21 May, 2024

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The Impact Of The Next Election On The Economic Reforms

By Harsha Gunasena

Harsha Gunasena

The next election is going to be a presidential election and according to the constitution it will be held during September-October 2024. Last year we observed the postponement of the elections of local bodies and the explanation given was that there were not sufficient funds to allocate for the elections due to the economic crisis. As a country, solving the economic crisis should be the priority and not who solved it. The upcoming presidential election cannot be postponed while keeping the democratic status of the country.

The government agreed with the IMF the conditions of the revival plan and in return Sri Lanka is getting IMF assistance in the form of  48-month Extended Fund Facility  of SDR 2.286 billion (around USD 3 billion) to be released in half yearly instalments. Next major step is external debt restructuring which is already delayed. With this delay the IMF delayed their second tranche and paid it last December amounting to USD 337 million.

Gotabaya Rajapaksa and his group was anti-IMF even prior to coming into power as expressed then by Nalaka Godahewa. That was why there was a delay in seeking IMF assistance when the country was in trouble. Not only that, but they have also taken policy decisions such as reduction of income tax in contrary to previous IMF advice  with the support of the Private Sector. Ultimately after the failure of the indigenous methods of Ajith Nivard Cabraal of borrowing from the Central Banks of India and China the then government sought the assistance of the IMF.

Now no one talks about indigenous methods and all the political parties have agreed with the IMF way. However. opposition  parties say that once come into power they will renegotiate the programme with the IMF. IMF Senior Mission Chief for Sri Lanka Peter Breuer responded that the IMF is willing to listen to the alternative suggestions of how the programme objectives can be reached. However, the suggestions must be realistic and achievable within the timeframe of the programme. He further said “The path is a knife-edge path. We have to remember that. So, yes, we acknowledge in our press report the green shoots that we see for the economy and that’s the beginning of a virtuous cycle and we have to keep it there”.

Therefore, those political parties should specify the areas they are going to renegotiate and whether they can achieve the result within the time frame.

The IMF primarily focuses on the sustainability of the debt which means after restructuring whether the residual balance of debt could be repaid within the timeframe and at the interest rate agreed and the total debt should not keep on accumulating. Hence the current revenue of the government should be more than the expenses. The government agreed with the IMF that a ceiling which is the primary account balance, meaning the revenue minus expenses other than interest and capital repayment of debt, should be more than 2.3% of the GDP.

Therefore, the aim of the IMF programme is fiscal consolidation and not improving the economic growth rate. Growth rate can be improved only with the background of sustainable debts and disciplined fiscal operations.

It is the duty of the government to have growth-oriented plans. Although the governments say that the engine of the growth is the private sector, there are a lot of public sector institutions operating in the economy. When an economy is small it is possible that the private sector is not in a  position to invest in large projects. Hence the governments can invest and subsequently those could be transferred to the private sector. In the USA spaceflight activities will be undertaken by the private sector. In Sri Lanka the government is running hotels.

From mid 1950s the government acquired  assets and businesses from the private sector. Therefore, at present considerable wealth is in the hands of the government. In order to have a higher growth rate these businesses should be transferred to the private sector at market prices in a transparent manner. Ceylinco Insurance is the market leader and not Sri Lanka Insurance Corporation. Dialog is the market leader and not Sri Lanka Telecom. Just earning profits is not sufficient.

By privatizing the government enterprises in one way the enterprises will be in more efficient hands to contribute to the economic growth and in the other way cash-strapped  government is getting some money. Investments for the economic growth should come largely from the private sector in the coming years.

I have written a critique of the policy statement of the NPP Rapid Response in January 2022. Looks like since then they have changed  in line with some of the suggestions made as well although a fresh official policy statement was not issued.

NPP emphasizes central planning of the government. “We advocate a value-added economic approach that considers which products and services should be manufactured, which production methods should be adopted, which technologies to use, how to utilise human and physical resources, how foreign trade structure should be shaped and how benefits of the manufacturing process should be shared among the people.”

