Ranil Wickremesinghe

Sri Lanka:  Correct The Price Distortion for A Sustainable Development – Part 1

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12 mins read

A riot in Sri Lanka dethroned the democratically elected prime minister and the president in May and June 2022, respectively. Ranil Wickremesinghe, who did not contest the presidential election and could not get the support of at least one per cent of the constituents during the general election, was elected as the president by the parliament. However, he did not have a single MP in the parliament from his party to vote for him. He doesn’t have members of parliament from his party to appoint to the cabinet of ministers. As such, his political opponents who are entirely against his liberal policies have been appointed to the cabinet, and he is yet to find MPs to fill all portfolios. Under these circumstances, since the beginning of 2022, Sri Lanka has been in Socio-political and economic turbulence. The country is bankrupt, people are suffering, and the economy is in reverse gear. 

Historically, Sri Lanka is accustomed to a welfare-oriented economic culture. During the colonial period, universal free health and vernacular education were available. In addition, universal and generous food subsidies with rationing started during World War II. Probably this would have been done to keep Sri Lankans contented, considering the strategic importance of Sri Lanka for the war. However, since independence, providing welfare and subsidies for the whole gamut of life of Sri Lankan has become a perpetual feature of the annual budgets. At the inception, the cost of subsidies and welfare was met from the surpluses generated from the plantation sector and the export of natural resources as raw materials to advanced countries. Even after depleting those resources, welfare programs and subsidies continued at the development budget’s cost but within the domestic economy’s capacity.

After introducing the open economic policy, the inflow of foreign grants and concessionary credits increased considerably. The government entered a comfortable zone enabling it to continue with the welfare budget and various subsidies without any attempt to increase the government revenue and foreign exchange earnings. Even after exhausting the concessionary foreign credit and grants, the government remained in the comfortable zone with high-cost local and foreign borrowings without enhancing the revenue. In addition to that, money printing was also done. The ability to brow and provide welfare and subsidies became a success indicator for all successive governments. The citizens are also accustomed to thinking on the same line. The political leaders, administrators, and economists, who managed the economy, did not seriously consider how to do debt servicing without being insolvent on a future date but continued with ceaseless borrowings. By living with a plethora of subsidies, individuals became accustomed to enjoying artificial prosperity and living beyond their means. Maintaining the rupee at an artificially high value in the recent past did not allow people to feel the actual cost of imported goods. Hence consumer preference was also for imported goods creating a high demand for foreign exchange, which was in short supply for debt servicing and essential imports. Over-dependency on foreign grants, domestic and external borrowings at a high cost, and lack of attempt to improve the government revenue and export earnings are the leading causes of the economic crisis/ bankruptcy in 2022.

 For this article, the word “Subsidies” covers a wide range of wasteful public expenditures that don’t contribute to the national economy, distort the market prices/demand, and lead to mal allocation of resources. It covers (a) cash and material grants without rendering goods or services, (b) price subsidies for various goods and services, (c) subsidising the losses of state-owned enterprises, (d) overstaffing in the public sector institutions, (e) losses due to corruptions, mismanagements, and wrong decisions (f) and all kinds of unproductive public expenditure and wastages.

There are different types of subsidies and welfare programs, such as direct cash and material grants, price subsidies for consumer goods and inputs, cross-subsidies between sectors and subsectors of the economy, cross-subsidies between institutions and different products of the same institution, tax holidays, different tax rates for industry types, subsidising the losses of SOEs, overstaffing in government institutions, etc. All these expenditures become an income for some people without contributing to the economy. Subsidies for inputs and consumer prices prevent reflecting the actual economic cost of local products and distort the consumer’s price in the market. Consequently, the demand also doesn’t reflect the people’s real needs and purchasing power. The ultimate result is the mal allocation of resources, low productivity, high cost of production, low income, and inefficiency of the economy at the macro level. The impact of a few subsidies and resultant market-price distortion are discussed below.

