Sri Lanka’s debt crisis, which led to political upheaval and change of government, is the result of debt accumulation, domestic policy dysfunction and external shocks.
Sri Lanka has long relied on external borrowing to bail itself out of financial crises. It has entered into 15 loan agreements with the International Monetary Fund in 52 years, with the ratio of its external debt to gross national income being above 50 percent for years.
Sri Lanka is a country with not only very high debts but also a very fragile debt structure. Short-term debt and private creditors, which are highly vulnerable to capital flight and interest rate volatility, account for 45 percent of its total external debt, while official creditors, which have low financing costs, long maturity periods and more stable financial flows, account for only 36 percent.
Besides, the COVID-19 pandemic and the Russia-Ukraine conflict have had a huge impact on Sri Lanka’s revenue, for they reduced, almost dried up, the flow of tourists to the country while affecting its tea exports, especially to Russia. That the tourism industry accounted for about 13 percent of Sri Lanka’s GDP and tea was a very big foreign exchange earner before the pandemic shows the importance of these industries. In 2020, for example, the number of tourists visiting Sri Lanka was only about 20 percent of that in 2018.
Wrong macroeconomic policies, too, accelerated Sri Lanka’s economic collapse. After coming to power in 2019, former president Gotabaya Rajapaksa implemented three major policies: tax cuts, printing more currency notes and introducing green agriculture.
While the tax cuts widened the fiscal deficit, with the fiscal revenue to GDP ratio falling from 12.6 percent to 9.1 percent in 2019-20, the government overissued currency notes to fill the funding gap, triggering hyperinflation. As for the green agriculture policy which took effect in 2021, it not only drastically increased farming costs but also halved production, creating an unprecedented food crisis.
As such, Sri Lanka is mired in a debt crisis, economic crisis, and food crisis. To overcome the economic crisis, Sri Lanka must first adopt prudent monetary and fiscal policies, and address the food shortage problem at the domestic level, and to resolve the debt crisis, it should cooperate with the international community.
In 2021, the share of sovereign bondholders in Sri Lanka’s external debt was as high as 47 percent, with China accounting for 10 percent, the Asian Development Bank 13 percent, Japan 10 percent, the World Bank 9 percent, and India 2 percent. Therefore, contrary to some Western politicians’ claim, China is not the largest creditor of Sri Lanka and Sri Lanka’s debt crisis cannot be resolved by China alone waiving its debt.
Over the years, China has been contributing to Sri Lanka’s economic construction and helping improve its people’s livelihoods. The infrastructure projects China has promoted and built overseas have not only reduced construction costs but also are suitable to the respective geographical and climate conditions of the host country, and therefore meet the realistic needs of developing countries.
Moreover, China’s overseas infrastructure projects are accompanied by long-term capital. Accordingly, China’s stable and preferential funds for Sri Lanka’s infrastructure projects were based on the policy of long-term infrastructure investment, high investments and long payback period, which have helped the country overcome many a financial woe and continue on the road to development.
Although China’s funding for Sri Lanka’s infrastructure projects has increased the latter’s liabilities, it has increased its public assets, too, while improving interconnectivity within the country and with the outside world, thereby reducing transportation costs and making the logistics sector more efficient.
China has always pursued an independent foreign policy and follows the Five Principles of Peaceful Co-existence, including non-interference in other country’s internal affairs.
Also, China helped finalize the G20 debt moratorium initiative for least-developed countries in 2020 and the common framework for follow-up after the G20 member states launched a debt service suspension initiative in early 2020 to offer debt referrals to 73 of the world’s poorest countries. In fact, China has suspended the highest number of debt repayments among all G20 members.
The year 2022 marks the 65th anniversary of the establishment of diplomatic relations between Sri Lanka and China. The two sides have always had close and friendly relations, and promoted the spirit of “independence and self-reliance, solidarity and mutual assistance”.
Since the Sri Lankan crisis broke out, China has sent emergency humanitarian aid worth 500 million yuan ($72.10 million) to Sri Lanka, including medicines, fuel, rice and other urgent necessities to help the country cope with the crisis. And China sincerely hopes Sri Lanka, under the new government, emerges from the crisis, revives its economy and restores peace, stability and prosperity in the country.
Views expressed are personal
This article is a part of the SLG Syndication project. Sun Jingying who is deputy chief of staff of the National Institute for Global Strategy in Beijing, authored this article for China Daily. Click Here to read the original
Thirty-seven newly installed state ministers to run bankrupt Sri Lanka have urged to allocate 296 government vehicles, fuel and drivers to serve the vehicles, according to highly placed government sources.
Sources confirmed that arrangements are currently being made to allocate 8 vehicles to each state minister from their respective ministries.
“Several state ministers who were appointed yesterday have already requested vehicles from their respective ministries and they have emphasized to the authorities about their vehicle rights and their need by showing the circulars that have been issued so far,” reliable sources say.
Accordingly, they have said to provide two vehicles to the Minister of State, one vehicle to the Private Secretary, personal coordination secretaries, personal assistants and media secretary to be given respective vehicles and prescribed fuel allowances.
The world’s largest container shipping company, the MSC, began in mid-2022 to re-route its vessels passing by Sri Lanka, on a new course that is approximately 15 nautical miles to the south of the current traffic separation scheme (TSS) for commercial shipping.
Specifically, MSC has followed guidance based on research surveys completed by the International Fund for Animal Welfare (IFAW), the World Trade Institute (WTI), Biosphere Foundation, University of Ruhuna (Sri Lanka), Raja and the Whales and University of St Andrews (UK), and additionally endorsed by the World Wide Fund for Nature (WWF), to change the routing for its boxships.
Westbound ship traffic is now limited to a latitude between 05 30N and 05 35N, and eastbound traffic is limited to a latitude between 05 24N and 05 29N in order to avoid designated cetacean habitats, according to an announcement.
An exception has been made for vessels embarking and disembarking for safety reasons in Galle, including in case of adverse weather. Additionally, smaller feeder ships sailing around the Bay of Bengal will reduce their speed to less than 10 knots in this area.
In the meantime, in January 2022, MSC decided to re-route its ships on the west coast of Greece to reduce the risk of collision with endangered sperm whales in the Mediterranean. According to NGOs such as IFAW, OceanCare, WWF Greece and the Pelagos Cetacean Research Institute, if all ship traffic using this area made a similar routing adjustment, the ship strike risk to sperm whales would be reduced by almost 75%.
Plots of land in the Colombo Port City have been allocated for foreign investors, but it is reported that only six plots have been acquired by the investors so far.
“74 plots in the port city have been reserved for investors and so far no investor has come forward for 68 plots,” the local media in Colombo citing reliable sources has reported.
