Back to pre-1977 era, a shocking reality

New proposals would bring hardships to citizens, but would be far simpler than those enforced during the pre-1977 era – Pic by Shehan Gunasekara

Although Gotabaya Rajapaksa was elected President of Sri Lanka, he was toothless with powers limited only over the armed forces. He received powers on 30 October after signing of the Parliament-approved 20th Amendment by the Speaker and the Gazette notification. Although large numbers including Buddhist priests opposed 20A, few understood the disastrous situation the President inherited.

Inheritance

In late September, Moody’s, the world’s economic watchdog, downgraded Sri Lanka’s long-term foreign currency ratings from B2 to Caa1, just one step above being bankrupt. Within two weeks of the Moody’s rating, a high-level Chinese delegation arrived in Sri Lanka for discussions and promised a $ 500 m concessionary loan. Hot on the heels of Chinese visit, United States Secretary of State Mike Pompeo arrived in late October.

Empowered President

Pompeo’s visit took place during the interim period of approval of the 20th Amendment by the Parliament and signing by the Speaker, transferring administrative powers of the Government from Prime Minister to the President.  

Impending disasters

The country the President received is facing multiple disasters, which need to be addressed immediately. They include,

a. Massive foreign debt payments due as short term, medium term and long term.

b. Shortage of local funds, with additional expenses with corona epidemic.

c. External threats as economic sanctions unless economic relationship with China is curtailed and shared with other countries.

Foreign loan payments  

The immediate issue is the settlement of $ 7.1 billion loans between now and end August 2021. Current foreign reserves stand at $ 6.4 billion which were mostly borrowed rather than earned. In addition settling further loans of $ 4.5 billion due each year until 2023. Until these debts are settled, the country would be in a critical situation. Meanwhile the country’s foreign debt stands at $ 56 billion or about 86% of GDP.

Our foreign earnings are less than imports, made worse by the corona issues. This year the country nearly managed to balance imports vs. exports by complete stoppage of vehicle imports and other non-essential items. In addition, garment exports as well as workers remittances were only slightly lower, with tourist earnings disrupted. Thanks to corona there were no foreign tours by politicians.

Choices before the President

For settlement of debts the President has a number of options.

a. Borrow from China, the easiest solution, but would create problems with the West.

b. US Secretary of State Mike Pompeo advocated borrowing from International Monitory Fund (IMF), meaning in return to low interest long term loans, heavy restrictions on imports, reducing Government expenditure including employee numbers, etc., drawing protests from public.

c. The middle-path, proper implementation as a non-aligned country. Getting help from all friendly countries including India, Japan, US and China. Although the country claimed to be non-aligned, during the past decade all economic dealings were with China. Thus the country need to show immediate positive actions for other countries to accept the change of policies.

d. The country’s largest export market is the US mostly garments. Considering all President Gotabaya informed that he would consider all avenues.

Reversal of ECT

The last Government signed a MOU to develop and run the ECT terminal with India, Japan and SLPA in 2019 with Sri Lanka owning 51%, but without further progress. The SLPA trade unions wished the ECT be run by them and went on strike, which was settled by MR. The Terminal commenced container handling operations on 27 October by offloading containers from a ship, inaugurated by the Minister of Ports and Shipping. 

The opening took place few hours prior to landing of US Secretary Mike Pompeo, who arrived after discussions with India. If India wished Pompeo to persuade SL to expedite handing over ECT, the entire plan evaporated, a slap to Pompeo by MR. Is it a coincidence that PM Mahinda failed to meet Pompeo as originally planned?

The Sunday Times online on 1 November reported that Sri Lanka had decided that India’s Adani Group which is building a port in Vizhingham, India will handle the management of ECT operations, with a 49% stake with its local partner – John Keells Holdings and SLPA holding 51%. Is it a coincidence that Gotabaya took over power with 20A approval only few hours before?

Help from IMF

The IMF had stated they will consider any help after the Budget. Does it mean that Gotabaya was in contact with IMF representatives while 20A was under discussion in Parliament? With the President’s new policy of friendly relations with all nations, settlement of massive loans would be possible.

But the main issue stands as insufficient foreign exchange earning vs the imports and extremely poor local income compared to expenditure needing corrections, demanded by IMF to be included in the next Budget. Meaning the Budget prepared under MR would undergo serious modifications, prior to presentation to the Parliament on 17 November.

Lowering deficits

The foreign exchange deficit could only be addressed by increasing exports and reduced imports. Increasing exports would be difficult and time-consuming, reducing imports could be faster but unpopular. Lowering local expenditure would be most difficult as most expenses are on staff salaries.

