A child’s guide to MCC Compact Sri Lanka

This project will not increase the country’s growth rate immediately. It will simply address solutions to some of the most critical constraints which the country’s economy faces today. It is a facilitator and not a final solution provider

Intelligent children, unlike some of the adults, are curious, probing and questioning. They do not jump to conclusions until and unless they are convinced of facts that have been presented to them. Asani, a student in the Advanced Level class in a leading school, is such a curious child. She had heard and read much about the Millennium Challenge Corporation or MCC Compact Grant for Sri Lanka and had not been convinced of the arguments made by those who stood for it or who criticised it. She wanted to explore it by herself. 

Fortunately for her grandfather – Sarath Mahaththaya, an ex-Director at the Department of External Resources – visited her family allowing her to question him on some of the grey areas in her mind about the MCC Compact Grant. This is the conversation between Asani and Sarath Mahaththaya:

 Asani: Sri Lanka’s main political leaders have been in one voice against the MCC Compact Grant. This is a unique situation in which they have spoken the same language on an issue. What is the reason behind their objection to this grant?

Sarath Mahaththaya: This is quite natural because Sri Lanka is presently going through an election process. There are some people who are suspicious of anything relating to Americans. Even if Americans come with good intentions, these people have fear that there is some ulterior motive behind it. This is some weakness in human beings, though they have now evolved into what is known as Homo sapiens or Man the Wise. In this uncertain world, there are all kinds of risks and dangers faced by them. Hence, their brains are programmed to be cautious and that has been done for their own good. 

But, many have overcome this weakness and can look at things from an open mind and make rational and logical choices. Unfortunately, it is these people who harbour fear are the most vociferous. At an election time when the clock is clicking fast, no candidate can spend time in explaining matters to these people. Therefore, they take the most pragmatic action. That is to silence them by giving into their fears. It allows them to spend time for other important matters relating to the election campaign.  

This is exactly what the four leading candidates in the present Presidential Election have done. It does not necessarily mean that they are convinced of the stand they have taken regarding MCC Compact Grant. 

A: That’s interesting, Grandpa. But what will happen after one of them gets elected? Do they have to continue with the same stand or change it?

S: Once in power, they have no luxury of rejecting everything that comes in their way. Their policy advisors, if they are worth of their salt, have to take an impassioned view on MCC Compact Grant. During the election time, all these candidates were in a dream world thinking that they were the most powerful. But, after getting elected, they’ve to face the reality of the country’s economic conditions and come up with programs to help the people who have elected them. However, they’ve to do it without losing face. 

So, my reading is that they’ll just pretend that they are renegotiating the compact grant with MCC authorities to take out the harmful conditions. My guess is that they would sign the same agreement but proclaim that it was a renegotiated one. This happened in 1970 during the July elections. The United Front led by Sirimavo Bandaranaike was highly critical of Dudley Senanayake government that the latter had sold Sri Lanka out to the World Bank by signing the loan agreement for the Mahaweli Project. But after they came to power, they implemented the project with a renewed vigour and urgency. Hence, whoever who will come to power at the election will have to be pragmatic.

A: Grandpa, my teacher said that we don’t have to get American support to build our country. Her point was that if King Parakramabahu the Great could build reservoirs as big as oceans without foreign support, why can’t Sri Lanka do it now? I think she is correct.

S: Asani Duwe, your teacher is both right and wrong. She is right about King Parakramabahu building those reservoirs without foreign aid and using purely domestic resources. But those days, there weren’t foreign aid facilities or foreign or domestic capital markets. Hence, the question of borrowing or getting foreign grants was out of order. She was wrong because she hadn’t explained to you that King Parakramabahu’s budgetary policies were completely different from the type of budgetary policies being followed by modern governments. 

King Parakramabahu and all other ancient Sri Lankan kings ran surplus budgets by spending less than what they got as tax revenue and profits from their enterprises. Hence, there wasn’t other source than using domestic resources to build those reservoirs. Their tax policy was very prohibitive. Since all the lands in the country belonged to the king, those who tilled the lands had to pay a very high tax. Farmers had to pay a tax of up to 40% of the harvest to the king. 

In addition, there was the compulsory king’s service or Rajakari Kramaya in which all the able-bodied males had to serve the king up to six months without getting paid. That was similar to the modern day polls taxes in which all those who have a body had to pay a tax to the government. The Rajakari Kramaya imposed an effective income tax of up to 50% on all able bodied males. With that kind of high tax system, kings could easily use only the domestic resources for building the nation. Modern governments haven’t got that luxury. 