The investors, unfortunately, who are currently reinvigorated for six plots have not been able to start their desired development activities due to the legal regulations related to the city not yet being implemented.
Sri Lanka, however, is offering 40 years of tax relief to investors in its China-built port after the project failed to attract any foreign interest after nearly 12 months of operations.
With the global economic downturn, attracting investment to Colombo’s Port City has become increasingly difficult, Minister for Mass Media and Cabinet spokesman Bandula Gunawardana said.
He said in a statement recently that Oman, for example, has offered tax breaks in its ports to attract industries and businesses.
“Attracting investors is a challenge while local investors in the country are moving to countries such as Bangladesh, Ethiopia and Kenya due to favourable investment opportunities,” he said.
Operated as a Chinese-Sri Lankan joint venture, Colombo Port City has an area of 269 hectares.
The IMF staff-level agreement with Sri Lanka on a USD2.9 billion programme, confirmed on 1 September, appears to signal a sharp change in policy settings in order to achieve macroeconomic stability, including through large fiscal adjustment, greater exchange-rate flexibility and more central bank autonomy, says Fitch Ratings. This should facilitate negotiations with official and private creditors, but the timing of any debt restructuring agreement remains uncertain.
The Extended Fund Facility will not be approved by the IMF’s Executive Board until the government has implemented a number of agreed prior actions (not publicly specified), financing assurances have been received from official creditors, and good faith efforts have been made to reach agreement with private creditors. The IMF has assessed Sri Lanka’s debt burden as unsustainable, so the outcome of negotiations with creditors should involve debt relief.
Tax reform will be an important element of the agreed programme. Personal income tax will be made more progressive and corporate income tax and VAT will be broadened, with a goal of achieving a primary fiscal surplus of 2.3% of GDP by 2025, compared with a deficit of 5.7% in 2021.
In line with this, the interim 2022 budget unveiled by the new government on 30 August laid out plans to raise the standard rate of VAT to 15% from 12% from 1 September, and proposed compulsory tax registration for all residents aged over 18 years. The budget sought to raise government revenue/GDP from 8.2% in 2021 to 15% by 2025, and to reduce public debt/GDP from around 110% at end-2021 to not more than 100% in the medium term. The revised budget deficit for 2022 is projected at 9.8% of GDP, up from 8.8% of GDP in the original 2022 budget.
Political instability will pose risks to the implementation of reforms and the distribution of IMF funding, even if a debt restructuring is agreed.
We believe the government has some room to reduce capex, but its non-discretionary expenditure is large. Interest payments and wages were equivalent to 1.3x government revenue in 2021. We expect additional revenue raising to be the main driver of fiscal consolidation, but the budget signalled there will be reallocation of expenditure towards social spending to cushion the effects of the economic crisis.
Political instability will pose risks to the implementation of reforms and the distribution of IMF funding, even if a debt restructuring is agreed. Additional social spending may not be sufficient to prevent public opposition, particularly given that the government’s public support appears weak, in our assessment, and that the economic growth recovery in 2023-2024 will be constrained by the strong fiscal consolidation.
Fitch rates Sri Lanka’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘RD’ (Restricted Default). The Long-Term Local-Currency IDR is ‘CCC’, and is Under Criteria Observation following our introduction of +/- modifiers in the ‘CCC’ category. A default on local-currency debt could have adverse effects on Sri Lanka’s banking sector that would erode the net benefits of such a restructuring.
When we affirmed the Long-Term Local-Currency IDR in May, we assumed that the government would continue to service local-currency debt. Nonetheless, the ‘CCC’ rating reflects a high risk that local-currency debt will be included in debt restructuring, as the stock and interest costs are large, and omitting it could increase the restructuring burden on holders of foreign-currency debt. The central bank governor in late August affirmed that Sri Lanka would not restructure domestic debt, but this was partly in response to comments from President Wickremesinghe that appeared to suggest that this policy option was being examined.
Fitch may move Sri Lanka’s LTFC IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Crisis-hit Sri Lanka has reached a preliminary agreement with the International Monetary Fund (IMF) for a loan of about $2.9 billion, the international lender said in a statement on Thursday.
“The objectives of Sri Lanka’s new Fund-supported programme are to restore macroeconomic stability and debt sustainability,” the statement said, outlining the 48-month long arrangement under the IMF’s Extended Fund Facility.
“Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps,” the statement added.
The debt-laden country has been seeking up to $3 billion from the IMF in a bid to escape its worst economic crisis since independence from Britain in 1948.
Sri Lankans have faced acute shortages of fuel and other basic goods for months, leaving it in political turmoil and hit by runaway inflation, which is now at almost 65% year-on-year.
( Inputs from Reuters)
The full text of the interim budget speech tabled today in the parliament by President Ranil Wickremesinghe is as follows;
The Interim Budget is being presented today to the Parliament, in order to prepare the basic foundation for changing the economic trajectory of our country. This is basic to the formulation of a national economic policy in accordance with the new world order. Based on this foundation, the Budget for the year 2023, will initiate the process of creating a new economy. For the process of creating a new economy, I plan to present a comprehensive set of proposals in the Budget 2023.
In presenting the Interim Budget, I wish to draw your attention to four aspects.
- Economic Crisis
- On many occasions, I have pointed out the extent and depth of the economic crisis that we are facing. We have not fallen into such an economic abyss in our recent history. Some people in our country do not yet have a real understanding of its severity. When pointing out the difficulties and hardships, they are viewed with sarcasm. They think like crabs that happily lay in the water that is on the fire, until it reaches boiling point. However, there are also those among us who think in a more responsible manner, having understood the gravity of this situation, and resolutely seek to battle in dousing the fire.
- Causes of the Economic Crisis
- It is a widespread slogan these days to claim that the country has deteriorated for 74 years after independence. Those who engage in chanting these slogans, earlier said that it was the colonial rulers who destroyed the country. This is the reality of slogan-led politics, they put forward slogans at different points in time for their own benefit. Engaging in rhetoric and politicalized economic policies for their own benefit rather than the country, are the main reasons for the collapse of our economy.
- Due to these short-sighted economic practices, the country’s progress has been hampered from time to time. Many of those setbacks occurred in the name of the citizens who also accepted those policies without any criticism.
- From the time the Government nationalized businesses, most of the tax revenue of our country has been spent to cover their losses. Funds which have to be utilized for the necessities of the community, are being wasted on keeping these companies afloat. Government should be formulating policies and implementing them. However, presently the Government does everything and the people also expect such from the country’s administration.
- We have not been following appropriate policies, not only in relation to state enterprises, but also in attracting foreign investments. Continuously there has been no proper use of the nation’s resources, that too in the guise of seeking to protect state assets.
- Solution to the Economic Crisis
- In order to solve this economic crisis, one of the basic tasks that we need is to extricate from our traditional political perspectives and impartially appraise the reality of the ground situation in the context of the global environment.