2021 Budget

The 2021 Budget would indicate the direction the Government is forced to move to address the issues. Imposing of import restrictions would mean the country moving towards a pre-1977 type of economy, which people would not dare to imagine.

Pre-1977 restrictions

During the era food was a major concern. Most rice for consumption was imported and serving rice in hotels and restaurants on Tuesdays and Fridays was prohibited. In addition transport of rice across the district boarders was banned. Each family was allowed one loaf of bread a day, which was of poor quality. Each family got only one pound of sugar a week, additional sugar costing over twice. Import of chillies, potatoes and onions were the major banned items.

On the positive side, the Sirimavo Bandaranaike Government prioritised agriculture research resulted creation of H 4 variety of rice responsible for improved yields, also the current potatoes and B onion cultivation are the results of the research efforts. Meanwhile hard working northern farmers cultivated chillies and red onions and became prosperous.  

In addition local industries commenced manufacture of halted imported items. But after restrictions were eased by the J.R. Jayewardene Government, most industries collapsed, unable to compete with imports.

Current problems

Now the country has developed, the problems would be different. The rice production has improved, making the country almost self-sufficient. The year 2020 had a good crop and the production exceeded requirement. But poor Maha rains in the north and east are causing problems to paddy farmers. But farmers in Mahaweli systems H and C also in Polonnaruwa region with water from Moragahakanda would have no issues with good rains in upcountry.

Curtailing imports

The Government cannot curtail import of raw materials for exports and local industries that will keep employments and exports intact. But how about wheat flour, sugar and milk consuming most foreign exchange, but needed by the masses? If taxes on wheat flour is raised, consumers would be forced to move over to rice, whose supply is also limited.

Of sugar consumption 10% is produced through Pelwatte and Sevenagala Sugar Factories. The Kantale Sugar Factory in the 1960s was considered the largest sugar production facility in Asia and was running at a profit. However in 1993 the UNP Government privatised the factory, but ended with closure by end of 1999.

Meanwhile, SugarAsia magazine in July 2020 disclosed that Kantale sugar factory would be restarted as a multi-functional project by a consortium of Israel, London, Singapore and Sri Lankan investors. The venture would be operated as a build own and transfer (BOT) project on a 30 year lease, showing discussions had taken place.

Of the milk requirement local production is only around 50%, the deficit is met by imports. President Gotabaya in January directed officials to improve production of liquid milk by small-scale farmers to meet demand for liquid milk. He ordered raising purchase price of liquid milk to Rs. 70 a litre. However in the market one litre packs retail at around Rs. 260, is it fair? But private sector buyers have been conducting programs to improve production of small farmers. In addition requirement of butter and cheese are supplied locally.

What would be the President’s policy on wheat flour, sugar and milk? As Minister Bandula Gunawardana stated a family could manage with 2 kg of sugar a month, poor family could be given 2 kg of sugar a month at Rs. 130 and for others at a higher price.

Electricity and oil

The country failed to establish even a single major electricity generating plant since Norochcholai in 2014 and is purchasing oil-based power at an extremely high cost. Early this year the Cabinet approved the award of 300 MW LNG based power plant at Kerawalapitiya to Lakdhanavi to deliver power at around Rs. 15 a unit. Another 300 MW plant by the same company capable of running on LNG has been running on oil, delivering electricity at nearly double the price for almost 10 years as CEB was unable to supply LNG. Even today CEB has no firm plans to import LNG.

But a ray of hope over the horizon. In August 2020, BOI signed an agreement with Pearl Energy, a local company to set up a $ 97.2 million floating liquefied natural gas storage unit off Hambantota with plans to re-export fuel to Maldives and South Asia, using small LNG carriers. The FSRU with a million tonnes capacity per annum is backed by Omar Siraj, a Saudi Arabian investor. The investors are confident that FSRU would commence functioning in six months and also supply local LNG requirements.

The President needs to discuss with Pearl Energy and force CEB to convert most thermal power plants to run on LNG.

But until the conversion is in place, the Government would be forced to withhold expensive power purchases reducing oil usage. Meaning, supply uninterrupted power to factories and restrict electricity to domestic users, resulting few hours of power cuts.

Electricity from wind and solar

CEB claims coal power is cheapest, ignoring loan payments for power plants by the Treasury. With improved technology, electricity from solar and wind power is cheapest at around Rs. 6 per unit for plants over 100 MW. When CEB called tenders for 10 MW solar plants, it received offers for less than Rs. 10 a unit. 