China followed the process of privatization of government enterprises  and moved from central planning to a great extent. In 1979 a set of radical agricultural reforms were started across China. They ended the commune system, increased the size of allowed private plots, and legalized the informal markets for farm products in rural areas. At the core of the urban reforms in mid 1980s,  was the enterprise reform, and its main feature was to allow enterprises to retain part of their profits. Before 1984 all profits of enterprises were fully remitted to the budget. Private firms  were also permitted in the cities, and their share in retail sales rose from less than 10 percent in the late 1970s to more than 50 percent in 1987.

If the private sector is equipped with adequate capital and necessary resources the government should not advise them in which businesses they should be engaged and how. However, there should be consistent national policies so that those are not changed every five years.

Ranil Wickremesinghe was appointed Prime Minister in May 2022. In his initial address to the nation, he named Sri Lankan Airlines and said that it should be restructured. He became the President in July 2022 and in August 2022 he gave an interview to the Economist and said Sri Lanka Insurance Corporation will be privatized. SOE restructuring unit was established under the Ministry of Finance and the Cabinet in March 2023 mandated the Restructuring Unit to divest an identified set of SOEs. In March 2024 the government decided to take over USD 210 million and SLR 41.4 billion taken by Sri Lankan Airlines from the state banks.

We have not seen the result yet. I understand that these activities take time and cannot be done in a rush. The so called neo liberalist Ranil Wickremesinghe has taken such a long time to finish this, and I cannot imagine what will happen under center-right, center-left, or far-left government. One reason for the delay may be the forthcoming elections and the President  is aware of the public perception.

In Sri Lanka there is a strong public perception that government enterprises should not be privatized. One reason for this maybe they have observed the manner the entities were privatized under the previous governments where those entities were given to their cronies for less than the market value. This defect could be rectified in future transactions. The other reason may be the perception based on socialist thinking that government entities will provide a better service for lessor price. It is not. Think of the behavior of Litro Gas in changing the gas formula and resultant explosions.

Opposition parties take this line of public perception into consideration, when talking about privatization. It is beneficial for politicians to have public enterprises so that they are in control of recruitments.

Private sector also should be geared up to take entrepreneurial decisions. Sometime back Amitha Gooneratne said he failed to convince the Commercial Bank Board to invest in Bangladesh much earlier and finally it got materialized. Recently Ronnie Peiris in an article to Daily FT said that the boards in Sri Lanka are too ‘old school’ and this is hampering Sri Lanka’s march to a new world economy.

Therefore, old school thinking should be abandoned by the political parties as well in order to take Sri Lanka to the next level not only in respect of the economy but also in all other aspects.

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Latest comments

  • 3
    0

    I am afraid that the remedies for solving the country’s economic problems will continue to be Plaster, Bandage, Paracetamol, Kasaya and similar stopgap measures until the grievances of the Tamil-speaking citizens are addressed and solved satisfactorily.

    • 1
      6

      -“Tamil-speaking citizens are addressed and solved satisfactorily.”-
      _
      Tamil in Sri Lanka enjoys more privileges than a Tamil in a western country. Anyway let Tamil Nadu take care of Tamils.

      • 9
        1

        Tony,
        .
        if you challenge them, Why don’t you return to India? It is believed that we also came to Sri Lanka from India a long time ago.
        If Sri Lankan Tamils are born and bred they should have the same rights enjoyed by a Sinhalese. That is valid for muslims as well.

        If you don’t seem to get it, you should be hanged by law. All citizens have the rights equally. No matter who came first to the island.
        The term “minority” should be removed from our vocabulary. Busta.

        Racism against minorities must not be extended if we as a nation are to achieve our economic goal for our youth. If NPP would win the next election, first thing they have to fulfil is to crush ” TONY” or the like racists. They should be put in jail at least for a 10year period.