- I wish to quote a recent statement made by Mr. Sunil Handunneththi of the JVP “The Government should make policies. The Government does not have a role to engage in commercial ventures.”
- If we can nourish our minds with creative thoughts, according to the current trends of the modern world, then we can solve the economic crisis.
- Method of Solving the Crisis
- This crisis will not be solved by accusing one another, nor by faulting the past. It can only be solved by adopting short- and long-term plans.
- In this context, we are now adopting the short-term measures. Negotiations with the International Monetary Fund (IMF) have successfully reached its final stage. Discussions on debt restructuring will be held with the main countries that provide loan assistance to our country. The United Nations in collaboration with leading international organizations, is launching a programme to ensure food security. The process of providing daily needs like gas, electricity and fuel without a shortage has been initiated. Schools have opened, and the universities are commencing their academic activities.
- All this reflects that, we are on the correct course in the short term for recovery.
- However, we cannot be complacent. We should prepare a National Economic Policy for implementation continuously at least over a period of 25 years. As I mentioned at the beginning, this Interim Budget forms the basic foundation for the National Economic Policy, which is envisaged to be established through the 2023 Budget.
- This Interim Budget speech, the IMF agreement and the Budget 2023 will set the framework for Economic Stabilization and Revival. Within it, we will set the Road Map.
- Once the discussions with the IMF are concluded, I expect to provide the information on the same to the Parliament.
- We briefly discussed the economic crisis, the cause of the economic crisis, the solution to the economic crisis and the method of solving the economic crisis. Now, I would like to present the Interim Budget and its proposals for your attention.
- Macro-fiscal Framework
- Our fiscal stabilisation programme envisages government revenue increasing to around 15 percent of GDP by 2025 from the 8.2 percent of GDP as at end 2021.
- The government is targeting a primary surplus more than 2 percent of GDP in 2025 and expects to improve upon this level thereafter.
- We aim to reduce public sector debt from around 110 percent of GDP as at end 2021, to no more than 100 percent of GDP in the medium term.
- It is expected that inflation will be brought back under control to a mid-single digit level in the medium term.
- In line with this, interest rates are also expected to reach a moderate level gradually.
- Once macroeconomic confidence is re-established and foreign exchange reserves are replenished through foreign financing, the adverse pressure on the exchange rate is also expected to abate.
- With the implementation of a series of growth enhancing structural reforms, the medium-term economic growth is expected to return towards 5 percent.
- Main items in the Interim Budget
- The Interim Budget includes the provisions to accommodate the policy package introduced in January 2022, provisions for strengthening social safety net programmes, additional cost due to increased interest payments in 2022, receipts of foreign assistance through repurposed projects by the World Bank and the Asian Development Bank (ADB), provisions for financing obtained through the Indian Line of Credit and increased cost of fertilizer subsidy, among others.
- As I promised earlier, we have directed around Rs. 300 billion out of capital expenditure and less priority spending allocated in the original budget 2022 for above purposes, including the provision of relief to those who are affected by the economic crisis.
- Revenue Proposals
- A number of tax reforms pertaining to Income Tax, Value Added Tax (VAT), Telecommunication Levy and Betting and Gaming Levy have been already approved to be implemented. Some of these tax proposals have already been implemented.
- In addition, the VAT rate will be increased to 15 percent from the current rate of 12 percent with effect from 1st September 2022.
- Most revenue proposals introduced in May 2022 will be effective from 1st October 2022.
- The implementation of these proposals will help increase the revenue. It will enable to gradually reduce the quantum of monetary financing for government expenditure.
- The revenue from the above proposals is also included under the revenue estimates presented in the amendments to the 2021 Appropriation Act.
- In addition, it is expected to present new revenue enhancing proposals aiming at Budget 2023.
- Tax Administration
- In our efforts to increase the revenue, tax administration must play a pivotal role in enhancing the tax collection efficiency, strengthening tax compliance and preventing tax avoidance.
- In addition to the already existing requirements, I propose to introduce compulsory tax registration for all residents who are above 18 years of age without considering their annual income and tax-free thresholds.
- The government is committed to implement the recommendations in the Final Report of the “Presidential Commission of Inquiry into Sri Lanka Customs”. This will strengthen corporate, administrative, and operational processes of Sri Lanka Customs to discharge its responsibilities effectively and efficiently.
- Non-Tax Revenue
- Measures will be taken to enhance non-tax revenue, including royalties received for government assets. I also propose to take actions to attract foreign investors and/or technology holders to establish joint ventures with Sri Lankan partners for industrial investments with advanced technologies to ensure better utilization of our mineral resources and increase value addition without jeopardizing the interests of the national economy and the sustainable use of resources.
- Expenditure Management
- At present, measures are being taken to develop a more prudent and evidence-based prioritisation mechanism for capital expenditure projects. Funding will be channelled to priority sectors such as education, healthcare, public transport, public service digitisation, and social protection.
- The effective expenditure management needs better and strong supervision as well. Hence, I propose to introduce required laws to establish a system like Inspector General (IG) in the USA, tasked with making sure government expenditure system is working well and in the way it is intended. The IG will be strongly empowered and will actively engage in protecting the integrity of the government by detecting and preventing fraud, waste, and abuse in government institutions.
- A comprehensive study of movable and immovable properties, including government owned buildings, lands and vehicles will be conducted with a view to optimise the utilisation and to identify potential real estate for income generating activities.
- Consolidation of identified Local Government Authorities
- There are 341 Local Government Authorities currently operating in the country consisting of 24 Municipal Councils, 41 Urban Councils and 276 Pradeshiya Sabhas. While there are local government authorities which have ample revenue streams, there are also local government authorities which do not have sufficient sources of revenue. Therefore, in order to provide a more efficient public service and to facilitate efficacies in administration, I propose to merge selected Pradeshiya Sabhas with a Municipal Council or an Urban Council adjacent to them. 22 Pradeshiya Sabhas have been selected for this programme as the initial step. Details are given in the Annexure VII.
- In order to making services to be efficient and easier to the public, all the local government authorities should arrange to offer online services to collect the related revenues without any delay. Accordingly, the online revenue collection programme should be implemented in all local government authorities before the end of 2022.
- It is important to review the activities of the project offices and project units that have been established for various purposes as these involve significant number of staff and high amounts of payments. Hence, I propose to appoint a committee to review whether the intended purposes of such offices and units have been met and whether it is necessary to continue such entities and submit recommendations to the Cabinet of Ministers within a period of 3 months.
- Public Sector Reforms
- As a part of efficient expenditure management, I propose to rationalize the number of government employees. Already, we have allowed those who are willing to take no pay leave for 5 years or so and go abroad or engage in educational activities in the country.