But over the years CEB has been sabotaging solar power production. After selecting tenderers and agreeing power purchase price, CEB delays contract awards for over two years. With the depreciation of the rupee, cost of imported equipment rises and tendered prices become uneconomic.

The future electricity requirement could be by hydro, solar and wind power plants balanced with LNG power plants, offering the cheapest power, and the President who proposed 80% power through renewable sources needs to push CEB in the direction. Also future investments in the power sector would be through the private sector, easing Government finances.

Local expenditure

A major reason for the current situation are the expensive foreign funded projects (mostly Chinese) without contribution to economy and the Rs. 10,000 salary increase to Government staff. Poor local income is a major issue, made worse with tax reductions in the 2019 Budget, also free education, health, and Samurdhi benefits for the poor.

University students claim being poor and are given financial assistance. But if multi-storeyed office buildings are constructed near universities and rented to IT companies, they could offer students part-time jobs as data-entry operators, making assistance unnecessary, and it would also lead to employment in the private sector after graduation.

The proposal to increase university student intake and additional 10 universities need to be immediately stopped and the quality of existing universities be improved to produce employable graduates, meaning majority in Arts streams in schools be converted into IT.

Samurdhi benefit distribution has been very liberal and needs reassessment. They need be directed towards employment, which are available without takers. If each beneficiary is reevaluated every 3 months and having to show efforts taken to secure employment, the numbers would reduce drastically.

The State sector employs nearly 1.7 million and the President employed a further 160,000. How could these be paid? The Government offices are overstaffed and most State-Owned Enterprises are running at a loss would need correction or closing down. Stoppage of imports and other measures would increase cost of living, reducing value of salaries and unions will demand salary increases. The President cannot give in to their demands and reduction of Government expenditure would require drastic unpopular measures.

Unnecessary projects

Even under financial crisis, politicians wish for massive projects without early benefits. UDA has proposed 5,000 houses for middle-class families to be purchased with 6.25% bank loans, for a period of 30 years. A few weeks ago Access Engineering had been awarded a Rs. 9.37 billion contract to build 400 houses in Elliot Place in Borella. Under current economic conditions these projects need to stop.

Developing with joint ventures

Although the country is short of funds, development projects, especially those reducing the country’s future expenses, could be achieved with joint ventures. The expansion of Kolonnawa Petroleum Refinery is proposed, which is also short of storage. A feasibility study to upgrade Sapugaskanda Oil Refinery in 2010 has an estimated cost of $ 2 billion, an almost impossible sum under current conditions.

Indian PM Modi proposed development of unused oil tanks in Trincomalee already leased to India for 99 years as strategic oil storage. Thus Trincomalee Port could be developed as a petroleum hub with a petroleum refinery to supply the country’s needs. It was noted that whenever India wished a project in Sri Lanka, Japan moved in to finance, the same theme could continue.

In addition, Japan proposed development of roads around Colombo to avoid traffic jams. The proposals including cancelled LRT project due to incorrect advice. The President needs to go ahead as Japanese funding comes with 40-year repayment, 0.1% interest with a 12-year grace period, giving sufficient time to overcome current issues. The road expansion projects would be slow due to land acquisition issues, but would give local contractors work in difficult times.

Balanced investment

With the President’s plan for balanced relations with all countries, the country would be able to tide over future loan payments. But satisfying demands of the IMF would require amending local policies that created the situation.

Balanced relations would allow continuation of the Port City, threatened by US sanctions and the Industrial Estate in Hambantota, both bringing substantial foreign investments and employment opportunities to locals. Hambantota development would also make Mattala Airport functional.

Reducing imports would result stoppage of vehicle imports for minimum three years. Thereafter the country could allow only electric vehicles, thereby encouraging rooftop solar power, reducing fuel costs to zero. Restrictions on essential foods would be a tough political decision.

The import stoppage of onions and potatoes would result in price escalation, but production would improve, bringing prices down. But inessential goods could be completely stopped or be permitted with semi-luxury taxed at 100% and luxury at 200%, making them beyond poor, but without queues and cards for each household as pre-1977.

When the President appointed new State ministers, he foresaw the need to increase local production. New proposals would bring hardships to citizens, but would be far simpler than those enforced during the pre-1977 era. With the new import control and revenue proposals Moody’s will upgrade the country to a more acceptable level. In a few years the results of controls would see a more prosperous and balanced country, which would be sure to be appreciated by the citizens.