economy slows, your trade slows, your tourism slows. Then your tax revenues can also come under pressure. So that can those pressures can build. But so far there is your fiscal side is fairly okay, right? The bigger threat is on the monetary monetary side in your view? Okay,

Dhananath Fernando  11:01
right. Correct. Correct. Okay.

charindra chandrasena  11:06
This IMF programme that we are ending next year. Generally, what is your view on it in terms of now a complaint that has been levelled against the IMF historically is that they are too focused on austerity, and that they ignore domestic concerns. I mean, they ignore political concerns as well. But let's say ignoring political concerns is a is a necessity because you can't let politics dominate economic policy, but they don't just forget political realities. They also, you know, that they used to ignore domestic realities on the ground in terms of social welfare, in terms of you know just cost of living for the average citizen. Now, the just to set some context to this, before the financial crisis of 2007 eight, the IMF was actually struggling for relevance to a certain extent, because their you know continued existence was was being questioned. Why do we need a body like the INF now? But then, when the crisis hit, a lot of countries actually started relying on it, and and at the time, they I think, made a conscious effort. This is my view, to be a bit more sensitive to domestic concerns. You could even say a bit more humane. And now that process has taken a long time, but the decision I think was made at that time. But with all that in mind, how do you gauge the current IMF programme in terms of balancing that that welfare aspect and the economic requirements?

Dhananath Fernando  13:13
So I think, sorry, exactly. IMF evolved because earlier the main question is generally they curtail the social welfare and all that, and now they wanted, as Ravi said, to spend more on social welfare. In fact, one of the main complaints by the IMF, I think, in one of the reviews, that we haven't really spent that particular percentage on social welfare, which we have promised in the agreement, especially on Astar Suman. Now, even

charindra chandrasena  13:36
that that that dana, do you do you not think that's a direct result of all the protests that we saw in the 2000s, 90s,

Dhananath Fernando  13:43
absolutely

charindra chandrasena  13:44
80s, you know, I think I think they finally come around to the reality of this exactly because

Dhananath Fernando  13:50
IMF, in my view, was not popular among anybody because you know the people are also blaming IMF because the politicians are saying because the IMF that we have to do, but some pain has to also be taken. But of course, they have slightly changed the structure of how they wanted to move it. They are more for targeted transfers, targeted subsidies rather than like subsidies through prices. So I think IMF has also evolved massively. So that is definitely there, and I think this programme also, if you look at what they have been mainly saying is go for more targeted ones, and I think this is a reasonable programme because we really did not have an option on the other way around. Because when you're on a restructuring programme, you have to have an IMF programme. Otherwise, you really cannot. I mean, you can, but it is very unlikely that someone will agree for a restructuring without an IMF programme, because what's the mandate or like who who is the person who can be liable or provide an assurance that their country will adhere to the what they say is mainly the concern of the creditors. Yeah. So in that sense, another

charindra chandrasena  14:53
thing that I think this programme is significant for the IMF also because I think for Asia at least. This is the first programme to capture governance, right? Correct, and especially with the focus on on corruption, on corruption. Absolutely. So, in that sense, I think that's another stage of the evolution.

Dhananath Fernando  15:12
Exactly, and I think IMF programme also, even if you go through the this time report, I mean, the technical assistance that they have provided has been massive because they have the global know-how how they have done in different parts of the world. It doesn't mean it's perfect and there are different views, but you can get a solid technical know-how. But the challenge is sometimes even what we really wanted to get through is difficult to get through because if you look at all the apps has been diluted. Even the central bank independence there was a better version. Electricity one there was a better version in my view. Now everything has been dilute because you challenge it at the Supreme Court. Then there are certain conditions that you remove. So those things have been happening. But I I don't I think this IMF programme we have to stick to it. And while I had some critique about the IMF programme, I mean I I don't subscribe for what they have recommended on like the the wealth taxes and all that. That's I'm not pretty much subscribing for. But overall, we needed that programme, and that's what kind of bringing some level of fiscal discipline. And we can see the results. Obviously, we can see the results how we the economy is stable and all that. So this programme, I think, it's needed. But moving forward, I think Ravi's monetary issues. I think there's a debate on like how we should really fix the monetary side. But definitely, the monetary side has to be fixed, and that's one reason we brought the independence of the central bank. In my view, it has to be further refined. But whether we need an IMF programme, I think we need. I need in the sense like

charindra chandrasena  16:46
no, no. I mean, this is not the future question. This is about the current programme and your evaluation of it. Yeah. No, I think we have been doing. Yeah. And and that the programme itself has been beneficial. Absolutely. I mean, purely beneficial to. Absolutely. It has