- It has been observed that there has been increasing unrest among unemployed youth as the government had decided to raise the mandatory retirement age of public sector employees to 65 years and that of semi-governmental employees to 62 years. Besides, it has also been reported that the increase in the retirement age has restricted the promotional opportunities available for many public sector and semi-governmental employees.
- Accordingly, it is proposed to reduce the retirement age of public sector and semi-governmental employees to 60 years. Those who have been employed beyond 60 years of age at present in the government and semi government sectors will be retired as of 31.12.2022.
- The Director General of Management Services will be tasked to conduct a work study covering the entire public service for the purpose of optimally obtaining services of the primary level employees in the government entities and to submit the report to the Cabinet of Ministers within three months.
- The purchase of fossil fuel-based vehicles for public sector will be suspended from hereafter as a government policy.
- As per this policy, only electric-powered vehicles will be purchased for the use of the public sector in the future and the private sector will also be encouraged to use electric vehicles.
- In purchasing vehicles for the public sector, suitable categories of vehicles are decided on the basis of the efficiency and prices of the vehicles. This proposal will be implemented step by step and will be completed by 01st January 2026.
- National Security – 2030
- As a geo-politically important country, Sri Lanka should work with everyone and design our defence policies accordingly to face the emerging realities.
- Hence, I propose to have a review on our defence strategy called “National Security – 2030” to achieve these objectives and to develop capabilities and knowledge of our security forces that would be required in the modern and evolving world.
- State Owned Enterprises
- Another critical area of reform is the management of state-owned enterprises (SOEs). The major fiscal risks arise from a few key SOEs, particularly in the transportation (SriLankan Airlines) and energy sector (CEB and CPC). These entities face significant losses, negative equity (SLA/CPC), and large volumes of debt that is predominantly owed to the state banks, creating significant financial sector risk.
- Some of the state-owned enterprises have been making losses on continuous basis due to issues of structural nature existed for some time. As these losses cannot be met endlessly from the General Treasury, attention should be paid to find alternative mechanism make them effective. Accordingly, it is proposed to establish the “State-Owned Enterprise Restructuring Unit” to facilitate restructuring of government owned business entities. I propose to allocate Rs. 200 million to implement this proposal.
- In addition, I propose to re-activate the Statement of Corporate Intent (SCI) process for key 50 SOEs, excluding CEB, CPC and Sri Lankan Airlines, as they are under different efforts to restructure, to closely monitor the set targets.
- These difficult but necessary measures pertaining to SOEs will no doubt be challenging to address, but failing to do so would create catastrophic risks, particularly for financial sector stability, and will entail even higher taxation burdens on the public in the future.
- Fiscal legislative/oversight framework
- The fiscal reforms that have been set out are not alien to us. These issues have long been recognized and until 2019, Sri Lanka was embarking on a path of fiscal stabilisation where many of these reforms were put in place. Unfortunately, these reforms were rolled back, putting the economy on a downward spiral to where we are today. We don’t have any alternative. We must undertake these reforms for the benefit of the future and the betterment of the presently young people.
- Therefore, it is essential that whatever reforms we put in place today are shielded from myopic and stubborn decision making that derails the economic recovery that we all hope to see. Towards this end, we will introduce new legislation under a Public Finance Management Act (PFM Act) that will include stronger Fiscal Rules.
- A “Parliamentary Committee on Ways and Means” will be
established to closely deal with issues and make proposals in raising government revenue.
- Disposal of scrap materials accumulated in public sector institutions
- It is found that a large amount of scrap material are piled up in many government institutions due to non-removal/disposal of the same for a long time. Besides, the government is losing a lot of revenue that could be obtained by selling the scrap material.
- Accordingly, a committee consisting of three government officials including Comptroller General of the General Treasury, will be appointed to supervise and implement the entire process of the disposal of scrap.
- Establishment of a National Debt Management Agency (NDMA)
- The government debt management related activities are carried out by the Central Bank of Sri Lanka, External Resources Department, National Budget Department and the Treasury Operations Department at present. As it is important to pay special attention to the management of public debt, an independent National Debt Management Agency (NDMA) will be set up under the General Treasury in lieu of current arrangement in this respect.
- Establishment of National Agency for Public Private Partnership (NAPPP)
- A national agency will be established for the purpose of identifying and facilitating investment to be undertaken in partnership with the public and private sector. I propose to allocate Rs. 250 million for the implementation of this proposal.
- Monetary and financial sector
- The new Central Bank Act will be implemented as a key legislation to strengthen the monetary sector in the country. This legislation would provide the framework for effective implementation of inflation targeting and prevent monetary financing of the budget deficit – what is commonly known as money printing.
- The new law insulates the Central Bank of Sri Lanka from politicisation of monetary policy decisions.
- Given the weak government revenue and lack of net foreign financing of the budget, it is inevitable that a limited level of monetary financing would continue until tax policy measures help improve the government cash flow and the IMF programme unlocks foreign financing for the budget.
- Allotment of 20 percent shareholding in state banks to the depositors and staff of those banks
- In order to meet recapitalization requirement borne out due to increase in interest rates, rising NPLs, loan settlement issues faced by businesses due to economic crisis, and liquidity issues faced by the state banks, it is proposed to allow 20 percent of shareholding of the Bank of Ceylon and People’s Bank by their depositors and staff.
- It is noted that government’s ability to provide additional capital at this stage to the state banks is very limited given the lack of fiscal space.
- Social welfare
- The Welfare Benefits Act became law in 2002, but it has not properly implemented thus far. The Welfare Benefits Board has now been activated and the data collection to establish the database or the social registry is progressing. A new mechanism for identifying beneficiaries through objective and verifiable criteria has also been established. It will ensure that transparent laws and systems are in place. With the completion of this work, the welfare programmes will be better targeted and cash transfers will be made directly to bank accounts of beneficiaries.
- I am well aware of the difficulties faced by many due to the ongoing crisis. That’s why I decided to cut some of the capital expenditure and find room to provide enhanced support for vulnerable communities.
- As you are aware, the government spent additional amount of about Rs. 31,000 million approximately from May to July 2022 to provide an additional monthly allowance as urgent assistance to those who have affected due to loss of employment, decline in agriculture output and inability to cultivate due to many reasons.
- I propose to continue this programme for further four months to reduce the pressure of the economic crisis on the affected people mentioned above.
- I also propose to provide additional monthly allowance of Rs. 2,500 for pregnant mothers in addition to Rs. 20,000 already provided for them.
- It has been reported that there are about 61,000 food insecure families, which need urgent assistance. I will provide Rs. 10,000 per family for a period of further four months.
- For all the above programmes, I will allocate Rs. 46,600 million for a period of 4 months.
