By W A Wijewardena –

Khema’s Boy is no more with us

It is with deep sadness that I learned of the passing away of the liberal politician and former Finance Minister Mangala Samaraweera. He made a heroic battle against COVID-19 that had infected him earlier. Despite the sad news circulating in the social media for some time, we still had the hope that he will eventually defeat his enemy. But like any other mortal human being, finally he had to give up and succumb to the deadly virus. He is not just one among many thousands of fellow Sri Lankans who have done so. He deserves a special appreciation on account of his contribution to Sri Lanka’s politics, economy, and the governance system. I would devote this appreciation to his contribution to economy and economic reforms.

The bold decision maker

I have had a good relationship with him for more than three decades while I was in the Central Bank and since my retirement from the Bank. He was one politician who had a patient ear to listen to others. He also made quick and bold decisions. One such instance was when he became the Minister of Posts and Communications under Chandrika Bandaranaike’s presidency.

As the Minister in charge of the postal department, we brought to his notice the deteriorating situation in the department and the need for improving postal services. But the necessary funds had to be raised by increasing the postal charges since the department could no longer depend on Treasury funding. But the amount involved was a mega increase and we feared that as an up-and-coming politician he would not risk his popularity for a worthy cause. Hence, we suggested to him that it would be advisable to do it in stages.

His response was quick and straight. He said that if it were something that should be done, it should be done immediately. “If people wanted to blame me for a good thing, let them do it once and not every time when I increase the postal rates,” he announced and went for a single mega increase. In his boldness, I found Sri Lanka’s version of Lee Kuan Yew and Goh Keng Swee of Singapore who too made such bold decisions.

Reforming telecom sector

Then came the reform of the telecommunication sector in the country. Since 1858, it had functioned as a government department which had been converted to a public corporation in 1991. With no new investment in fast changing technology in the sector, this outfit was the essence of inefficiency within Sri Lanka’s public sector operations. A Sri Lankan had to wait a minimum of four years in a waiting list to get a telephone connection. Even that would have happened had he known the right people in the corporation.

President Chandrika had decided to invite foreign capital and technology to make it a modern telecom company. This important task fell on Mangala as the Minister of Communications. But it was a hotbed of trade union action that could have paralysed the entire country had it been handled in the wrong way. Hence, it was a suicidal mission for a minister and any other person would have thought twice before agreeing to undertake that task. For Mangala, it was difficult and challenging and not impossible.

The reform-minded animal within him forced him to work day and night, negotiate with prospective foreign investors as well as trade union leaders, and deliver what President Chandrika wanted within years. That was how Japan’s Nippon Telegraph and Telephone Corporation, popularly known as NTT, became a part-owner of the outfit that was known as the Sri Lanka Telecom. The militant trade unions were appeased by offering share ownership in the new foreign-Sri Lanka partnership. In the history of public sector reforms in Sri Lanka, this was a major achievement.

New technology and investment poured into the company, employees who now felt that it was their company began to work hard and smart, and Sri Lanka Telecom was able to expand its capacity beyond the demand for landline telephone services. Within a few years, instead of frustrated customers chasing after the Telecom for a landline connection, the Telecom was going behind citizens to take them as new subscribers. That was the marvel of Mangala’s achievement.

Recently, when I reminded him about it, the humble man within him corrected me quickly saying that it was a teamwork and not an achievement by him alone. But those of us in the Central Bank knew how hard it was for him to get even the support of his Cabinet colleagues to divest a part of telecom to NTT.

A man with hands-on experience in finance

After he became the finance minister in late 2017, there was a group of people who had started a slander campaign targeting him. Their claim was that he, being a fashion designer, was not fit to hold that post which required a knowledge of high finance. But he had a hands-on experience in the finance ministry during Chandrika’s time as her deputy. On top of this, he was a good listener, learner and a man of pragmatic disposition. Hence, I knew that he was the best choice in the previous Good Governance government to hold that post.

When he took over the ministry, Sri Lanka had been undergoing a mini version of the macroeconomic crisis which the country is undergoing today. The budget was in a precarious situation with a low revenue base and a stubborn high overall deficit.

The central government debt had been rising both in absolute terms and relative to the GDP. The country’s foreign reserves were falling, putting pressure for the rupee to depreciate in the market. Only a lip service had been paid by the Government to the needed economic reforms.

Growth was slowing down and it was obvious that the country would descend to the near zero or negative range. Despite the arrangement with IMF for an extended fund facility or EFF, the top Government leaders had not been fully convinced of its necessity. Thus, he had walked into a bed of burning coals and not that of roses. It seemed that he himself would get burned while driving the entire country to rising flames.

A listener willing to learn

It was in this background that he called me to a meeting at the finance ministry. It was a one-on-one meeting except for the presence of his deputy, Eran Wickramaratne. Mangala said that he wanted an independent opinion on the state of the country’s economy. We made an objective assessment of the precarious situation of the economy, the need for implementing the IMF program in all sincerity and not as a duty, and the priority to be given for economic reforms.

It was a fruitful meeting and Mangala showed his willingness to learn anew of the issues involved. We departed agreeing to meet again or contact each other whenever an issue needing his attention arose. He kept to his undertaking dearly.

The challenge of a new finance minister

I wrote in this series the Herculean task which the new Finance Minister faced under the title ‘The New Finance Minister has a Herculean Task Ahead: He will win only if he moves with foresight’. This is the advice I gave him in this article: “Countries that have faced worse economic crises have come out of them by using prudential policy packages aiming at future prosperity rather than short-term political expediency. For long-term economic prosperity, Sri Lanka has to make it easier for people to do business, improve its competitiveness, invest heavily in both human and physical infrastructure, improve productivity and efficiency in government services and have access to foreign markets.”

