Repeal para-tariffs on period products

Originally appeared on The Morning

By Thathsarini Siriwardana

On 2 October, the President’s Media Division announced that the Government had decided to remove all import duties on imported raw materials for domestically-produced sanitary napkins while providing zero VAT benefits for imported finished sanitary napkins. This is yet to be implemented; no gazette has been issued at the time of writing. 

The move to reduce tariffs is positive and doubtless well-intentioned and should be welcomed. These tax revisions will help to reduce the prices of domestically-produced sanitary napkins considerably. Nevertheless, we would have liked to see the tariff cuts on sanitary napkins as part of a broader overall reform of the tariff structure rather than an ad hoc adjustment.

Women constitute just over half of Sri Lanka’s population of 21 million. Of the female population, 5.3 million menstruate. Menstrual products had high tariffs prior to 2018. The total tariff imposed on sanitary napkins was over 101.2% [1] in 2018, but these were gradually reduced. 

The current total tariff on sanitary napkins is 46.9% [2]. Although the current tariffs are much lower, they are still quite high, so access to affordable and safe menstrual products remains a luxury for some women. 

The collapse of the currency and soaring inflation have brought a lot of pressure on household budgets. The Government should try to reduce inflationary pressure through supply-side reforms. Simplifying and standardising the tariff structure will facilitate trade and can reduce costs.

Sanitary napkins are vital for girls and women. High protective tariffs imposed on these products benefit producers, but this is at the expense of consumers. The inability to afford sanitary napkins in Sri Lanka is pervasive, especially among the low-income segment of society.  

Tariffs on menstrual hygiene products

It is clear that in terms of tariffs on menstrual hygiene products, such policy decisions benefit producers. The current total tariff of 46.9% consists of 15% (VAT) + 10% (PAL) + 15% (CESS) [3] and while this is an improvement, prices are still high.

When a protectionist tariff is placed on a good, it will achieve two main things. First, it will act as a barrier for new products entering the domestic market. This lowers competition and reduces the choice available to women when purchasing sanitary napkins. Secondly, high tariffs trickle down to final product prices, resulting in higher prices for both domestically-produced and imported products. 

Sri Lankan women and girls face challenges in choosing a menstrual hygiene product that best suits them. The ability to choose comes with the affordability and the availability of the product. The current high tariff rates hinder the choice of women and girls.

By reducing tariffs, the cost of importing products will decrease while simultaneously creating competition, which will help to reduce the prices. This will encourage new local producers to innovate better quality products while ensuring their prices remain low and competitive in the market. 

Cost analysis of sanitary napkins

A market price analysis of sanitary napkins shows that the average imported price per pad remained more expensive than the most expensive locally-produced price per pad as of September 2022. The currently available cheapest price per pad is Rs. 33. When comparing per-pad price changes within a year, it shows that both prices of local and imported brands have increased by more than 70%. 

Economic factors such as the depreciating exchange rate and high rates of inflation are the main contributors to this vast price increase. The increasing prices are also influenced by the high para-tariffs. Removing the imposed protectionist tariffs on sanitary napkins and menstrual hygiene products will provide some degree of relief for low-income-earning women.

Advocata Institute reported that in 2016 Sri Lanka’s absolute household period poverty rate was approximately 50%. This means that around half of the households with menstruating women do not report buying sanitary napkins as part of their household expenditure. In 2019, Sri Lanka’s absolute household period poverty rate was approximately 40%. Even though this is an improvement compared to 2016, the situation is expected to worsen due to the economic crisis.

To provide relief, the Government should also focus on removing the PAL (10%) and the CESS (15%) imposed on imported sanitary napkins. This will allow competition to enter domestic markets while providing cheaper and healthier options for women. 

Necessary tariff structure reforms

The Sri Lankan tariff structure is complex, disorganised, and comprises a combination of multiple para-tariffs and duties. The current protectionist import tax structure has significant negative effects on exports as well as the domestic economy. 

The International Monetary Fund (IMF) in its Article IV consultation in 2021 stated that high para-tariffs hindered competitiveness and growth [4]. This clearly shows that immediate reforms should be carried out on the Sri Lankan tariff system. 

To begin with, the existing Customs duty and excess para-tariffs such as PAL, VAT, CESS, surcharge, etc. should be unified into a single Customs duty. For a simpler tariff system, a single rate should apply across all categories where possible, within each HS code. A uniform tariff rate should apply for raw materials and components of the industry [5].

Sri Lanka has been a member of multiple international organisations such as the World Trade Organization (WTO) since 1955, the General Agreement on Tariffs and Trade since 1948, and the IMF since 1950, due to which we have to reaffirm commitments to the multilateral trading system. As members of these organisations, we have to adhere to their protocols and commitments to reducing barriers to international trade by eliminating or reducing tariffs and quotas. 

Thathsarini Siriwardana is a Research Assistant at the Advocata Institute. She can be contacted at thathsarini.advocata@gmail.com. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Restructuring SriLankan Airlines can help reduce our economic woes

Originally appeared on The Morning

By Anuka Ratnayake

There is much discussion on the precarious financial situation of the island’s National Carrier SriLankan Airlines. A month ago, Minister of Ports, Shipping, and Aviation Nimal Siripala de Silva revealed that “The only way to rescue the National Carrier is via urgent restructuring” [1].
The airline has racked up significant losses while its debt obligations have increased significantly with the depreciation of the currency. Getting rid of the airline will allow the Government to focus on its limited resources to strengthen social security nets and improve social infrastructure.
The argument regarding the airline has been muddied by emotion, for it is ultimately the people who pay for it and who have the right to ask if this is the best use of taxpayers’ money.
SriLankan Airlines’ Annual Report for 2020/’21 (latest available annual report) provides that the SriLankan Airlines Group recorded a loss of Rs. 49.7 billion. However, the Ministry of Finance in its latest Annual Report records that the loss (before tax) of SriLankan Airlines for the year 2021/’22 is Rs. 170.8 billion [2]. The accumulated loss amounts to Rs. 542.5 billion as at 31 March 2022. The National Carrier lost Rs. 248.4 billion in the first four months of 2022 due to the volatility in exchange rates [3].
The airline is in debt to the Bank of Ceylon and the People’s Bank to the tune of $ 380 million in 2022, while another $ 80 million loan has been obtained from the Bank of Ceylon by mortgaging shares of SriLankan Catering. The banks have extended support to the airline on the basis of letters of comfort issued by the Ministry of Finance.

Further, the airline has a debt payable on an international bond on a Government guarantee of $ 175 million. The guarantees extended by the Government to banks and bondholders represent additional potential losses of public funds. The group owes an arrears amount of $ 325 million to State-Owned Enterprises (SOEs) such as the Ceylon Petroleum Corporation (CPC), the Airport and Aviation Services (Sri Lanka) (AASL), and the Civil Aviation Authority of Sri Lanka (CAASL) [4].
The group’s current liabilities exceeded its current assets by Rs. 214.6 billion by 31 March 2021 and the total equity of the company as at reporting date has declined to a negative Rs. 281.5 billion.
The Auditor General’s report has continuously warned the company that “a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern” [5]. The Auditor General has relied on the Cabinet approval dated 7 February 2022 and the letter issued by the Secretary to the Treasury on 24 February 2022 confirming the support of the Government to the company to continue its operations as a “going concern”. In simpler terms, the SriLankan Airlines Group is technically insolvent and it continues to operate using taxpayer money.
The airline last reported a profit in 2008, under the management of Emirates. It has failed to report a profit in any year since then. The airline industry is known to be a high-risk, low profitability business.

Future losses and lessons learnt from India

The International Monetary Fund (IMF) has now reached a Staff-Level Agreement (SLA) with Sri Lanka to assist its economic recovery process. It was agreed that the IMF would provide an Extended Fund Facility (EFF) of $ 2.9 billion on a 48-month arrangement.
The total debt of SriLankan Airlines (just over $ 1 billion) is nearly one-third of the EFF. Sustaining further losses is an impossible task since the Government can no longer fund the airline. Covering future losses of the airline through tax increases is unacceptable given the dire economic conditions faced by the public.
Sri Lanka needs air connectivity, but this is best provided by privatising air services and not by operating an airline. A good example is the Air India privatisation which took place in the past year. The Indian National Carrier was sold to the Tata Group for the relatively small sum of INR 180 billion [6]. Prior to the sale of the airline, it was losing $ 3 million a day on average, which totaled to over $ 1 billion per year [7].
The rising aviation fuel prices and airport usage charges were not sustainable after the pandemic restricted air travel. Further, competition from low-cost carriers and the poor financial performance of the airline made things worse. Air India’s poor client orientation, lack of punctuality, obsolete productivity practises, and poor revenue generation techniques were among the reasons for its incompetency [8].
The impact of the Air India privatisation was discussed at a panel at the ReformNow Conference hosted by the Advocata Institute. The panellists stressed how the Tata Group had already begun the process of value addition through efficient customer care services, improving fleet productivity, and focusing on budget flights for the domestic market.

Aviation hub

Singapore’s aviation policy has been a key factor in the growth of Singapore’s Changi International Airport, where air transport contributed to nearly $ 20 billion of value added to the Singapore economy or about 6% of the Singapore GDP in 2011.
There is much public support for restructuring SriLankan Airlines due to its heavy burden on State coffers and thereby the taxpayers. However, rather than selling the airline alone, bundling the sale of the airline with the other business units such as SriLankan Catering and SriLankan Airlines Ground Handling would be attractive to investors. At the same time, the airport too can be included and marketed as an aviation package with a similar potential to the Changi International Airport.
A national carrier is a source of pride, but it is not a priority for a cash-strapped Government. The airline should be disposed of or even closed, and a liberal air services policy should be adopted instead.
This could boost growth and truly turn Sri Lanka into an aviation hub, freeing taxpayers’ money to be used for health, education, and other priorities.

References
1. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
2. https://www.treasury.gov.lk/api/file/a7a35d1a-556f-49b2-81e0-20294eb5a519
3. https://www.treasury.gov.lk/api/file/bc1e8eaf-91eb-4cb3-94e0-35d81f65a949
4. https://www.ft.lk/top-story/Answering-aviation-Aragalaya/26-739243
5. https://www.srilankan.com/pdf/annual-report/SriLankan_Airlines_Annual_Report_2020-21_English.pdf
6. https://www.indiatoday.in/business/story/explained-air-india-handover-government-to-tata-group-changes-1904217-2022-01-25
7. https://www.advocata.org/commentary-archives/2021/10/11/air-india-sold-privatise-srilankan-now
8. https://www.bbc.com/news/world-asia-india-60150531

Anuka Ratnayake is a Research Assistant at the Advocata Institute. She can be contacted at anuka.advocata@gmail.com. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Who pays God’s electricity bill?

Originally appeared on The Morning.

By Dhananath Fernando

Over the years, I have volunteered at a humanitarian organisation named CandleAid Lanka to help the poor. The organisation has a programme called ‘Gift a Meal,’ where we provide meals to selected vulnerable households. When these people receive meals or dry rations, they thank the organisation profusely. I have noticed that most families also thank whichever god they believe in, because poor people think it is their god who is giving them a meal through CandleAid. 

I shared this observation later during a dinner table conversation with CandleAid’s Founder, Captain Elmo Jayawardena, who, as usual, cracked a joke regarding my observation. He said: “God takes very good care of people who support CandleAid, because God is rational. God ultimately gets the credit for all the hard work we do, so he must be thinking that he will lose the people’s support on two fronts if he harms such people. Firstly, he will lose the credit he gets through CandleAid’s work, and secondly, people will lose trust in God, because if something happens to people who donate to these charities, others will wonder why generous people are not being taken care of by God. So any rational God would simply do everything to protect us.”

Captain Jayawardena of course did not mean any particular god or religion, but was simply sharing a light moment at a private dinner. 

Lower power tariffs for religious institutions 

There was a time when the high powers of the Ceylon Electricity Board requested the blessings of a rain god for uninterrupted power supply during the Yahapalana regime. Now, religious institutions have requested a lower tariff rate compared to the normal rate.

Let’s face the truth. Even if we provide low tariffs for religious institutions or ask them to pay high tariffs, it is the common people who will pay. If we provide a tariff concession, common people and businesses have to pay it as taxpayers. Someone has to bear the cost of electricity generation, transmission, and distribution. If we cross-subsidise religious institutions, it is ultimately the taxpayers who have to pay. If we ask religious institutions to pay higher tariff rates, these same common people have to pay, as devotees of the god they believe in. 

However, there is a significant difference in behaviour and impact of usage, although the end payer is the same. 

If taxpayers are asked to pay the subsidy for religious institutions, religious institutions have no motivation to reduce their usage, because the buying price is far less than the market price. Therefore, there is no motivation to save electricity. 

At the same time, the difference in treatment of one set of customers will create market distortions. It will also set a bad example and many other customer categories will make the same request. 