- The recent increase in the kerosene prices has created difficulties for the owners of small boats which are used for fishing industry and for those who in the plantation areas that has no electricity services. I will provide a subsidy for these areas.
- Rs. 133 billion has been allocated under the World Bank loan assistance for the implementation of programs with the view of reducing the impact of the current economic crisis and restoring social stability.
- Accordingly, I have obtained approval through the Supplementary Estimate presented to Parliament before presenting this budget to provide immediate relief to around 3.2 million people affected by the current economic situation.
- Under this, monthly Samurdhi allowance has been increased to an amount ranging between Rs. 5,000 to Rs. 7,500 per month for approximately 1.7 million currently Samurdhi receiving families. Apart from that, an assistance of Rs. 5,000 was provided per month temporarily to around 726,000 families who were in the waiting list for expecting Samurdhi benefits.
- Also, the allowance paid for the elderly, disabled, and kidney patients was increased to an amount ranging between Rs. 5,000 to Rs. 7,500. Further, the temporary assistance of Rs. 5,000 was arranged for the people who are in the waiting lists in anticipation of receiving this assistance.
- In addition to the above concessions provided under this project, US dollars 110 million (Rs. 40 billion) has been allocated for the import of Urea required for paddy cultivation in the 2022/2023 “Maha” season, and fertilizer procurement is already underway. I believe that this will enable the paddy farmers to get a good harvest in the coming season and thus will be able to get rice at a reasonable price for the rice consumers.
- Further, under this loan facility, domestic cooking gas was imported and distributed in the country during a short time duration to overcome the domestic gas shortage that had arisen in the country due to the current shortage of foreign exchange. Also, we are working to meet the domestic gas requirement without shortage in the future as well. It is intended to spend about US dollars 70 million (Rs. 25 billion) from this loan assistance for that.
- That is in addition to the concessions mentioned in Section 19.3 above.
- Introduction of new laws / revision of laws
- In order to stabilize the economy and facilitate the growth process, it is proposed to make appropriate revisions and introduce new laws to make reforms expeditiously in a short period of time as given below.
- New Laws
- Food Security Bill
- Public Asset Management Bill
- Economic Stabilisation Bill
- Offshore Economic Management Bill
- Public Service Employment Bill
- Public Finance Management Bill
- The Recovery of Possession of the Premises Given on Lease (Special Provisions) Bill
- Contributory National Pension Fund Bill
- Agency for Overseas Sri Lankans Bill
(b). Revision of Laws
- Amendments to Agrarian Development Act
- Amendments to Excise Ordinance
- Amendments to Finance Act
- Amendments to Foreign Exchange Act
- We will discuss with all stakeholders to introduce a more realistic mechanism than Termination of Employment of Workman Act (TEWA) to handle employees who lose their jobs due to the crisis.
- Chapter 11 of the Bankruptcy Code of the United States and introduction of similar provisions to Sri Lanka
Chapter 11 of the US bankruptcy Code of the United States contains provisions on how to reorganize businesses in distress due to indebtedness. Bankruptcy alone is not a reason to close the business and there are ways to reorganize the business by restructuring the assets and liabilities and by getting rid of the indebtedness while staying alive in the business. New laws in similar lines should be enacted for Sri Lanka as well.
- The number of paddy farmers with 2 hectares or less who are in repayment arrears of cultivation loans given by the state banks as of 31.05.2022 due to the decrease in harvest, lack of fertilizers, agro-chemicals and inputs, abandonment of cultivation, etc., was 28,259. Aimed at strengthening of the farmers and freeing them from debt burden, actions are being taken to write off the outstanding loan amounting to Rs. 688 million (excluding interest) which is currently in default to the state banks. The money to be writing off will be paid back to the respective banks in two years in a phased manner so as not to put added pressure on the cash flow of the General Treasury. Accordingly, the respective banks should arrange to write off the interest relating to such loans. I propose to allocate Rs. 350 million for the implementation of this proposal.
- We must ensure that agriculture and entrepreneurship are fused together. We should make sure we understand problems and rethink to promote our agriculture. The youth are quick to adopt new technologies. They can use innovative tools and improve efficiency across the value chain. In this context, I propose to establish Youth Agriculture Companies and link them with 331 Divisional Federation of Youth Clubs to get maximum results. Rs. 250 million will be allocated for this proposal.
- It is important to develop agriculture value chains as well. For this purpose, I propose to strengthen the Domestic Agriculture Development (DAD) Value Chain Programme. The DAD pilot phase (DAD PP) is being implemented by CBSL with its own funds (Rs. 1 billion) and it is expected to expand the program in 2023 with the assistance of the development partners, while encouraging the production for the overseas market.
- There is a strong need to enhance domestic dairy production. Therefore, it is prudent to implement a National Programme with the support of all stakeholders through a project that will be funded by government or a development partner. Since the productivity in the highland climate is higher, the unutilized or low productivity lands of plantations could also be utilized for this project. I propose to allocate Rs. 200 million for this initially.
- Since there is a shortage of seeds and planting material due to the decrease in the cultivated area and yield in the past, the Department of Agriculture and government farms should implement an urgent programme to supply the necessary seeds and planting material to the farmers. Accordingly, I propose to allocate Rs. 400 million to the Department of Agriculture to produce the necessary seeds and planting materials.
- Utilizing unemployed youth for the productive use of the existing government lands.With the aim of efficiently and productively using government land for agriculture and livestock under the strategy for encouraging export-oriented agriculture, the government lands will be used efficiently and unemployed youth will be directed for that purpose. Accordingly, it is expected that 20 acres of land will be allotted to currently unemployed youth groups (groups of about 10 members) in the area where the identified lands are located for the purpose. I propose to allocate Rs. 50 million to implement this proposal.
- I also propose to introduce a “National Food Security Programme” covering broad areas, including the enhancement of production, collection, storage, and distribution of food, as well the provision of food to those who do not have the capacity, to ensure food security and implement the same as a national priority.
- Revision of Agricultural Insurance Programme
- Although the farmers have actively contributed to the program by providing insurance premiums from the beginning of the implementation of the agricultural insurance program, it appears that the government currently bears all the funds related to this insurance.
- Accordingly, it should be reviewed whether it is necessary to continue the present system or whether it is possible to provide the relevant facilities to the farmers under another convenient system.
- Revision of Agricultural Insurance Programme
- Research and Development (R&D)
- Improving R&D is important to improve Sri Lanka’s global competitive ranking in order to be successful.
- I propose Rs. 100 million to establish a mechanism to promote R&D and commercialize the same, particularly with the startup culture, with the assistance of local universities and technological institutes.
- Promotion of local packaging products
- There is a need to reduce wastage of agricultural produce by way of improving the marketing and storage time. Therefore, food packaging industries using local raw materials should also be promoted to preservation and marketing of agricultural produce.
