Economic management and the way forward
The Parliament, as the country’s foremost representative institution, has the sole authority over national resources and financial allocations and concurrently has a prominent role to play in fiscal responsibility, the budgetary process, economic development and effective transparent economic and financial management, with a view to assuring sustainable growth and development of the nation in a manner adding equitable value to all people.
It is within our Parliamentary oversight, responsibility and purview to scrutinise and evaluate whether the Government’s implementation ensures transparency and helps to promote good governance and democracy.
In pursuit of the aforesaid accountability, this analysis seeks to develop a report card on the economic governance effectiveness of the current regime, looking at it specifically from the perspective of the people, the civil society at large, the private sector, investors both local and international, the international community of network partners and the nation Sri Lanka as a whole, all collectively being the stakeholders of our nation. The way forward in discharging this Parliament’s accountability is also presented.
Delivery expectations of stakeholders from effective economic good governance
The national economic governance must deliver through effective resource and financial allocations, budgeting and budgetary control, economic policies/systems/structures and effective management and regulations, the following expectations of the stakeholders;
nBasic needs including food, essential utility services, education and skills development , transportation, communications, housing, health care etc. at affordable prices
- Equal opportunities for economic enhancement and full employment
- Security, justice, effective rule of law,
- Social equity and equality, freedoms, rights and social justice
- Peace, harmony, national reconciliation
- Equitable economic development promoting conflict resolution, poverty eradication, achievement of Millennium Development Goals and uplifting the living standards of all people, especially those marginalised and disadvantaged segments living in less developed areas of the country
- Sustainable economic value adding growth
- Low inflation and appropriate interest rates
- Macroeconomic and balance of payment stability
- Economy, efficiency and effectiveness of economic resources, national resource allocations and budgetary spends with due accountability
- Infrastructure ensuring effective and efficient service delivery at economical costs
- Policies and practices attracting investments and capital formation meeting savings gap, trade, services and technology transfers
- Economic freedom and Ease of Doing Business
- Right to information, transparency and anti corruption linked management, regulation and enforcement
- Environment and ecological preservation
- Adherence to international obligations
- Effective regional global international relations
- Effective economic diplomacy
Report card of economic governance
The under noted risk weighted evidence based examples of significant ineffective and unacceptable economic governance and acts of fiscal irresponsibility signals a ‘failure’ based report card for the economic governance of the present regime. This report card must equally acknowledge the associated failure of the accountability of the Parliament, in allowing such a national economic and social tragedy to be delivered by the Executive resulting in a consequential failure to deliver to the stakeholders of the nation their expectations.
- Risks of IMF riots in Sri Lanka
Nobel Prize winner Joseph Stieglitz stated that a nation’s economy is independently analysed by the IMF, but they hand every member the same policy prescription, involving four steps:
1.Privatisation: Actually a prescription for ‘briberisation’ where leaders sell government assets to cronies for fat commissions deposited in foreign bank accounts
2.One size fits all reserve building plan of capital market liberalisation where ‘hot money’ flows in and moves out in tidal waves at the most critical juncture
3.Market-based pricing that leads to IMF riots
4.Poverty reduction strategy led by free market policies
All of this end leading to economic and social tragedy of the common people. This house has a responsibility to validate whether Sri Lanka too is on course for such a disaster as recently seen in Greece.
- Imprudent debt management
The total Government debt at end of November 2011 of Rs. 5.2 trillion shows a significant increase over the end 2005 total debt exposure of Rs. 2.2 trillion. Non-transparent and imprudent debt management, in the face of the Government’s failure to demonstrate that the difference in the discounted future estimated earnings and spends are adequate to service this level of debt, raises the accountability of this House to the young and unborn population of this country who may become burdened by indebtedness due to economic mismanagement of the current regime.
The Government has totally failed to prudently manage the national debt. In fact, this House has responsibility to probe whether the increase in the national debt is consistent with the enhancements in effective social capital benefitting in the long term the under privileged and poverty driven majority population of this country.