Moreover, even those who don’t use electricity at the religious institution have to indirectly pay for it through taxes, instead of spending the money on something productive. This will incentivise the religious institutions to continue using electricity without moving to sustainable energy sources. Even if the particular line ministry pays the electricity bill, it is ultimately the taxpayer who has to foot the bill. 

If the higher electricity tariff is borne by the religious institutions, even then the same taxpayers have to pay the bill, as devotees of the institution. But in this case, devotees who use electricity at the institution will be the ones to bear the cost, so they have a motivation to reduce their consumption. This will also incentivise them to look for alternative energy sources. 

Market reform for better options

Considering the political dynamics surrounding the tariff hike, it appears that once again electricity tariffs are becoming a political weapon as usual. Most likely this will block some electricity sector reforms. 

If there was a market system, there could have been a concessionary rate for religious institutions. For instance, if we had a few companies that undertook electricity generation and distribution, one of these companies may have offered an option for religious institutions to receive electricity at a concessionary rate as charity. 

For example, supermarket chains run various charity projects geared towards sustainability through their outlets. Telco service providers offer different services to donate money on a range of issues at a corporate level. 

Therefore, I believe that religious institutions should request for market reforms rather than tariff concessions, because it is more likely that they will receive a better offer from a market system than from politicians. 

Energy sector reforms should not only be about simple tariff hikes. When we approach an election, these same politicians will simply use the electricity tariff as a political tool, resulting in a bigger mess. The same will happen for fuel as well. 

In Sri Lanka, the culture of entitlement across all sectors is a genuine issue. This culture is not only present in requesting tariff concessions for religious institutions but also in requesting tariff protections for selected industries. On both occasions, the burden is simply passed on to the common man. When the same thing happens repeatedly, there is only one thing left for the common man to say: “God save us.” 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Education is an investment for the future

Originally appeared on The Morning.

By Dhananath Fernando

Last week I was invited for a panel discussion by one of Sri Lanka’s leading stationery manufacturers. This was  for an initiative by them to support 100,000 families with children who are facing hardship due to the current economic crisis. 

According to their data, 50% of Sri Lanka’s families are struggling to support their children’s education. High inflation was mentioned as one main reason for this hardship.  Especially as more than 60% of what people earn have to be spent on basic food so what is left for education is shrinking. Unlike any other crisis, economic crises are the worst because it disrupts society. Inflation is not what the Central Bank says or what Prof.Steve Hanke’s updates as numbers. 

It is people’s pain, sorrow, emotion and helplessness. 80 page exercise books have increased from Rs. 75 to Rs. 100, 120 page books from Rs. 120 to Rs. 225. If you recall Sri Lanka’s World Champion Toastmaster Dhananjaya Hettiarachchi’s winning speech, he says mothers have three types of tears - tears of joy, tears of sorrow and tears of shame. There cannot be any sorrow or shame for a mother other than the inability to educate their loving children. Education is pretty much the most poor parents' insurance policy to overcome poverty at their later stage in life, especially in our context.

In Lebanon the protein intake came down by half and  35% of Lebanon’s 2 million student population have dropped out of school due to the current  economic crisis. As a result of this World Human Capital Index (2020) have projected that children born in Lebanon will only have 52% of productivity. 

So since Sri Lanka is on the same route as Lebanon,  it’s very unlikely that we would deviate far from Lebanon.  The impact of an economic crisis is beyond fuel queues and LP gas lines. Impact can run longer for generations. As Prof.Ricardo Hausmann from the Harvard Kennedy School mentioned, “economic crisis is the same as a civil war.”

So Sri Lanka has to be prepared to overcome this productivity deficit by reskilling and upskilling people. 

Sri Lanka keeps bragging about our skilled labor force and services exports of IT (Information Technology).  This is an industry that is already affected, especially as many such skilled individuals are migrating to greener pastures. Unskilled labour is remaining simply because they can’t afford to leave or they are not skilled enough to leave. Some are unskilled not due to any of their faults but due to economic conditions and flaws in the education system. 

Even though Sri Lanka moves somewhat forward towards economic reforms, after a few years we will experience a skilled labour shortage. When labour is in short supply investors don’t look at us and we become uncompetitive. 

Existing businesses will be further impacted and recovery would be challenging 

What can we do

Reskilling and upskilling our labour force is not just a function of formal education. It is mainly a function of working with co-skilled workers. For example, someone who works in a pizza restaurant has a higher chance of coming up with his or her own pizza recipe than someone just taking a degree in pizza. It's the same like someone who practices and bowls with Lasith Malinga will bowl better yorkers than someone who just watches Malinga bowling or someone just taking a theory course on bowling in cricket. 

So we have to revamp our labour regulations allowing foreign workers to come and work here specially for skilled job categories. That is one way we can attract investors. Not only will it attract investors it would reskill and upskill our own people through on the job training. We have to allow labor markets to work where hiring and firing is easy. 

If the government cannot spend money on education and if the government is too late to contain inflation then at least the government can change the archaic labour laws which have made Sri Lanka uncompetitive. 

While the support and the initiatives by the private sector in uplifting education is welcome, there are quite a lot that can be done with just a stroke of a pen which would have a very high impact at the same time. We need to do charity and reforms both to really survive this education crisis which has been triggered as a result of the economic crisis. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

One-size-fits-all reform strategy will not work

Originally appeared on The Morning.

By Dhananath Fernando

It is said that there are three kinds of people: those who watch things happen, those who make things happen, and those who wonder what happened. Sri Lanka’s economic crisis and its story of reforms is undeniably a case of the latter.

Unfortunately, our key institutions and the Government authorities who are currently in the driving seat fall into a new category called ‘those who wonder what happened, but frankly just don’t care’. 

A good example is the recent discussion on the validity of the debt servicing suspension announcement. Since Parliament has the power to approve all public finance decisions, questions have been raised as to how such an important decision, which was made for the first time in the history of Sri Lanka, was not tabled before Parliament for approval.  

Of course, if we had enough money and if our State coffers held a reasonable amount of foreign reserves, we wouldn’t have needed to skip debt servicing or suspend debt repayments, and this would not have been an issue. However, it is no secret that the country did not even have enough funds to clear a shipment of LP Gas worth $ 20-30 million. The phrase ‘scraping the bottom of the barrel’ is not appropriate in this instance, because there is simply nothing at the bottom. 

Warnings fell on deaf ears

There were multiple alerts on Sri Lanka’s debt sustainability issued by local intellectuals as well as by common men and women. Global banks such as Citibank even issued a report titled ‘Denial is not a strategy’. But their warnings fell on deaf ears as our Parliament and Central Bank did next to nothing to remedy the situation. 

Months after suspending debt payments, Parliament is now questioning whether the debt suspension decision had been approved by them. Instead, they should be asking themselves what they were doing for so long when it was obvious that we did not have money to pay our debt. 

When the country was heading straight towards bankruptcy, many policymakers did not bother to question what was happening. This does not justify the failure to follow parliamentary protocol, of course, but two wrongs will not make a right. 

In desperate need of reforms

The current system is a clear indication that our institutions are in desperate need of a complete reform programme, one that includes political reforms. However, expecting reforms to be implemented by a set of policymakers who, up until very recently, did not even bother to question what was happening may be too high an expectation. 

The execution of a solid reform programme requires building upon an understanding of what these reforms should be as well as understanding the importance of laying the foundations for strong, independent institutions. Along with specialist skills, a commitment to seeing these reforms through is required. Political reforms should support economic reforms and vice versa.

SOEs as a starting point

A good starting point is reforming State-Owned Enterprises (SOE). It is quite surprising to me that the International Monetary Fund (IMF) press release on the Staff-Level Agreement (SLA) gives little significance to SOE reforms. 

One of the seven main points highlighted by the IMF and the Government is the need for cost reflective pricing for energy and petroleum products. This is a welcome move, but it will lead to the same problems we have been facing so far. 

Given the state of our institutions, our politicians will adopt the cost reflective pricing strategy for as long as is needed and then simply revert back to their old habits – changing the pricing formula, bringing  prices down, and ignoring the cost factor. For this reason, our reforms have to be of a much more permanent nature this time around and that is why we need a strong combination of specialist skills and a commitment to implementing these reforms. 

The role of the Government

The Government’s role is not to conduct business, and a private sector business leader recently said as much: “The Government’s only business is to not to do business.” Simply looking at which enterprises make profits or incur losses is definitely the wrong way to look at it.  

Government businesses that make profits at present can incur losses in future. The Government has the ability to destroy any notion of a level playing field and can support Government businesses through loans, subsidies, and special permits. The vast majority of profit-making SOEs are not profitable solely due to their own efforts, and in reality, they aren’t competitive businesses.

For instance, it is widely known that the Development Lotteries Board is a profit-making Government institution. What may be a lesser known fact is that there is only one other competitor – the National Lotteries Board, and the directors of both these companies are appointed by the Minister of Finance. Under these circumstances, it can hardly be a surprise that the Development Lotteries Board is profitable. 

Therefore, looking solely at profitability won’t address prevailing issues. We have to first look at what the role of the Government should be. 

It is true that all SOE reforms cannot adopt a one-size-fits-all strategy. Different SOEs have to be treated differently. This treatment has to be based on the principle of the government having no role in business.  

In cricket and football, it is a commonly held view that the umpire or referee has no role in playing the game. It is the umpire’s responsibility to overlook the game and ensure that it is being played fairly. The umpire’s decision is final and if the umpire acts more favourably towards one side, there is another set of regulation mechanisms to manage this. The umpire facilitates the competitive nature of the game. The same holds true for the role of the government. 

Many options have been discussed for reforming SOEs, including privatisation and SOE consolidation that follows models like the Temasek in Singapore and Khazanah in Malaysia. Regardless of which option is chosen and which model is followed, we expect the Government to implement SOE reforms on a case-by-case basis, with special attention being paid to the role of the State.  

If we fail to understand the role of the State and implement solutions for SOEs based on this, Sri Lanka’s reform programme will probably fall into the category of things that make people ‘wonder what happened’. People will certainly question the reform programme and its credibility, while our next generation will wonder how they inherited such a poorly-managed nation that was once so full of potential.  

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Reform or perish

Originally appeared on The Morning.

By Dhananath Fernando

A Staff-Level Agreement (SLA) with the International Monetary Fund (IMF) is a positive indicator of things to come. However, we still have a long journey to go and getting an SLA is just the beginning. 

We have negotiated with our creditors and have begun to implement reforms to stabilise the ship. We have to continue this trend and perform hard reforms to ensure our economy grows to a level where we can sustain it without resorting to borrowing.

In the status quo, I foresee a few scenarios that could happen with present political dynamics.

Scenario 1: Forming reform committees but not performing reforms

Sri Lankan policymakers’ solution for all problems is to set up a committee. There is a risk that we will do the same for reforms. Already, committees are being formed to take reforms forward, but reforms generally get sidelined or stuck in limbo. 

I recall many years ago there was a Cabinet Committee on Economic Management (CCEM), which was later replaced by the National Economic Council (NEC). Afterwards, the NEC was also dissolved and no economic reforms were taken forward. 

In the interim Budget, a new committee on SOE reforms and a few other pre-reform steps have been suggested. But the willingness to reform and the ability to execute is the most important aspect. If we leave a committee for reforms to its own devices, it will kill time while this crisis kills many of us.

Scenario 2: Some reforms are as good as no reforms 

There is a probability that a few reforms will be enacted. This is also a dangerous scenario. While in 1977 some reforms were implemented, labour market reforms and many other required reforms were not carried out. As a result, we failed to get the maximum benefit out of opening up the markets. 

Reforms in the 1990s were also not carried out in a holistic manner. Half-baked and half-hearted reforms will not rescue us from this crisis 

Scenario 3: Capitalising on low expectations but no real reforms

Another possible scenario is that policymakers and politicians will try to build their political capital based on a low-expectation environment. 

People’s expectations have fallen so low that a two-hour power cut has become accepted given the circumstances. A few hours staying in a fuel line has also become acceptable and even an achievement, despite us taking the ability to freely pump fuel for granted only a few months ago. The availability of LP gas has also become an achievement. 

Given this environment, politicians may try to just keep the basics supplied and settle for a new normal with very low expectations and build political capital until the election without enacting hard reforms. That will not only take Sri Lanka backwards, but we will move towards stagflation. Our youth will be less aspirational and the dream of a higher income country will fade away 

Scenario 4: Making reforms the entry gate for corruption 

While economic reforms are essential, since we haven’t seen any reforms on the political front, the same corrupt politicians may misuse this opportunity. 

Important reforms such as privatisation and Public-Private Partnerships will be passed with less transparency and no accountability to benefit the inner circle of corrupt politicians and with minimum benefit for poor taxpayers. This will dilute the public’s trust of reforms and create resistance against much-needed change. 

Scenario 5: Reforms that snowball 

This would be the best-case scenario, where we move proactively on a series of reforms to completely transform our economy. These reforms will not just halt after one wave.

