Reputed Economist and UNP Member of Parliament Dr. Harsha de Silva, while talking about the crony capitalism in the country, warns that the situation is only going to get worse within the new set up, where economic management has been completely concentrated among a very few people. Dr. de Silva, who is known for voicing his opposition to the economic policies of the Rajapaksa regime, reveals he was approached to support the Government during the 18th Amendment Bill and stresses he is not for sale and when the UNP establishes a government, he will have a key role to play in that government. Following are experts:
Q: What do you have to say about the country’s economy?
A: This is a text book example of crony capitalism. We can clearly see the movement of wealth from poor to the rich. There are multiple examples for me to say this. The ‘Chinthanaya’ has ended. Now we have ‘Mahinda Vindana’ and ‘Mahinda Hinsana’. ‘Vindana’ is the crony capitalists who are now going to start to benefit. ‘Hinsana’ is the general public that will have to pay.
The last set of taxes enforced on food has still not been brought to Parliament. It was only gazetted. Nobody talks about it. The last couple of times the Government brought it to Parliament after the period had lapsed.
I have being arguing about this whole thing about duty reduction of vehicles. I am not against reducing duties, which were exorbitant. Tax policies must be fair and equitable. When people can’t afford to eat, taxing food is not equitable. It is regressive. But that is what is happening.
Rich people make billions on the stock market. There is no capital gains tax, but unfortunately people who buy a tin of salmon have to pay Rs. 85 as tax. From dhal to onions, everything is taxed. That is just one example of this whole ‘Hinsanaya, Vindanaya’ story.
Take the latest story about Shell Gas. The ‘Mahinda Chinthana’ said there would be no privatising. Now what are they going to do? They are going to nationalise the stake from Shell. There were newspaper reports quoting LAUGFS Chairman Wegapitiya saying he is fairly sure that he is going to get the Shell stake.
Wegapitiya sees an opportunity as a businessman. But didn’t the ‘Chinthana’ say there wasn’t going to be any privatisation? Who is going to benefit from this privatisation? Definitely, the people are not going to benefit from it. People will have to pay even greater taxes whereas a few people will benefit.
Look at the example of flyover bridges. Ravi Karunanayake questioned in Parliament why tenders were not called for flyover bridges in Dehiwala and Nugegoda. It is learnt that these flyover bridges were built at approximately twice what it would have cost if they used concrete. Furthermore, it would have lasted for 100 years if concrete was used.
The Dehiwela flyover, said to be the world’s most expensive flyover, already has a sign saying it is only for three-wheelers, motorcycles and cars. That money has been taken from the HSBC. It has to be paid at a highly inflated cost. Who pays for it? The people have to pay for it through enormous taxes on their food.
A total of 32 cents of a one minute mobile phone calls goes to the Government as taxes. Who made money off the fly-over bridges? I am not going to comment by naming people, but there is a fair amount of suspicion that the company which took the contract was in fact found guilty of overseas corruption.
In a report by Prof. A.D.V. de S. Indraratna, President of the Sri Lanka Economics Association, he points out an incident of a 70 kilometre road where a particular VIP asked for Rs. 1 million per kilometre. That is the kind of grand corruption that is taking place and on page 82 of that report he calculates the cost of corruption on the economy and estimates it to be 8.7 per cent of GDP for that particular year. If you look at a 50 billion dollar economy, you are talking of US$ 5 billion a year.
When a few people enjoy this type of ‘Vindanaya,’ the common man has to pay for all that. That is the transfer of wealth from the poor to the rich. Essentially, this is only going to get worse within this new set up, where economic management has been completely concentrated among a very few people.
For the first time in the world, we saw an election poster become a currency note. If you remember, the famous election poster of the President suddenly became the currency note before the election.
With the 18th Amendment, the need for independent members to be appointed to the Monetary Board in concurrence with the Constitution of the House has been done away with. Actually the 17th Amendment didn’t talk about the Monetary Board because the Monetary Law Act was changed in 2002. But there was a moral obligation on the part of the Government to include the Monetary Board at least nominally in the Parliamentary Council. I agree that entity has no teeth, but morally at least it was required that the Monetary Board have some ensembles of independence; it no longer exists.
The Central Bank has been totally politicised. Even in the case of the Central Bank, investing EPF funds – particularly trading in shares of banks – cannot be done, based on an opinion by K.C. Kamalasabayson, Attorney General of the time. When I bring this up, the Governor replies to the contrary, saying he can. And then people’s money is being used to purchase shares of various companies and banks under this dictatorial regime.