Dhananath Fernando  17:01
been quite beneficial because it brought the credibility. It's not about the money in an IMF programme. It's not about the money. It's basically the credibility and the funds that you can unlock by having an IMF programme. So in that sense, I think this programme is quite a success. We have another about yeah less than a year to go. So there, we have to complete this programme properly with reforms. But what we need to keep in mind is most of the reform reforms we have to front load,

Dhananath Fernando  17:29
because the more that you take time, as you can see, major ones are not taking place. So we have to front load the reforms at the early stages, so that you can get the reforms done. Right,

charindra chandrasena  17:40
Raj. Do you consider this a good programme? This particular programme that we are in currently?

Speaker 1  17:46
No. The thing is, we were already in a mess, right? So we didn't have too many options. You had to go to the IMF, right? But and in the heat of that moment, okay, they agreed to something, but over the over the years, my misgivings about this programme have grown. The principal thing is, it's all about tax, tax and more tax, right? Not not a thing on on expenditure, nothing on real on any structural reform. We have had zero structural reforms, right? There are some namesake things that are some stories about privatisation and some some other things that are put out for all of those are in the nice to do category. Nothing is compulsory, right? The only compulsory thing is tax, right? So you have just tax and then nothing about restructuring the public sector, reducing the size of the public sector workforce, all those government base. So you have simply taxed and balance your budget. So people have paid a heavy price for that, right? So that is the primary weakness. Nothing on the expenditure side. Nothing on the. There are there are various things that are included in it, but nothing is compulsory. So then nothing gets done, right? So you do some you do some namesake.

charindra chandrasena  19:12
Could you could you, Ravi, give us give us an example of something that you could have that if you were the IMF, you would have included

Speaker 1  19:22
right to begin with. I think the tariff reforms. This was the opportunity that Rajvikrama should have done at that time, when when inflation was when the cost of living was at its worst, right? When people were facing hardship, when the currency has collapsed to 300 or from 200, you needed to give people some kind of relief on cost of living, right? We know that we have all these protective tariffs that that we are talking about and which keep growing and never keep coming down, which at. To our cost of living, your cost of food can be reduced significantly. Your cost of your other household expenditures on on your toiletries, on your on your toothpaste, on your all of your household cleaning products, all of that significantly you can reduce it if you get rid of the the. The protective tariffs, yes, and you see there is no need for the currency has gone from 200 to 350, right? The local producers are getting enough protection from the currency. The imported product has become 50% more expensive. Why do you need protective tariffs on top of that, right? So in that moment is when you should have slashed those to zero, right? One golden opportunity which you threw away and which cost you the election ultimately because you had the you had all the pains of the currency depreciation, all the pains of the taxes imposed on people, and absolutely no relief. You don't need to give us. Where you reduce, which you give to a select group of people. On one side, you create the problem. You say we are protecting local producers. Fine, that's your policy. But the consequence of that is that consumers are going to pay the price. So your cost of living is related to that. If you are interested in producers, then you have to ignore the consumers, right? So on one side you say, okay, we are going to protect producers, and you increase the cost of living for everybody, right? Then you say, oh my goodness, cost of living is high, and then you go giving handouts to some people saying relief, right? Does this make sense to you? I don't know. It doesn't make sense to me. Okay.