Given dynamic economic and global conditions, reforms have to keep moving while keeping up with global changes, since otherwise the reforms that we do today will pose the same barriers for us a few years later. Sri Lanka needs to move towards reform and resetting itself in a holistic manner. 

Our aim has to be to create an economy where the 17th time becomes the last time in which we go to the IMF.  We need in-depth thinking to move fast. Simply making statements or addressing the audience based on current sentiments is not a solution; we need genuine willpower to get reforms done.

We have to capitalise on the IMF SLA and move forward with the rest of the reforms without delaying the process. The research has already been done and what needs to happen is very well known. It is just that we need to get our act together and move forward.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

New electricity tariff structure leaves room for considerable improvement

Originally appeared on the Daily Mirror, Timesonline.lk

By the Resident Fellow of Advocata Institute

The recent revision of electricity tariffs is a step towards reducing the fiscal burden caused by the supply of electricity below its cost of production. While the new tariff structure is an improvement on the previous one, anomalies remain.

 In determining tariffs, there are three characteristics of electricity that must be noted:

I. Electricity is a commodity that is interchangeable, both in its generation and use. One megawatt hour (MWh) of electricity produced from coal or hydropower contains the same amount of energy. Different categories of users consume the same product.

II. It must be produced and used simultaneously. Electricity storage is still prohibitively expensive. Supply must meet demand exactly in the power grid.

III. The cost of supplying electricity fluctuates throughout the day, depending on the power generation mix, cost of fuels used, transmission costs and energy losses.

As electricity is a commodity, there should be no difference in the prices charged to different users. The tariff should also reflect the varying cost of supply, depending on the time of day and should as far as possible, balance the generation of electricity with its use. For sustainability, the tariff needs to be on a cost-recovery basis.

The new tariff addresses some of the shortcomings of the existing structure but there is still considerable room for improvement.

1. The proposed structure reduces the discrimination between different types of bulk supply customers.

For users below 42kVA, the different rates that were charged to hotels, government and general-purpose bulk supply, have been amalgamated into a single general-purpose tariff but a lower rate remains applicable to ‘industrial’ customers. However, it is positive that the differential between the general-purpose bulk supply and customers categorised as ‘industrial’ has decreased.

For larger bulk customers, it is welcome that the distinction between categories has been done away with and a single tariff, close to cost recovery and reflecting time of use, has been applied.

The Public Utilities Commission of Sri Lanka (PUCSL) consultation document states that the average cost of generation is Rs.32.87 but the tariff charged to low-use industrial users (Rs.20) and low-use general-purpose customers (Rs.25 for those below 180kWh) is both below cost.

The only justification for a discriminatory tariff is for a lifeline tariff for the poor. While the domestic users below 90kWh do receive a subsidised tariff, the domestic consumers, who exceed this, pay the highest tariff (Rs.50 for usage between 90-180kWh, Rs.75 above 180kWh), which is almost double that of all bulk users. Thus, high-use domestic consumers are subsidising industrial and commercial users.

Moreover, instead of increasing the rate for each block of use, the moment domestic customers exceed 60 units, the tariff increases from an average of Rs.9 to Rs.16. A customer, who consumes 59 units, will pay Rs.9 but one who consumes 61 units will pay Rs.16 per unit. This is unfair and can promote corruption in meter reading. In general, such cross subsidies are undesirable, as they can lead to inefficient resource allocation or have unintended consequences.

For example, the higher domestic tariff may serve as a disincentive for remote work. Remote or flexible work arrangements can reduce transport costs, congestion, energy use and for some, enable a better work/life balance. The government should be facilitating flexible work but the higher rates applicable to some domestic consumers may be a disincentive.

The PUCSL has an unusual definition of industry. It includes, ‘agriculture’, ‘forestry and fishing’, ‘mining and quarrying’, ‘manufacturing’, ‘electricity, gas, steam and air conditioning supply’, ‘water supply, sewerage and waste management. As a matter of principle, the producer should not make judgment on how the product is used or attempt to encourage or discourage particular activities through prices. If the government does wish to encourage particular industries, it is more efficient to do this through a transparent system of grants, rather than distorting prices.

Economic activity is increasingly complex and a value chain can involve many different sectors. For example, the tea industry involves agriculture, processing in factories, transport, warehousing, blending, financing, marketing and exports. Moreover, products are now more knowledge intensive, so a greater part of the value addition arises in non-production-oriented components of the value chain. With differential tariffs, parts of the same value chain may pay different prices for use of the same commodity.

Religious and charitable bodies continue to enjoy preferential treatment under the domestic tariff category but there is a small decrease in the discount offered to these bodies. High-use customers in this category should also be subject to a time of use (TOU)-based tariff. Advocata reiterates that there should be no price discrimination between users; at most there should be two categories, households and businesses.

2. It is welcome to note that the new tariff structure extends the TOU tariff to the agriculture subsector but this should be extended to smaller bulk users and made compulsory for the high-use domestic category. For customers using solar power on a net metering basis, the export and import tariffs should be based on TOU. A TOU-based tariff reflects the changing cost of generation across the day. Generation during peak hours relies more heavily on thermal power, which is more costly. Tariffs charged to customers should reflect this, so that the consumers are incentivised to shift demand to off-peak hours.

3. The new tariff maintains a lower rate for low-use domestic customers and it is welcome that the new structure applies marginal tariffs based on different slabs of usage. The previous system was inherently unfair to the consumer; the new tariff removes this anomaly.

4. The decision to charge for street lighting, which should be paid for by the local authorities, is welcome. Previously, as the Ceylon Electricity Board (CEB) did not charge for street lighting, the local authorities, which have control over when the lights are switched on and off, had no particular incentive to switch off street lights during day time. A lower rate for street lighting is justified because the major part of the use falls into off-peak hours.

5. It is regrettable that the PUCSL permitted the CEB to compel selected clients to pay for electricity in US dollars. This is a step towards forced dollarisation of payments and is precluded under Section 4 of Monetary Law Act No. 58 of 1949. The proposal is meant to address the current shortage of US dollars for importation of fuel for the energy sector. However, this would only divert resources from other alternative users and may not be the most efficient way of allocating the scarce foreign exchange in the country. It would be preferable to allow US dollars to flow into the banking sector (by removing any restrictions and requirements such as forced conversions and surrendering requirements) and for those funds to be allocated based on price (exchange rate).

The increase in the electricity tariff is unavoidable but will impose an additional burden on consumers. Therefore, it is imperative that this must be accompanied by increased transparency and efficiency

within the utility.

Consumers may expect to pay for higher world prices but cannot be expected to pay higher costs, due to inefficiency, waste or corruption. State enterprises need to be open and transparent in their affairs, particularly in procurement and where possible should operate in competitive markets.

As a first step, the CEB should provide a detailed breakdown on the components of its tariff:

• Energy costs: (Own generation costs and that paid to the private generation companies). This must be broken down into the fuel cost and the costs of operating the power stations, such as the manpower and maintenance costs as well as the capital cost of the stations.

• Network costs: This reflects the cost of transporting electricity through the power grid.

• Overhead: This is to recover the costs of central administration, billing and meter reading, data management, retail market systems as well as market development initiatives.

The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Import controls: Regression when we really need reform

Originally appeared on The Morning.

By Dhananath Fernando

I recall a visit I made to a small eatery back in 2015, just a few weeks after the interim budget speech by the new Yahapalanaya Government. The eatery prepared hoppers, egg hoppers, and short-eats – this was just after the then Finance Minister, in his Budget speech, had announced price controls on hoppers at Rs. 10, egg hoppers at Rs. 25, and, if my memory serves me right, plain tea at Rs. 5 and Rs. 10 for milk tea.

When I asked for an egg hopper, the shopkeeper (‘mudalali’) said: “Sir, we are not selling egg hoppers. If you want, you can buy an egg here for Rs. 17 and give it to the chef and he will put the egg on a normal hopper, which is priced at Rs. 10, and you will get your egg hopper.” I was totally confused and I asked the shopkeeper: “What do you mean? Can’t you give the egg from your counter straight away and give me the final bill?”

He replied: “Sir, because of the price controls we can’t sell egg hoppers at profitable prices. An egg costs about Rs. 17-18. Coconut is also expensive, as are rice flour, wheat flour, and cooking gas, so we can’t sell egg hoppers at Rs. 25. So we sell eggs and hoppers separately.” I then followed his instructions and got the egg hopper prepared.

Generally when buying hoppers, chilli sambol, known as ‘lunu miris,’ comes complementary. I was waiting for ‘lunu miris,’ which did not arrive. I asked the shopkeeper: “Where is my lunu miris?” He replied: “How can we give lunu miris free when we sell hoppers at Rs. 10? You have to buy lunu miris separately by paying an extra Rs. 10.”

Price controls never work

The recently-imposed price controls on eggs will not make any difference to the same set of outcomes I observed about seven years ago. Sadly, Sri Lanka’s policymakers have not learnt their lesson – that price controls have never worked and will never work. Following the implementation of price controls on tea, tea shops will stop serving sugar and ask people to buy their sugar separately. 

If you recall, in the recent past there was a Government-controlled price for chicken. Meat shops at one point stopped selling whole chicken and instead only sold chicken parts. Thereafter, we had many price controls on rice, dhal, tinned fish, sugar, cement, and even on USD. Anyone who has a reasonable memory will remember that none of these price controls worked. 

At one point, there were price controls on pharmaceutical products despite the currency depreciating by 80%. How can a company import the same drugs and keep the same price, with the cost rising by 80% due to poor monetary policy? The only option available for pharma companies was to stop procuring those formulas. 

The same happened with milk powder. The consumer became the ultimate loser by suffering shortages in the market. There is a sentiment that private businesses hoard similar goods, which are stocked at lower prices, and sell only when the prices are increased. There may be some truth in it. As we all are aware, the private sector is also a reflection of our Government sector and policymakers, and the private sector has been given those opportunities when competition is not allowed and financial instability is not managed. But ultimately the common person loses on both ends – both through shortages and higher prices. 

The price control on eggs is going to impact the less-fortunate the most, since eggs are their main source of protein. They don’t require refrigeration and they are more affordable compared to the other protein options. The price of 500 g of fish is now Rs. 1,500-1,800. Chicken and other protein sources are also very expensive. Even dried fish and sprats are more expensive than eggs when calculated on a per meal basis and when accounting for overall convenience, effort, LP gas consumption, etc. 

So when price controls discourage suppliers from supplying eggs at that rate in an environment where chicken feed prices have gone up and prices of medicine for poultry and transportation have increased, price controls simply become meaningless and send a completely wrong signal to markets, while we are in the spotlight for an IMF programme and debt restructuring. 

Import controls a mistake

The Government made a similar, crucial mistake by announcing import controls on 300 selected HS codes as a measure to save our valuable dollars. We need to first remember that we have already cut down quite a lot of imports and we are really scraping the bottom of the barrel by restricting our fuel and some essential medicines. We have completely banned imports such as vehicles for more than two years now. 

Sri Lanka’s imports have been declining since the 1990s; policymakers should ask themselves: if import controls brought us to our darkest hour, how are the same import controls expected to save us from the crisis? Some import bans are on intermediary goods, and, as economic theory has shown around the world, with import restrictions, exports will also decline and Sri Lanka will become a net loser. We have to discourage imports through the pricing of dollars so imports will automatically come down with higher prices.

Import controls will also confuse markets and dilute the credibility of the Central Bank Governor. As he mentioned, we have adequate forex for essentials in the coming months. So the question arises: if we have enough forex, what is the purpose of import controls?

Secondly, both import controls and price controls, in my view, will have an impact on IMF negotiations at home. The Article IV IMF staff report clearly notes that we have to phase out import controls. Announcing import controls at a time when they are visiting Sri Lanka sends a negative signal to the IMF and to our creditors that Sri Lanka is not open to reforms.

Trade is a two-way street

Already the European Union and Japan have on multiple occasions indicated the importance of trade. In fact, the European Union stated: “Trade is a two-way street.” In this context, we are creating more resistance from our neighbouring countries at the brink of a very important debt restructuring and IMF programme. 

Both recent policy actions indicate to the world that we are just following the same old methods and are not open to serious market reforms. We will also not comply with some guidelines of the World Trade Organization with this decision, isolating ourselves globally at a time we need support the most.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Debunking myths about reforms

Originally appeared on The Morning.

By Dhananath Fernando

As this column has highlighted many times, Sri Lanka is presently at a crossroads. Either we will excel and emerge as one of the dynamic tiger economies of Asia, or we will become a failed state, going from one crisis to another. There is simply no middle path between the two outcomes. 

So far in our history, we have missed the bus of economic reforms repeatedly. Our reforms of the late 1970s were half-hearted and necessary labour market reforms; other economic reforms haven’t been completed. Following this, we had a 30-year war and a short period of high growth post war. 