“All these require Sri Lanka to introduce economic reforms, but reforms are painful and costly. Hence, in the past, all finance ministers, including Samaraweera’s immediate predecessor, chose the easy path of seeking short-term political expediency sacrificing long-term growth objectives. Now Samaraweera has to make this hard choice which is politically unpalatable but necessary for long-term prosperity.”

“An important requirement for Samaraweera to do this job has been that all financial institutions should be correctly placed under him. Thus, institutions which have been listed under different ministries but legitimately should come within the Ministry of Finance should be returned to that Ministry.”

“The financial institutions involved are the Central Bank, state banks, Securities and Exchange Commission, Employees’ Trust Fund and the Sri Lanka Insurance Corporation. Without them under him, it is unthinkable that he would be able to introduce the reforms which the Government expects him to do.”

Clipped wings given back to Mangala

This last comment was further elaborated in a subsequent article in this series under the title ‘Asking a Wings-clipped Finance Minister to Fly is a Classic Repeat of Dunna Dunugamuwe’. This was one of the follies committed by the Good Governance government when it was formed in 2015 and it continued without a change since then.

I argued in this article as follows: “This functional allocation was unorthodox and illogical. It was unorthodox because it was the first time that they were taken away from the purview of the Ministry of Finance. It was illogical because it violated the principle of categorising similar functions in a single ministerial portfolio. A Government observing that principle helps it to coordinate its interagency and intraagency work effectively, efficiently and smoothly.” Fortunately, sanity prevailed and before Mangala presented his budget for 2018, the error was rectified by the President.

Mangala’s Mangala Budget

When Mangala presented his ‘Mangala Budget’ for 2018, I appraised it in two articles in this series.

The following was a common observation of the presentation of the budget in Parliament: “When presenting the Budget, unlike his predecessors, Mangala exuded confidence in what he was reading. It did not appear to viewers that he was reading a text prepared for him by someone else. It was short and to the point. Both offensive bashing of the previous administration and colourful eulogising of the achievements of the present administration had been kept to a minimum.

“The entirety of the budget speech had been used to present the case for a new theme in budgeting, namely, the establishment of a ‘Blue-Green Economic System’ in the country. It also gives a different connotation. That is, the economy to be developed in Sri Lanka in the future is a joint effort by both the Green party and the Blue party.”

A politician determined to go for long-term reforms

I warned him in these articles that he should not savour in small gains like improving the revenue base or generating a surplus in the primary account of the budget but concentrate on introducing an economy-wide reform program to place the country in a long-term growth path. The country’s macroeconomic ailment was much more than what small, isolated gains could solve. A politician naturally tends to market such small gains to project his success to appease the angry voters, while the country’s problems begin to worsen day by day like a rolling snowball.

I warned that Mangala should avoid this pitfall and that was exactly what he did. He moved into full swing of the Extended Fund Facility or EFF which his government had embraced half-heartedly a year ago. The progress relating to the economic reforms had been lacklustre as highlighted repeatedly by the visiting IMF missions on the progress of EFF. Mangala along with Eran mobilised resources at the Ministry and the Central Bank to introduce tax reforms, fuel price formula to reflect the market prices, a new central bank legislation, and reform of the budget and state-owned enterprises.

Reversing Mangala’s reforms by present Government to its peril

It is these reforms which the present Government reversed at its very formation to its peril to reap a whirlwind of macroeconomic crisis today. It offered an unsolicited tax concession to income tax and VAT payers creating a huge hole in its revenue base as large as Rs. 500 billion a year. The resultant gap was met by borrowing from the banking sector which is commonly known as money printing and those borrowings amounted to Rs. 2.8 trillion during the 18-month period from January 2020 to June 2021.

The resultant money supply growth at 33% caused foreign reserves to flow out of the country creating an acute balance of payments crisis and putting pressure for the exchange rate to depreciate.

Today, Central Bank’s maverick attempt at fixing the rate at Rs. 203 per US dollar without supporting foreign reserves has created a shortage of dollars in the market, a thriving black market for dollars, and rent-seeking opportunity for those who have dollars to sell them unofficially to hungry importers at much higher rates.

Eventually when the system would be overstretched beyond its ability to hold-on, like Thailand in 1997 and the Maldives in 2009, the Central Bank will be forced to follow the market and allow the rupee to have a freefall. The abolition of the fuel price formula in a background of low international prices gave a temporary solace to CPC in 2020, but the bloom became a gloom in early 2021 when the international prices began to rise. The Government was eventually forced to increase fuel prices substantially, invoking a public outroar, in June 2021 to save both CPC and lending banks.

Mangala had agreed to provide independence to the Central Bank to conduct its policy for the sake of the nation by introducing a new Bill. But it was shelved by the new Government. Today, the charge is that the Central Bank is not an autonomous body anymore but a branch of the Ministry of Finance. Mangala, therefore, did not go for cheap popularity but bold economic reforms for the sake of long-term stability and growth.

Khema’s Boy no more but his ideology will prevail

His 30 years in politics was celebrated in 2019 and a special documentary titled Khema’s Boy was produced to bring forth his contribution as a politician. He invited me to speak on his contribution to economic reforms. Appraising his work, I said that his contribution will be felt by Sri Lanka not immediately but in the medium to long-term.

Mangala is no more with us. But the ideology which he left with us will continue to inspire us forever.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com