28 November, 2020

Blog

Interim Budget: A Necessary Corrective To Rajapaksa-Economics

By Tisaranee Gunasekara

“Ultimately it is what happens in peoples lives that matters.” – Sri Lanka Human Development Report 2012 – UNDP

November 2006: The Fourth Eelam War was raging. The regime exhorts the populace to make sacrifices – and awards the executive, the legislature and the judiciary massive salary hikes. The steepest increase goes to President Rajapaksa[i].

November 2008: The Eelam War is in its final phase. President Rajapaksa gives himself and the entire legislature another massive salary hike[ii].

MahindaMost Lankan were probably unaware that their rulers were ladling their own plates with unmerited generosity even as they preached the virtues of patriotic self-denial. Few Sinhalese would have cared anyway; hopeful of a definitive victory, they were willing to give the Rajapaksas a blank cheque.

When the war ended, hope of imminent good times soared in the South. That hope enabled Mahinda Rajapaksa to win massively the 2010 Presidential election. But as taxes and prices continued their upward trajectory, the hope of a better future began to ebb. The razzle-dazzle of massive physical infrastructure projects succeeded in camouflaging the absence of the peace dividend for a while. But as the years rolled on, the growing gap between an economically cosseted ruling caste and an economically depressed populace became too abysmal to be concealed by propaganda tricks.

Profligacy for the ruling caste and austerity for ordinary people were neither accidental nor incidental. They stemmed from the very nature of Rajapaksa economics.

Rajapaksa economic strategy was an extractive one. Its aim was to ensure the financial sustainability of Rajapaksa politics. And Rajapaksa politics was an extremely expensive affair; the amount of money needed to sustain the ruling caste and their megalomanic-projects was enormous. In the absence of natural resources such as oil, a modern form of ‘tax-farming’ became essential to Rajapaksa economics.

80% of tax revenue came from indirect taxes imposed on essential goods and services. These taxes became a key source of inflation; they reduced the purchasing power of the ordinary people, had a knock-on effect on small and medium entrepreneurs and depressed the ‘main street’, that economy in which the absolute majority of ordinary people work and produce, buy and sell.

Rajapaksa economics therefore created two economies – one for the ruling caste and favoured businesses and one for ordinary Lankans. The privileged economy grew and throve by sucking the lifeblood of the non-privileged economy.

Pablo Iglesias, the founder-leader of the left-radical Podemos Party, claims that in Spain, “…the fundamental divide now is between an oligarchy and democracy, between a social majority and a privileged minority.” [iii] An analogous situation obtained at the tail-end of Rajapaksa rule. It was this reality which enabled the Common Opposition to surmount seemingly insurmountable odds and defeat the Rajapaksas.

Unpicking Rajapaksa Economics

The Rajapaksas derailed the Lankan economy. The necessary process of undoing Rajapaksa economics and returning the economy to some sort of capitalist normalcy commenced with the Interim Budget.

The shift from indirect taxation towards direct taxation is not a radical formula but a sober economic necessity. In 2012, the UNDP pointed out that Sri Lanka’s excessive dependence on indirect taxes “shifted the burden of taxation on to the poor” and suggested that the government should try to “spread the burden of taxation more evenly, to improve revenue collection, to achieve better governance and accountability and to ensure that revenue is in line with growth”[iv].

Rajapaksa brand of tax-and-spend (taxing the people and spending on themselves) was creating a socio-economic volcano, consisting of growing youth unemployment and increasing inequality. According to the ILO’s Asia Pacific Labour Market Update of April 2013, “…in Sri Lanka youth unemployment rate was more than four times the overall unemployment rate….”[v] Minister Sarath Amunugama told the parliament that the richest 20% of the country account for 54.1% of the national income while the bottom 20% receive just 4.5%[vi].

Rajapaksa economics was not business-friendly either. For instance, Sri Lanka is categorised as a ‘mostly unfree’ country in the Economic Freedom Index. Fitch Ratings revealed that post-war Sri Lanka has not been successful in attracting foreign direct investment; since 2009, the average net FDI has been just 1.2% of GDP. “This is low in comparison with most regional peers and has fuelled a reliance on debt-creating capital….. This has kept the external debt burden at 57% of GDP which is much higher than all other emerging Asian markets, except Mongolia”[vii].

Rajapaksa economics was business-friendly only in a very limited and parochial sense. A small coterie of businesses with links to the ruling caste did extremely well. Economic policy was used to enable these favourites to make super profits via tax concessions and monopoly formation. For instance, in the 2014 Budget, “….more industries were given protectionism, allowing favoured businessmen to avoid competition, further worsening a culture of rent seeking and exploitation of poorer consumers. Boats and gauze were added to the list while protectionism was increased for building materials and food. Already monopolises have developed in building materials under protective tariffs…”[viii]

Rajapaksa economics therefore worked to create an Acolyte Capitalism, a system in which business success depended to a disturbing extent on how loyal and obedient you were to the rulers.