- Looming balance of payment crisis
The trade deficit from January to December 2011 expanded 100 per cent to US$ 9.7 billion from US$ 4.9 billion in the previous year. It is expected to grow to as much as US$ 13 billion this year.
The Government is dependent on inward remittances from hard working labour mainly in difficult conditions in the Middle East. This was at a high of over US$ 4 billion last year. Sri Lanka’s foreign exchange reserves fell 23.4 per cent to US$ 6,201 million in November 2011 or US$ 1,897.8 million from an end July peak.
The Central Bank estimates reserves are equal to 3.8 months of imports in November, down from 5.7 months of imports in July. Central Bank estimates end December reserves to be around US$ 6 billion.
It is pertinent for this House to note that the Central Bank expended nearly $ 1.5 billion since the Budget to defend the value of the rupee. All together it appears that the Central Bank expended over $ 2 billion of reserves to defend the rupee.
The Central Bank being forced to withdraw its support to peg the free fall in the exchange rate, exacerbated by the external uncertainties and country risks of continuing balance of payments crisis, has led to the exchange rate devaluing by nearly 15% in 2012. The current selling rate is around Rs. 131.93 compared to the rate at the beginning of 2012 of Rs. 114.88.
The unprecedented widening of the trade gap is mostly due to import expenditure, which includes a large share of non essential and luxury items. The Government policy driven by short-term needs for enhancing tax revenues have been to the detriment of the national economy and future growth prospects.
The overvalued exchange rate and failure to actively promote export growth have demonstrated the unwise policies of the Government. The Central Bank has not considered it a problem owing to the expectations of higher inward remittances, foreign direct investments, and tourism earnings, other service receipts and capital inflows.
This House must critically review the longer-term social costs of migratory labour being used as the buffer to support the Government’s trade policy. It has till recently characterised the problem as a temporary one that would be resolved by favourable developments during the course of the year.
The impression is that the Sri Lankan economy is faring well with a high growth rate of 8% last year and a similar economic growth rate expected this year. With a boast of being the second highest growing economy in the world gripped by economic slowdowns, especially in Western economies, could there yet be a looming economic crisis in the horizon? This House needs transparent information and an opportunity to examine these issues in detail, in order that we exercise our Constitutional duty by the people who elected us.
- Interest rate policy
This House must exercise its accountability to the people by a detailed examination of the interest rate policy adopted by the government, in the face of the imprudent polices hitherto adopted. The National Savings Bank, the poor man’s savings institution, paid interest rates of 5% on savings deposits and around 7% interest on fixed deposits in 2009/10.
However, selected foreign investors like the Templeton Fund were extended, during comparable periods, preferential treatment and extraordinary capital gain opportunities by the Central Bank, thus entitling them to investment yields based on coupon rates of 11% to 13%. This is how the macroeconomic policies of this Government, driven by imprudent professionals, favoured the foreign robber barons and punished the poor citizens.
- Failure to control cost of living
The net effect of the imprudent fiscal policies, inefficient and ineffective spends, lack effective financial management, budgetary controls and risk management, wasteful spends, and perceived corruption, in the context of executive actions lacking transparency and accountability to Parliament, have now translated in to unbearable cost of living increases, which are negatively impacting on the marginalised segments of society, with resultant enhancement of malnutrition, poverty, social disparity.
- Lack of opportunities for economic enhancement and full employment
The net result of the deteriorating fiscal and balance of payment stability enhancing country risks, the depreciation of currency, break down in the rule of law and justice systems, lack of necessary economic reforms, failure to attract local and foreign investments, widening trade gap, perceived corruption and the recently adopted Expropriation Act contrary to international obligations, within a climate of deteriorating international relations, opportunities for economic enhancement and full employment are denied to the people.
