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Missing the bus to prosperity: Sri Lanka should now go for comprehensive reforms instead of savourin


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Samaraweera’s commitment to policy reforms

Finance Minister Mangala Samaraweera, lamenting over the country’s missed opportunities in the past due to not making correct decisions at the correct time, has reiterated his commitment to introducing major reforms to facilitate the country’s move to join the rich country club within a few decades. 

Samaraweera has done so when he had commenced wearing his other hat, Media, at the Media Ministry last week (available at: http://www.ft.lk/article/619737/Media-Minister-requests-everyone-s-support-without-division ). 

Relying on private educational institutions

He is reported to have said that the Government will establish, as a part of its reform program, an education authority under which private universities would be licensed and regulated. This will create opportunities for students to acquire quality higher education while remaining on Sri Lankan soil. 

To accommodate deserving students from low-income families in private university education, he had opined that 30-40% of the places at those universities should be allocated to them through a scholarship program. The Government need not sponsor such scholarships, since every private university, conscious of the need for maintaining high-quality standards, would offer such scholarships to top level students on their own to create a competitive learning environment for students to excel in their studies. 

Such moves are known as ‘cross-fertilisation strategies’ under which students are bred within the university system to produce a more talented output by promoting intellectual competition.

IN-1Wishes should be converted into concrete policies

Samaraweera’s commitment to tough economic reforms is praiseworthy, as this writer observed in his article in this series in the previous week (available at: http://www.ft.lk/article/618280/New-Finance-Minister-has-a-Herculean-task-ahead--he-will-win-only-if-he-moves-with-foresight). But this is not the first time politicians have made such public pronouncements. If they are to be successful, they should be converted into concrete economic strategies and plans that should be pursued religiously until their goals are realised. 

Pronouncements as wish lists

In the past, such public announcements were made but they had just remained as wish lists without concrete action. For instance, Prime Minister Ranil Wickremesinghe too made two such bold pronouncements in Parliament when he delivered the Government’s economic policy statement in November 2015 and October 2016. 

These statements were made by the Prime Minister weeks before the Government’s budget was to be presented in Parliament in each year. Hence, it was expected that the Budget would be aligned to the pronounced policy package by allocating public funds to realise them, while incentivising the private sector to carry them forward. 

However, instead of laying the foundation for taking the policy package forward, the budgets concerned took the country mostly in the opposite direction. 

Failed tax reform 

One glaring backward movement was visible with respect to changing the existing tax structure of the country. The Prime Minister wanted to change the structure from the existing high weight for indirect taxes at 80% and direct taxes at 20% to a more sustainable structure with a higher share of 40% from direct taxes and a reduced share of 60% from indirect taxes by 2020.

This is because indirect taxes, though they generate easy revenue for the Government, punish the poor more severely than they do the rich. This is a regressive tax structure and the Prime Minister had quite correctly opined that it should be reversed over a five-year period.

However, the budget for 2016, presented immediately after the statement had been made, had envisaged higher revenue at 87% through indirect taxes and 13% through direct taxes. The actual outcome had been a little better with a lesser share of 83% being generated through indirect taxes, but it was totally opposite to the Government’s plan. 

The Budget 2017 has still envisaged generating as high as 82% through indirect taxes. Obviously, the message in the economic policy statement had not been communicated to the Ministry of Finance or Ministry officials had been reluctant to change their original budget strategies.

A Government living in dissavings

The Prime Minister had also opined in the economic policy statement that the country was living beyond its means, implying that the country does not make enough savings to finance the required investments. However, this charge was valid only for the Government sector since the private sector has been saving around 20% of its income. 

Contrary to this, the Government has always been consuming more than what it earns generating what is known in economics as ‘dissavings’ in the budget. Hence, the correct strategy has been to keep a check on the expansion of the government sector so that it did not have to spend more money on consumption. 

New capital projects without proper screening

However, the budget for 2016, presented in Parliament in November 2015, had proposed a number of new capital expenditure projects which entailed continuous high recurrent expenditure by the Government. 

Another state sector university when existing ones needed more funding

One such proposal was to establish a new university in Malabe called Mahapola University in honour of the founder of the Mahapola Program, the late Lalith Athulathmudali. 

This displayed that the Government, at least the Ministry of Finance, did not have a clear policy on higher education. When the Government could not fund even the existing university system due to lack of resources, establishing another state university would have been a severe burden on the budget. 

It was also unfair by the existing universities which had been starved of funding for both recurrent expenditure and development expenditure programs. The establishment of new universities by the state should not be done in an ad hoc manner but in accordance with a national policy of promoting higher education in the country. 

The current challenge of the country’s higher education system is not the establishment of new universities, but the consolidation of the existing universities and upgrading their teaching and research qualities. 

If the Government is desirous of honouring the late Lalith Athulathmudali, the best course of action would have been to create a Chair in his name in a law faculty of an existing university or establishing a new School of Law named after him.

An import-export bank

The other was the proposal to establish an import-export bank as a public-private partnership, obviously on the presumption that the existing banking sector did not cater to the external trade sector. 

This was not correct since the existing banking sector had been meeting the requirements of the external trade sector by providing working capital in the form of packing credit and post-shipment credit and investment capital trough medium- and long-term credit. However, the establishment of a specialised export-import bank would have served its purpose when Sri Lanka would have moved from short-term financing of exports to long-term financing. That would be some time in the future and not at the present state of the country’s economic development.

Past episodes of failure 

Sri Lanka had experimented with such new banks by establishing an infrastructure bank called the Lanka Putra Bank or LPB and a bank to cater to small and medium enterprises called the National Enterprise Bank or NEB. Both banks became insolvent due to heavy amounts of non-performing loans, granted at the instance of politicians, and eventually had to be rescued by the Treasury by using taxpayers’ money. In this background, the proposal to establish another bank with state funds meant that the Government was putting good money after the bad with no clear cut policy on the country’s banking sector. 

