By Vijaya Kumar –

Prof. Vijaya Kumar

Mr. Murtaza Jafferjee, Chairman of the Advocata Institute has analyzed the NPP manifesto from the point of view of a neo-liberal economist and has found it to be good, bad and ugly. This is not surprising as Mr. Jafferjee is Chairman of the Advocata Institute, an NGO committed to the free market and limited government interference in the economy, a former Director of the Colombo Stock Exchange and the CEO of a Securities company and Portfolio Manager of an investment company, part of the leading private conglomerate in Sri Lanka, Jafferjee Brothers. The NPP should be happy that such a formidable businessman finds much of the policy good.

One of the problems of the IMF agreement is that the agreement was never really negotiated. The so-called bailout of the IMF should in ‘the good, the bad and the ugly’ terminology can be called ‘a fistful of dollars’ as the pittance it provides each year is less than 10% of the inward remittances sent in by our housemaids working their hearts out in the Middle East. Sri Lanka which is ready to vociferously challenge any criticism by the UN Human Rights Organization sheepishly accepted the terms of the IMF agreement. This could have been because Mr. Ranil Wickremesinghe (RW) like Murtaza is a great believer of neoliberal economics, but more likely because RW was in a hurry to quickly create an aura of economic well-being to better his election prospects. The IMF is an organization dominated by the West representing the interests of our creditor nations and to some extend those of the sovereign bond holders. Its opinions, suggestions and activities while providing some temporary relief to developing countries in debt is largely aimed at recovering the loans provided by creditors. Unfortunately, because of their own backgrounds, the IMF team and the Sri Lankan ‘negotiators’ are unable to empathize with the feelings, the needs and the desires of the common people of the country. This is why the measures hurriedly taken by RW government to conform with IMF requirements are largely against the interests of the ordinary people of this country. The unkindest cut was the haircut given to the treasury bonds held by the EPF and ETF superannuation funds, leading to a 30% – 50% cut in the money employees receive when they retire, sometimes a few lakhs as in the case of estate workers. Those held by the banks who could well afford the haircut were exempted on the false premise that it would affect the stability of the banks. The stability of the very life of ordinary people was sacrificed for the financial stability of the banks. The IMF also suggested an easily implementable capital gains tax on profits from the sale of shares – an area close to Murtaza’s expertise – but we have still not heard of any moves in that direction. In many countries, capital gains from shares sold within a year is added to income for tax purposes. This exception permits individuals to earn hundreds of millions of tax-free rupees annually by trading in the stock market.

Looking at some of the points raised, there would indeed have been no need for a development bank if those created originally to help industry, the DFCC and the NDB had survived. Unfortunately, the Chandrika government privatized these institutions under pressure from the IMF, whereupon they made a pretense of providing developmental banking for a few years through separate but allied divisions but they were soon abandoned as it was affecting their bottom line. Today one of the biggest hurdles start-up SMEs have to face is obtaining loans from the banking sector. Banks will advance monies to blue-chip companies but not to entrepreneurs as they operate on a zero-risk basis. Murtaza is also against the treasury recapitalizing state banks. His suggestion is for them to access private capital instead, an euphemism for privatization. What he does not realize is that it is only the state banks which are prepared to provide low-cost personal banking to the ordinary people of this country and some of them do provide an efficient service. Private banks concentrate mainly on rich clients and company accounts.

It is well known that a the large number of SMEs which collapsed because they were unable to repay their loans when interest rates were suddenly increased and held at13.5-15.5% by the Central Bank for more than a year after April 2022 Is the Central Bank truly independent ? Recent statements by its Governor suggests that while the Central Bank wishes to insulate itself from the people, it seems amenable to pressures from the IMF and also the President. A popularly elected government should be able to intervene if it feels Central Bank policies are going against the people who elected it to power. Economic strategies have changed over the years and the decision as to whether we should take a Marxist, a Keynesian, a Hayekian or a Chicago approach cannot be left solely to the Central Bank.

I agree with the analysis on the causes of our forex crisis but it would have been better if it included the role of JR’s open economy in stimulating excessive consumption. The NPP’s policy on removal of duty-free import permits for MPs will have an immediate impact on excessive consumption. Regarding export proceeds, everyone will agree that at times of rapid devaluation such as during 2021-2023, the government must have the tools to intervene to prevent the use of export proceeds in gambling on the exchange rate.

Nobody disputes that VAT is better than a transaction tax. There are already hundreds of items exempted from VAT but exemption from VAT can be used to reduce inflation and reduce the hardship experienced by the average wage earner if provided for essentials, notably those used for calculating minimum incomes. If 70% of fuel is purchased by 30% of the wealthiest households as claimed, it must be realized that the remaining 30% of fuel is what allows the common man to transport his family on his motorcycle, to travel to work by bus and to take a three-wheeler when he has to take his groceries home. While the wealthiest can well afford to pay for any rise in fuel prices, any increase in fuel prices will seriously impact the living standards of the common man.

Nobody should recommend cash transfer schemes to vulnerable households as it has never worked in Sri Lanka as the identification of such households have always been politically tainted or driven by corruption even for the small sums involve in Jansaviya, Samudri and Aswesuma.

The tax-free threshold and the slabs have to be increased to take inflation into account. Furthermore RW’s tax policy has been the immediate cause of the brain drain that saw numerous professionals flee the country.We can increase the tax base even further if we lower the tax-free threshold to Rs. 50,000 per month, but should we do it ? No, as it should be fixed taking inflation and fairness into account. Today the 36% rate applies to anyone earning just over Rs. 300,000 a month, which includes many employees but this is the rate applied to even someone earning Rs 300 million a month, which seems rather unfair. If we really wish to increase the tax base we have to rope in those avoiding tax, but governments do not seem to have the political will to take measures which monitor transactions such as payments only through the banking systems (cheque, credit/debit card, bank transfer) for payments exceeding say, Rs 10,000. There are several ways to increase tax collection including the IMF suggested capital gains tax for transactions in the stock exchange and a wealth tax.

Lastly the debt sustainability analysis accepted by the government is the one developed by the IMF. The RW government made no attempt whatsoever to formulate an alternate analysis. Alternative debt sustainability analyses which better take into account our interests are possible as shown recently by Martin Guzman, economist and former Finance Minister of Argentina. We should always protect the interests of the country and its people and should not be worried of changes that affect debt relief as that too is an agreement that can be revisited.

*Vijaya Kumar is a Professor Emeritus in Science of the University of Peradeniya