Recently, Prof. Premachandra Athukorala devised an interesting metaphor about Sri Lanka’s economy at Advocata’s #ReformNow conference on ‘Let’s Reset Sri Lanka’. He compared a sumo wrestler to a normal wrestler. 

Sumo wrestlers are big and heavy, whereas the normal wrestler is skinny and small-made in comparison. To the casual observer, it may look like the sumo wrestler is stronger than the normal wrestler, but in reality, the life expectancy of a sumo wrestler is about 20 years less than an average Japanese man. 

Prof. Athukorala compared the Sri Lankan economy’s high growth years to a sumo wrestler. Although the growth numbers were high, our economy has always been vulnerable – just one trigger can cause so many problems. 

As he very correctly mentioned, due to a few triggers such as the Easter attacks and Covid, we are going through a lot and will have to shoulder a great burden in the future. What we need to be, with regard to our economy, is a normal wrestler; one who is flexible, agile, and dynamic, with a high life expectancy and who can adjust easily to global trends and to challenging times. 

As we all know, change is difficult and resistance to reforms is inevitable. In many cases, it is untrue myths about reforms that drive this resistance.

Myth 1 – Privatisation would mean selling the family silver and our sovereignty 

A common myth against State-Owned Enterprise (SOE) reform is the rhetoric that it amounts to selling the family silver or selling off national assets. This is a popular argument in the vernacular.

We have to first identify most of our SOEs as loss-making; they are more of a liability than an asset. Secondly, being owned by the State doesn’t mean that they are owned by the people. If they are owned by the private sector, that is what you might call being owned by the people. 

Let’s take the Ceylon Petroleum Corporation (CPC) or SriLankan Airlines as examples. Both are owned by the Government of Sri Lanka. So where are the benefits for the people? There are none.

We can’t pump all the fuel we want despite being able to pay for it. Most of us can’t apply for a job at the CPC or at SriLankan, since many of these opportunities are given to supporters of political elites. As both institutes are loss-making and taxpayers are paying for something they don’t consume, what is left for the people to own or obtain benefits from? 

But if the same institutes were owned by the private sector, then that company would have to pay taxes, which is a source of revenue for the Government that can be spent on the people and on public goods. People can buy shares, will be entitled to a dividend, and can apply for job opportunities on a competitive basis. 

Sri Lankan businesses and foreigners can invest money and create jobs for our people while improving productivity and efficiency. So in reality, ownership of assets by private companies is a situation where they are in reality owned by the public. 

Consider the main telecom companies and conglomerates as an example. They are the main tax payers to the Government and are often victimised by one-off surcharge taxes when Government revenue drops significantly. This definitely does not mean that all participants in the private sector are clean, but we all know that they are usually better than the Government sector and Government-owned businesses. 

On the argument of sovereignty, it has been said that “the business of business is business”. Businesses enter a market to make profits and they become sustainable when they generate profit. Many Sri Lankans have successfully expanded globally, but have we ever heard the people of those countries complain that Sri Lankans have come to take the sovereignty of their country? 

Myth 2 – The IMF is the solution to all problems

Another common myth is that the International Monetary Fund (IMF) is the solution to all our economic problems. This is simply not the case. The IMF can only give us some money and credibility. Both will bring some stability, but our economy needs to grow organically and continuously like an agile, flexible wrestler for us to overcome the crisis and to become a tiger economy. 

The IMF cannot implement reforms for us – we have to buckle down and implement economic reforms and reset Sri Lanka for our own progress. The IMF is just a stepping stone on a long journey; it cannot solve all our problems. 

We have to welcome a full package of reforms to grow the economy. We have gone to the IMF about 16 times previously and only six programmes have been completed. Out of the Extended Fund Facility (EFF) programmes, which require structural reforms, we have completed only two programmes. Our track record indicates that we are a nation that expects the IMF to solve our problems rather than solving them on our own.   

Myth 3 – IMF is the problem 

On the flip side of the coin are those who think the IMF is the problem. They are of the view that the IMF is some sort of secret agent who will engineer all privatisations in the interest of Western oligarchs and they believe that the IMF operates like a gangster with a gun ready to shoot us if we don’t do what they say. 

This is simply untrue; the IMF in this case is the International Monetary Fund and not the Impossible Missions Force from Tom Cruise’s action film franchise. 

The IMF is like a bank’s credit officer who will evaluate a business proposal and then approve the granting of money. We all know bank officers don’t initiate business proposals, but the customers do. 

Similarly, the Government has to go to the IMF with a plan and the IMF will evaluate whether the plan is adequate to achieve the desired results. If we fail to adhere to what we promise, as we have done 10 times out of 16 in the past, they won’t release the balance money, and nothing will happen except the continued deterioration of our economy. 

Given this context, a side effect will be that no one else will come forward to give us assistance if we don’t move forward with the IMF programme. They are like a gym instructor and they can recommend a good diet and exercise, while our policymakers have to do the work to ensure an outcome. 

Myth 4 – Imports are the problem; imports are bad, exports are good

Since we have a USD/forex shortage, some are of the view that imports are the reason for the crisis. We first need to understand that before we import goods or services, we buy USD by paying in LKR for imports. 

If we really wish to do so, the best way to discourage imports is to increase the price of USD before we ban any imports. This is where the stability of the monetary system becomes of paramount importance in overcoming the crisis. 

If we need to encourage exports, the best way to do it is to pay the market rate for USD to exporters so they can be more competitive. This is why it is said that “stability is not everything and without stability everything is nothing”. 

The truth is that imports and exports are both good because they are two sides of the same coin. We need exports for imports and imports for exports. We need to look at overall trade reforms and facilitate further trade rather than thinking that imports are the problem. The problem is the monetary system which determines the price of USD, not imports or exports. 

The above are just four myths out of many. Those perceptions are like a virus, but we need to implement reforms and reset Sri Lanka if we are interested in forming a dynamic and healthy economy like a natural wrestler who can absorb shocks and perform in good times as well as in bad times.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The case for privatisation

Originally appeared on The Morning.

By Dhananath Fernando

Privatisation has entered the lingo of the nation once more. A few years ago, the mere mention of it was taboo in many circles and although the fear of using the word hasn’t fully evaporated, an increasing number of people actually understand the concept today. 

The discussion is now drifting towards whether privatisation is good or bad, with those proposing privatisation highlighting examples of success stories while those against it bring up examples of where it has gone wrong. 

In my view, rather than debating the merits of privatisation right away, the starting point of the discussion has to be about what Sri Lanka can do to overcome the crisis and how to transform our little island into a dynamic economy in Asia. 

On our journey to find answers, we can consider many options, of which privatisation is definitely one. However, our starting point has to be getting Sri Lanka out of this mess and our solutions have to be pragmatic and suited to our context. 

It is the same as a doctor prescribing medicine for ailing patients. The doctor first performs a diagnosis and then recommends medication based on the patient’s condition, history, affordability, side effects, and many more; he does not begin debating the merits of a particular treatment without a thorough diagnosis.

Obstacles against reforming the State sector

There is a brewing school of thought in Sri Lanka that given the many public corporations well-operated by honest and honourable professionals in other countries, nothing stands in the way of Sri Lanka having the same. The oft-cited examples include Singapore and New Zealand. 

Firstly, we have to realise that Sri Lanka’s context is very different. We are a country whose political system is rotten to the core. In fact, when President Gotabaya Rajapaksa took over the office of the president, he appointed a committee to appoint directors to State corporations and we are all aware how that ended. 

Simply put, our political system and context doesn’t facilitate getting talented professionals for the management of State-Owned Enterprises (SOEs). 

Secondly, the vast majority of capable professionals in Sri Lanka are very well compensated and taken care of by the private sector, so they have no reason to move to the public sector, which would come with a massive risk of political backlash and less pay to boot. Salary scales in our SOEs simply do not attract the right talent to drive management change. And that’s just one side of the story. 

Thirdly, Sri Lanka is now unfortunately bankrupt and most of the key SOEs carry both massive debts and losses. We cannot realistically expect the right talent to join and transform SOEs, knowing they will be faced with a difficult restructuring and turnaround, particularly without even the incentive of competitive salaries. 

Last but not least, there is a principal-agent problem when the State attempts to conduct business. The State is currently involved in many industries as botha  regulator and a market player. Can you imagine if the umpire in a game of cricket was also a batsman for one of the sides? 

The State is involved in a multitude of sectors including hospitality, aviation, modern trade, banking, energy and many more. Although it has a bigger role in establishing the rule of law and a competitive marketplace, it is instead wasting resources on micromanaging certain industries. 

The State is presently a jack of all trades and master of none, falling far behind expectations both in terms of ensuring the rule of law and managing business. 

Privatisation as a viable option 

It is in this context that Sri Lanka has to consider privatisation – not simply for the sake of privatisation but as a solution for the problems we have. There are six basic reforms that we have to implement if we wish to emerge from this crisis in a timely fashion.

• Increase revenue

Privatisation can increase revenue because private companies pay taxes to the State. At present, rather than receiving taxes, the Government finances a number of heavily loss-making institutions. When undergoing privatisation, the government earns money from the assets it sells, so on both ends it will bring revenue for the Government to overcome the crisis.

• Reduce expenditure

Currently, the Government’s main expenditure is on SOEs. The Ceylon Petroleum Corporation (CPC), for example, has lost Rs. 600 billion in four months. SriLankan Airlines has lost Rs. 200 billion in four months, an amount that is four times the entire Samurdhi budget (Rs. 50 billion), which is used to take care of the most vulnerable people in our society. 

When we privatise, our expenditure will fall and we will stop leaking money, whereupon those savings can be given to the most vulnerable.

• Reduce debt

SOEs not only increase expenditure and burden State coffers – they carry a lot of debt in both LKR and USD. The Central Bank Governor recently stated that the CPC had neither USD nor LKR to run its operations and that the Government had to finance it. Privatisation will reduce our current and future debt burden, which will help restructure our debt and achieve debt sustainability. 

• Increasing growth

Another important aspect of overcoming the crisis is to create growth. The current set-up of retaining State ownership of these loss-making and inefficient enterprises will simply slow down growth. 

Consider the example of the East Container Terminal. Multiple tender proceedings were stopped and cancelled but the Government was still said to be capable of seeing it through. However, it is now obvious that this is not possible given the crisis. 

Moreover, not only are we behind, but we are also losing container transhipment due to capacity constraints while business is moving away from the country, challenging our long-standing transhipment status. 

However, the private sector can drive growth. They have cash, and to an extent, lending capacity. The private sector is more concerned about profits, not so much about the overall economy of the country.  

• Increasing productivity

We all are aware of the productivity figures of State-managed institutes. News reports revealed that even with fuel shortages, the CPC had paid a total overtime pay amounting to billions of rupees. 

The private sector can drive productivity. It can introduce technology, processors, business ecosystems and networks to create synergies, which will create job opportunities and drive productivity across the nation. 

• Attracting FDI

The private sector, locally and internationally, can bring investments to our shores with privatisation (meaning US Dollars) in addition to technology and skills which will spill over to other sectors, driving productivity and efficiency. Foreign Direct Investments (FDIs) will undoubtedly ease the pressure off the Government in relation to USD shortages. 

Case-by-case basis 

Thus, privatisation suits Sri Lanka based on the crisis and context. It is a solution for what we are going through and a medication that fits the condition of the patient. 

However, this doesn’t mean we have to privatise everything. Energy and electricity have to be unbundled first and the market must be made competitive. The pressure on the Ceylon Electricity Board (CEB) and the CPC will ease and consumers will have a better experience. 

Some institutions such as SriLankan Airlines have to go for a fire sale, while some institutions can be consolidated and some can opt for public-private partnerships. There is no single remedy for all, but we have to move forward on a case-by-case basis. The important thing is to move forward and for the State to slowly move away from doing business, instead focusing on the Judiciary and the rule of law. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

A reformist mindset is crucial

Originally appeared on The Morning.

By Dhananath Fernando

On one side of the aisle, hopes have been raised with the election of a new President. Hopes abound that necessary and sorely needed economic reforms will now move forward. On the other side, yet another round of suspicion has arisen about whether politicians are yet again deceiving the common people. 

There is suspicion that the unaddressed sufferings of the people will be swept under the rug with another political plot. As I was trying to understand which side made the more compelling argument, I recollected my memories of a story related by my school Principal, the late Rev. Father Bonnie Fernandopulle. 

He asked his students: “Do you know the difference between a good kettle and a bad kettle? Both kettles serve the same purpose – boiling water. They both give the same whistle when water is boiling.” He paused before continuing: “Then what is the difference between a good kettle and a bad kettle?” 

After letting the students mull over it for a moment, he said: “Only time will tell which one is good and which one is bad. The good kettle will be durable and can be used for a longer time, while the bad kettle cannot be used for that long. Only time will tell which is which.” 