And this system was rapidly becoming unsustainable.

In August 2014, a Cabinet Subcommittee in a confidential report warned that government revenue was declining and that revenue estimates for 2015 were unrealistically optimistic: “It is not prudent to continue our over reliance on indirect taxes and must rely instead on a direct tax effort. We must ease taxing of goods for consumption and services regardless of the people’s income levels and avoid placing burdens on the poorer households.” [ix]

The course correction effected by the Interim Budge therefore is a necessary one. It has reduced reliance on indirect taxes while taxing some of the favoured-businesses which enjoyed economically irrational privileges in the last several years. Super Gains Tax, the Special Levy on casinos, the doubling of Betting and Gaming Levy, and the taxes on satellite TV operators and Sports channels belong in this category.

The pay hikes to the government sector are a socio-political and an economic necessity (its beneficiaries include the armed forces and police). This measure is necessary to pull the popularity-rug from under the Rajapaksas even further; it will also help correct income-distribution anomalies, expand purchasing power at the middle and lower level and help local businesses, especially SMEs.

More work remains to be done to transform the Lankan economy into some sort of capitalist normal. Sri Lanka needs to further reduce her reliance on indirect taxes, broaden the tax base and rationalise the taxing system. She needs to come to grip with the massive debt burden and develop an economic strategy which generates both employment and income for ordinary Lankans.

But for now, Ravi Karunanayake has presented a budget which Greece’s Syriza would be proud of. Class divisions and class conflicts are far from dead. They will come to the surface when the Lankan economy returns to some sort of capitalist normal. But without the Rajapaksa factor and in democratic conditions (however flawed), the playing field will be far less skewed and defeat will not be the only permissible o

[i] http://archives.dailymirror.lk/2007/01/12/news/07.asp

[ii] http://www.lankanewspapers.com/news/2008/11/35037.html

[iii] http://www.thenation.com/article/195129/can-podemos-win-spain

[iv] Sri Lanka Human Development Report – 2012

[v] http://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/publication/wcms_212030.pdf

[vi] http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=91542

[vii] http://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Sri-Lanka’s-Resilience?pr_id=805953&cm_sp=homepage-_-FitchWire-_-%20Sri%20Lanka’s%20Resilience%20Masks%20Medium-Term%20Credit%20Risks

[viii] http://www.lankabusinessonline.com/news/sri-lanka-targets-lower-deficit-in-2014-budget,-ups-protectionism/1793196494

[ix] Red Light on revenue: Cabinet subcommittee says 2015 revenue targets unrealistic and unachievable
– Sandun Jayasekera – Daily Mirror – 23.8.2014

Print Friendly, PDF & Email

Latest comments

  • 10
    0

    .
    It’s time for the majority to take a decision?

    Are they ready to accommodate the minorities and move forward or continue to rule with majoritarian complex and fall downwards.

    :-)

    • 1
      1

      You query is confined to bottom rung thala thel.

      But there is more pol thel at the bottom that you care to recognition..
      TG says “They will come to the surface when the Lankan economy returns to some sort of capitalist normal.“

      There can only be a total dal`it` parripuuuu.

    • 1
      2

      aratai

      “Are they ready to accommodate the minorities and move forward or continue to rule with majoritarian complex and fall downwards.”

      Do the people have to wait until the IQ of the Majority and Minorities, the National Average IQ goes up from the current 79 to 100?

      National IQ Scores – Country Rankings

      http://www.photius.com/rankings/national_iq_scores_country_ranks.html
      1 Singapore 108
      2 South Korea 106
      3 Japan 105
      4 Italy 102
      5 Iceland 101
      5 Mongolia 101
      6 Switzerland 101
      7 Austria 100
      7 China 100
      7 Luxembourg 100
      7 Netherlands 100
      7 Norway 100
      7 United Kingdom 100
      8 Belgium 99
      8 Canada 99
      8 Estonia 99
      8 Finland 99
      8 Germany 99
      8 New Zealand 99
      8 Poland 99
      8 Sweden 99
      9 Andorra 98
      9 Australia 98
      9 Czech Republic 98
      9 Denmark 98
      9 France 98
      9 Hungary 98
      9 Latvia 98
      9 Spain 98
      9 United States 98

      27 Bhutan 80
      27 El Salvador 80
      27 Kenya 80
      28 Guatemala 79
      28 Sri Lanka 79
      28 Zambia 79

    • 1
      2

      Tisaranee Gunasekara,

      The Common Sense Phamplet, Sri Lanka 2015? Can you do it?

      http://en.wikipedia.org/wiki/Common_Sense_%28pamphlet%29

      The Sri Lanka Crisis Pamphlets 2015? Can you do it?

      http://en.wikipedia.org/wiki/The_American_Crisis

      Peop;e are wairing to post on walls, without being abducted by white Vans,

      PS. Now Gotabaya Rajapaksa is hiding in one of those white Vans, so goes a rumour..