Controlling private banks through state-managed funds

The previous administration had already acquired controlling interests in major private banks by using state or Central Bank managed funds. It had enabled the Minister of Finance to appoint his own nominees as directors and Chairpersons of these banks. 

When the new Yahapalana Government came to power and upheld the policy of allowing the private sector to take the lead, the Minister of Finance was expected to make an announcement that the Government would allow private banks be run by private people. Instead, the Ministry of Finance seized on the opportunity and continued to appoint its own nominees to those banks giving a wrong as well as a confused signal to the private sector. 

At a time when the Government was seeking private sector involvement in economic development, such a bad signal dented the country’s incentive system.

Hence, if an Export-Import Bank would have been needed, the correct policy action would have been to encourage the private sector to set up such a bank.

From wish list to concrete action

Thus, Samaraweera should now ensure that what he has announced is not a mere wish list but something that would be pursued by the Government with dedication. What he should do is to come up with a comprehensive plan for economic reforms and economic strategies for the Government to follow. 

So far, no such plan has been devised by the Government to take the economy forward. However, there are only three more years IN-1.1left for the Government and, therefore, this has to be done pretty fast. 

Preparation of a five-year plan before the General Elections

This writer is aware that just before the last Parliamentary elections in August 2015 such a policy package was designed by a team of private economists under the direction of Dr. Harsha de Silva, the Deputy Minister of Economic Affairs at that time. 

He even made a pre-announcement of this package in June 2015 when he addressed the CIMA Business Leaders Summit in Colombo (available at: http://www.dailymirror.lk/76735/-90 ). 

Harsha was quoted in the report under reference as saying: “A renowned economist in the likes of former Central Bank Deputy Governor Dr. W.A. Wijewardena, former Central Bank Assistant Governor Dr. Anila Dias Bandaranaike, Verite Research Executive Director and Head of Research Dr. Nishan De Mel, JB Securities CEO Murtaza Jafferjee and Sampath Bank Plc Director Deshal De Mel are currently involved in designing the five-year policy.” 

He had also revealed that the proposed five-year policy would be released as a white paper to generate public consultations, then, it would be tabled in Parliament and professional views would be sought to buy in all stakeholders to implement it. He had said boldly that the objective of the Government through this strategy was to create the most competitive economy in this part of the world. 

The steps announced by Harsha have indeed been in accord with how such an important plan should be introduced in a democracy.

The plan disappearing off the radar 

This plan was submitted to Prime Minister Ranil Wickremesinghe before the elections. He is reported to have readily agreed to it. But after the election, with Harsha moving to the Foreign Ministry, the plan disappeared from the radar and it just became a thing of the past. Harsha was destined to live with an unfulfilled ‘wish list’.

An economic forum leading nowhere

The Government tried to come up with a new plan in January 2016 by hosting the Sri Lanka Economic Forum with the support of the Harvard University’s Center for International Development. The forum was attended by bigwigs in the field like Nobel Laureate Joseph Stiglitz, global investor George Soros and Harvard economist Ricardo Hausmann. 

The critics immediately pointed out that the participation of local economists in this venture was minimal and it was purely a Harvard affair. For instance, the Sri Lanka Economic Association, the main body of Sri Lanka’s economists, was nowhere to be seen. The forum was held for two days but no development plan came out of its deliberations. Thus, it was another ‘discuss-and-forget event’ that took place in Colombo.

The need for a new plan today

Now that Harsha has returned to the Ministry of Economic Affairs, it is time to restart working on such a plan since the original plan would have become obsolete after two years. But of course, now Harsha’s Ministry cannot do it alone since there is the need for involving the Finance Ministry as well. Samaraweera has to take the leadership in designing this plan fast. 

The trio which should work toward this end are Mangala Samaraweera, Minister of Finance, Eran Wickramaratne, State Minister or Finance and Harsha de Silva, Deputy Minister of Economic Affairs.

Harsha’s wish to go after small miracles 

Harsha is trying to keep himself occupied by concentrating only on the Colombo Port City Financial Project (available at: http://nation.lk/online/2017/06/03/financial-city-my-biggest-challenge-dr-harsha-de-silva.html ). 

But what the country expects from the Deputy Minister of Economic Affairs is not just continuing to feast on a small miracle, but come up with a comprehensive policy plan to drive the economy toward eventual prosperity. Time is running out for Samaraweera, Eran and Harsha as well as for the nation. 

Engaging private policy tanks a must

Who should assist Samaraweera in designing such a policy package in a hurry? There are two potential candidates. One is the Advocata Institute, the newest policy think tank functioning under the direction of Prof. Razeen Sally, presently Chairman of Institute of Policy Studies, known as IPS. He is in a position to marshal the resources of both IPS and Advocata Institute for this purpose. 

The other candidate is the Verite Research which had helped Harsha to come up with his first five-year economic plan earlier. 

Sri Lanka’s state sector suffers from a talent deficiency for coming up with a comprehensive reform program at the speed at which the Government should work now.

Hence, Samaraweera should consider engaging one of the above institutes or all of them to help him attain his goal. However, whoever who is to prepare the plan has to work in close collaboration with the Central Bank.

Desist from feasting on small miracles

Otherwise, Sri Lanka would continue to take pleasure in enjoying ‘small miracles’ as it had been doing in the past. It is now time to desist from feasting on small miracles and go for the ‘overall big thing’ that would deliver prosperity to the nation.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com) 

 


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