    • 1
      2

      RANIL’S ECONOMIC POLICY
      .
      I too was of the opinion that Ranil is a neo liberalist, but according to Dr. W. A. Jayawardena and Ranil’s own admission at least on couple of occassions in the Parliament, his economic doctrine appears to be Social Market Economics, not Neo Liberal Free Market Capitalism like many, including Harsha above believe.
      .
      Whether Ranil is true to his word is a different matter. I doubt if any SOE would be restructured or privatised before the elections.
      .
      GEOPOLITICS IN DEBT RESTRUCTURING.
      .
      China seems to hold the biggest leveraging power when it comes to debt restructuring, the crucial next immediate hurdle on the horizon in the path to recovery from the economic crisis.
      .
      India I believe is neither a member of the Paris Club nor London Club, if I’ve got the two names correctly, therefore seems to be less important compared to China in the debt restructuring process.
      .
      With newest move the US have made, Modi’s trumps seem to be limited.
      .
      FATE OF SOEs
      .
      The upcoming elections will be crucial.
      .
      Other than external debt restructuring any other main changes, including decisions on SOE’s, I believe would take place only after the elections, depending on the policies adapted by the winners. Ranil is unlikely to be among them.

      • 1
        1

        Ruchira

        Ranil is not a neo liberalist. Opponents have labeled him in that way. (https://www.colombotelegraph.com/index.php/are-the-imf-ranil-wickremesinghe-neoliberal/)
        After he became the Prime Minister in December 2016, Bank of Ceylon (BOC) sold shares of Seylan Bank held by them through Colombo Stock Exchange (CSE). After the sale took place, he intervened and asked BOC to reverse the sale saying that it was not the policy of the government to sell the state assets and BOC did not take approval of the government to sell the shares. He also met the buyer of the shares to explain his position.
        SOE restructuring unit also did not recommend that all the SOEs should be sold. Some will be closed down and some will continue under government ownership but under a different way of management.

        • 0
          0

          Harsha – Thank you for the comment and sorry for not replying sooner. I thought you referred to him as a neo-liberalist. I have seen Dr. Dayan Jayathilaka do the same and I was previously of the view that he (Ranil) is one of those extremely right wing neo liberalist. Thank you also for the link shared of your previous article addressing the same. I do agree with your concluding statement there: “The country should be able to take positives from any ideology and implement those to the benefit of our people,…” In any case that is I believe what happens everywhere. There’s neither true laissez-faire capitalism nor pure socialism anywhere in the world. It, I believe is always a matter of finding the right mix and balance that works on a case by case basis. I think the biggest problem in Sri Lanka is cronyism and nepotism that jeopardise any form of economic policy and work against tge betterment of the country at large. Once again thank you for the clarification.

    • 3
      0

      Dear Readers,
      many commenters including just simpletons in CT website behave like they are experts about not paying the loan installments by the govt.
      The truths lie aside and they dont even focus on the facts.
      Those who are interested in, please watch the video (sinhala) below
      https://www.youtube.com/watch?v=Xkc8dxiG_2s&t=38s

      • 0
        0

        Dear “leelagemalli”,
        .
        Thank you for the link.
        I’ve begun listening to it on another Tab. But, I hope that you, and other readers, realise that this is only 20 seconds short of two hours.
        .
        If comments on this article by Mr Harsha Gunasena are still being accepted, I shall give you feedback.
        .
        I have repeatedly told you (and Raj-UK) that you must be humble enough to listen so as to learn, not to keep insulting other contributors, and not to refuse to listen to other videos that don’t toe the line that you are following. Both of you have refused to view the two separate links that I provide you below for this interview, ten years ago, that lasts less than 14 minutes below this Kumar David article:
        .
        https://www.colombotelegraph.com/index.php/planning-for-a-year-of-elections/
        .
        This is the link again:
        .
        https://www.youtube.com/watch?v=IL1-RW6h7d4
        .
        Please listen and provide some feedback, here or elsewhere (if comments here have closed).
        .
        Panini Edirisinhe

  • 3
    1

    Politicians of SL make strange bedfellows. CBK went to bed the the JVP who were responsible for her husband’s murder, RW became bosom pals with the Rajapakses & the very punks who ridiculed him are now backing him. So will RW welcome the proverbial prodigal son? WIll Premadasa jnr. eat humble pie & abide his time, happy with playing second fiddle to RW?