- Fiscal irresponsibility due to wasteful national economic spends
The following are only a few examples of the wasteful national economic spends made outside effective Parliamentary control:
1.Commonwealth Games Bid spend in excess of Rs. 1 billion (including ex gratia air fares): The wasteful, extravagant, non risk evaluated and egoistic decision making based spends which added less value in the local economy as most spends where remitted out of the country, were made without any accountability to the Parliament. A majority well informed opinion was always that Hambantota was most unlikely to succeed as a bid, and even if successful, would eventually result in nationally unaffordable further spends of several billion of dollars, thus leaving behind an adverse international image and a ‘white elephant’ underutilised and wasteful infrastructure. This wasteful spend could have supported each district in having a Rs. 40 million worth infrastructure supporting regional development of sports.
2.Mihin Air: In the face of high risks associated with low cost airlines and the challenges experienced in other countries (e.g. ‘the emergence of low cost airlines is a very interesting phenomenon, but should be regarded carefully in the context of regional development. Airports and regional tourism providers should not rely solely on low cost air travel. Low cost airlines can act as a trigger, but cannot be a general cure for economic problems at airports or in regions’. http://www.du.se/PageFiles/5050/ETM%20Thesis%20H%C3%B6rsch.pdf), the continuing investments supporting the loss making low cost airline, with accumulated losses during 2007 to 2010 estimated at Rs 13 billion is act of fiscal irresponsibility. Had the allocation of these funds been diverted to improve the quality and productivity enhancement of railways in Sri Lanka, the common people and business sector would have immensely benefitted.
3.Sri Lanka Cricket spends on new cricket grounds: The COPE Report identified that the expenditure on cricket grounds in Hambantota (Sooriyawewa), Pallekele (Kandy) and R. Premadasa ICS (Khettarama) was initially estimated at Rs. 3.3 billion, whereas the total expenditure had been Rs. 7.18 billion. These spends are now not supported by necessary maintenance spends and have been handed over to the three armed forces for funding via the excessive and non transparent defence spends. Had the extra development spends necessary for holding the World Cup at existing approved venues, including Dambulla and Kandy were resorted, to over half the spend, i.e. around Rs. 4 billion could have been saved and allocated to improve the essential capital spends in improving the education and health sectors, benefitting the common masses.
- Economy, efficiency and effectiveness of economic resources
The following are only a few examples of significant national economic resource allocations made outside effective Parliamentary control:
1.Investments in Hambantota Port: Total estimated construction cost of Phase 1 of the project is US$ 361 million, out of which 85% has been funded by the Ex-Im Bank of the People’s Republic of China, on commercial terms estimated at over 8% interest with a very short period to the commencement of repayments. The total estimated additional costs of the project has shown a substantial increase due to increase of hard material quantities both in basin and channel, increase of price adjustment amounts compensating the changes in the prices of material and labour. The basin excavation and channel dredging contribute approximately 40% of the project cost. Accordingly the total estimated amount of additional loan is estimated at US$ 148 million. Some part of these additional spends are due to an ill timed opening to coincide with an egoistic commitment. The commercial viability of the Phase 1 and how the cash flows yields to service the loan will be derived have not been established before this Parliament along with the firm marketing arrangements committed towards such assurance.
2.Investment in Mattala Airport: Stage I of the Hambantota International Airport project at Mattala is estimated to cost of US$ 209 million. The airport is scheduled to open in November 2012. The Mattala Airport is targeting at least 24 flights per week upon commencement. The national carrier is to invest approximately Rs. 150 million to begin its operations at Weerawila. Economic viability, expected service turnaround productivity and quality, service facilities to meet the needs of the aircrafts and passengers landing at Mattala, marketing arrangements and above all the estimated realisation of cash flow margins to service the debt and interest components have not been established before this Parliament. Further, as it is believed that both Air Lanka and Mihin Air may transfer some of its operations to Mattala, the consequential financial impact on these State-owned enterprises of such a decision have also not been established before this House. It is further reported that this airport will have the second longest runway in the world and that Airbus A380 aircrafts will have facilities of landing. It is a commonly held belief in airline industry that the service of these large modern aircrafts are not economically justified in terms of airport operations, and only the resultant value addition in the economic system as whole, justifies investments and facilities provided at the airports. Unfortunately, this House is in the dark about all of above.