Rev. Fr. Fernandopulle repeatedly advised students to be good kettles and make decisions that could stand the test of time. His message can also be applied to the spheres of politics and reforms. Within these spheres, too, the test of the time is the best test to administer before arriving at hasty conclusions.

Political instability 

Since 2018, back-to-back political instability has too often been present in the key decision-making positions. The 2018 constitutional coup and 2019 Easter attacks kick-started a sequence of events fraught with political instability. Then the country was sent into lockdown as Covid numbers surged. 

Since then, after the country was reopened, we have so far had five finance ministers, three prime ministers, and two presidents in the very short period of time of two-and-a-half years. Since 2019, even the Central Bank has had three governors.

To make any headway in reforms, a government should be allowed to remain in place for at least two or three years to ensure that some progress is made. The first 100 days are the main reform window. Any government can capitalise on the first 100 days if it has done its homework and if it has a competent team and reforms ready to execute at short notice. 

To stay in power for two to three years, the initial reforms have to have some impact and people should have some level of hope that things are improving. The common people should also have some level of confidence that the people in charge are moving the country in the right direction. To achieve this, we need a written action plan to give confidence to all stakeholders, including the International Monetary Fund (IMF), and even for all political parties to reach a consensus and work together. 

So it is of paramount importance that we obtain some level of consensus on a programme of reforms. Otherwise, we will just waste time going back and forth appointing more ministers and cabinets every fortnight while reforms come to a complete standstill. 

A reform programme 

Putting forth a reform programme in a document is the very first step on the path to achieving consensus. 

Surprisingly, no political party has taken the initiative or led discussions on a commonly-agreeable work plan. What political parties have put forward are long manifesto type documents which lack an actionable plan. Those documents often have drawn-out explanations of the problem and broader solutions with executions that are vague.

The National Movement for Social Justice (NMSJ) has compiled a common minimum programme evaluating reform ideas from multiple parties and organisations (the author was a part of the process). 

In a recent tweet, Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva mentioned that they have created a reform plan based on NMSJ proposals. According to his tweet, the team, which was supported by Dullas Alahapperuma and included Dr. Nalaka Godahewa and Prof. Charitha Herath, had agreed on the proposals. All that happened before the parliamentary presidential race, but nonetheless the reform plan remains valid. 

NMSJ documents have been endorsed by economists and business leaders, so a sensible starting point could be to move ahead with the plan and get the consensus of all parties, forging ahead with the reform pathway. Let me remind you that we are already very late to start reforms at all.  

Unfortunately, we do not have many options other than performing economic reforms if we are serious about overcoming this crisis. If we want to settle for not executing any reforms, we will have to settle for becoming a failed state in the coming years. 

Reform communications 

The second step of any successful reform package is the communication of reforms. 

Reform communication is less about running an expensive media campaign and airing catchy commercials, and is instead more about explaining clearly and simply the change that will be wrought on the system and ensuring transparency. Transparency and actually executing actions are the biggest tool of communication. It provides signals to both markets and individuals. 

For example, if we start the process of privatising SriLankan Airlines, the tender process has to be competitive so that it communicates to investors, the local community, and international financial institutions that the urge for change has come from within. Then when we actually go about enacting privatisation, it will clearly communicate the message that we are open for private investments, which assures private property and competitiveness. 

In the world of reforms, actions are the strongest tool of communication. The second most important tool is ensuring transparency and explaining reforms in simple language for people to understand their impacts and how they will help us emerge from the crisis.

Institutions for executing reforms

Another key piece of the puzzle is having necessary institutions and capacity to carry forward reforms. 

For instance, there is a process and an engagement strategy we need to follow to privatise a State enterprise. The strategy and the execution requires skilled manpower, networking capabilities, negotiation power, and transaction management. Only a strong institutional structure will bring transparency and seriousness to our reform programme. 

The new Government or any governments expected to be formed in future should realise that reforms are the only way out. Economic reforms are both a science and an art. A key challenge for the new Government is that it is running out of time. 

As my Principal mentioned, the sooner people realise which kettle is which, the better for the nation. If people realise the kettle is bad, it is natural that people will take to the streets and protest will gain momentum, where forceful control will have little effect than to push things completely out of control. 

Only time will tell us whether the new Government is serious about reforms. That will decide whether Sri Lanka will become a tiger economy or a failed state.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Invest to progress, not to regress: Bridging the infrastructure gaps in Sri Lanka

Originally appeared on the Daily FT, the Morning, Lanka Business Online, Groundviews, Ada Derana Biz English

By Tiffahny Hoole and Janani Wanigaratne

Sri Lanka is going through a crisis of a magnitude that has never been witnessed in its economic history. The country is in disarray as people wait in lines to purchase essentials. Official reserve assets have plummeted to a $ 1,920 (1) million by May this year and the debt to GDP ratio has reached an all time high of 104.6% by 2021. (2) The country is struggling to meet its domestic needs while having fallen into a debt default for the first time in its history. Why did Sri Lanka’s debt obligations escalate to the point of an economic crisis? Debt taken on to finance unproductive infrastructure is a part of the problem. (Debt was also taken to finance recurring expenditure including interest on past debts and subsidies to SOEs). 

Professor Amal Kumarage, one of the leading experts on transport infrastructure in Sri Lanka says, “Sri Lanka’s inability to service debts is a clear indication of inefficient infrastructure investment. Over 50% of the foreign loans in the past decade were for different transport infrastructure projects that have not delivered the anticipated economic outcomes. The professionals who promoted unfound optimism in economic analysis of these projects to please the political masters must come forward and accept their responsibility for contributing to this crisis.”

Since the end of the civil war, there has been a longstanding commitment towards developing large-scale infrastructure projects (See table 0.1). (3)In the first eight months of 2020, Sri Lanka’s public expenditure on infrastructure development amounted to Rs. 98 billion. (4) The Ministry of Finance aims to maintain public investment at an average of 5-6% of the GDP per annum till 2025. (5) In terms of performance however Sri Lanka infrastructure falls short – it ranked 61 out of 141 under the overall infrastructure performance indicator by the ‘Global Competitiveness Report 2019’. (6)  

Sri Lanka does have an infrastructure gap but it must invest in the right projects. The World Bank (2014) reports that Sri Lanka still needed $ 36 billion worth of investments to close its infrastructure gap, which amounts to 40.5% of the GDP in 2018. (7) To avoid wasteful investments, Sri Lanka requires a fact-based project selection process and an optimised operation and maintenance system for existing large-scale infrastructure projects to close this gap.(8) This would also reduce the country’s spending significantly. Among the numerous factors that fuelled this crisis, lavish investments in infrastructure of limited benefits seems to have played a crucial role. 

Useful infrastructure projects should enable the best return to public investment with higher efficiency, increased safety and minimal environmental damage. It should also have a positive spillover effect which may range from generating employment and increased foreign direct investment to improved tax revenue.

How are large-scale infrastructure projects financed? 

In an effort to close the gap between existing and required infrastructure, the Government resorted to foreign loans. Foreign borrowing amounted to $ 1,710 million in the first eight months of 2021.(10) This accounts to an increase of 16% of foreign financing disbursement in comparison to the previous year.(11) Sri Lanka’s disbursement commitments consist of loans from multilateral agencies, such as the World Bank and the Asian Development Bank, and bilateral partners including China, Japan and India(.12) 

With the provision of foreign loans to finance large-scale infrastructure projects among numerous other borrowings, Sri Lanka’s debt to GDP ratio has reached 104.6% in 2021. Based on the high foreign loans obtained, in conjunction to Sri Lanka’s current economic status, there seems to be a strong indication that large-scale infrastructure projects severely indebted the State. If so, where did Sri Lanka go wrong? 

Lack of preliminary procedure 

Taking on multi-million dollar investment projects is a complex task. Large infrastructure projects need to pass the test of utility in order to serve long-term demands before public money is spent.(13)

This means, thorough scrutiny is mandatory to enable the gains of large-scale infrastructure to be fully realised. This would include looking at the interest rates, grace periods and maturity periods provided. It also requires a comprehensive understanding of the type of loan provided. These can be achieved through conducting proper feasibility studies and risk assessments which will shed light on the project’s potential to service debt and its sustainability in the long run. For instance, loans obtained through multilateral agencies such as the World Bank and Asian Development Bank require a competitive bidding process to select a contractor. (14) In contrast, projects funded by bilateral agencies are through tied loans.(15) This means that bidding is limited to contractors from the lender’s country.916) During the period of 2005-2018, 28 out of 35 high value bilateral loans were procured without a competitive bidding process.(17) The inability to gauge all available contractors at competitive rates to construct large-infrastructure potentially results in poor quality infrastructure at a cost of very high prices.(18) 

The National Procurement Agency was a statutory body that handled competitive public procurement. However, right before the height of Sri Lanka’s investment spree in 2008, it was removed. In lieu of this, the Standing Cabinet Approved Review Committee (SCARC) was set up in 2010 to approve projects without public tendering or parliamentary approval. This creates additional concerns over the commercial viability of the project approved.(19)

Take for instance the Colombo Port City. Soon after SCARC approval, it was heavily criticised on the claims that its Environmental Assessment Impact was compromised. Further fuelled by the opposition from the fishing community, the project was temporarily suspended. The interim review of these concerns cost the Government $ 143 million as compensation. If proper procedures were followed, these costs could have been circumvented.(20) 

Public infrastructure or political infrastructure? 

Investments in large and complex infrastructure projects have also been a fertile ground for corruption, thereby increasing the risk of creating ‘White Elephants’(.21) Rather than considering the economic value of obtaining loans from foreign lenders, governments utilise large-infrastructure projects as a tool to win the votes from the public. In the event such projects are not completed within their term, successive governments are inclined to halt its operations.(22) This leads to unconsummated, poorly built infrastructure with limited benefits to the people.

Gaps in information: Calling for increased transparency

An effective mechanism of ensuring public money is spent to the best of its ability is to increase the access to information. There is a significant gap in data available to the public on large-infrastructure projects in Sri Lanka. For instance, a comprehensive breakdown of the loan amount, its repayment and interest rates are inconsistently provided in the Ministry of Finance Annual Reports. Selected projects financed through bilateral agencies have been completely omitted. Furthermore, information pertaining to the project’s appraisal and performance is not publicly available. This hampers the ability for the public to conduct an analysis on the investment made. The public must relegate to submitting Right to Information applications to the relevant implementing agency. However, comprehensive responses are rare.  Nevertheless, investment on large infrastructure is a necessity. It has been assessed that 1 dollar worth of infrastructure investment can raise GDP by 20 cents in the long run.(23) Furthermore, infrastructure development can facilitate trade and foreign direct investment. 

In order to ensure that the benefits of each and every infrastructure project undertaken is fully realised, it is vital to set up a comprehensive framework with active public policy, transparent and competitive procurement, proper evaluation and an in-depth financing structure.(24) Hard infrastructure should be accompanied by soft components such as policies and regulations in order to facilitate efficient performance.(25) Therefore, a long-term plan for national infrastructure that is publicly available has the potential to pivot the feeding ground of corruption to the stepping stone of development. 

Refernces:

1CBSL

2CBSL

3https://www.ips.lk/talkingeconomics/wp-content/uploads/2012/09/pb10_Infrastructure-Challenges.pdf

4https://www.treasury.gov.lk/api/file/0d77beee-4e42-478b-9089-7f09be23a0e0

5https://www.treasury.gov.lk/api/file/0d77beee-4e42-478b-9089-7f09be23a0e0

6https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2020/en/13_Box_02.pdf

7Chinese Investment and the BRI in Sri Lanka

8https://www.mckinsey.com/business-functions/operations/our-insights/bridging-infrastructure-gaps-has-the-world-made-progress

9CBSL Annual reports from various years

10https://www.treasury.gov.lk/api/file/16e9c6ec-7a13-4220-a8a7-1427c5d14785

11http://www.erd.gov.lk/index.php?option=com_content&view=article&id=94&Itemid=216&lang=en

12http://www.erd.gov.lk/index.php?option=com_content&view=article&id=94&Itemid=216&lang=en

13https://www.echelon.lk/a-circus-of-white-elephants/

14https://www.veriteresearch.org/wp-content/uploads/2021/07/VR_Eng_RR_Feb2021_Opportunities-to-Protect-Public-Interest-in-Public-Infrastructure-1.pdf

15https://www.veriteresearch.org/wp-content/uploads/2021/07/VR_Eng_RR_Feb2021_Opportunities-to-Protect-Public-Interest-in-Public-Infrastructure-1.pdf

16ibid

17ibid

18Key Informant Interview

19‘Locked in’ to China: The Colombo Port City Project

20‘Locked in’ to China: The Colombo Port City Project

21https://www.veriteresearch.org/wp-content/uploads/2021/07/VR_Eng_RR_Feb2021_Opportunities-to-Protect-Public-Interest-in-Public-Infrastructure-1.pdf

22https://www.chathamhouse.org/sites/default/files/CHHJ8010-Sri-Lanka-RP-WEB-200324.pdf

23https://www.mckinsey.com/industries/public-and-social-sector/our-insights/four-ways-governments-can-get-the-most-out-of-their-infrastructure-projects

24https://www.adb.org/sites/default/files/publication/177093/adbi-wp553.pdf

25https://www.adb.org/sites/default/files/publication/29823/infrastructure-supporting-inclusive-growth.pdf

Janani Wanigaratne is a research intern at the Advocata Institute. She can be contacted at janani.advocata@gmail.com. Tiffahny Hoole is a former researcher at the Advocata Institute. She can be contacted at tiffahny.advocata@gmail.com. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Any government’s biggest enemy is INFLATION

Originally appeared on The Morning.