Dhananath Fernando  21:42
No. Yeah. I mean, I think Ravi has has some. I mean, agree. I mean, it has mainly came from the taxes side. But my point is from taxes. Yeah, it all became taxes. Yeah. And you see

Speaker 1  21:54
the way the expenditure has been growing. No. My

Dhananath Fernando  21:57
point was we really did not have an option because, as I said, like the debt restructuring, the credibility, even the legal stability that we had, because ultimately, in either way, it has to be borne by the public. They just recently passed it mainly to the public side. But I feel this programme at least had some level of reforms. Even I know there's debate on the cost reflective price formula. Even the public fiscal, the the public the public not the rate management office that is one and the public fiscal management act which basically ties the government's expenditure front legally is in a way containing the government's expenditure of course we cut down the expenditure from the capital side, which is also not a bad thing. But it also have an impact on growth on the other side, on the con side. But I think there are certain things that has been done. It could have been, I would say, rapid, or like it could have been done on a radical way on the expenditure curtailment front. So I have slightly different view to Ravi. That's right. Okay. Yeah. Okay. Okay. But don't you think like Ravi? No public. I forget the name of the act. Like public finance. Okay.

Speaker 1  23:12
Okay. Fiscal responsibility management act is okay. But you, I think you should have set done gone in with the with the proper medium term expenditure forecast and set your set your expenditure limits lower rather than encouraging them to spend more. That no on the taxes. Okay, look at it practically now. You have a very rigid expenditure structure. At the time of the crisis, I think it was 50% of your revenue was going to pay pensions and salaries. 25% was going to pay interest, right? Very rigid, very difficult, right? No, it

Dhananath Fernando  23:51
was about 50% on interest, no? No,

Speaker 1  23:54
I think about 25% 50% was payroll. Anyway, but it's those two big ones, both difficult to reduce. So you could have looked, and of course you had some big tax cuts that took place during the 2020 or so. Yeah, so you could have done this. You have some tax increases, right? To try because you have a rigid structure of expenditure, which will take you time to reduce. The way you look at this is you buy time to do your expenditure reduction, right? Because you need to balance. Yeah,

charindra chandrasena  24:34
just for clarity, what you are advocating for is for the VAT increases to have happened anyway, but for the para tariffs to be removed,

Speaker 1  24:43
no para tariffs removal is a separate thing. You could have brought the cost of living down, but you kept that. I agree, and that should have been done in one fell swoop. You don't you don't wait for that because because the vested interest will build up and and in that moment, and they were they were not at a loss because. The currency has depreciated. You are protected by the currency. You don't need any more. So they wouldn't have felt it either. They'd have been okay, right? And then you allow the thing to work itself out, right? So you could you had that opportunity because the currency depreciated so much, right? Which you lost. So what I'm talking about is it doesn't matter what you had some room for tax increases, right? So you could have increased wet, maybe some some other. So the type of taxes, ideally indirect taxes, more than direct. But anyway, you could have increased. But the way you do it is this. You don't look as tax as a solution, right? Tax buys you enough time to fix your expenditure. You need to do VRSS. You need to reduce your public sector payroll at least by half, ideally by about 75% because you had 400,000 people in 1990. I don't think you need any more than that, right? 200,000 teachers, 50,000 in the health service, and then the rest is is in administrative. You don't need this huge 300,000 people in the or 250,000 people in the military, and and 160,000 peons, and 300,000 of or 100,000 of of labourers or whatever it is, they are not publishing the break up of the government after 2017. You don't have figures, so you can't see how many hundreds or 1000s they've just given as jobs, right? Which you are paying for, which is so your tax increases are conditional. It's a it's a temporary thing to buy you enough time. You do a little, right, and then you cut. Now the kind. When I talk about serious reforms, you have to look at okay. Uganda did a good thing, right? Musaveni you know they they did what they call cash based budgeting, right? The expenditure for January is limited to the tax revenue collected in December, right? You spend only that much, and you spend no more. Anything else, you don't, right? So the motto was: we eat what we gather, right? Now that is serious reform, right? Your budget balances within three months. Of course, they didn't have a huge welfare state. They didn't. They were a much less developed country. They could. It was much easier to implement something radical like that. But you have to think radically if you want to get anywhere, right? If you look at what's happening here, nothing. No, absolutely nothing in two IMF programmes. All you see in 2016, you know, it was tax, tax, and tax. Your government and and depreciate, depreciate, depreciate. But Ravi, Ravi, does

charindra chandrasena  27:51
it does it not come down to the actual mandate of the IMF? Is the IMF's mandate to actually, you know, spur economic growth, because the way I see it, the IMF's mandate seems to be to stabilise an economy.