  • 6
    17

    This writer must have smoke something before writing this garbage. This budget is recipe for a disaster, hopefully by April people will kick out these mean corrupt people who came to power through the back door.

    Quick comparison between MR and MS budget (in billion )
    MR MS
    Total revenue 1,654 1,592 ( -62.00)
    Income tax 322 302 ( still the same)
    Good and service tax 774 763 (still the same)
    Salaries 558 616 (for how long ???)
    Public investment 696 520 (-176) huge hit to the economy
    Infrastructure 576 399(-177more bad news for the ecom:
    Total financing 521 499 (same)
    Foreign borrowing 251 251(less expenditure same borrowing?)

    Inflation already jumped to 3.1% from 1.7% from December. By 30/01/15 stock market lost its value by 110 billion. If this continues, Sri Lanka will be on par with Greece and Syria in no time.

    • 1
      4

      Sadith yours is the 3rd degree statistical lie-
      preek preek & the preachers all a paripu. Phew!!!

      • 3
        0

        I am sorry, I it too much information for your brain to process!!! Just because your brain cannot grasp these statistics, don’t dismiss it as lies.

    • 5
      0

      Also note that Sri Lanka’s GDP increased from 24 Billion in 2005 to 67 Billion in 2013.

      Corruption index ranking (1 being the least corrupt) varied from 78 in 2005 to 79 in 2012 and down to 91 in 2013.

    • 2
      0

      Sadly, I agree. The tax revenue remaining unchanged is Pie in the Sky accounting. I am not sure of the number of houses valued at Rs.100,000,000 and even less sure of the owners paying the mansion tax of Rs.1,000,000 annually. The take up on the Dual Citizenship in total was under 4,000 when the fee was at its maximum Rs.100,000. Now that it is proposed to rise to Rs.500,000 I wonder how many would apply. The Finance Minister obviously has not grasped the economic advantages these expats could bring. Finally, the requirement of US$10 million in investments besides the annual fee for foreigners wishing permanent residency is laughable. With a fraction of that capital one could permanently reside in several developed countries that are stable and safe.

  • 4
    2

    Good one TG. Thank you. One large area that will bring a significant boost to FDI is to actively promote the north and East for investment and positively encourage dual citizenships as india did.
    By the way I hope DJ read these articles and learn something.

  • 5
    15

    Packer Junior pulled the plug on his A$ 400 Mil investment saying he doesn’t get in to unstable nations to do business.

    That says all about Ms T’s darling , the new PM Rani’s economic & political credentials.

    The naive Colombo Elite , probably haven’t realized that Junior has pulled the plug on 8- 10,000 well paid jobs too, which would have gone to not so sharp Colombo kids who can’t get a even a paid Degree.

    But Rathne, Sobitha and Champika plus the Elite’s new Pin Up boy Anura Kumara can go around, saying that they saved the Sinhala Buddhists from evil Casinos.

    And the majority of our inhabitant population wouldn’t know that the new PM Ranil gave Casinos in Colombo to Balagios in Vegas, a long time ago.

    SLMC Mustapha has already thrown in the towel , because he had no say in the appointment of the new SLA boss.

    And Mustapha reckons this dude is not cut out for it.

    Mustapha is right on the money there,,

    Just imagine .a Sweat Shop Boss running Srilankan Airlines which even our Pope picked to go to the Phillipines.

    This is another set back for the Elite which even Ms T has missed.

    Do our good looking SLA cabin staff, who are Elite offsprings in the main want to be treated the same as the Village Girls in Sweat Shops in Katunayaka?….

    Wonder whether Sira had anything to do with this appointment?..

    • 1
      0

      Oi Dal_`It` Lokka Fund- K.A Sumanasekera

      says : “”Do our good looking SLA cabin staff, who are Elite offsprings in the main want to be treated the same as the Village Girls in Sweat Shops in Katunayaka?…””

      I could on this PC CAD/CAM it for you Dal_`It` look pretty poo
      Or
      you could wake up the Mafia Italy and they could smart produce inclusive of genetic modifications – there are lovey ones from Big Foot to Beetle Poo.