- Accordingly, 50 percent import duty concession is offered on import of advanced new technology equipment/accessories for food packaging. Apart from this, the Palmyra Development Board, National Design Center and Export Development Board should jointly introduce new packaging programme and contribute to the promotion of the export market through innovative packaging.
- I propose to allocate Rs. 250 million to implement this proposal.
- Promotion of tourism industry
- In order to attract more tourists from September this year, the Ministry of Tourism should organize special programmes with the support of the Tourist Board and other institutions related to the tourism industry. Here, it is necessary to target the cultural /religious events that are unique to different races to be held in Sri Lanka in the future. Considering the importance of this industry, by the end of 2023, the number of tourist arrivals per year should be increased to more than 25 lakhs as the target.
• In addition, special attention should be paid to attract high-end tourists.
• Also, a five-member committee, representing various sectors, should be appointed to present a report focusing on the identification of new places of tourist attractions and the improvement of related facilities and a report containing their recommendations to be presented in a month for onward actions. I propose to allocate Rs. 300 million to implement these proposals.
- Facilities from the Climate Fund
- As there is a trend of increasing accidents, disasters and property damage due to weather and climate related effects in Sri Lanka, suitable measures should be taken urgently to reduce the climate effects.
- For that, the Ministry in charge of the subject of environment should prepare a suitable program and obtain necessary support from the Climate Fund and implement a mitigation program accordingly.
- Expanding higher education opportunities
- Many countries in the world have opened educational opportunities to foreign students in a manner to build their foreign reserves. In the South Asian region, Bangladesh, India and Nepal have already opened up their countries to foreign students to build up their foreign reserves. Accordingly, Sri Lanka also needs to encourage private investment to provide educational opportunities to foreign students.
- Hence, I propose to facilitate the establishment of branch campuses in Sri Lanka, particularly focusing on Science, Technology, Engineering and Mathematics (STEM) subjects as well as finance, information technology and medicine. For this purpose, the government will provide all facilities through the Board of Investment (BOI) to establish such branch campuses as per the provision laid down in the Companies Act and Universities Act and other applicable legal provisions subject to amend them when and where necessary.
- The creation of space for private investment in higher education will free up government resources that will enable the state to ensure that free education is preserved and in fact expanded beyond present levels. Scholarships will also be provided to Sri Lankan students to study in these universities.
- I also propose to open a branch campus of the Kotalawala Defence University (KDU) in Kurunegala.
- Facilitating new jobs based on skills
- In the Sri Lankan labor market, there are a large number of people who are employed without any previous training and are employed by getting skills through work.
- There is a need to provide more training and qualification to this group, including relevant theoretical knowledge. Through this, the productivity of work will grow, and businesses will be able to gain a competitive position in the global context by having skilled staff. Also, the job seekers will be able to find more effective employment opportunities as well as foreign employment opportunities.
- As a result of the negative impact of the COVID-19 pandemic and the economic recession, there are people who are losing their jobs, so there is a need to train them for new job opportunities. Support level staff working in free trade zone factories from rural areas tend to return to the countryside after working for about five years. Here, women often lose job opportunities and men are engaged in informal jobs.
- Accordingly, it is necessary to provide further training to be able to get a new job based on the skills acquired in the jobs engaged in free trade zones.
- Accordingly, it will be possible under this system to train and provide NVQ certificates from the selected vocational training institutes (Youth Corps, VTA, NAITA,) and TVEC, which is the regulatory body in the vocational training sector.
- I propose to allocate Rs. 200 million to implement this proposal.
- Ensuring the employment security of the community engaged in Micro-scale self-employment / Livelihood occupations
- Many people in the community living in urban and rural areas are engaged in micro-scale self-employment / livelihood occupations. By providing part-time or short-term formal training in technology and innovation for life occupations to this community, the productivity, safety and health of those jobs will increase, and the quality of products will also improve. For this purpose, it is proposed to establish a community unit in every Vocational Training Center operating under the government to empower the community and the technical services that are not available in the training center will be obtained from outside and training facilities will be provided to the community.
- Accordingly, work is being done to provide formal training in food and beverage preparation, fish drying and vegetable dehydrating, sewing knitting, beeralu weaving, brass industry and Black Smithing as livelihood around the training center, online self-employments based on the Gig economy and other life occupations. After the training, a certificate is also being provided.
- After formal training, the currently engaged profession can be done effectively and efficiently, so food and other products can be provided in quality. Through that, it is possible to confirm their job security and improve their businesses.
- I will allocate Rs. 200 million to implement this proposal.
- Use of railway facilities for vegetable and fruit transportation to make the supply chain more efficient.
- The transport of vegetables, fruits, flowers and tea products from the upland areas to Colombo and urban areas is important to the farmer, the producer, the trading community as well as the consumer while preserving the freshness. Hence, it is necessary to encourage the transportation of these goods by railway. Through this, waste, delays and costs can be minimized and an additional revenue will come to the Sri Lanka Railways.
- As a starting point, a train with relevant facilities should be deployed to transport vegetables, fruits and other products from Hali Ela Railway Station to Colombo Fort Railway Station. Cargo loading facilities should be improved in relevant railway stations for this purpose, a system should be implemented with the participation of cooperatives and private entrepreneurs to establish cargo collection centers and provide transport facilities from those centers to the respective railway stations.
- Sri Lanka Railways should work to implement a suitable program to encourage wholesalers to transport goods from Colombo to Badulla.
- I propose to allocate Rs. 200 million to implement this proposal.
- Private investment to improve quality and efficiency of the railway
- Since providing efficient and high-quality transport service to the people is a priority task of the government, it is expected that private sector investments will be used for the development of the railway transport service using the existing infrastructure under this program.
- Accordingly, it is expected to develop the Kelaniweli train service as a pilot project. The selection of investor/s will be based on competitive bidding process.
- Trade and investment
- The government’s macroeconomic reform programme will focus on re-engaging with the global economy to tap into regional and global value chains to enhance exports and export oriented FDI.
- Accordingly, the government will gradually phase out the high trade barriers in the form of para-tariffs. This will be done in conjunction with a Trade Adjustment Programme to support industries and workers adversely affected by such tariff liberalization.
- The government will provide renewed support to the National Export Strategy, a well thought out framework of export support that was developed through broad stakeholder consensus in 2018.
- We will resume efforts towards engaging broader regional trade agreements in order to link into regional value chains which have been the driver of export growth in the South East Asian region in particular.
- The Government will facilitate the expansion of renewable energy sources to enhance availability and reduce the cost of energy generation in Sri Lanka by allocation of necessary land and through the necessary operational restructuring of the CEB.