Agriculture products

Rice, the staple food of Sri Lanka, was sold at a highly subsidised price on a ration for everybody, regardless of family income, from 1945 to 1978, with some modifications to the scheme from time to time. Consequently, two different prices, subsidised and open market prices, existed for many years. From the 1960s to the 1980s, the government purchased paddy at a relatively higher guaranteed price, encouraging farmers and sold it at a subsidised price to relieve poverty. Further, irrigation water, the most important and valuable input of paddy farming, is still free to the farmer, though it is a hefty cost to the nation. In addition, low-cost finances were also provided through the cooperative banking system. The fertiliser was also supplied at a nominal price, virtually free from 2006 to 2020. Research findings and extension services are also provided free for everybody. Due to the guaranteed price and availability of low-cost/free inputs, farmers do not pay the actual cost of inputs.  Though the government has spent a lot of public resources to increase paddy output, farmers remained poor. But the market price of rice is unaffordable for many people and high compared to imported rice. If all subsidies are removed, the actual cost of production of a kilo of rice could be doubled. In addition to subsidies, tariff protection and the guaranteed price are also available for rice production. The farmers could not reap the optimal Productivity and income of these support packages due to inappropriate technology and farming practices.

Tariff protection and guaranteed prices are available from time to time for certain other field crops, such as lentils, big onions, potatoes, dried chillies, maise, turmeric, milk, sugar, and poultry products, but it is inconsistent. Farmer’s reaction to intermittent ad-hoc tariff protection distorts the market (demand and supply) and gets them into a further disaster. High prices in a season encourage farmers to produce more in the next season, dropping prices below the cost of production.  Hence, often, it brings more fortune to traders/stockists than farmers. If everything works well, farmers may occasionally benefit from crops like potatoes and onions, but at a very high hidden cost to the macroeconomy, consumers, and the environment. Under these circumstances, much research is needed to produce those crops competitively. Otherwise, those land and resources may be used for other high-value crops and economic activities, which have the capacity to generate more income, employment, and foreign exchange. Having different climatic zones and two rainy seasons and two dry seasons, anything can be cultivated in Sri Lanka. But tariff protections, subsidies, and incentives should not encourage the misuse of valuable resources. Perhaps, instead of using those resources for import substitutions, cultivating export-oriented crops may bring more benefits to the economy. However, rice is not a product that can respond immediately to the demand and price. Also, there is no surplus rice production in the world market.  As rice is the staple food, reaching near self-sufficiency, even at a comparatively higher cost, is justified to ensure food security. However, producing a surplus is detrimental to paddy cultivation’s sustainability as the production cost is higher than in other rice-producing countries. Also, subsidising the cultivation of paddy fields in the low country wet zone is justifiable to ensure those will remain as lowlands for water retention.

As discussed above, Sri Lanka has spent a colossal amount to subsidise paddy farming and to increase the area under cultivation for over seven decades.  For the government, researchers, and the public, agriculture means paddy farming, but not very wide other varieties of grains, lentils, vegetables, fruits, and animal products. Prices of those nutritious foods are relatively high and unaffordable to ordinary people.  As a result, though we are a middle-income country, our malnutrition level is much higher than other developing countries in the region. Even with a plethora of subsidies, agriculture has become a survival strategy for the rural poor and reinforced the subsistent farming system. Sri Lanka needs more research on technological innovations in seed production, livestock breeding, farming practices, tools and equipment, post-harvest technology, etc., appropriate for smallholder farming to improve productivity and make it profitable.

Transport and petroleum

During the last three decades, government policy on energy was inconsistent and kept changing with party politics.  Unlike other countries, Sri Lanka kept fuel prices low, even at times of high prices in the world market. From 2007 to 2014, while fuel price in the world market was very high, Sri Lanka kept the kerosene and diesel prices relatively low by keeping the petrol price high. Very often, fuel prices in Sri Lanka are kept low compared to other countries in the region. In 2016, the Gasoline price in Sri Lanka was US$0.88 per litter. During the same period, gasoline prices in India, China, and the United Kingdom were US$ 0.97, US$ 0.96, and US$ 1.46. respectively. Though CPC is highly indebted to banks, the fuel is being supplied to CEB, Railway Department, the Armed forces, and Sri Lankan Air Line on credit and subsidised price. The CPC meets the financing cost of these credit supplies. On many occasions, the government used to tax the CPC exceeding its cost of production, compelling it to borrow to fill the gap. The CEB, Sri Lankan, and Railway are not concerned very much about their cost of production as a significant part of it is met by the CPC. Consumers also opt to use more diesel and kerosene to increase profitability, disregarding the actual economic cost to the nation.