The story is ‘we do whatever we want to do – the means do not matter’. And in the process, certain people are going to get very, very rich and we see this happening now, whereas most people are subjected to unfair inequitable taxes.
Q: But aren’t all the numbers good, inflation 5.8%, development growth of 8% expected by the year and there is a boom in tourism. How can you say the economy is in bad shape?
A: I am not saying the economy is in bad shape. In fact, I am saying that the economy is in pretty good shape right now. IPS has done a study, Sarvi had shown these numbers, I have quoted these numbers on numerous occasions and many others have worked on this.
The peace dividend is 2%. With the end of the conflict the additional two per cent was going to come anyway, the Government has nothing to do with it. We saw this even during the CFA, the minus negative growth turned to a positive four per cent immediately the next year. This is a spike.
There are three reasons for the current uptrend; one is private small time investments taking place. People building new, small tourist guest houses, refurbishing hotels, etc. Car duties have been brought down; there is large amount of import trade that is taking place; rubber prices are good, tea prices are good. But the Government has nothing to do with these things. It had happened due to various local changing conditions.
The second reason is that some of the jobs we lost last year are coming back. People are able to spend some money. There is a certain increase in private consumption expenditure. The third is fairly large projects where the Government is putting in money. These three are contributing towards this sudden surge in GDP.
The question however, is how sustainable this growth is going to be in the face of falling foreign direct investments. Yes, money is coming. Money is coming in to the stock market, but that is just portfolio money. That money can go as fast as it came. It is not only peculiar to Sri Lanka; there is evidence of this all over the world.
In addition, a lot of money comes in from the Tamil Diaspora simply for spending on the survival of hundreds of thousands of Tamil people who now need places to live in and food to eat. The Government in its manifesto promised financial assistance and various other things for these people. Unfortunately they have not materialised.
Then if you look at debt money, the loans that have been taken – we just raised a billion dollars, then brought 500 million dollars a few months back; we got money from people like Templeton just under a year ago at very high rates of interest. This is the merging market story. Here we have these areas where portfolio money and debt money can come in. And that is coming. That again is a phenomenon not necessarily positive because these are commercial loans.
The real indicator in my view is that in the first six months of this year after the war, Foreign Direct Investment fell by 17 per cent as against the first six months of last year during the war. My question is, why is that? Isn’t that the problem? Where is the confidence of putting your own money into Sri Lanka’s economy?
This implies the sustainability problem of the high growth. While I do not deny there is a hike in economic activity, the issue is its sustainability because of the other indicators that I explained.
Q: The Government just ended a 30-year war. How do you expect everything to be perfect in no time? Do you agree that it needs considerable time to recover?
A: In an economy, there are two kinds of models. Model one is a more acceptable one, where you put up the conditions creating an environment for investors to come in. This is the good governance model. There is law and order, media freedom, democratic governance, good institutions, less corruption and you create a predictable, well-governed structure which attracts the respect of investors, who will come. In this kind of a model the governance indicators are compared, countries are compared. We are not doing well at all in those rankings. We are way below well governed countries.
Then there is the other model; the Mushtaq Khan model, which talks of a simmering situation in which everything is happening, everyone wants to become powerful, grab opportunities and win. There are no clear demarcations on anything. Rule of law doesn’t apply, justice system doesn’t matter, bribery and corruption is high and media is muzzled. In this kind of a set-up too growth takes place, but the kinds of people who rise and make money are cronies. You see this in Africa, various parts of South America and even in some Asian countries.
Growth is growth. I agree. But at what expense are we getting this growth? Is this growth sustainable? For the forces that operate in this environment, rules don’t apply. I don’t like you so I get rid of you. You are blocking my tender so I kill you or put you in jail. I use power extra judicial to shut someone up who is critical of the Government and its policies. Do the means matter or not?
If you remove yourself from the emotions and analyse the situation, then you can explain what is going on here. You can explain why some people are minting money, including in the Colombo Stock market where rules don’t apply and insider trading is the name of the game and why people around powerful people are making money.
Now I think it is coming around to two months since the Government announced it would install surveillance software at the Colombo Stock Exchange. What has happened? Have they done it? They have not done it. Have they caught a single man for breaking the rules? No, they have not. This is the law of the jungle. In the law of the jungle, the powerful animals kill the animals that are weak.
Q: What needs to be done to curb such situations?
A: I think the people are still euphoric about the military victory. Even today in Parliament that is what the Government members are talking about. Almost 90 per cent of their speeches glorify the military victory, even though Sarath Fonseka is languishing in jail. But we have to move beyond the military victory.
