By Ameer Ali –
President Ranil Wickremesinghe, since he struck the deal with IMF, has been preaching his mantra about transforming Sri Lanka’s economy into an export-oriented First World model led by a vibrant private sector, employing state of the art technology and driven by renewable energy. His time limit is twenty-five years when the country would reach its centenary year of independence. This transformation according to him would gain momentum once the immediate financial crisis is overcome with the advice and assistance from IMF and other international institutions. Until then he is appealing to the citizens to bear the hardships for the sake of the country and allow him and the government to implement his One Policy Framework. But there is a warning coming from an unexpected quarter, which was not issued directly but implied by the decision of a private entity, which seemed to have received scant attention.
After nearly sixty years of involvement in Sri Lanka’s infrastructure development and helping to create business and exporting opportunities to a number of small and medium enterprises (SME), one of Japan’s monolithic conglomerates or keiretsu, Mitsubishi, has decided to wind up operations at the end of March 2023. This megacorporation ranked 41st among the top 500 global corporations in 2022. Among the reasons for its closure are Sri Lanka’s debt default, adverse international ratings and gloomy economic outlook. However, there are also other reasons which Mitsubishi did not mention but cannot be discounted. The cancellation of the Light Rail Track (LRT) and Liquefied Natural Gas Plant (LNG) projects, and contract to build and operate jointly with India the Colombo Harbour East Container Terminal, all under Gotabaya Rajapaksa’s (GR) Presidency must have contributed to this shocking decision. Whatever the reasons may be, the wider implication of Mitsubishi’s departure would be a blow to Ranil Wickremasinghe’s dream of transforming this country into a First World export economy.
This decision should not be considered however, as Japan’s revenge for what GR presidency had done. That country is still Sri Lanka’s second largest lender with $2.46 billion as of September 2022, and is willing to provide financial assurance through the Paris Club to help RW and his government to restructure the country’s debt and get funding from IMF. Om the contrary, it is purely as an entrepreneurial or commercial decision by a megacorporation in the interest of saving its own overall profitability and international standing. This is typical behaviour of any oligopolistic organization that has global exposure. Even in Japan, the government will go to extraordinary length to protect its keiretsu, because the collapse of any one of them would create detrimental ripple effects to the entire economy. But in Sri Lanka, Mitsubishi’s departure would create a different type of effect and that is why it is a warning that should be taken seriously.
Sri Lanka’s economy rebuilding efforts and RW’s export-oriented transformation depend not only on funding from IMF, the World Bank, Asian Development Bank and other sources, but also and more importantly on massive foreign investment. Mitsubishi’s closure would certainly sound alarm bells in that quarter. Foreign investors are profit makers and not philanthropists. Unless they are confident of making more money they would not invest in Sri Lanka. That confidence would certainly be weakened by Mitsubishi’s decision. The choice for RW therefore is either to provide extra incentives to attract foreign investors or depend mainly on the domestic component to fill the void. But what incentives could he offer to foreign investors with a bankrupt treasury, loss making state enterprises, semiskilled or unskilled and therefore unemployable labour force, undependable public utility services and above all a corrupt public administration?
Alternatively, what are the prospects of substituting foreign with domestic investment? Hardly any. It won’t make a difference because profit motive is the common denominator and its algorithm is the same whether the investor is foreign or local. The same disincentives listed above would also deter the domestic component. In addition, RW’s 2023 budget with its higher rates of personal and corporate taxes, though still lower compared to rates in other industrial economies, would induce domestic investors to look for greener pastures, which is happening already. No wonder Sri Lanka’s Honorary Consul for Cote d’Ivoire is enticing local entrepreneurs to invest in Ivory Coast. Even with higher tax rates in other countries, expected profit margin is greater there because of an efficient supplementary public sector. RW called for patriotism, but no patriotic investor would be prepared to throw away his or her savings and capital without assured returns.
In sum, the private sector on which RW has placed all his bets to rebuild the economy is turning out to be his silent enemy. The dent created by Mitsubishi’s absence would widen and could become a sinkhole. Is there an alternative? Yes, there is.
No amount of financial assistance from either IMF or anywhere else and no remedial blueprints from expert economists and advisory institutions is going to work in Sri Lanka unless there is a clean government and strong public institutions, which unfortunately are not there. This fact is not something new, and even IMF and its guardians are aware of it. But for reasons other than economic and which fall within the purview of geopolitics, such international bodies and their promoting powers see benefit in maintaining unclean governments led by dishonest leaders. This had been the sad story in several developing countries in Asia, Africa, Latin America and the Middle East. Sri Lanka is not an exception to this. Politicization has corroded the independence and strength of public institutions and together with corrupt political leaders they have destroyed the economy. This was why a group of young men and women staged the aragalaya last year to and demanded SYSTEM CHANGE and removal of all 225 parliamentarians.
What trust could IMF for example have on the honesty of a government whose ministers are in arrears of paying their utility bills that run into millions of rupees? What trust the people of the country and international bodies could have on a central bank that surrendered its independence to politicians and sat as an onlooker while a reported $53 billion leaked out of the system and sought asylum in foreign destinations? There is obviously something fundamentally wrong in the political culture of this country, its public institutions and the system that upholds them. Unfortunately, President RW who is one of the products of that system and surrounded by the same corrupt gang of politicians has now become its champion promising improvement. Is the world going to trust him? Not the Mitsubishi Corporation certainly. That is why it decided to leave.
Sri Lanka’s economy cannot be rebuilt by money alone. It needs a new approach and a new system operated by a team of dedicated technocrats mandated by the people. Of all the parties and coalitions that are vying for that mandate, only the NPP and its leader has so far made a firm commitment to change the system. Would he be given a chance?
This is why the forthcoming Local Government Elections (LGE), if and when it held, would be testing RW’s popularity and decide the fate of his IMF dictated economy rebuilding plan. Mounting opposition from trade unions, universities and professionals against unfair taxes and renewed communal tension over the 13th Amendment fiasco, spell trouble before the elections. But RW is trying more subtle means to stop LGE. If he succeeds, public unrest would continue and intensify, and he would have no alternative but to resort to repression. The country would enter into another interregnum of political instability that would put an end to his economic dream. Mitsubishi must have counted that possibility also in its calculations to depart.
*Dr. Ameer Ali, Murdoch Business School, Murdoch University, W. Australia