However, in 2022, petroleum price distortion has been corrected to a considerable extent. In June 2022, the diesel price in Sri Lanka stood at US$ 1.28, while India, China, and Pakistan stood at US$ 1.18, 1.03, and 1.35, respectively. Kerosine price also increased to reflect the actual cost. Gasoline price has also increased to US$ 1.53, which is relatively higher than the above-said countries. Further, the cross-subsidization has been removed, reflecting the actual cost of production of each product. This price correction should continue without distorting it again for cheap political gains. However, losses sustained due to mismanagement, inefficiency and corruption shall be eliminated to reduce the cost of production.

Due to the subsidised/ distorted fuel price and the low priority for public transport, ownership of private vehicles has increased rapidly. The annual per capita petroleum consumption in Sri Lanka in 2021 stood at 350.5 Lt, while India, Bangladesh, Pakistan, and Nepal stood at 194.5, 41.6, 158.6, and 91.6Lt. respectively. The number of road motor vehicles per 1,000 inhabitants of Sri Lanka, excluding two-wheelers, was 157 in 2019. The same for Pakistan, Nepal, India, and Bangladesh was 111 in 2019, 110 in 1918, 45 in 2016, and 27 in2021, respectively.

The policies and strategies in the transport sector, including subsidised fuel, encouraged the use of private vehicles. Today Sri Lankans are reluctant to walk even a 200-meter distance; instead opt for a car, three-wheeler, or motorbike. Since 2022, Sri Lanka has had no foreign exchange to import fuel to satisfy the demand, but still harping on to maintain the previous lifestyle.

Electricity

The government policy was to achieve a hundred per cent coverage of households with electricity connections. According to the World Bank Collection of Development Indicators, 100% of the country’s population had access to electricity in 2020. This achievement is due to the political commitment of all governments to ensure 100% electricity coverage of households. For several decades, subnational-level development programs such as the Decentralised Budget have emphasised rural electrification. It was used by all political parties as bait to lure votes in all elections. Rural electrification has several negative economic aspects, such as high capital outlay due to scattered housing, low demand, low purchasing power, lack of commercial demand, high transmission loss, etc. Though rural electrification has no significant contribution to economic growth, it has improved the living standard of rural communities by uplifting the status of health, education, welfare, and use of household electrical equipment. So, the quality of human capital has improved tremendously, which would lay the foundation for future economic advancement if appropriately used.

The government and CPC highly subsidise the CEB to generate and distribute electricity. Further, the capital cost of rural electricity is 100% funded by the government. But CEB is running at a massive loss. It is reported that from 2006 to 2017, the cumulative net loss of energy sector institutions was 363.9 billion. According to the CEB Annual Report 2019, 37% of the electricity sale was for highly subsidised domestic and religious uses, but revenue was only 31.6%. The Average selling price was Rs. 16.63 per kWh, while the average cost of production was Rs 23.29. Cross-subsidising between consumer categories couldn’t fill this considerable revenue gap without passing the burden to the taxpayers. According to the same report, the total number of employees was 26,114; perhaps about 50% could be overstaffed. Overstaff also amounts to a considerable subsidy or payment of unemployment benefits by a commercial entity, which the Treasury should have done through a welfare program.