- The government being the owner of around 80 percent of land will take measures to facilitate access to land with suitable utilities for domestic and foreign investment. We will implement a programme to award title deeds for lands previously handed over under numerous grants.
- I also like to propose to establish an “Office for Overseas Sri Lankans”, which will act as a central point of coordination to obtain the support of Sri Lankans who are living abroad to the country. This office will encompass various organisations of the Sri Lankans across the globe and focus mainly on attracting investments, promoting tourism and similar matters. In order to support this, an “Overseas Sri Lankan’s Fund” will also be established. It is expected to get the support of all Sinhala, Tamil, Muslim, Burgher and other Sri Lankans who live abroad for this programme.
- Manufacture of electric bicycles
- Manufacturing of electric bicycles should be encouraged as a local industry with a view to reducing fossil fuel consumption.
- Therefore, tax concessions will be provided for imported accessories/parts required in the manufacture of electric bicycles locally with more than 50 percent value addition.
- Strengthening governance and fighting corruption
- A comprehensive legal framework will be established to strengthen governance and fight corruption. This framework will strengthen the asset declaration system and increase independence of the Commission to Investigate Allegations of Bribery or Corruption. Further, I propose to promote technology infused systems to eliminate grounds for corruption and create transparency.
- The End
- We will prepare the foundation for the journey of creating a revitalized economy through these proposals. I would like to draw your attention to another particular issue.
- As I have mentioned on several previous occasions, our aim is to create a surplus in the primary budget by the year 2025. Our effort is to stabilize the economic growth rate. Our aspiration is to establish a solid economic foundation by the year 2026. As at end 2021, public debt is about 110 percent of the Gross Domestic Product (GDP). Our target is to bring this down to less than 100 percent in the medium term.
- If we build the nation and its populace based on the National Economic Policy, we would be able to become a fully developed country by the year 2048, when we celebrate the 100th anniversary of independence.
- We can no longer be a nation dependent on loan assistance. We can also no longer be used as a tool of interference by other countries with strong economies. All of our collective vision should be to make our country strong and stable, in order to stand independently. We must strive to bring business entities of our country to a competitive level in the global market. We must pursue to capture a share of the global market on agricultural exports. We should seek to create a disciplined, knowledgeable society, that provides right opportunities to maintain social justice.
- All this can be achieved, only if we work together in unity with common consent. I reiterate the invitation to all the parties represented in this Parliament to join an All-Party Government, since this unprecedented situation is the responsibility of us all, and therefore need to prioritize the necessities of the country and the nation.
- Some parties say that they will not join an All-Party Government due to action by the Government which they cannot condone. Others express a reluctance to join due to their opposition to the policies. In this instance, I wish to emphasize that, I am not the person who decides the actions or policies of an All-Party Government. It is not an administration of a single person or a single party, and will be established according to the consent of all stakeholders of the government. Therefore, I reiterate that, if there are policies or practices which you do not condone, then you have the right and mandate to change them within an All-Party Government.
- Therefore, I request all of you in this House and all the citizens of the country, to put aside your personal political goals and unite in the context of the national cause of rebuilding the country and the nation. If we all come together, we will be able to uplift our Motherland, and create a nation that competes and moves forward with the ever-changing world. If we miss these opportunities, we will be marginalized globally.
- I would like to remind you, the line of the lyrics ‘Aaji Thapara Lahila’ written by Bandara Eheliyagoda for a teledrama produced for the Mahapola Scholarship Fund.
‘Apa pamanada ekathena karakenne – Apa thanikara lokaya diva yanne’
- So, let’s get together for the country, without spinning in one place anymore. Let’s create a knowledgeable society with a strong economy that can run forward together with the world.
Japan is Ready to Coordinate with Creditors
Japan will coordinate with other creditors to resolve Sri Lanka’s deepening financial crisis, Finance Minister Shunichi Suzuki said on Tuesday, urging all creditor nations to gather and discuss the South Asian nation’s debt at the same table.
“We are concerned about Sri Lanka’s severe socio-economic situation,” Suzuki quoted by Reuters.
Sri Lanka must accelerate talks with the International Monetary Fund (IMF) on a bailout, while all bilateral creditors, including China and India, must gather to discuss the issue, Suzuki said.
“Japan wants to actively cooperate with other creditor countries and public organisations.”
Japan is seeking to organise an all creditors’ conference, hoping it could help solve Sri Lanka’s debt crisis, and it is open to hosting such talks possibly with China, sources with knowledge of the situation told Reuters last week.
It remains unclear whether top creditor China would join and a lack of clarity remains about Sri Lanka’s finances, one source told Reuters.
President Ranil Wickremesinghe told Reuters this month that Sri Lanka would ask Japan to invite the main creditor nations to talks on restructuring bilateral debts. He said he would discuss the issue with Prime Minister Fumio Kishida in Tokyo next month.
The ports-to-power conglomerate Gautam Adani’s business is “deeply overleveraged,” as the organisation is heavily investing across existing as well as new businesses, profusely funded with debt, CreditSights, a Fitch Group unit, said in a report.
Billionaire Gautam Adani’s ports-to-power conglomerate is “deeply overleveraged,” with the group investing aggressively across existing as well as new businesses, predominantly funded with debt, CreditSights, a Fitch Group unit, said in a report.
The aggressive expansion pursued by the Adani Group, led by Asia’s richest person, has put pressure on its credit metrics and cash flow, CreditSights said in the report on Tuesday, adding that “in the worst-case scenario” it may spiral into a debt trap and possibly a default.
“We see little evidence of promoter equity capital injections into the group companies, which we feel is needed to reduce leverage in their stretched balance sheets,” the agency said, referring to fund infusions from the Adani Group’s founders, known as “promoters” in India.
A representative for the Adani Group didn’t immediately respond to a request for comment on the report. All seven listed Adani firms declined by 2% to 7% in trading Tuesday.
CreditSights’ report comes after a big few years for Adani, who’s been on a rapid diversification spree, expanding an empire centered on ports and coal mining to include airports, data centers and cement as well as green energy.
The group recently pledged to plow $70 billion into renewable projects. These moves have not only boosted Adani’s stature in India, but his fortune, with his net worth surging past $135 billion this year.
He’s also increasingly moving into spheres dominated by the man he replaced as Asia’s richest man, compatriot Mukesh Ambani of Reliance Industries.
The report puts a spotlight on the multiple fault lines that may impede Adani’s ambitions and the stratospheric surge in the shares of his firms. CreditSights’ analysts, however, said they draw “comfort” from the group’s strong relationships with banks as well as the administration of Prime Minister Narendra Modi.
Some other highlights from the report include:
The Adani Group is entering new and unrelated businesses, which are highly capital intensive, raising concerns over execution oversight
Potential strong competition between the group and Ambani’s Reliance to achieve market dominance could lead to “imprudent financial decisions”.
