IMF’s Call for Reform in 16 Points: Sri Lanka’s Governance Challenge

Despite widespread public outrage, manifesting in mass protests and social unrest last year, the authorities have remained shockingly inert in the pursuit of stolen funds, while civil society participation continues to be stifled.

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President Ranil Wickremesinghe had talks with the Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva, during meeting took place on the sidelines of the COP27 conference in Egypt, end of last year [Photo: Social Arrangement]

The International Monetary Fund (IMF) has issued a stern and uncompromising call to action. In its recently unveiled Governance Diagnostic Assessment (GDA) on Sri Lanka, the IMF has laid bare a stark reality: systematic and deeply entrenched governance weaknesses, coupled with rampant corruption vulnerabilities, are throttling the nation’s growth potential.

Sri Lanka stands as a unique testament to the IMF’s scrutiny, becoming the inaugural Asian nation subjected to the IMF’s rigorous governance diagnostic examination. An IMF mission diligently conducted this assessment from March 9th to March 31st of this year.

The technical assistance report, released with unwavering candor, exposes a disheartening panorama of corruption vulnerabilities stemming from hasty tax policies, half-hearted approaches to Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT), a frail legal framework, and abysmal processes within state-owned enterprises (SOEs). The absence of public procurement legislation and erratic tax policy modifications have created a breeding ground for corruption. Additionally, the conflict of interest surrounding the Central Bank’s management of the Employee Provident Fund (EPF) and its regulation of Non-Bank Financial Institutions (NBIFs) has further eroded trust.

Despite widespread public outrage, manifesting in mass protests and social unrest last year, the authorities have remained shockingly inert in the pursuit of stolen funds, while civil society participation continues to be stifled.

The report minces no words, decrying the absence of clear standards for official conduct, the lack of deterrence and sanctions for misconduct, and the failure to chase down individuals and ill-gotten public funds that have fled the country. Civil society’s oversight and monitoring of government actions are muffled by a veil of limited transparency, the dearth of inclusive platforms for governance, and the overreaching shadow of counter-terrorism regulations.

The GDA pulls no punches, unequivocally asserting that the culture of impunity enjoyed by officials continues to corrode trust in the public sector. This inaction compounds concerns over the absence of an efficient, rule-based dispute resolution mechanism, ultimately undermining the judiciary’s integrity.

While the Anti-Corruption Act (ACA) has been enacted, it’s exposed as toothless without the necessary support. Key accountability institutions, such as the Commission to Investigate Allegations of Bribery and Corruption (CIABOC), remain toothless and ineffectual. The ACA’s improvements must be complemented by the drafting and implementation of a modern Asset Recovery Law, essential to tackle current corruption vulnerabilities and procedural deficiencies in the investigation and prosecution of corruption cases.

In a scathing indictment, the GDA calls for the government to suspend the Strategic Development Projects Act, pending the establishment of a transparent evaluation process. The absence of criteria for determining strategic relevance and the lack of fiscal oversight by the Department of Fiscal Policy (DoFP) have potentially significant consequences.

A clarion call for a holistic, transparent analysis of projects is sounded, emphasizing the need to assess whether their social benefits outweigh their costs, including lost revenue, increased administrative overhead, market distortions, and perceived inequities. The Department of Fiscal Policy must be enlisted to evaluate and guide the design of all tax incentives.

The report casts a glaring spotlight on high corruption risks in public procurement due to the absence of procurement laws. Political interference, poor contract management, limited transparency, and other issues plague this critical area. Enacting a Public Procurement Law reflecting international best practices by December next year is a non-negotiable demand.

The lack of information on beneficial ownership of companies further fuels conflicts of interest in contract awards. The current Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) approaches are roundly condemned as ineffective, plagued by legal ambiguities, weak cooperation, and an inability to identify and prevent money laundering.

The report also exposes governance frailties in contract enforcement and property rights, crippling private sector growth. Excessive delays in resolving contract disputes push parties toward illicit means of hastening adjudication. Ambiguities around property rights and the absence of digital property records spawn protracted legal disputes, inviting corruption.

This gloomy landscape has eroded the judiciary’s integrity and led private entities to resort to corrupt practices for dispute resolution.

The IMF’s recommendations are crystal clear, and their urgency cannot be overstated. A comprehensive overhaul of governance and anti-corruption policies, legal frameworks, and institutions is imperative. The path forward lies in the implementation of these reforms, an essential commitment embedded in the Staff Level Agreement for an Extended Credit Facility Arrangement for Sri Lanka.

The time for action is now. The stakes are too high, and the cost of inaction is incalculable. Sri Lanka’s destiny hinges on the resolve to confront these governance and corruption demons head-on. Failure is not an option. The world is watching, and the nation’s future depends on its ability to rise above this crisis.

16 points: Priority Recommendations by IMF

  1. By November 2023, establish an Advisory Committee, composed of independent experts on anticorruption to assist in the nomination of CIABOC Commissioners and the Director General.
  2. Publication of Asset Declarations for senior officials (President, Prime Minister, ministers) on a designated website in line with anti-corruption law by July 2024.
  3. Enact Proceeds of Crime legislation that is fully aligned with UNCAC and FATF standards by April 2024
  4. Amend the National Audit Act to enable the Auditor General to levy surcharges on officers, including Chief Accounting Officers, for failure to properly discharge responsibility for oversight and accountability for use of public resources.
  5. Finalise and implement regulations to support the provision of beneficial ownership information as required by the Companies Act and establish a public beneficial ownership registry by April 2024.
  6. Enact a Public Procurement Law that reflects international good practice by December 2024.
  7. In December 2024, publish report on a designated website on progress in increasing the proportion of competitive tendered procurement contracts in the 10 agencies determined to have the lowest level of competitive tenders in 2022.
  8. Starting in March 2024, publish on a designated website: (i) all public procurement contracts above LKR 1 billion, along with comprehensive information in a searchable format on contract award winners; (ii) a list of all firms receiving tax exemptions through the Board of Investment and the SDP, and an estimation of the value of the tax exemption; and (iii) a list of firms receiving tax exemptions on luxury vehicle import. Information to be updated every 6 months.
  9. Implement the SOE Reform Policy, ensuring that the holding company (HoCo) and the advisory committee are comprised of skilled, independent, and ethical staff.
  10. Abolish or suspend the application of the Strategic Development Projects Act until the promulgation of explicit and transparent process for evaluation of proposals and costing of investment promotion conditions.
  11. Amend tax legislation to eliminate or restrict ministerial authority to introduce tax changes without prior parliamentary approval and ensure that such changes do not generate revenue losses
  12. Institute short-term anti-corruption measures within each revenue department to strengthen internal oversight and sanctioning processes and linkages with CIABOC and related criminal investigation and enforcement processes by Dec 2023 and issue a public report on steps taken and results obtained by Dec 2024.
  13. Following a broad consultative process, produce a Cabinet policy paper by June 2024 on options for establishing new management arrangements for the Employee Provident Fund that terminates direct CBSL management.
  14. Revise legislation, regulations, and processes relating to financial sector oversight in the banking sector, including strengthening corporate governance for banks with government ownership by improving the selection of executives and Board members.
  15. By December 2024, establish an online digital land registry, and publish, on a designated website, a report on progress in implementing a published Plan for registering/titling all state land.
  16. Establish and implement a plan to expand the resources and skills available to the Judicial Services Commission in order to enhance their ability to carry out their function and define potential options for modifying governance arrangements in the Justice sector to strengthen oversight, monitoring, and proper sector development.

Source: IMF

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