Speaker 1  28:06
Yes, yes, stabilisation is about so. So it's the details of the pro. It's it's a joint thing between government and the IMF. It's what you negotiate, right? So what has happened is this programme was written by people in government. It was written for the benefit of government, for so that you keep your rents and patronage untouched, right? Your government spending so that you can spend on the keep your public setting intact, keep your vote base intact, and you so you structure it like that, right? These fellows we say yes, if if their figures balance, right? So it was written by the government for the benefit of the government and not for our benefit. That's an actual.

charindra chandrasena  28:45
That's an extra important point, Nana, because I think a lot of people assume that the IMF writes the programme and sends it to the government. You take it or leave it, kind of vibe. But that's not what happens in reality. The government is the one that sends that proposal, and then they network

Dhananath Fernando  29:06
correct, correct. Yes, not on Ravi's. No, exactly. So that's something that that we need to understand. It is like the government that we basically think say that this is what we can do, and unfortunately, the government has more skewed towards the tax increases rather than expenditure cuts because anyway the tax increases are also unpopular. If you look at the the noise in social media and complaint by the middle class is on the tax increases. So rather than the expenditure cuts, which is politically unfeasible, so that's why they have moved towards tax. But my view is the tax increases it also need to cherry connected to the root cause. In my view, the tax increases, of course, while it is bad, it is mainly to cover the unsustainable debt that we have taken. We borrow too much money in dollar terms in short maturity and invested in on completely unsustainable infrastructure projects. So now we have to pay the price. So basically, we have paid the we have. Pass that price to the consumer in the form of taxes, but the problem is I agree agree with Ravi in that point that we have completely forgotten about expenditure curtailment. No privatisation, no state-owned enterprises reforms. Only one is available is the state hold. No tariff or trade reform. Yeah, exactly. We have made

Speaker 1  30:18
the environment much harder, much more difficult. It is

Dhananath Fernando  30:21
there, but tell me, man. No, it's there

Speaker 1  30:25
in the it's in the document. I mean, nice to do, and it's nice to do. It gets keep getting forward. It is not mandatory. It is not in the

Dhananath Fernando  30:34
rapid form. So, so it's the capital confidence that we got. Because I am comparing with what we were, how we were before, and where we are now. Exactly, we

Speaker 1  30:44
are in a much better life front.

Dhananath Fernando  30:46
Yes, we are okay. But again, IMF. That's why I'm saying IMF is not a solution. Taxi is not a solution. The solution is on the reforms. All reforms that Ravi and I both subscribe for the tariff reforms, the growth reforms, the land reforms, the privatisations, the the state sector reforms, curtailing the state sector, cutting down expenditure, all that. But we have to also looking into a more comparative and arm for also rapid reforms. No two words about it. But the challenge is there's also a realistic way that you need to manage it. No, whether we have the capacity to do it, whether they have the political will and the timing whether it is right because as we see it is falling with the election cycle and so many other global uncertainties. Whether we are capable of managing it is the question, and whether the government has the political capital to do that is where I think the battle is. There is definitely no disagreement with the formation of the reforms and like how the reforms needs to be done, and agree. The more more that you delay the tariff reforms and things like that, the other side is getting strong and strong, and they basically lobby to a point that it may not move anywhere further. That's that's basically the experience. Yeah, sure.

charindra chandrasena  31:56
Yeah, sorry. Yeah,

Speaker 1  31:59
yeah. Okay, you have been making life even more and more difficult for businesses, right? By creating new red tape, new rules, new taxes. Right now, I'll give you now in the register of companies, they have gone and introduced some new things where you have to have NICs of all your all your shareholders, shareholders, yes. Right now, small private company that was set up in the 1960s, right? There were some seven or founder shareholders, right? All of whom are now dead, right? Some we don't know. They are asking for that. There were no NICs in the 1960s, right? NICs came from somewhere in 1970s, right? We don't know where these people's relatives are. Whether they had NICs at any one time, and now going round and round. This is something that was introduced maybe a year or two ago, and now can't file your returns with the company, the registrar of company because because you have gone and introduced some new now now new rule. Now let me tell you about what a foreign investor had written right about this. I sent I spent for one of my cousins who's a dual citizen. Who now they have said you need. They are not living here. They have told them that you need a NIC, right? I spent two or three days sitting inside. She had to fly here to get that sitting inside the immigration sign, trying to sort out an NIC for for someone, right, who's already a dual city. Now this. Now we

charindra chandrasena  33:42
summarise that and tell us just what what the what the stuff that was that was no you no