3.The economic viability of Nelum Pokuna Performing Arts Complex: Mahinda Rajapaksa Performance Arts Theatre built on a model similar to the Nelum Pokuna of Polonnaruwa and constructed with the expertise from China cost over Rs. 3 billion. It is believed to be financed by a Chinese foreign loan of around Rs. 2.4 billion. A performance, with at least two prior rehearsals together with necessary costs of lighting, is estimated at around Rs. 1.2 million. At this cost it will not be a viable option for staging performances aimed at common citizens’ viewing. Based on the likely occupancy of this complex with private funding, it appears extremely unlikely that the estimated cash flows will be sufficient to meet costs of interest servicing, maintenance, running costs and associated fixed overheads. It is in this likely environment that the operations and maintenance accountability have been probably been assigned to the Army for funding via the non-transparent defence establishment budgets.
- Rule of law, law enforcements and justice systems
It is clear that the business environment and generation of local and foreign new investments critical to meeting the investment gap in driving sustainable economic growth have been seriously and negatively impacted by the governance systems failure to generate required confidence in the rule of law, law enforcements and justice systems. This is yet another area requiring the immediate attention of this House in enhancing effective economic good governance. The recent passage of the Expropriation Act and several reported incidents involving highly connected persons and irresponsible behaviours of politically networked individuals have seriously damaged the business confidence, so essential for creation of new employment opportunities in value adding sectors of the economy.
- Effectiveness, prudency and transparency of the management of public savings institutions
This House in the discharge of its accountability must closely examine whether the public savings institutions including the EPF, ETF, State banks, State pension and State-managed pension schemes are operated within expected best practices of prudency and transparent management by persons of competency and integrity within accepted codes of conduct and ethics solely for the benefit of their effective stakeholders. A failure in this area can result in explosive common citizens’ reactions as experienced when an imprudent and unacceptable legal reform was proposed by the Government.
- Effective international relations and economic diplomacy
The policies, management practices, key personnel competency and commitment to processes of effective networking and good relations in maintaining effective international relations and economic diplomacy initiatives appears to be yet another area of failure in governance, which will have a severe long-term damaging impact on Sri Lanka and its people.
- International obligations
Sri Lanka appears to have been tagged with the label of a nation not caring to meet its international economic, social, rights and societal norms and obligations. This will deter trade, investment and technology flows essential for sustainable economic development.
- Trade and investment agreements
The failure to conclude an effective, transparent, sustainable and national economic value adding set of trade, services, investment and technology transfer agreements with fast growing India, enabling Sri Lankan business sector to effectively network and benefit from the bigger market and have access to resources of India, targeting the even more faster growing Southern Indian states, all built on old relationships and mutual trust will be to the detriment of economic growth of Sri Lanka. This House must examine this strategy at the earliest.
- Operations of the stock market detrimental to common citizen interests
The series of regulatory failures and looking the other way at critical times by the authorities on insider dealings, related party transactions and market manipulations, driven by egoistic demands towards building the globally best performing stock market in Sri Lanka, has made many already super rich persons enormously rich, whilst subjecting the marginalised majority to a process of highway robbery. These unscrupulous elements have made use of State managed provident and similar funds as dumping grounds for their overvalued share trades. There are a large number of pyramid schemes in operation that is making the poor and unaware citizens to lose their savings and increase their indebtedness. It is common market understanding that with correct irregular network payments, any quantity of stocks at any desired price can be placed amongst the large pool state managed investment funds.
- Another financial crisis on the horizon with leasing and finance companies
With the likelihood of market interest rates taking a spike and the finance companies and leasing industry operating on short term borrowings in an environment with interest rates, tenor and liability mismatches, there is a probability that a repeat of a financial crisis as seen three years ago repeating in the next 12-18 moths. It is unfortunate that the Regulators are taking a blind folded attitude towards this potential risk. This House should debate its likelihood. This risk is further exacerbated by the phenomenal growth seen in the lease and financed sale of vehicles (over one weekend a leasing company in Kurunegala contracting 3,000 new vehicle leases) and intermediate goods and household goods growth last year first three quarters expected at over 40%).