We seem to believe that just because Prabhakaran is dead, Tamil people have no issues. That is the general consensus. Nobody talks about devolution of power or about the problems that existed prior to the war. War was a manifestation of the issues that were there. We need to be able to bring the two communities together. But today what are we talking about?
Recently Athuruliye Rathana Thera was talking in Parliament. I don’t know how a Buddhist priest speaks in such an angry manner. He was talking about the issue of Sinhalese people resettled in the north. True, there are Sinhalese people who were displaced. But he doesn’t talk about the hundreds of thousands of Tamil people who have been displaced from their places of existence. When we do that and without the legal structure, we do as we please because we want to be in power.
Since there is some kind of growth, you are not addressing the fundamental problems in our society. The Lessons Learnt Commission is a farce. The problem between the Tamil and the Sinhalese didn’t start in 2002, so what is the point in learning lessons only from 2002? This is an ‘aggressive, short term, power hungry, I don’t care, I have the guns so you better be subservient to me’ attitude. This may work in the short term. But I doubt that this may create the right conditions for sustainable growth.
Q: There are allegations that the UNP only criticises the Government and does not appreciate the positive things. Your comments?
A: This is a criticism people particularly level at me too. The opposition’s job is to be constructively critical. There are 161 Government members to praise their work. Let it be known that people have approached me before the 18th Amendment. But I am not for sale! I do my job.
I agreed that there is growth. But I constructively criticise this model, because I don’t think it is sustainable. Instead I offered an answer on what we need to do. The UNP is not a Sinhala Buddhist party. The UNP was formed as a secular party. We have all kinds of people from all kinds of religion representing our party. We have to look at the greater interest of all people.
I have been one of the most vocal critics of the Government’s economic policy for a number of years. But I have also said in and outside Parliament that I applaud the efforts by the Central Bank in the recent past to bring inflation down.
I want to academically prove that it was money printing that was causing runaway inflation. If you look at how the Central Bank reduced money printing, you will see that it was one of the main reasons of inflation to drop. What needs to be done to bring inflation down has been agreed on by all sides including the Government.
In the same way, I am critical of the exchange rate policy. We are pricing ourselves out of the market. We are no longer competitive. The rupee is appreciating and of course, on governance issues, we have lost the GSP+. While the Central Bank has done some good, I don’t think it is doing the right thing with regard to the exchange rates policy. Because sooner or later they will have to realise that by trying to control the Government’s debt repayment expenditure by letting the rupee appreciate, they are in fact hurting the stability of society through this process.
I am not critical of everything. I am looking at the facts and trying to find out what is right and what is wrong. If I want to glorify all that the Government is doing, I might as well go and join the Government.
Q: If you were approached, why didn’t you join the Government?
A: There is no say for anybody outside of a close circle in Government. Like Mangala Samaraweera said, there are three or four ministers and 100 doormats. Look at those people in Parliament. What power do they have? There are MPs who are many times powerful than ministers. There are certain officials who are equally powerful.
It is this romanticised thing about ‘join the Government, point out the deficiencies and correct them’. Unless you are part of that ‘group,’ you won’t have any power. And I absolutely have no desire to be part of that group. I believe that I am doing a greater service to this country by remaining in opposition and constructively criticising the Government.
Q: There are a number of large scale development projects taking place at the present. What are your views?
A: This is the problem. If you see what is happening for this whole ‘Vindanaya’ story, you see Sri Lanka is getting into unsustainable debt. We are getting into large debts and I am telling you in 2010 our entire tax income is not going to be sufficient to service our debt. How can you sustain it if you don’t have enough income to pay your loan payment?
Why are we taking more and more loans? Because the rulers want to do those projects. If you look at the five hubs that these people want to develop, the naval hub, the Colombo south port expansion, was done long before the ‘Chinthana’. Look at who is doing most of these projects. The Government of Sri Lanka is taking loans from banks at high rates getting into debt and doing these projects.
If you take all these harbours, it is the Government that is doing all of this. Look at aviation, shares of the Emirates guy have been bought. I won’t be surprised that they sell shares to cronies in the new regime. They are already saying that the catering operation might be divested. That’s another story. The Government has set up an airline company to run domestic flights and the Air Force is getting into that. That also the Government has to pay.
SriLankan Airlines is buying new planes; who’s going to pay for them? Mihin Air is going to buy another plane next month; who’s going to pay for it? We are getting loans to do that. Look at energy. Little by little they are pushing away the private operators and the Government is going for loans from China and building these projects.