      Its all in the asking price all are jackals-sleeping with hares & hunting with hounds

    • 2
      1

      I thought the Buddhism and Casino cannot go hand-in-hand, If the $$ value is ok, they can that is what you think?. If that is the case what about brothel, would Gnanasara would allow this?.

      When Seychelles money comes back, people will be able to see cost of living price pressure being reduced. Then European money, Dubai money, USA money, Italian island investment money, etc. people for pleasant surprises. Let Packer to pack up and go.

  • 2
    1

    In other words, new GSL will take on the foundations of old GSL and attempt to fine tune them. Truth is, foundations made by the old GSL should be fine-tuned by them, and them alone, because too many glitches and gilmarts will come about with new GSL, without the first GSL’s interaction and consultancy expertise.

    Also, vast swathes of the country will not need the intricate cranial analytical capitalistic process. The hinterland of the disadvantaged majority would have become more advantaged if concepts were left to the hear-center;the soul of the country so necessary to meld historical, cultural and heritage for greatest productivity, prosperity and happiness.

    • 1
      0

      You mean fine tune the Casino Contract with new commissions negotiated by the Financial Wiz Galleo Ravi, and the proceeds going to UNP London this time, instead of Union Bank in Kirullpone?.

      Problem is Packer junior is the chip off the old block,

      It will be hard to screw him, even by the UNP Elite unless Yahapalanaya Boss provides an iron clad guarantee of immunity for commission agents from both sides.

      Packer wouldn’t accept any from the UNP PM, because Packer investments don’t go to unstable Nations. in Junior’s own words.

    • 0
      0

      ~correction : I mean……The hinterland of the disadvantaged majority would have become more advantaged if concepts were left to the *HEART*-center

  • 4
    1

    Rajapakse business regime was favorable to many new born business men. We all know how they became super rich over the last 10 years. Hopefully Thilak at SEC and Harsha De Silva will reveal the truth in a short period of time. Harsha has taken over the CBSL, EPF and SEC under his wing for this purpose. Wait for the fun to start over the next few weeks.

    We do not need casions to develop this country and to provide employment to youth. In which country do you give tax breaks to start a casino?

    Ajith Dias is one of the best to run SLA and one of the best appointments made by the new regime. Compare him to Nishantha W the BIL please who was the former chairman.

    Musthapha has no electoral base and he can be kicked out without a problem. He cannot get elected from SLFP and hence will have no choice but to remain with UNP or another Muslim party. He had a practice in law when he was a Minister but there will not be anyone to retain him now. Wait and see.

    SL will once again get some concessions from GSP and also the fishing ban by EU will Be lifted in time to come.

    • 2
      1

      I totally agree re Faizer Mustafa. Ranil should kick him out. A waste of a human being.

      • 2
        1

        @Point of View
        Paisa,”A waste of a human being”?????
        Should read, “A waste of public funds” This jumping-jackass should be kicked out immediately.

  • 3
    1

    Sumane, You are damn right.

    Quote: “DOESN’T GET INTO UNSTABLE NATIONS TO DO BUSINESS”.

    We as a Nation would not allow the likes of MARA AND PACKER to plunder our country and most notably the women of our country to be treated like whores for the pleasure of people like YOU and the MARA CLAN.

    We are a country of rich heritage and possess a high degree of educational standards, save for the days of your MARA Regime.

    We will prevail over, wait and see pal. The Lord Buddha has re-visited the island for the fourth time in the form of MS to save our country and the Nation.

    I suggested earlier too, to pal up with MARA at MEDAMULANA and enjoy the plundered wealth of MARA which will surely smell of poor people’s blood. I am sure that will be fragrance for people like you and MARA. Go enjoy pal..

    • 0
      0

      We need people such as sumanasekarams as much as a Tisaranee Gunasekara.
      They remind us our rights and responsibilities.

  • 1
    1

    At this rate in about a year or so We will be begging the Americans Eu and India . with all the big talk and getting on the worng page with China these morons are digging the hole for Sri Lanka to lie in for a long time . Sad indeed . now these beggars was 5000 $ for dual citizenship . REALLY . Morons Really ?

    Hoots

    Abhaya

    • 0
      1

      I, myself was wondering 5000$ is way too much for dual citizenship, but then again how else are we supposed to pay back the loans and interest due to wrong borrowing by the former regime, their corrupt practices, swindling and much more…Oh they even used Public funds to feed elephant calves and now that they are out of power, they have to give away the Elephant calves coz they can NOT afford it no more… sad to see how much national wealth has been wasted for their thamashas, pride and arrogance..now WE the citizenry have to pay ….

      Charge all these goons, sell their assets, freeze their off shore accounts and properties, sell em reimburse the Central Bank…

Leave A Comment

Comments should not exceed 200 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically disabled after 7 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.