    Whatever the power struggle for the top job, the crucial question is which party will govern the country? Favourite maybe the NPP but now Mr Gunasena seems to be casting his doubt about NPP strategy. My conclusion, considering AKD as the leader of both the JVP & NPP, is that the JVP will take over the reigns of NPP if in power, with the worst case scenario of a communist regime or a trade union underpinned socialist regime as the alternative (Please refer to Wikipedia description of the NPP). Either way, it’s not likely to attract FDI. It could very well lead to extended oligarchy & monopolies with state blessings. I may be wrong, so I eagerly await the proposed debate on the economic strategy with all political parties participating.

    • 0
      0

      Dear Raj-UK,
      .
      You have written,
      CBK went to bed the the JVP who were responsible for her husband’s murder,”.
      .
      I know that you meant “went to bed” in a metaphorical sense, but be mindful of the ambiguity of what you have said. Please try to avoid this sort of thing.
      .
      Yes, I have always believed (and I still do) that it was the JVP who shot Vijaya Kumaranatunga. I admire CBK for having been able to overcome her personal loss. She later lost the sight of an eye, but continued to pursue the possibility of peace with the Tamil community (I have written it like that because I have no time check whether she talked to LTTE.)
      .
      This has now run for 50 minutes: https://www.youtube.com/watch?v=Xkc8dxiG_2s&t=38s
      .
      It is a civilised conversation.
      .
      Both of you must overcome the temptation to score debating points when commenting.

  • 1
    1

    Sri Lanka will escape bankruptcy, but it will probably resemble Argentina in the future, due to structural deficiencies.

  • 2
    3

    Harsha Gunasena,

    Economists (and the politicians they advise) should be forward-thinking. The next Black Swan could be some kind of US debt default. This would put the US dollar at risk of losing its reserve currency status. Volcker raised rates to 19% but these days investors are hung up on 5.5%. The US Federal Reserve will not go above 6% because of the debt. If Sri Lanka wants to make this bet, it should align with China, as the yen is the only possible replacement for the USD. Without the USD as reserve currency, the geopolitical ambitions of the US would also fade. My analysis is only wrong if the “AI revolution” pans out. In this scenario, AI achieves efficiencies in labor, R&D, etc. that add significant, unprecedented returns to the bottom line. In the second scenario, Sri Lanka should aim to create industries that align with IT, specifically AI. We should also consider the state of the Chinese economy. It has shifted to services, meaning the middle class is now well-established. China is likely to be a superpower in the future, and India is not.

    • 0
      0

      Hello Lester,
      Until Sri Lanka does something about its atrocious infrastructure they do not have a chance in hell of competing in the Global IT Industry let alone AI.
      Until such time as we have Star Trek Transporters we will still need Cars, Trains, Buses, Scooters and Bicycles etc. Someone has to manufacture these. Maybe in some of the more advanced countries 3D printers will make whatever you need to order, but here in Sri Lanka you still need Builders, Carpenters, Electricians, Mechanics and even IT Engineers etc.
      So what is the plan to take Sri Lanka from a 1940s British Model to a 21st Century Service Infrastructure and what are all these people that have been dispensed with, due to AI efficiencies, going to do?
      Best regards

      • 0
        0

        Hello LankaScot,

        AI is still in the early stage, as are many of the applications. These applications rely on large volumes of data. And so offshore data centers will need to be built. Compared to neighboring countries, Sri Lanka can be a good choice. Other possible investments in the island include semiconductor fabs and car factories. Companies are moving away from China now, due to geopolitics as well as a rising labor cost. They are looking at countries like Vietnam and Indonesia. And lastly, Sri Lanka can be a regional hub for solar energy.

  • 0
    0

    *yuan, not yen.

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