If you take India for an example, it is a completely different model. Look at the number of private airlines flying the skies of India. I would have expected private operators to be flying in Sri Lanka now. Unfortunately it’s the Government that is doing it. The Government is getting bigger and giving jobs to its people, but at what cost? Can we sustain this?
You need to reduce the size of the Government, increase its efficiency and create the condition for solid, well-meaning private operators to invest in this country. I am warning you, if we go down this road we are going to create huge, bunched-up payments. In 2012 we have to pay the 500 million dollars in one go. Unless we can create the kind of dividends, the growth that is required to sustain these loans, we will have a problem.
Q: If UNP was in power, how would your regime differ from today’s context?
A: The UNP has learnt over the years. And we are not a party that is stuck in theories. We are the people who opened the economy in 1977. We want development in the household’s perspective.
What is the point of having 8.5 % growth when there is 35 per cent malnutrition in this country? What is the point in having 8.5% growth when some 40% of the people live on below two dollars a day? Today to be able to survive or be above the poverty level, you need to have Rs. 15,700 for a family of five. There has to be equitable growth.
To have equitable growth, people need to be able to participate in development growth and benefit from that growth. Therefore, our thinking is more on the lines of how we make the family unit better off. That doesn’t remove us from our original economy framework, but we will be global players.
We are not going to be crony capitalists trying to protect ourselves. We will try to link up with the rest of the world, not close this up. The market exists out there. We will create exchange rate policies, trade policies and investment policies that bring investors to this country.
Some of these people are mistaken by thinking that we grow our own food and we are self sufficient in x, y and z produce and therefore everything is fine. But it is not the case. What are we going to do with our rice? Can we even export our rice? So our policies will be more mindful in ensuring there is equity in the distribution of that growth.
Our primary focus would be on education. We want to develop Sri Lanka as a true hub. One main component in our programme would be the former of the two models that I explained before, where we will have rule of law, good governance, free media and democracy and create an environment that is conducive for private investors, both local and foreign.
Q: How do you see the Government’s move to acquire privatised State properties?
A: I honestly believe that the nationalised assets will start to get privatised once again. They are already talking about privatising parts of SriLankan Catering, petroleum, electricity, insurance and ITN. It will be interesting to see who the ultimate beneficiaries would be. That is a textbook example of crony capitalism that I explained earlier. That is the way this is going to be.
Q: What impact will that have on the economy?
A: That’s the interesting thing. As far as we are going to be happy with the approach of ‘the means don’t matter, only ends do,’ well I guess there is no impact. If people don’t have the power, nobody can rise up against the regime, critics will be dealt with, media shall be muzzled or bought, judiciary shall be broken.
That is the inherent danger in this whole game. The people could rise up at some point. When they are sick and tired and can no longer tolerate the situation, they will rise up. Democracy is dead in this country. They are saying you can’t even paste posters in this country, so what democracy are we talking about?
If you look at India, democracy is well rooted. Manmohan Singh is never going to say ‘I shall be Prime Minister for life’. There is freedom of information building in India, there is a free media. With a free press and thriving democracy, India will be the greatest county on earth in time to come. We still have a window of opportunity to do that and I hope that wise men will advice the powers that be that this march is not in anyone’s best interest.
Q: Why do you think there is an outflow of 19.6 billion in foreign investment in the Colombo Stock Exchange despite it being Asia’s best and hitting all-time highs?
A: The Colombo Stock Exchange is a funny place. In my view, rules are not being adhered to. It is a well-known secret that there is enormous amount of insider trading that is taking place. Even though several people have been criminally charged for manipulating stocks, no one has been sent to jail.
Very, very influential people who have been essentially in court being prosecuted have been allowed to compound their offenses for a mere few million rupees. Nobody talks about the surveillance software that was supposed to be installed two months ago. Why is that? If you are connected, if you know what is happening, becoming a multimillionaire overnight on the stock market is child’s play.
They say that I can move markets. It is an amazing compliment for anybody to be given. All nonsense! I can’t move markets! I can’t do that! It only shows that people are jittery. They themselves are not sure about the markets. Here we have me saying something that touches the nerve and they buckle and flee, because they themselves know that what I am saying has some truth in it. That is what it is.
I am not accusing any individual. We have companies that have questionable backgrounds. There are companies that have raised large amounts of money domestically and invested in overseas mineral companies. If these companies are so positive about the Sri Lankan story why do you want to invest overseas? Why not invest in Sri Lanka?