Adani Group is also exposed to moderate levels of governance and ESG risks.
The group has a “strong track record of churning out strong and stable companies” through its flagship, Adani Enterprises, and has built a portfolio of “stable infrastructure assets tied to the healthy functioning” of the Indian economy.
Its founder “enjoys a strong relationship” with the Modi government and has benefited from “policy tailwinds”.
CreditSights remain “cautiously watchful” of the group’s growing appetite for expansion, which is largely debt-funded.
A self-made billionaire who started his business as an agri-trading firm in late 1980s, Adani has also been a busy dealmaker this year. Adani Group acquired the Haifa port in Israel in July for $1.2 billion and Swiss firm Holcim’s Indian cement units for $10.5 billion in May, besides almost three dozen big and small acquisitions. It’s also expanding into media, health care and digital services.
The group owns India’s largest private sector port operator, coal miner, city gas distributor and airport operator and is aiming to create the world’s largest renewable power generator.
‘Pull all stops’
Investors have cheered the tycoon’s ability to rapidly scale up his businesses, spurring massive share rallies in Adani firms even during the pandemic, when most businesses suffered.
Adani Enterprises and Adani Green Energy have surged more than 1,300% since the beginning of 2020. Adani Total Gas has rallied about 1,900% and Adani Transmission over 900%, while the benchmark S&P BSE sensex surged almost 42% over this period.
But it’s this breakneck growth that’s making credit watchers, including CreditSights, uneasy. The research firm acknowledges that the Adani founding family’s status as a majority shareholder in most of their listed group companies means they will go all out to support them. The family’s “entire fortune and reputation is tied to the Adani Group companies,” it said. “Having such major ‘skin in the game’ could imply that the family would pull all stops to avoid default in any of the entities, since any material liquidity or solvency issue in one company would likely have a contagion effect on the valuation of the remaining companies too.”
( Inputs from News Agencies, and LiveMint News in India )
The Government has launched a devastating assault on working people across the rural and urban divide. The increase of the kerosene price from Rs. 87 to Rs. 340 a litre—or roughly quadrupling the existing price—will have a tremendous impact on people’s livelihoods. Fisherfolk dependent on kerosene for their boats will be among those hit hardest. But so also will be the small farmers who use kerosene for irrigating their farms and the urban poor who depend on kerosene to cook.
The increase is no doubt in line with the recommendations of the IMF to implement “cost recovery energy pricing.” But much like the disastrous decision to ban chemical fertilisers last year, the kerosene price hike will set the rural and urban periphery on fire. How will working people respond?
If the fertiliser ban in 2021 managed to stimulate unprecedented protests in the Rajapaksa strongholds in the south, the response to the kerosene price hike is likely to converge and acquire new dimensions. Much of the focus in recent months has been on the uprisings led in part by urban youth, who girded the great revolt that ousted Gotabaya Rajapaksa. The obvious class character of the kerosene price hike will provide a fresh impetus to the struggles.
In the recent past, in 2012, for example, the IMF-recommended fuel price hikes including the 49% increase in kerosene oil, led to militant protests in the fishing community, resulting in state repression and the murder of a protestor. The government of Mahinda Rajapaksa was subsequently forced onto the backfoot. In addition, the past year of struggles has raised people’s consciousness to new heights and created a national awakening for resistance to illegitimate governments. Any government that does not understand the implications of the kerosene price hike is playing with fire.
Class and kerosene
To understand why the kerosene price hike is akin to setting the countryside especially aflame, we must grasp the everyday livelihoods in which it is embedded. To use one example, a fisherman in Jaffna generally hires a helper to go out to sea on a small fiberglass boat powered by an outboard motor. Depending on the point from which they start in the peninsula they may use roughly 30 to 40 litres of kerosene per day, and no less than 10 litres if they are doing near shore fishing off the islands. They usually divide the income four ways to cover payments; one share for each of the fishermen, another share for kerosene, and then the last share for the use of the boat, nets and the cost of their depreciation. Accordingly, when the price of kerosene quadruples, we can see that it becomes practically impossible to sustain their livelihood.
The resulting impact on the rural economy is likely to be devastating. Food production is already reeling from the fertiliser ban last year. Beyond all the other price hikes and shortages that have occurred over the past year, this most recent hike is a gut punch to those who depend on kerosene for their basic ability to participate in economic life. There is no doubt, of course, that the Government and the neoliberal establishment will argue that the price hikes can be contained through targeted subsidies and relief; but working people, and certainly the fisher folk are not likely to fall for this deception they have heard many times in the past. The Government’s deceitful strategy of not delivering kerosene for close to three months by claiming shortages, and waiting until the last moment to try and impose the price hike after consolidating more power, is plain and clear to all those who use kerosene.
But for a commodity that is so essential to a diverse group of people, effects of the increase in price cannot be contained with irregular or otherwise piecemeal transfers, which ignore its fundamental role in working people’s livelihoods. The fact that the policymakers do not seem to understand the ramifications throughout the economy of price hikes for essential goods, along with their narrow definition of the most vulnerable, means that they are blind to the potentially disastrous impact both in terms of production and demand. In many ways this ignorance recalls the hubris of the defunct Rajapaksa government and its overnight decision to ban chemical fertilisers.
The effects of these price hikes will trigger a response. What that reaction will look like may be uncertain. But anyone who thinks that people’s anger in the countryside and in the urban periphery can be contained with talk of meagre concessions is sorely confused. The only type of policy that can prevent another disaster from occurring is redistribution to cover the effective cost of subsidies, while actively pursuing longer term plans to increase investment and support for rural reconstruction. In contrast, cost recovery energy pricing, or price hikes, will have a disastrous impact.
Kerosene especially is the vector along which the economic breakdown within Sri Lanka’s entire polity can be traced. If the Central Bank Governor himself has admitted that the economy will contract by 8% this year, then it is truly incomprehensible how anyone can even think of inflicting more economic pain on a suffering people. The market is clearly failing. Anyone who thinks the market will automatically adjust to an acceptable equilibrium is throwing out all the lessons we learned through Keynes, among others, about the Great Depression of the 1930s, which almost brought capitalism itself to an end.
The fact that the Government in Sri Lanka today could so severely hike the price on an essential commodity for the rural and urban working people reflects its fundamental disconnect from reality on the ground. This does not bode well for its longevity. It reminds us instead of the tone-deaf approach that marked the Government of Gotabaya Rajapaksa. If Rajapaksa’s own support could collapse so rapidly, the current administration should begin packing its bags, if it thinks it can inflict shock therapy on a people who are already suffering. Clearly only a major and immediate course correction can prevent further disaster. The ruling elite will have only themselves to blame when the working people respond with the fury that mirrors the impact of the kerosene price hike on their own lives.