- State interference in governance of private sector banks
State interference, using the voting power of shares invested in by the State-managed Provident funds and insurers, in the management of private sector commercial banks, including in key appointments even of independent directors, is a recipe for disaster negatively impacting on the key stakeholder of such banks (i.e. citizen depositors).
- Money laundering
Despite necessary legal framework being in place, due to network links and power politics, pyramid schemes and other money laundering and corrupt financial transactions are continuing unabated with the frequency and size of transactions as reported expanding exponentially, (including the transactions and remittances using spurious deposit schemes, land transactions, stock market and fake import export trades), signals emerging amber lights in economic governance.
- Post conflict economic development facilitating national reconciliation harmony and empowerment of marginalised and disadvantaged segments of society
As the national legislature this House must critically review whether the economic development policies, priorities and national resource allocations and budgetary spends authorised are consistent with our collective accountability towards post conflict economic development facilitating national reconciliation, harmony and empowerment of marginalised and disadvantaged segments of society across the island. A prima facie review of the outcomes of such economic development initiatives, bench marked to positive international experiences, show that the resource allocations and development initiatives have failed to significantly touch the lives and livelihoods of the targeted communities across the island and fall far short of similar achievements in Rwanda post the tragic incidents and years of conflict it went through.
- Ineffectiveness of independent institutions and regulatory control bodies
With all independent institutions and regulatory bodies appointed under enactments passed by this House failing to meet civil society expectations and thus destroying the fundamental base of effectiveness and control over transparent and integrity driven economic governance, this House must use its capability to have these institutions made effectively functional led by persons of high competence, independence and integrity.
The way forward
The way forward in the context of the above revelations lie in this House taking full accountability for national financial allocations and discharging its responsibility for effective national resource allocations and spends, assuring effective economic good governance adding value to the people and the nation.
Towards the realisation of the above objective I propose that:
- This House resolves to meet for a special session held over three days to review all issues relevant to enhancing effective economic good governance and adding prioritised and optimised value to our people and Sri Lanka. The first two days of the proposed session be devoted to get necessary, information and clarifications from the senior administrators, including the Secretary to the President, Secretary to the Treasury, secretaries of key ministries, Governor of the Central Bank, Chairman SEC, chairmen of State banks, Ports Authority, Airport Authority and others who should be summoned before this House to answer our questions in an open and transparent way. The third day of this special session should be dedicated to debate of the issues and recommend to the Executive the way forward.
- This House further resolves that sessions similar to above be programmed bi-annually in the Parliamentary Calendar.
- This House in addition resolve that the Annual Budget process be expanded by:
Holding a special midyear review by the House of the economy following the presentation of the midyear economic review by the Minister of Finance.
- The committee stage review of the budget be restructured, where this House supported by invited professionals and experts review in detail along with he key administrators, all key national resource allocations and proposed financial spend allocations and their priority and focus on expected outcomes( similar to the process followed by the New Zealand Parliament).
- The Chief Accounting Officers of all relevant Ministries through the Secretary to the Treasury, present pre commitment approval report (with the objectives, resource allocations, expected outcomes and national economic and social value addition, time plans, key action plans, risk mitigation steps and accountability for realisation of results and control of budgets) for review and due endorsement by this House, where all spends on a project or capital or revenue spend per accounting head over Rs. 10 billion for budgeted items and Rs. 5 billion for unbudgeted spends.
- The Chief Accounting Officers of all relevant Ministries through the Secretary to the Treasury, present to this House post audit reports, not later than one year after completion of all spends on a project or capital or revenue spend per accounting head, over Rs. 10 billion for budgeted items and Rs. 5 billion for unbudgeted spends.
- This House Resolve that an effective and practically enforceable Right to Information Act be presented and approved by this House before the presentation of the 2013 Budget.