Speaker 1  33:48
you keep adding no no rules. Okay, so he is without

charindra chandrasena  33:52
without verbatim. Okay, okay, okay, okay, okay, okay, fine. Right.

Speaker 1  33:55
So this is a for he has said he's an 100% export-oriented Canadian FDI. He has just got his visa, right? Where he has lived for six years in this, and he has built his business here. He is very happy with the quality of the people, right? But he has had to spend 10 days, right? Sitting two weeks of a CEO's time removed from business development, removed from client management, removed from revenue generation. Instead, that time was spent navigating a scattered archipelago of government silos that refuse to talk to each other. One department demands a letter that another department won't receive until the third department stamps a form, you become a glorified courier, physically ferrying papers. So this you keep adding to people's problems, and now this the worst thing. So you are saying the

charindra chandrasena  34:51
IMF programme could have actually mandated the easing of the business. I mean, doing business climate as well.

Speaker 1  35:00
Yeah, doing business is more the government's area, not really the IMF. No, no, but they

charindra chandrasena  35:06
can mandate it. Everything is a government area, but they can manage. On the mandate question,

Dhananath Fernando  35:11
I also have a different not a point of view. But the challenge is because what we discussed was this IMF. Whatever the guideline is, decided by the officials, the government. Yes, and if you really don't have the capable people, you know the the proactive measure because someone in the government when you get to the negotiation table and when you draft those what we can do, someone really need to understand this point of view and basically incorporate that into the programme. And someone should have sense to front load it, realising that in a political economic context, delaying it. Yeah. So I don't think that programme. That's the

charindra chandrasena  35:44
thing. That's the thing, Nana. I'm wondering how much consultation went into this initial proposal, right? Where there's a letter of intent. No, I I think it's an annex to this letter of intent that services. I don't know this. I'm guessing, and you might have a better idea, but I but I feel like it may be an annexure to this letter of intent, where we spell out okay, these are the things we can do, right? And then the IMF can review and say this is okay, but this is not. So you know, change that, whatever. But I feel that there was very little consultation in when doing this, where they spoke to different stakeholders and found out okay what are the things that we can what are the what are the what is the low hanging fruit that we can offer the IMF as a reform right I don't know how much of that happened because it was such a sudden true

Dhananath Fernando  36:35
and also sorry in my I mean I'm not justifying it but when we negotiated this IMF programme, it was a very I mean it was chaotic time. Chaotic time, and also we know there were only very few individuals at the treasury who could actually do it. And I think the same people were also in the debt restructuring team and also with the IMF team. And it was basically in terms of government side, it was governor and the treasury secretary, and there were a few individuals. Like it's like not more than I think five six people who did it. So I think there was a massive capacity constraint who think and like I mean they did a, in my view they did a fantastic job. But still, it is not enough to do all that to front load and really get the get what is required because now it is easy to do the post mortem because we know what happened. But in that context, it was quite difficult in my view. But again, agree this could have been done better. The programme could have been negotiated better. Not just

charindra chandrasena  37:31
the post mortem. Now, if we are going for another programme,

Speaker 3  37:34
yeah,

charindra chandrasena  37:35
now we have 10 months to plan ahead and potentially more. If we have to, I'm saying, not that I'm advocating for us going to the IMF again, but if we have to, now we have no time.

Dhananath Fernando  37:48
Exactly,

charindra chandrasena  37:48
and also maybe a government with a different outlook, also because I think one one issue that I had with this, and I think Ravi touched on it as well, that this was all about taxing the the public, yeah. And as we all know, the taxes affect the poor if it's if it's a public tax and not a targeted tax. So I I do have a have an issue with how how indiscriminate this wars with the taxation, and maybe a different government with a more sort of a public welfare push might be able to negotiate a better deal.