A: Why do you say that modern Sri Lanka hasn’t got the luxury of using its own resources for economic development?

S: Because Sri Lanka is poor not only with respect to resources but also with respect to savings. At the time the country gained independence in 1948, the British rulers had left it with the largest amount of foreign reserves sufficient to finance 17 months of future imports. During that period, the country didn’t have problems of domestic resources and the Galoya Project, the massive multipurpose project was financed out of completely domestic resources. Since then, Sri Lanka ate up all its savings and today, it is in eternal deficit with respect to foreign payments. As a result, if it does not borrow, it cannot make its payments. 

The Government is a notorious consumer using more than its revenue for consumption. The private sector on average consumes about Rs. 78 if it earns Rs. 100. Thus, the nation as a whole saves only about Rs. 20 if it earns Rs. 100. This is insufficient for the country to undertake investments on the scale it has to do. Therefore, Sri Lanka has to depend on savings transferred to the country by foreigners. 

If it wants to use only domestic savings for investment, it has to cut down its consumption drastically like modern day Singapore or China. Those two countries practically have savings rates of about 40 to 50% of their earnings. For Sri Lanka, unless people are willing to tighten their belts, they have to use savings by other countries, no matter whether it is from Americans, Indians or Chinese or any other nation. 

But people are unwilling to cut their present consumption levels. That is why it is a luxury for modern Sri Lanka to finance its investments purely out of domestic resources. 

A: My teacher also said that USA has an ulterior motive in giving this grant to Sri Lanka. Why should they do it? She believes that USA is trying to convert Sri Lanka to an American colony through this type of aid.

S: Once again your teacher is perfectly right. World’s aid flows have been determined not on sympathy or economic factors but on country interests. This is true whether it is from India, China, Russia, EU or USA. Sri Lanka being a non-aligned neutral country during the whole of its post-independence history has tapped all these sources to get resources for its investments. China saves more than it invests in the domestic economy and therefore has to transfer its excess savings to other countries. That’s why its presence is pretty much seen in Asia, Africa and even in USA. 

But it has tilted the geopolitical balance in the region badly towards that country. Americans and Indians don’t like it and want to stop the spread of Chinese influence in the region. So, both are competing to maintain their grip on the countries in the region. So, India is lending huge amounts of money to Sri Lanka. Similarly, USA also has entered the fray now. 

So, it is pragmatic for Sri Lankan leaders to welcome both these donors and receive funding from them for investment. That is why I said that Sri Lankan leaders also do not enjoy the luxury which they had in criticising these countries prior to election once they are elected to office.

A: Grandpa, I read some people arguing that USA is trying to militarily intervene in Sri Lanka’s affairs compromising its sovereignty. They have said that Sri Lanka should stop this invasion at all costs.

S: Asani Duwe, there’s a point in what you say. But economic choices involve calculating costs and benefits and choosing the one which is least costly. In this case, getting US aid is the least costly option available to Sri Lanka compared to confronting them. On the other hand, with the advancements in technology today, USA doesn’t have to come to Sri Lanka in the guise of giving aid to dominate it. It has the capacity to collect all the necessary data if it wants to control Sri Lanka. 

For instance, if a farmer in Polonnaruwa goes out of his house in the night to enjoy the open air, US satellites can photograph the mosquito sitting on his nose even before the farmer notices a mosquito there. If USA wants, it can really punish Sri Lanka through other means. We export about a quarter of our products to USA amounting to about $ 3 billion every year and import about $ 500 million from that country. So, we have a huge trade surplus of about $ 2.5 billion in trade with that country and we use it to import medicines from India and cars from Japan. 

I shudder to think what happens to Sri Lanka if USA imposes trade sanctions the way it has done to Iran or Venezuela. That would really kill all of us. It is therefore in our interest to do trade in collaboration with that giant instead of confronting it. Our political leaders are totally aware of this ground reality. That is why they don’t speak anything against USA openly and have allowed some rabble-rousers within the respective party to do the job for them. 

A: Thanks, Grandpa, for the explanation. Can you tell me about this MCC Compact Grant to Sri Lanka?