By Dhananath Fernando

Friedrich Hayek famously said, “I do not think it is an exaggeration to say history is largely a history of inflation, usually inflation is engineered by governments for the gain of governments.” While there are many reasons for the ‘Aragalaya’ to advance and develop as a movement, the economic context for movements such as the ‘Aragalaya’ taking off should not be underestimated. 

Those who remember our recent history will recall a similar ‘Aragalaya’ in 2001-2002 called ‘#JanabalaAragalaya’. During that time as well, Sri Lanka’s currency depreciated significantly and cost of living was on the rise. In fact, every time Sri Lanka’s currency depreciated and inflation started soaring, we would see similar kinds of people’s protests rising to prominence. 

Inflation leads to crisis

Today we are going through one of the largest crises in our history and the people’s resistance has been reflective of what we are going through. That is why it is said that the biggest enemy of any government is not the opposition, but inflation. 

Unfortunately, many governments and central banks around the world have not realised this truth and have created inflation by lending their respective governments money without any control; they followed reckless monetary policies without understanding the gravity of their actions.

Another currency crisis hit in 2011-2012, which led to the build-up of pressure on then President Mahinda Rajapaksa. Later, in 2016-2017, yet another currency crisis took place, with pressure mounting against the Yahapalana Government in connection with the Bond scam. Since 2019, Modern Monetary Theory (MMT)-led money printing has undoubtedly been one of the main reasons for the crisis we are experiencing today. 

When countries that do not possess a global reserve currency as the national currency add money to their economy, that money will generally chase behind imports, which require foreign exchange. If the country allows the currency to fluctuate automatically, the prices of imports will increase and demand will drop without any forex shortages. But if a country is trying to control the exchange rate using its reserves, unless it has a mechanism to continuously build reserves, at some point it will encounter forex shortages followed by steep currency depreciation. 

Perfect storm 

Sri Lanka has often faced this same problem, which is also the reason we always face currency crises. The present crisis is of historic proportions, as it is accompanied by a perfect storm of so many other policy errors, along with deteriorating global conditions. 

Since 2008, we have had the option of borrowing from markets. We complicated our problem by borrowing money at high interest rates to build our reserves as well as to keep the exchange rate controlled and artificially high. 

Ultimately, we have lost control of everything, and now we have a USD shortage which has led to many shortages of essentials. Since we have borrowed money from international markets, we are now experiencing a debt crisis. Further, due to our own banks investing in sovereign bonds, the stability of our financial system is in question. 

The graph shows the currency depreciation since 1970. We can observe what has happened in recent years to understand and validate Freidrich Hayek’s statement that history is a history of inflation. 

Solutions 

The first part of the solution is for all future and potential leaders and governments to understand that one of the main potential enemies of the country is the inflation they themselves have the power to create. On the other hand, central banks should understand that their excessive lending to governments can lead the country to absolute chaos and instability.

Therefore, regulation has to come forward for inflation targeting and to have a limitation on lending capacity of central banks to governments to ensure stability in our financial system. 

The already-drafted Monetary Law Act is a good starting point for the new government and finance minister and getting it approved with necessary amendments and inflation targeting is an easy win that will establish and indicate the direction of monetary stability. When inflation starts moving upwards, bringing it down is not an easy task, so we should make sure to keep it in check before it takes control and sends every other aspect out of control. 

Sri Lanka is at a crossroads, where we undoubtedly need a sequence of reforms. If we implement the reforms that are required, we have the potential to become a tiger economy, but if we continue to behave with old habits and allow inflation to take us over with our bad monetary policy, we will become a failed state. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Economic ‘Aragalaya’ crucial for reform

Originally appeared on The Morning.

By Dhananath Fernando

SL economy has reached point of collapse; needs a total reset to recover

Every day on my way to work I walk past 5th Lane, the current Prime Minister’s residence. Last week, one of his security officers stopped me. He smiled and said, “Sir, we watch videos of Advocata Plus.” After a moment, he continued: “What is actually happening? How long will it take to recover?” I didn’t have a concrete answer. I couldn’t adequately answer him because our path to recovery depends on our course of action. 

The only certainty is the fact that it’s going to take time. Yet, to refrain from discouraging a hopeful individual, I smiled back, and said: “It’s a difficult time and recovery will be slow, but we will recover if people like the Prime Minister make the right decisions and policies.” His response was heavy with emotion, as his eyes brimmed with tears: “Our time is over. I thought we could make our children’s lives better, but now I can’t even provide my kids with what my parents provided me. It hurts, sir.”

The story of many Sri Lankans is no different. This is why we need a complete reset of our economy. The existing system, which we have inherited, cannot move forward any further – a point of collapse has been reached. The collapse has been painful and recovery takes time, but in order to ensure that we successfully overcome this collapsed system, an ‘Aragalaya’ for economic reform is absolutely crucial.

A question remains. What can we do to overcome and speed up our recovery? One common mistake many policymakers make is that they only see a fraction of the bigger picture. Reviving tourism, or getting remittances, or bridge financing is seen as a solution. However, these are just smaller concerns in a much larger problem. 

The core issue is that our economy is not competitive. Having existed as a closed economy for an extended period of time and losing our competitive edge has caused the Sri Lankan economy to lose its overall competitiveness. Many believe in the myth that our economy has been open since 1977, when in reality it has been closing down since the 1990s. One of the best indicators to measure this is through the comparison of our imports and exports to the size of our economy – both of which have been declining at a record pace since the 1990s. Exports are the indicator to measure our relevance in the global market and the declining trend in our exports means that we have become less relevant to global markets. 

Why is Sri Lanka losing competitive advantage? Firstly, the nation’s factor and product markets have not experienced any major reforms for decades – and in some cases for centuries. As Charles Darwin said in his Theory of Evolution, only those who adapt will remain. Sri Lanka did not adapt and thus became irrelevant. The country’s land market is virtually a closed market, with approximately 82% of the land owned by the Government, which causes one of the main factors of production to be hindered. 

Secondly, labour market reforms have not been implemented. Even in 1977 there were no labour market reforms. Hiring and firing employees is a very difficult process and stringent regulations on part-time work and flexible work hours are preventing Sri Lanka’s growth. On the supply side, productive labour remains glued to the Government sector, with very low salary scales despite having the potential of contributing to the economy in a far bigger capacity.  

Sri Lanka’s public sector employment, which was at 812,472 in 1994 (1), increased to 909,564 by 2002. By 2020, public sector employment was at 1,423,116 (2). The latest figures report 1.58 million public sector employees, making Sri Lanka home to one of the highest ratios of public sector employees in Asia (3).

The current economic crisis has brought the country’s public sector finances and savings to shame. With 54% inflation and more than 100% currency depreciation, EPF/ETF savings and the pensions of the public sector have been reduced to an amount that means little in comparison to skyrocketing living expenses. 

While the situation is unfortunate, it can be capitalised upon to enact public sector reforms. The first step would be to first freeze all recruitment and offer a retirement scheme to bring the employee numbers down. We can cut down the number of working days for public servants and consider different types of voluntary retirement schemes to hedge costs. There needs to be a prioritisation of public servants and the salaries of capable staff should be increased, with adequate training opportunities provided to enable further refinement of skills.

The current structure of public workers is not only negatively impacting their own lives, but also making the lives of the general public quite difficult. As a result, similar to the Prime Minister’s security personnel, most of us are unable to provide our children with what our parents provided for us. As such, public sector reforms have to occupy a core spot in the ‘Aragalaya’ to ensure economic reform. 

When suitable policies that can bring macroeconomic stability are implemented, the micro pieces will adjust accordingly. Thus far, the strategy has been micromanagement rather than macro stabilisation. However, when necessary Government policies attend to macromanagement, micromanagement will naturally be provided for by the private sector.

In the investment sector, labour and land have once again been key constraints, as the country lacks adequate land to provide investors. Zones managed by the Board of Investment (BOI) have run out of plots of land and getting new land for development has become a nightmare. Until the newly-appointed Minister of Investment Promotion offered a five-year visa for foreign investors, we did not even have a programme to attract talent and investment through our immigration system. 

If the macro policy is sound and a level playing field is created for all, then future generations will be better equipped to take care of themselves. One very important component of the ‘Aragalaya’ for economic reforms is our monetary policy, since without fixing our currency and the value of the notes we exchange, macro stabilisation will be a futile effort. 

References:

• Census of the Public and Semi-Government Sector Employment 1994, Department of Census and Statistics. http://www.statistics.gov.lk/PublicEmployment/StaticalInformation/census_reports/CensusOfPublicAndSemiGovernmentSectorEmployment-1994FinalReport

• Ministry of Finance Sri Lanka Annual Report 2020, treasury.gov.lk. https://www.treasury.gov.lk/api/file/0b7d1935-6235-4156-97b6-752d6a8039d0

• Employment in Public Sector and by Gender, OECD iLibrary. https://www.oecd-ilibrary.org/sites/2558c185-en/index.html?itemId=/content/component/2558c185-en

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Golden opportunity for energy market reform

Originally appeared on The Morning.

By Dhananath Fernando

Let markets work and adjust expectations

As children, most of you might have tried the trick of obscuring the vision of a bigger object by closing one eye. I used to try this with a lamp post, by moving the finger closer to the eye while closing the other eye, thereby making the lamp post disappear. As a child, there was a thrill in making the lamp post disappear with a minute object such as my finger. 

However, in reality, we know that a lamp post or a bigger object cannot be covered with a finger, due to factors such as volume and mass. Similarly, until we ran out of petrol, Sri Lanka also pretty much thought the finger could actually cover the lamp post – the finger in this case was import controls, which we all thought was the solution for a brewing Balance of Payments crisis. 

This column has been a consistent opponent of import controls since the beginning. It has been two years since we stopped importing vehicles. Some non-essential imports (as per the definition of policymakers) such as apples and other food items have also been halted. At one point in this debacle, the Government issued licences for imports, which threatened to create a new Licence Raj. 

We went as far as to kill the forward market and once even issued a regulation mandating a 100% cash requirement to open Letters of Credit (LCs), which were then required to be opened with a 90-180-day credit period. We did so much to reduce imports for so long, so why didn’t any of these policies bring their promised results and how did we run out of money even to import fuel and life-saving medicines? After all those remedies, why have we fallen to a state where the country is in a de facto lockdown – not because of Covid but due to a fuel shortage? 

Many still haven’t understood that imports were not the problem. By contrast, having no fuel imports has become a significant problem. Of course, at a time when we as a nation have hit rock bottom, imports will come to an automatic halt due to the unavailability of foreign exchange. But import controls have certainly not helped matters and have in fact worsened the problem. If we had a solid monetary policy, if we hadn’t maintained the exchange rate at artificial levels and if we maintained stability, this problem would not have arisen. 

It is in this context that the Cabinet has granted the opportunity for any oil producing country that can bring fuel to Sri Lanka to run the fuel distribution while the Government keeps control of the operations of the Sapugaskanda Refinery. 

Surprisingly, even the strong Ceylon Petroleum Corporation (CPC) unions remain silent. Previously, CPC unions were the first to mobilise on the streets when any policymaker dared to even broach the topic of opening up investment activity to the private sector for energy and fuel. Now, private investment has entered their territory and the signals of privatisation are all there, but silence still remains. It is obvious now to these unions and to the nation at large that the State cannot operate in such competitive sectors and that attempting to do so guarantees disaster. Unfortunately, we are presently living through such a disaster. 

While allowing the private sector to operate in the energy market is a good move, expecting the fuel problem to go away simply by allowing private companies to enter the Sri Lankan market is very short-sighted. For context, the reality of the fuel market is that fuel supply can only be secured by paying in US Dollars, but sales in Sri Lanka are transacted in LKR. Even if an investor enters the market with a USD investment, if they can’t convert their LKR into USD, there will be no strong business case unless they have some other business lines which have LKR and USD interests. Whoever invests in USD should be able to convert their sales to USD; otherwise this is not a sustainable long-term solution. 

One segment that has both USD and LKR interests is exporters. They earn USD from their exports and they need LKR for their local operations. If they can get a higher profit margin through fuel sales than through a USD conversion in the banking sector and if they have adequate volumes to run a fuel business, then there is a business case for these exporters to manage a fuel distribution operation. 