Speaker 1  38:31
Okay, could I just yeah, right? Okay, so if you look back at that time of crisis in 2021-22, right now these thoughts have come to me afterwards after observing the what's been happening the last couple of years. At that time, we were you know we were half the time wondering where to get food from. Half the time wondering where where to get you and and so many we had no time to think through these things properly. So these these criticisms that I have, I didn't I didn't understand enough at the time that we made it right. So if you ask about the next programme, right now we have learned something about the. So what I said earlier about the problems with this one, this emphasis on taxes, this not the no the lack of emphasis on expenditure reductions, on reducing the size of government, the role of government, the trying to reduce the cost of living for people. You can't do it. You have an opportunity for doing that because you have your your you have deliberately through policy pushed up the cost for people, and when your currency depreciates, it becomes much worse. So now those lessons you can bring into the next programme of what not to do, right? That that and you had two programmes. Which were very similar. 2017 was also was also on the same lines, and in the last 10 years, absolutely no structural reforms of any kind have taken place. Right from Yahba. And the 15

charindra chandrasena  40:15
programme wasn't completed actually. No, that wasn't completed either. But

Speaker 1  40:20
it was on the same lines, and it went in the same direction. The taxes didn't have to be so high that time. That time it was tolerable. But then you went and widened the imbalances in between. So now you're sort of happily saying you collected so much in taxes, but you've not really fixed anything else. And when you have a very difficult global situation, right now this is a foreign investor writing, right? The old model of trying to of relying on a few small export sector, right? And you keep hitting them with with problems like this, right? And your markets overseas are closing up; they are getting more protectionist, right? You are going to have that. There is going to be limited opportunities there now if you don't join real trouble.

charindra chandrasena  41:17
Yeah, yeah. Just just back on the IMF programme, I think one positive that we can take maybe is and and you guys can correct me if I'm wrong. But in the last 20 years, is this the only IMA programme that has continued into two governments? Definitely, I

Dhananath Fernando  41:31
don't know. Interesting, yes. Because

charindra chandrasena  41:33
2009 one didn't continue into correct two for sure. 2015 one continued, but then it was abandoned by the second government. Correct, and this has continued, and then it is going to be taken two completely

Dhananath Fernando  41:47
three governments, right? Not two governments, no. President

charindra chandrasena  41:50
technically yes, technically three governments also, right? But the but the first two governments were yeah essentially the same same parliamentary parliament, yeah. But this is a completely new government which has taken it forward. I think. I think that also says something about the understanding of correct economic reality is now after the crisis than before, because the same government whether they would have continued with that programme earlier, I I don't know. Okay, but in that sense, I think this bipartisanship on the economy and and these policies and reforms, I think, is very important going forward. And another thing I want to touch on is, I think for the IMF also, this programme seems to be something that they are, you know, quietly proud about. Yeah, yeah, they

Dhananath Fernando  42:36
become the blue-eyed boy, right? Yeah, I feel

charindra chandrasena  42:39
like we are because yes, because because I I I when I see Miss Cristalina Georgieva and all the other IMF officials, you know, raving about Sri Lanka, not just with this government, even with previous government, I feel like this is a programme that they can hold up as a success story for them, and I think that was badly needed for them as well, because a lot of countries wouldn't have taken the pitter pill, no, like this. Before before we wind up, as final thoughts, I want to get Ravi's thoughts as well. But as your final thoughts, Dana, can you speak about the full price increase? Are you? I asked you at the beginning of the show. You laughed. Now tell me, without laughing, are you happy with the fuel price increase, or does it need to increase more?

Dhananath Fernando  43:29
No, I think according to the numbers, it the the diesel prices has to increase. I mean, it has to go up further. Again, I'm not saying the fuel prices increasing is a good thing for the economy, but you are always have to compare. I'm

charindra chandrasena  43:43
saying it's a good thing for the economy.