S: MCC is a new aid disbursement agency created by US Congress in 2004 similar to the US Agency for International Development or US AID which has been in operation in Sri Lanka for a long time. MCC provides grants to eligible countries for development projects that aim to improve the living of people. A country which is still a lower middle income country or below is eligible to receive support from MCC provided it has passed 20 tests covering three major areas, namely, economic freedom, ruling justly and investing in people. 

Economic freedom component has six sub-components, fiscal policy, inflation, trade policy, how women are treated in the economy, land rights and access, access to credit and ease of starting up business. Ruling justly contains political rights, civil liberties, control of corruption, government effectiveness, rule of law, and freedom of information. The last criterion – investing in people – has six sub components such as health expenditures, primary education expenditures, natural resource protection, immunisation rates, girls’ secondary education enrolment rates and child health. 

A country becomes eligible to receive assistance if it has passed at least 12 out of 20. For this purpose, MCC prepares a country scorecard and what is available for Sri Lanka is the one prepared for 2019.In that scorecard, Sri Lanka has passed 13 and failed in the case of fiscal policy, gender in the economy, land rights and access, freedom of information, health expenditures, and primary education expenditures. These seven areas should be improved in the future. Sri Lanka had attempted to obtain MCC funding as far back as 2005 but could not because it could not pass a minimum of 12 tests. 

However, in 2016, MCC Board had approved Sri Lanka as an eligible country and, to receive the funding, Sri Lanka Government in 2017 had completed an analysis which a country should do compulsorily before receiving assistance known as a ‘Constraints Analysis’. This analysis is important for any development policy implementation because without identifying the constraints the country is facing, it cannot implement the policy. 

Experts on this subject say that if a country does not tackle the constraints, the constraints will tackle the countries. It should be mentioned that the past development policies have not been successful because the country had not been able to tackle constraints successfully. 

A: But what is this neck-breaking hurry which Sri Lanka Government has shown in bringing this compact into force?

S: We have to be clear on one thing, Asani Duwe. That’s, Sri Lanka passed the threshold of the lower middle income country to become a higher middle income country in June 2019. Therefore, it is no longer eligible to receive MCC support. Hence, after 1 January 2020, Sri Lanka cannot expect to receive this facility. The present Compact is being considered by MCC because the work in connection with the Compact was started in 2016. 

However, there are two requirements which Sri Lanka has to satisfy before 15 December 2019 to receive this facility. One is the signing of the Agreement by Sri Lanka and having the necessary laws passed by Parliament. MCC Board is expected to meet later in December and by that time these two requirements should have been met. This is the reason for the hurry with which the present Government is working. If the Government cannot do it before the deadline, Sri Lanka will lose MCC Compact forever.

A: Grandpa, can you describe what this Compact means?

S: Out of $ 480 million, $350 million will be used for road development component. It has three main components. One is the easing of the traffic congestion in the Western Province which is in fact a menace. The project doesn’t aim at eradicating the menace but to provide a relief so that the country will have a breathing space to implement a permanent solution. Accordingly, the eight main roads that feed the city of Colombo will be improved and traffic causing 132 junctions will be widened to allow traffic to pass easily. 

In addition, 50 places in which there are pedestrian crossings that cause traffic to move slowly will be provided with overhead or underground crossings without impact on the vehicles passing those sections. In addition, public bus service, both CTB and privately owned, will be modernised by using advanced information and communication technology to issue e-tickets and better coordination of time tables. The third one is the development of a ring road net connecting major towns like Dambulla-Mahiyangana-Bibile-Moneragala-Rathnapura-Kegalla-Kurunegala-Dambulla with a class A road net and connecting them to Western Province where there is the major market in the country.

In the case land title modernisation, moneys will be used to convert the present paper based title deeds to e-titles and improving the valuation capacity of the Valuation Department. 

This project will not increase the country’s growth rate immediately. It will simply address solutions to some of the most critical constraints which the country’s economy faces today. It is a facilitator and not a final solution provider. 

A: Do you think this Compact will increase the country’s growth rate to a higher level?

S: Don’t have such high expectations. The Compact will certainly help Sri Lanka to lay foundation for high economic growth. There’re many more which Sri Lanka has to do in order to accelerate economic growth. Combined with those strategies, This Compact will help Sri Lanka to attain a higher prosperity in the years to come.

A: Thanks Grandpa for your explanation. I now know what MCC Compact Grant means.

S: You’re an intelligent girl and keep this thirst for knowledge going unquenched. Go by what Steve Jobs of Apple fame told the passing out graduates from the Stanford University: “Stay hungry; stay foolish”. 

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)