Alternatively, there has to be a separate financing arm for fuel, whereby anyone who has an interest in both USD and LKR can invest with an expectation of dividends. To do that, however, fuel pricing requires flexibility. Our present environment of price controls won’t work as fuel has far too many variable cost components and competitive margins. Therefore, one solution is to open the fuel business to anyone – including local exporters – to enter distribution and not necessarily to provide the opportunity only to oil producing nations.  

Allowing anyone to import fuel is the right decision at this moment, particularly as the big companies that can afford to purchase fuel at a premium either individually or through business collaborations will do so, thereby minimising the burden on the Government. The private sector, of course, will increase efficiency as well. 

Another group that has both USD and LKR interests is our overseas workforce that provides foreign remittances. If they can get higher margins than the conversion rate offered by Sri Lankan banks, they might be willing to channel their money into the business of importing essentials. That was the logic expounded by Daniel Alphonsus in his recent article on allowing anybody to undertake fuel imports, even through open accounts. 

The expectation is that the undiyal money presently parked offshore will be channelled to essential imports as the importers can now obtain LKR by selling fuel and other goods. But again, prices have to be flexible and competition will bring the market to a stable position. Currently, the black market price of a litre of petrol is over Rs. 1,500, whereas the official price is Rs. 400. This is no secret. Alphonsus argues that the same system existed during the war in the north and east – although there was no official supply, fuel was available even in small mom-and-pop stores at a price premium, often in small glass bottles. 

Markets are strong and they will always work. Of course, they may not work as per our expectations, but the reality is that our expectations should adjust according to the markets. Since we have completely run out of options, we have a golden opportunity for reform. It is possible that we may fail, but we have little to lose and are presently not doing anything other than going around the world with a begging bowl. That too will have to be continued for now, but expecting other countries to donate their taxpayer money to Sri Lanka after so much mismanagement and loss of credibility is idealistic thinking. It is the same as our thinking when we were children – that an object would disappear if we simply didn’t see it anymore.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Cricket while the country burns?

Originally appeared on The Morning.

By Dhananath Fernando

In the mid 1990s, when Sri Lanka’s Cricket was performing extraordinarily well, there was an accusation that then President Chandrika Bandaranayake Kumarathunga was announcing unpopular policy decisions while public attention was on cricket. After Sri Lanka won a match, and while people are celebrating the next morning, the prices of items such as bread and LP gas are increased. There were even rumors that LTTE leaders had said “Sri Lankans remember any event only for two weeks”. Today, while public & media attention is focused on our historic cricket win against Australia, our policymakers seem to think that the attention diversion from cricket would save them from a historic Economic crisis. They are definitely wrong.

While IMF representatives are in Sri Lanka to explore the details of the programme, the drive for reforms among policy makers is extremely slow. Even more than 2 months after announcing the suspension of external debt, we have not yet provided any policy direction for stakeholders on reforms that we intend to follow to overcome the crisis.

So far, it seems like another round of political musical chairs without any genuine effort from policymakers to enact economic reforms. The school of thought that favored bringing political reforms hand in hand with Economic reforms is also now in question due to the situation with the 21st amendment. According to the Prime Minister, as per his recent speech in Parliament, we have to show our willingness for reforms to get the support of other countries. So what willingness has been indicated by our policy makers on any reforms? We have only been going to other countries and organizations with a begging bowl to find money for essentials on a weekly basis, and sadly that has become the new normal. We are at a very high risk of some level of social unrest with no reforms on the table and the poor leadership on display from our representatives. A short video clip uploaded by a journalist of a man in a fuel queue alerted me to the degree of risk we are in. The journalist asked about the impact of the economic crisis from this particular person in the queue. He said, with a very calm tone and patient body language, “I am a chauffeur and a father of 3 kids. I kindly request our leaders to not test the patience of fathers like me. The current protests & ‘Galle Face Green protests’ are broadly by youth. Not by fathers like me. Fathers like me do everything for our kids. We can’t see them suffering. When a father crosses the border of patience we don’t know where it will stop,” he said, with a measured tone and with a lot of depth.

While this column highlighted many preliminary reforms over the last two years, there are new reforms that we have to expedite given the severity of the crisis. As recent news stories have indicated, the debt restructuring in Sri Lanka seems likely to be very complicated and time consuming. In particular, the news that Hamilton Reserve Bank is suing Sri Lanka in American Federal courts indicates how complicated the situation could become. As per the report, they possess more than 25% of the July 2022 bond series and are requesting the full amount to be paid; they possess a share of the bond large enough to make them a ‘blocking minority’ which can block and delay the entire debt negotiating programme. The IMF, for their part, has indicated that they want to see a clear direction on debt restructuring if they were to support Sri Lanka. Bilateral partners such as China and Japan will also play a vital role in the entire process.

Given this situation and our slow approach to Economic reforms even after announcing debt restructuring, we will be left with a lot more debt to be paid. If we move at this pace, there is no doubt that we will have subsequent defaults even after restructuring, if we fail to boost economic growth. Therefore, the establishment of an independent debt office is extremely important. Our debt portfolio is diverse and expensive so highly skilled financial analysts should manage our debt in line with global trends. Following the dilution of our Civil Service, that level of skill is unfortunately not available in our public sector. Given the salary scale of the public sector we can’t expect talent with the calibre of skills of a fund manager to stay in the public sector. Simply put, a salary scale of LKR80,000 will not attract a fund manager who has to manage a few billion rupees worth of debts. Therefore, the independent public debt office should have a different salary scale (based on key performance indicators) and independent regulation if we are to have a sustainable problem for our debt crisis. We are where we are today due to our poor debt management. The “Common Minimum Programme” by the National Movement for Social Justice has indicated the same.

Furthermore, this crisis will inevitably impact many private enterprises and a record number of businesses will go bankrupt. In a market system it is unavoidable that while some companies succeed, others will fail. Our legal framework should allow the failed firms a faster exit so entrepreneurs can bounce back with a new business or otherwise utilise their time productively. Investing their energy and money on something productive instead of on an already failed business will inevitably affect the overall productivity and efficiency of the economy. Unfortunately, Sri Lanka does not have unified bankruptcy laws. So when a company fails, exit is not easy. More money, time & energy has to be invested to manage a bankruptcy as a result. There are some exceptions laid out as provisions in the Companies Act, but for most micro, small and medium enterprises - which are sole properties and partnerships - the absence of a bankruptcy law will cause severe repercussions. Sri Lanka should proactively think of these issues before the situation gets out of control.

Our policymakers should realise that the hunger and anger of the common man has created a volatile and flammable situation. There is no way for cricket or any other diversion to stop the righteous fury of a hungry man, so it is imperative that we bring about Economic reforms before a spark ignites the entire situation and pushes us deeper into crisis.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The economics behind the fuel crisis

Originally appeared on The Morning.

By Dhananath Fernando

I recently overheard a conversation while taking public transport. The bus I was commuting in was moving at a snail’s pace across Dehiwala as people had blocked the road to show their displeasure over fuel shortages. The fuel queue was long, spanning over a few kilometres, consisting of mostly three-wheelers. The conversation started when a lady seated at the back lost her patience as some three-wheeler drivers tried to block the road. 

“Three-wheelers are a curse on our country,” she said. “Look how long the queue is and how undisciplined these tuk drivers are. They consume a lot of fuel and they just sit and waste their time browsing the internet on their phones while they are in the queue. All these drivers are a part of our labour force and they are part of the problem behind this fuel crisis. We should ban three-wheelers and develop public transport. The Sri Lanka Transport Board should field as many buses as possible. Why can’t they employ more trains at this time?” She had initiated the conversation with a gentleman seated next to her, who was also highlighting some solutions. 

Her opinion would be mirrored by many Sri Lankans if they were asked about the reasons behind the fuel crisis and economic crisis. While we all understand that it is the foreign exchange or USD shortage which led to this fuel crisis, the productive use of our limited fuel stocks has been in discussion for many months. People are now worried that once the latest fuel shipment is exhausted, Sri Lanka will completely run out of fuel as we are scraping the bottom of the barrel of the Indian credit line. 

We all have to admit that fuel has become an extremely scarce resource given the shortage of USD. Another side to the problem is that fuel importation and distribution is mainly done by the Ceylon Petroleum Corporation (CPC) and Lanka IOC (LIOC). Both these companies do not generate USD revenue. 

If we allow anyone to import fuel, then the exporters who have US Dollars will import fuel mainly for their usage for export output. The garment and rubber industries will import fuel on their own with their own US Dollars to run their generators and plants and pay the tax. 

It is far more convenient, efficient, and productive for them to depend on their own supply chains than depend on the inefficient CPC. When there are industries that can afford fuel imports at their own cost, there will be more fuel for common people through CPC and LIOC with the little forex and credit lines they secure. 

Daniel Alponsus has explained this in his recent blog in detail (1), where he further suggested removing price controls on fuel and allowing an open market account for fuel imports so the informal forex will automatically move towards essentials such as fuel while remittances will start flowing.

Before we come to the conclusion that three-wheelers are the problem (as per the conversation I overheard on my journey), we have to first ask why there are so many three-wheelers on the roads. The simple fact of the matter is that they are very efficient – they are lightweight, their fuel economy is about 30 km/litre, and they can transport one to three passengers per trip. By comparison, the fuel efficiency of a personal vehicle – depending on the weight and engine displacement – would on average be approximately one-third of the fuel efficiency of a three-wheeler. 

Secondly, three-wheelers are the main form of last-mile transport. They provide flexibility in labour markets, contributing to their popularity. The final and most significant reason for the large number of three-wheelers is the lack of sufficient public transport – both in terms of quantity and quality. If there was an option for anyone to become a service provider of public transport, most three-wheeler drivers would have become public transport drivers. 

At present, just because you have a bus doesn’t mean that you can field it on the road due to the route permit system. In many cases, the selling price of a route permit is a few times higher than the value of the bus even after a massive excise duty, sometimes above 100%, being imposed on the vehicle. 

Our policies have therefore discouraged many entrepreneurs from entering the market for public transport. In addition, we have strict price controls on bus fares, which limit the ability of service providers to differentiate their services at different price levels. 

For example, a young executive may be willing to leave his vehicle at home and shift to public transport if there is a transport service that provides internet service and a breakfast package. The executive can work while commuting and he can save on his breakfast preparation time at home. However, with the current controlled prices and route permit system, such niches with higher quality of service (and higher prices) cannot be fulfilled. 

So the main reason for the higher number of three-wheelers and more fuel combinations is the absence of market forces in the public transportation sector. The fuel crisis has been exacerbated by bad public policy in relation to public transport. This has compelled us to use 60% of our fuel imports, which is the highest single commodity type import in our import basket. 

The only encouragement provided for public transport was the bus lane priority system – now even that has unfortunately been abandoned. If we want to incentivise the buses for their fuel, another option is to subsidise their fuel based on mileage. This means the bus operators would buy fuel at the same price as a normal customer at the pump but they will obtain a subsidy based on mileage to avoid any leakages (i.e. resale of fuel on the secondary market at a premium) and provide incentive for drivers and consumers. 

Poor data availability and the lack of information systems acts as a bottleneck for such initiatives. However, if private mobile based services like PickMe or Uber can track mileage and location, there cannot be a reason why the same mechanism cannot be implemented for public transport.  

In the midst of rising fuel prices, Germany reduced public transport fares to encourage more people to commute through public transport. This is so that the fuel consumption of using individual vehicles would be lower. Unfortunately, Sri Lanka did otherwise. Our policymakers did not understand the economics and optics of the problem. Until we understand the dynamics of the situation, we will all simply listen to and believe conversations about three-wheelers being the issue without really understanding the fundamental problem.  

References:

1. https://danielalphonsus.substack.com/p/solving-sri-lankas-fuel-crisis?s=w

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Don’t throw the baby out with the bathwater

Originally appeared on The Morning.

By Dhananath Fernando

While Sri Lankans have learned to accommodate daily blackouts by now, Sri Lanka’s power generation, or rather the lack thereof, has made headlines again. Minister of Power and Energy Kanchana Wijesekera’s amendments to the Electricity Act and trade union actions have created quite the chaos.

Sri Lanka’s power generation has always been political capital for politicians. During the Yahapalana Government, then President Maithripala Sirisena said he wouldn’t join the Cabinet until the Public Utilities Commission of Sri Lanka (PUCSL) and Ceylon Electricity Board (CEB) came to some resolution (1). The same administration saw CEB officials vehemently organising ‘bodhi poojas’ for the rain gods to avoid the horrors of extended power cuts. Recently, the CEB Chairman followed suit, stating: “When God gives rain and the Ceylon Petroleum Corporation (CPC) gives fuel, the CEB can provide electricity”(2).