Dhananath Fernando  43:44
No, I mean good saying in the sense. I mean, if the fuel prices are, if the if you can keep it low as per the like without incurring a loss, that is the ideal scenario. Right

charindra chandrasena  43:53
now, it is the better thing for the economy. Is what you're saying? Exactly. So it

Dhananath Fernando  43:56
has to be always compared to the next best solution. No. So the next not not the next best solution. The next alternative is that we continue with the subsidy and basically even the hard with with Ravi always complain about like the taxpayer money. You are just subsidising to the richest of the rich is what we are been doing. If we continue to subsidise dieser and at the same time we are adding more and more pressure on the more and more pressure on the currency by doing it. So the next available option is a disastrous one compared to increasing the prices. But I understand the political challenges of it. But the prices ideally has to go

charindra chandrasena  44:35
for for which

Dhananath Fernando  44:36
one? For diesel mainly.

charindra chandrasena  44:38
Diesel mainly. Not for petrol.

Dhananath Fernando  44:40
Petrol is manageable. I mean, still there is a loss, but it is with the taxes negligible. It's it's it's manageable, right? But diesel, it is not feasible at all. What is?

charindra chandrasena  44:51
Do you have the numbers on what the loss is now? Yes,

Dhananath Fernando  44:54
you can also go through. Yes, but we what we see is the on land auto diesel, the land. Cost is about 560 rupees. So you know, even after the tax increases, the the the current retail price is at about 400 and you know it's about 410, right? In that stretch, it was 392. So still, to at least to sell it at the landed cost, it has to be at least about 560.

charindra chandrasena  45:24
So it has to increase by 100 and

Dhananath Fernando  45:28
exactly land at 140

charindra chandrasena  45:30
more.

Dhananath Fernando  45:31
Exactly ideally with the taxes, but even if you remove the taxes component of it, at least it has to be you know somewhere in the 404 100 to 450 rate, so that's where it is at the moment. I think there was a press con by the CPC also because we are not giving the signal to the markets that we have to curtail the you know usage. We are trying to do it through the quota system, QR system, which is I don't recommend on a long run. Of the short run, you can try it out, but you can see because when we had the price increases, there was a drop in consumption, which we discussed about. Right, right. So I

charindra chandrasena  46:07
won't, I won't press you on that because on another show, on previous shows, actually multiple shows, I have pressed you on this about the inflation impact, and then you you have spoken about how this vicious cycle works. But again, I'm saying it has to be landed in exactly, and it has to increase with

Dhananath Fernando  46:22
a with a social safety net measure. It has to the two things has to be combined together. Finally, I want to comment on okay, if you are even if you are considering an IMF programme, when I did the reading, there are two options. One is okay because for for us to become eligible, we have to have a balance of payment crisis. If not, there is another option called policy coordination instrument, where you don't get money, but you are with an IMF programme on policy package.

charindra chandrasena  46:48
Right. So credibility is still there. Exactly. So you can

Dhananath Fernando  46:51
bring the credibility. You can unlock some other funding because you are an IMF programme, and your interest cost may be brought lower because you are an IMF programme, so that's one option. The other one is a staff monitored programme. So there are a lot of guidelines because while it's not about only about money, there's whether the director board endorsement has to be there and certain parameters. So if you what is

charindra chandrasena  47:14
it again?

Dhananath Fernando  47:15
No, a staff monitored programme. Staff

charindra chandrasena  47:17
monitored

Dhananath Fernando  47:17
in a staff monitored programme. Basically, IMF board endorsement is not usually required, but on a PCI, which is called the policy coordinated instrument, that you need to have a the board level endorsement. But

charindra chandrasena  47:31
both carry the same level of credibility. Kind of, yes.

Dhananath Fernando  47:35
There are differences. Yeah, but I I

charindra chandrasena  47:37
feel like the staff one might have less of a credibility. There has a board level endorsement. There's a policy

Dhananath Fernando  47:42
coordinator is human, there you have options. But of course, even I think with the challenges, we even can go for another programme, even with some money. But again, that is again in my view kicking the can down the road approach. Probably some there has to be some bipartisan agreement, at least on some of the reforms, in my view. Otherwise, we will not see an end. And as from what

charindra chandrasena  48:09
you are saying, you country can't just go to the IMF just because they want the IMF as a exactly as a policeman. You have to be eligible, which means you have to be in trouble. You have to be in trouble. You can't you can't say that I'm trying to avoid trouble and therefore I'm coming. You have to be in actual and it

Dhananath Fernando  48:24
has to be growth-oriented reforms. IMF is mainly for stability.