I am a Member of Parliament and I am doing my job. It is my duty. People may lose money, but I may say it for a lot of people to save more money. Today I got an abusive letter to my address in Parliament. If that is the level at which powerful people believe they can behave, I will warn them that they are sadly mistaken. You call me anything and send me a letter to my Parliament office thinking you can upset me, but I am no doormat.
I didn’t fall from the sky yesterday. I also know how to play the game. I know how the money market works; I know how some corrupt people work in this system. People sending me an abusive letter cannot scare me.
Now what is this all about? For talking the truth, trying to show this country there are two sides to every story. I will take necessary steps about this letter. I am not looking for a cheap way up; I am not looking for a shortcut. I will serve my term in the opposition. When we establish a government, which we will do, I will have a key important role to play in that government.
Q: Why do you think there aren’t significant foreign direct investments coming into the country?
A: To attract ‘good money,’ money that comes based on the confidence of that country, the confidence must be built. That is the good governance model that I explained earlier. I won’t be surprised if investment money speeds up the rate at which it is flowing in this chaotic set up also.
I think the Government needs to create the right conditions and open up. You can’t close the system and expect investments to come. For instance, they have opened domestic flying. But why is that foreign investments aren’t coming into this business? Because they can’t compete; the Air Force is running the operation.
Then look at airport expansion. You think private investors cannot be generated to expand the airport either in Colombo or wherever else. You can, but the Government won’t let them. Why? Because it is not in the interest of the regime to do that; it is in the interest of the regime to borrow.
All the things built by the Chinese Government in various parts of this country, where have you seen competitive tenders, where have you seen transparency? Until those basic structures are established, it’s going to be difficult to attract good money.
Q: The Appropriation Bill shows a 6.7% increase in Government expenditure and also an increase in foreign borrowing. How do you see this?
A: I have not gone through the bill in depth. But something I immediately noticed is that a significant amount of money has been allocated for the Ministry of Defence. I was looking whether part of that is going for the UDA, but the Appropriation Bill under the Ministry of Defence does not have UDA separately. We haven’t got the detailed documents yet, but from what I have seen it is under the Minister of Defence.
There is this large increase both in recurrent expenditure and capital expenditure. I don’t see why we need to increase both capital and recurrent expenditure. I see hardly any increase in education. I was expecting to see a doubling of the education and higher education budget. Let alone doubling, I see hardly any increase. So much time has passed since the end of the war. This Government has got its priorities messed up once again.
Q: Do you think the Government can have a 7% budget deficit as it promised to the IMF?
A: Every time the IMF was on mission in Sri Lanka, we have met them. We have had fairly intense and sometimes unfriendly professional discussions with them. What we told them was that the Government is not going to keep to the deficit target they promised at the beginning. But the IMF somehow seems to know even more than us. That is, when we accused the Government when they presented the budget; the morning before the Government presented the budget the IMF issued a statement about the budget.
Unlike in the past, the conditions imposed by the IMF are technical – such as the net foreign assets, the amount of money advanced by the Central Bank to the Government. These are typical technical targets that really become the responsibility of the Central Bank to stick to. The Central Bank has been sticking to those targets.
The deficit number is not really a hard and fast target. The IMF is willing to shift a little this way and that on this. What it is saying is even more than what is happening now, it is concerned about what may happen in the future, a quarter down the road, two quarters down the road. Somehow it seems to be very confident that these targets will be met. It is amenable to shifting the deficit target. The issue really is on the fiscal side.
While I find faults with the Central Bank for its irresponsible behaviour in the stock market, I do appreciate its very responsible behaviour in maintaining monetary targets to ensure they are in check and all other matters. It is true that inflation has increased to six per cent from what it was, but the truth is that the number is not a bad one. If they can keep it at that level, it is good. It is not an easy thing to do.
The real problem comes from the fiscal side, where it is the responsible of the Treasury. The expenditure reductions and allocations of money for various projects and programmes lie in the hands of P.B. Jayasundera and he will have to deal with those issues. From a country point of view in dealing with the IMF, things are much easier for the Government as a whole now than what it was in the previous set up.
Q: What are your views on the Government’s financial discipline?
A: Financial disciple is a challenge to the Government. It is ultimately the expenditure of the State and where that expenditure is made that will really make or break the sustainable development of this country. Depending on its expenditure pattern, the debt situation will evolve and sustainability of growth will also be determined by that expenditure.
It will also determine how much space the private sector will get to play in this. That will determine how widespread the dividends of growth are going to be. Both in a short term perspective of keeping the IMF money coming in and all that, to a long term sustainable growth, the challenge will be for the Government to not only be disciplined in its expenditure, but to prioritise that expenditure.