In this context, the new Power and Energy Minister plans to amend the Electricity Act. The CEB Engineers’ Union has declared public resistance. The CEB enjoys a monopoly in transmission and maintenance of the grid and a greater control on power generation development and distribution. Therefore, as a trade union it has very high influence. This makes energy sector reforms very complicated. Achieving consensus between stakeholders is next to impossible. Given this monopoly and profit-making ability, reforms have taken a backseat. In this climate, the willingness of the Power and Energy Minister to prioritise reforms is commendable.

The Minister made a speech in Parliament highlighting the delays of renewable energy. In response, the Government suggested moving away from competitive bidding for renewable energy projects. While there is some degree of truth to delays occurring during the process of competitive bidding, the sustainable solution is not to completely do away with it. Under competitive bidding, the cost per unit of solar energy can drop drastically. Getting rid of competitive bidding would mean welcoming unsolicited renewable energy projects with much higher cost per unit. This cost will ultimately have to be borne by industries and consumers. In any trade, complete absence of competition means more rent seeking, inefficiencies, and corruption. 

A major reason for the delay of solar energy projects is the unavailability of land; 82% of Sri Lanka’s land is owned by the Government. Therefore, finding land for projects has become very difficult. The Government must prioritise clearing land for private investments. This applies to businesses across the board.

Secondly, making the policy and regulatory environment conducive to unsolicited proposals may not benefit the Government. This is because the current economic conditions are such that we do not have dollars to import material needed for renewable energy projects. Further, the cost of finance is also significantly high as our interest rates have skyrocketed. Without foreign exchange and high capital cost for any investor, development of renewable energy projects will take a backseat. Ultimately we will end up abolishing a competitive system with further delays and corruption.

The controversial wind power plants in Mannar should also be under the competitive bidding process. Failing this, Sri Lanka will not be able to reach market rates and will probably have to sell our energy generation for less than the market rate.

The solution is the unbundling of power generation, development, and distribution. Presently, whoever generates power has to contribute to the CEB grid. They have a monopoly in generation and development. Unbundling will divide these three segments and open some of it to the private sector. This will give people the choice to switch between any service provider based on the quality and reliability of the supply. Completely removing the competitive bidding process, without unbundling, will bring a double whammy on the cost. The prices of renewable energy will increase, while the CEB will continue to control the system through the grid. Thereby the Power and Energy Minister’s good intention to reform the energy sector may end up leading to a more negative condition with unintended consequences.

The Minister’s suggestion to connect the grid with India through a HVDC (High Voltage DC) cable is a sensible decision. One of the main challenges and restrictions for the expansion of renewable energy are demand and supply. Lack of management and access to a larger grid to sell and buy surplus or deficit of power too is an impediment. Connecting the Sri Lankan grid with India creates opportunities to overcome this issue. However, energy security precautions will have to be taken.

The suggestion of connecting the power grids of India and Sri Lanka was also made by Prof. Rohan Samarajiva in a report compiled under the chairmanship of former Governor of the Central Bank Dr. Indrajit Coomaraswamy, which was handed over to the President.

If Sri Lanka is to overcome the current energy crisis, reforms in the sector through unbundling and competitive bidding are necessary. Let’s be hopeful that our young Minister can make this crisis an opportunity to implement necessary reforms. 

References

(1) https://www.timesonline.lk/news/president-wont-attend-cabinet-meetings-until-ceb-pucsl-dispute-is-resolved/18-1082024

(2) https://www.newsfirst.lk/2022/03/31/when-god-gives-rain-and-cpc-gives-fuel-ceb-can-give-power-ceb-chairman/

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Low-hanging fruit from a disastrous harvest

Originally appeared on The Morning.

By Dhananath Fernando

We all want quick fixes to reset the economy. Difficult times like these make quick fixes a vital necessity as patience amongst the public runs thin. However, when an economy grows to a level of high dysfunctionality – as ours unfortunately has – the availability of quick fixes is extremely limited. 

The first step towards economic recovery is for individuals to understand that given the nature of the current crisis, quick fixes simply do not exist. The process of economic recovery can be likened to the growth of a plant. A mere need for a quick harvest does not mean that what is sown can be reaped in just a few days – it takes its own time. All that we can do is to sow the right policy strategy. We will eventually reap what we sow; if we sow the wrong ideas and wrong policies we will have to reap painful outcomes in future, similarly to how we are currently reaping the pain of what we sowed many years ago. 

However, a few quick fixes can still be attempted. One such attempt can be made in the tourism sector. We all know that there is a shortage of fuel for transportation and hotels don’t have reliable electricity. It’s true that tourists consider the situation of the country before they visit, and we are far from presenting an ideal situation. That said, in economic terms what we can do is to provide incentives on the regulatory side for people to visit Sri Lanka. 

One possible measure is to provide an on-arrival short stay visa for selected countries, which will encourage and increase tourist arrivals. Merely maintaining existing regulations will not help in economic recovery as it does not attract tourism. At the same time, Sri Lanka’s aviation authorities charge very high prices for landing and other aviation related services. For example, an economy class flight from Singapore to Colombo costs Rs. 155,000, of which Rs. 35,000 (23%) is incurred in airport and Government taxes. If we reduce those charges, prices of air tickets to Colombo will come down. 

One business leader recently informed me that the price of a flight from Chennai to Colombo was significantly higher than a flight of the same distance and duration from Chennai to other airports in India. Despite the same travel class on the flight, the same quality of staff, and the same distance, the price is mainly driven up by levies and taxes charged when the border is crossed. Given this, bringing down our rates may mean that some audiences may consider visiting Sri Lanka. 

In my humble opinion, when foreign media questioned the Prime Minister on tourism, his answer should have been: “It is a difficult time for all of us, but even with all those difficulties we have the best beaches and the most amazing sunsets and Sri Lanka is still ranked very high on all travel magazines.” 

Nonetheless, we have to keep in mind that tourism alone will not be sufficient to turn our economy around. We made this mistake earlier and attempted to settle our sovereign debt through tourism receipts. Generally, about 80% of tourism income will go back as a USD outflow due to the consumption of imported items required to sustain tourism. At the moment, we have little going for us and this is just a suggestion that is scraping the bottom of the barrel. 

Moreover, we have to establish a unified bankruptcy law. It will take time, but it is needed urgently, and it’s important to start now. With the economic downturn, many organisations have had to downsize or wrap up their operations. This is the same sequence of events that has taken place in other countries that were facing similar crisis situations. 

In Sri Lanka, private limited companies have some cover on bankruptcy, but about 80% of the business establishments in Sri Lanka are Micro, Small, and Medium Enterprises (MSMEs). Most of these businesses are registered as proprietorships or as partnerships. When these enterprises are impacted, closing down the company is often the easiest and least painful option, as it helps the entrepreneurs move forward and get to the next phase of their lives quickly. If they have to spend a lot of time wrapping up their existing businesses that are not sustainable, it will slow down the economic recovery process, as a lot of valuable time, energy, money, and effort of capable people will be wasted on shutting down a company which is no longer viable. Therefore, an easy exit for businesses is as important as easy entry. Unfortunately, Sri Lanka’s labour laws do not support such an exit process and therefore, the process of exit is slowed. 

Finally, while accepting that there are no quick fixes to overcome the current crisis, we have to steel ourselves to go through the tough process of bridging reforms for markets to work. Markets work with credibility, a sound legal framework, and the rule of law. Given that the current situation has more to do with a question of credibility, legal reforms often go hand in hand with political reforms. Therefore, policymakers have to look at the reforms from a holistic point of view rather than just seeking out a quick fix. We are at the stage of sowing seeds for future reaping – if we don’t manage this situation well, we will reap a bad harvest once again.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Tackling poverty with competent policies

Originally appeared on The Morning.

By Dhananath Fernando

I learnt poverty through two sources. Firstly, I myself have experienced poverty. 

At university, a basic lunch was served for Rs. 20. It was just three curries, and often the only source of protein was a watery fish curry or half an egg. A watery chicken curry with saffron rice was only served on Fridays. It was a very basic meal. There was an option to get a re-serving for Rs. 5.

The re-serving provided only the curries (not the protein source) on the condition that you went with the unfinished plate. Students who couldn’t afford Rs. 20 for the full meal would wait until a friend finished their first round, borrow their unwashed plate, and join the line for just the Rs. 5 re-serving. At one point in my life I was one of those students. 

That’s why this column has alerted the reader many times to the possibility of rising inflation due to Modern Monetary Theory (MMT). Money matters, and when inflation starts skyrocketing, basic essentials will be in short supply and the poor will suffer. 

Secondly, I learnt about poverty through my volunteer experience at CandleAid Lanka (1). CandleAid is a Government-approved humanitarian organisation founded by Captain Elmo Jayawardena. I have seen and heard so many stories of poverty and overcoming poverty from around the country during my interactions with CandleAid and Capt. Jayawardena. Out of all the stories, the story of Pahalagedara Jayathilaka is simply inspiring and reshaped my understanding of what poverty means for the poor.

Pahalagedara Jayathilaka was a crippled child who started his education in a borrowed wheelchair. His father had passed away from cancer when he was 10. Once, when narrating Jayathilaka’s story, Capt. Jayawardena said: “Jayathilaka’s best meals at university had been a cream bun or a fish bun.”

To cut a long story short, from the bottom of the poverty barrel, with the sheer determination and pure courage of his mother, Jayathilaka successfully entered the University of Moratuwa. He had come to Moratuwa with just his crutches and Rs. 1,000 in hand. Then CandleAid had provided him with an education sponsorship, through which he obtained superb results and a first class in Mechanical Engineering, and subsequently received a scholarship to the National University of Singapore (NUS). Today he is a Postdoctoral Researcher at the Department of Oncology of the University of Oxford (2).

In the terminology of economic research, there are many definitions of poverty, such as urban poverty and rural poverty, but the jargon of researchers is not sufficiently descriptive of the circumstances people find themselves in. When you are actually facing poverty, your decision-making processes, consequences, and outcomes in life are very different. 

For people in poverty, what matters the most is a fair opportunity to have a chance to succeed in life. It is an evolving process and it will never be an overnight miracle. 

They can overcome their circumstances if we establish the proper macroeconomic environment. That is what most of us forget; we forget the basics and try to target poverty without realising that macroeconomic instability causes poverty. 

I believe Pahalagedara Jayathilaka was unstoppable because he got a fair chance to compete as well as  support from a private charitable organisation. He was upskilled, an opportunity was created, and his fate was changed. 

The question during these unprecedented times is: how can we save our poor, and how can we support more people like Jayathilaka to create outstanding success stories? Of course, most people may not have stories as outstanding as Jayathilaka did, but they will at least gradually move above the poverty line and acquire a higher standard of living.

Before any suggestions are made, we need to understand that bringing down the inflation rate is the best way to help the poor. We created this problem of high inflation through bad monetary and fiscal policy, so bringing down inflation and creating stability through competent policy has to be the first priority. 

Furthermore, this column has often suggested the establishment of an efficient cash transfer system through the Government mechanism. While that is still an option, we all know how inefficient our Government apparatus is. 

The other option is to encourage private charitable organisations to help the poor. These organisations have good targeting systems and they have the capacity to reach people like Pahalagedara Jayathilaka and identify those who are truly in need. They are already doing a commendable service at a grassroots level, managing highly agile and impactful charitable projects to look after the poor. 

It would of course be the best case scenario if the Government can manage this, but our experience is that the Government’s management of all affairs is far below even our most basic expectations. 

Most charitable organisations have a far better reputation than the Government, and it is likely that expatriates will be more open to the idea of donating to these organisations than to the State to manage relief for the poor. This will bring in foreign exchange inflows, which will add further relief to our State coffers to manage essential imports.  

The best way to eradicate poverty is by creating wealth. To create wealth we need to first create opportunities, because the easiest tradeable good that the poor have is labour and human capital. We need to set up competitive processes to upskill our labour; poor people will gradually emerge from the poverty trap through the dignity of labour, and not by just becoming henchmen for a political party or by waiting in long queues to get a small cash subsidy or a handout.

A cash transfer system is a must. We should move as fast as possible on this matter. However, looking at how slowly things move with Government bureaucracy, it’s reasonable to assume that this will take time. 

Regardless, poor people cannot stay hungry for long. That is why we have to tackle inflation as public enemy number one and stop adding further inflationary pressures to our economy. Until we get the cash transfer system up and running, private charitable organisations should at least be approached or requested to come forward to utilise their network. They will be able to work faster than the Government and find and support many other Pahalagedara Jayathilakas who can excel. 

I still remember how Captain Jayawardena concluded his long story with a lot of emotion all those years ago. 

Every word I wrote about Jayathilaka is the absolute truth. Jayathilaka does not need colouring.

References:

• https://www.ft.lk/News/some-call-it-courage-e28093-the-definition-is-inadequate/56-39233

• https://www.oncology.ox.ac.uk/team/jayathilake-pahala-gedara

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.