Speaker 1  48:28
Exactly,

Dhananath Fernando  48:28
it is like the how shall I say? It is like the you know anaesthesia or you know they are job bees only that they are not liable for you know the surgery. They are getting

charindra chandrasena  48:38
getting them out of the ICU is the the the job exactly? It's not going to help you do the rehabilitation and the physiotherapy and all other and get you know back to exactly. So

Dhananath Fernando  48:48
that is our role. That is our responsibility. But I think the the stability thing has slowly. I mean, it's there. Of course, as Ravi says, it's mainly because of taxation. But then the next growth reforms has to happen. The trade agreements has to move forward. The para tariffs has to be removed. Public sector, all that has to happen quite faster if you are serious about it. Because by worries, all these are becoming unfeasible. If there's a provincial council election, no one really want to do it. Then comes the presidential election. Then comes the parliamentary election, and the honeymoon period is over. Period is over,

charindra chandrasena  49:21
and the danger is that the provincial council election might actually be held after the IMF programme expires. The way things are going now, because I doubt there'll be one this year. We are halfway into the year. I doubt there'll be one this year. And if it if it if it is next year, they're definitely going to put it after March. One thought. Yeah, fewer final thoughts. Now the

Speaker 1  49:42
market pricing of fuel is okay, right? But the question you need to ask is about the fuel procurement, right? Was that because having to pay because the world price has gone up is one thing, having to pay more because your procurement was corrupt. Because you have inefficiencies in the to cover all the inefficiencies in the petroleum corporation, both in terms of staffing and in terms of operation, having to pay higher price, but that is not accessible. So what you should do is, in any case, most of your fuel is imported refined, right? Allow some others to start importing in directly, so then you have a more competitive market in fuel, then at least you have a choice between CPC and paying the price that they have paid for their fuel. You may have an opportunity that somebody else who's more efficient, who's simply importing and selling fuel, might. So that is something that you can look at because this fuel procurement, like gas procurement, as all all these large government procurement contracts are they issued about 10 licences?

Dhananath Fernando  50:49
No, for businesses, no, mainly for bunkering companies. They issue, but money is not addicted. I understand. No,

Speaker 1  50:54
allow people to import and sell. The problem is the petroleum corporation, the sheds and the things like that, but the plan with LIOC was to was to have another player as well. I think, but you need to have other players coming in, and where you remove from the where at least then you have some the you get over that procurement issue,

charindra chandrasena  51:24
right? Okay. So before we wind up, you have a message. So

Dhananath Fernando  51:29
exactly, we

charindra chandrasena  51:30
missed you last week. There was for for many reasons. One being that there was no one to do the message. Message. It's not. It's not the answer. So I

Dhananath Fernando  51:38
think we are getting good traction on our podcast. So thank you very much. First of all, for your comments and shares and likes and all that, but you can support more rather than subscribing. That is to become an Advocata insider. So you get about exchange rate, the property market, the stock market, multiple analysis only for insiders. But more than that, what you support is a longer term policy package, the much needed reforms for Sri Lankan economy, and that we stand on an independent basis because we are nonpartisan, independent think tank. So we speak our mind, and as you can see, there are different views, and we try to shape the policy narrative in Sri Lanka in all three languages, in Singa, Tamil, and English. So please become an Advocata insider. It's just 12,000 rupees a year, 1000 rupees a month, and there are multiple packages. So consider becoming an Advocata insider, so we can continue the good work that we do.

charindra chandrasena  52:32
Right. With that, we are going to wind up. Thank you, gentlemen. Thanks, Dana. Thanks, Ravi. Thank you. And thank you for watching. As always, do let us know your thoughts on on this show and all our other shows. It'll help us improve. We are open to feedback, both positive and negative, constructive criticism. So thanks for joining, and we'll see you again next week.


Transcribed by https://otter.ai