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World Bank Country Director Sri Lanka and the Maldives Françoise Clottes handing over the report to the Prime Minister Ranil Wickramasinghe
By Uditha Jayasinghe
Holding fast to Government efforts to reduce protectionism, tough-talking Prime Minister Ranil Wickremesinghe read the riot act to the private sector yesterday, telling them to get ready to do business with international companies or face broadened capital gains taxes.
Speaking at the launch of the Systematic Country Diagnostic (SCD) conducted by the World Bank to identify the main constraints to sustaining progress in ending poverty and boosting shared prosperity, the Prime Minister was adamant the time had come for Sri Lanka to move away from the South Asian growth model towards East Asian style development.
Due to regressive policies made in the past, Sri Lanka’s economy has become constrained with reduced public revenue creating a rigid Budget, he said, adding it led to limited social expenditure such as healthcare and education. The Government has to stop merely subsidising the poor and create capital for them so they can engage with the economy directly, he advocated.
Decades of limited economic policies has left Sri Lanka with one of the strongest protectionist economies in the world, the Prime Minister observed, calling on the private sector to support efforts to open up the economy.
“The people appointed a National Government to deliver results. The private sector must learn to work with international companies. They must get ready to work with India or China or any other country. Instead they are holding protests against positive policies to deliver growth, either they must work or pay more taxes,” a tough talking Wickremesinghe said, threatening to broaden capital gains taxation on companies.
“Either work with us or pay more taxes,” he said.
He also admonished media not to cover protests by professional bodies connected to the proposed Economic and Technology Cooperation Agreement (ETCA) with India, which could liberalise the IT industry to foster international investment.
The private sector was invited to link itself with Government measures to increase productivity and improve social investment.
Key Government bodies will be given two weeks to improve services while officials could be dished out three year contracts to roll back red tape and improve efficiency, Wickremesinghe noted saying, “We have done all we can under the South Asian version.”
Wickremesinghe recalled his shock at seeing the many layers of bureaucracy in crucial ministries such as education and welfare, hampering the free flow of services to people and inflating public expenditure. The populist policies of the previous Government have created additional pressure on pensions and other retirement benefits.
“Increased employment in the public sector has created a massive bureaucracy and administrative road blocks, which we are working to reduce. Ministries and other Government bodies have been given two weeks to change and provide services to the public. The only thing that has happened is the rich have become richer while the poor pay taxes,” he said.
Taxation has deteriorated to 20% of the poor supporting 80% of the public, the Prime Minister pointing out insisting it was an untenable situation. He also reiterated gains to be made by increasing freehold land titles by handing out State-owned land to farmers, as previously proposed by the Government.
Despite significant economic gains over the past few years, 40% of Sri Lanka’s population lives on less than Rs. 225 a day with growing inequality and higher numbers of poor living in urban areas, a World Bank report said yesterday.
Sri Lanka has made encouraging progress in reducing poverty to below 7% of the population, but pockets of severe poverty remain, especially in the north and east regions of the country. The effectiveness of poverty alleviation programmes launched over the past few years are also questionable with measures not lifting people out of poverty, the report noted.
It also pointed out that a large number of near poor, that is people who are just above the poverty line but can very easily fall below it, show the vulnerable situation of many people. Getting jobs to these low qualified members of society will be a major challenge before the Government.
Future prosperity will depend on addressing chronic revenue shortfalls and fostering a more competitive and inclusive economy, the new research findings announced by the World Bank Group went on to say.
The Sri Lanka Poverty Assessment has found that the fall in poverty stems mostly from increasing labour incomes as the economy has shifted from less productive agriculture towards the industry and service sectors, more urbanisation, and rising domestic demand. But the top growth sectors such as construction, high commodity prices and transport that fuelled post-war growth is unsustainable and does not foster exports, petering out over the last two years.
The World Bank Group carried out a Systematic Country Diagnostic (SCD) to identify the key constraints to sustaining progress in ending poverty and boosting shared prosperity. The SCD highlights that Sri Lanka has one of the lowest tax-to-GDP rates in the world, undercutting the Government’s ability to invest in education, health, and other services.
Meanwhile, generating growth and jobs are constrained by protectionist policies, low foreign direct investment, a deficit of skills needed for a middle income country, and an unduly large public sector.
“Addressing these issues will be critical for bringing all Sri Lankans out of poverty and ensuring a prosperous future shared by all,” the report added.
The research finds that while poverty has decreased, progress is uneven across location, gender, and ethnicity. Women’s participation in the labour market has remained low for a middle income country and static for decades, some data collected by the Census and Statistics Department shows the discrepancy could be fuelled by a large wage gap. Coupled with social spending that is very low for a middle income country, inequality has increased.
“This new research provides an important platform of evidence and analysis to strengthen our partnership with the government to help design policies aimed at improving job opportunities for the poor and other disadvantaged segments of the population, while promoting sustainable growth,” said World Bank Country Director Françoise Clottes.
“The findings of the reports also reinforce the need to further measures aimed at improving the Government’s effectiveness, transparency, accountability and establishing strong institutions so all Sri Lankans can take part in the country’s increasing prosperity.”
The SCD explores the dynamics of how Sri Lanka’s private sector is evolving, noting the variation in the balance between public and private sector participation in the economy over the past decades. It highlights the continuing high levels of informality, which tends to dampen productivity, access to credit, and generation of good jobs.
“The findings re-emphasise the large role that the private sector can play in driving sustainable growth and the need for policies that can unleash the potential of Sri Lanka’s entrepreneurs,” said IFC Sri Lanka Country Manager Amena Arif.
The Group’s activities are guided by a Country Partnership Framework (CPF) which is agreed upon with the Government of Sri Lanka; the next CPF which will shape the collaboration for the next five years is currently being finalised. The World Bank’s portfolio consists of $1.4 billion in financing commitments and IFC has a portfolio of private sector financing commitments of over $230 million.