According to a consultative document of PUCSL, the average cost of production of one unit of electricity is forecasted as Rs.32.87 for 2022. The cost increase of Rs.9.58 in 3 years from 2018 to 2022 is unrealistic. The average selling price for 2022 has yet to be made available. According to the “Electricity Tariff Revision -2022”, the subsidy element to domestic use and religious places has been removed to a considerable extent. However, compared to the forecasted average unit cost of production (Rs.32.87), the tariff is extremely low for the domestic user category, 0 to 60kWh per month (Rs. 8.00 for the first 30 units and Rs.10.00 per unit for the following 30 units). The religious places are subsidised up to 120 units a month (Rs.8.00 for the First 30 units, Rs. 15 for the second 60 units, and Rs.20.00 for the following 30 units). Exceeding the consumption of 180 units a month, Rs.65.00 per unit is charged, much higher than the forecasted average unit cost of production.

The tariff for industries (Rs. 20.00 per unit), general-purpose users (Rs. 25.00 per unit below 180 kWh and Rs 32.00 for 181 and above), agriculture, and street lighting (Rs.20.00), are also below the cost of production. However, all these categories have a monthly service charge which is increasing parallel to the increasing usage. Also, there is an optional time of use; the low tariff for the daytime and off-peak hours and a slightly higher tariff than the cost of production for peak hours (agriculture and industries Rs.35 and general-purpose Rs.34). However, the peak time tariff and monthly service charges are grossly insufficient to meet the cost of the subsidy.

 The second category of domestic users (consumption above 06kWh), up to 90 units per month, is entitled to a subsidised tariff of Rs 16 .00 per unit. Compared to the tariff of the low quantity user category, this group pays a two times higher tariff for the first 60 units. There is no subsidy element beyond 90 units a month (Rs50.00 for 91-180 units and Rs.75.50 above 180 units). Most households consume more than 90 units monthly, resulting in an automatically annulled subsidy. Therefore, this is punitive and much higher than the forecasted average cost of production of Rs. 32.87.  According to the revised tariff, the entire cost of the subsidies to the low-quantity domestic user category, production-oriented sectors, street lighting, etc., has been passed on to the high-quantity user domestic customer category and religious institutions, which is highly unfair. Further, the tariff applicable to electric vehicle charging is Rs.81.00 per unit in the daytime. This discourages the use of electric vehicles and contradicts the overall policy of reducing the use of fossil fuels.

Increasing the total revenue is very doubtful if the high-quantity domestic user category becomes unaffordable for the revised tariff. If the above-said forecasted cost of production is correct, the loss may be increased further. The Optional Time Use (daytime, peak, and off-peak) is reasonable to discourage the overuse of power during peak hours. However, the monthly service charge is not a strategic tool but an attempt to collect additional money from those who can afford to pay.  The tariff structure has become complicated and irrational because of several tariff blocks, user categories and loading with various charges. Instead of having many user categories, such as low-income, middle-income, rich, small industries, large-scale industries, tourism, agriculture, government institutions, streetlights, etc., tariff Blocks may be rationalised with a small number of user categories. It must structure to discourage excessive non-productive consumption, allow reasonable domestic use without punitive tariffs, encourage consumption for production-oriented activities and make the poor affordable for the minimum requirements. In doing so, the underlying principle shall be ‘operating the business above the breakeven point’. Under any circumstances, subsidising the inefficiency, corruption, and negative impacts of individual or group hypocrisy and wilful sabotage is not acceptable.

Energy prices and consumption are not guided by economic forces but by the interest of politicians and pressure groups. Social and political concerns have overshadowed economic considerations. If all subsidies are removed, the optimal combination of the energy source is used, corruption is minimised, and the electricity is sold at a cost-reflective price, the CEB can become profitable. Then it will save the vast amount spent to subsidise the loss. Ultimately, the energy sector price distortions have encouraged the outflow of foreign exchange earnings for importing motor vehicles and fuel and for constructing costly highways. Also, the distorted price in the energy and transport sectors distorts the prices of many other products. It is worthwhile to do an in-depth study to understand whether the huge loss incurred by the CEB justifies the social benefits achieved through subsidised electricity and to identify a cheaper solution to achieve the same results.

To be continued

Budgets 2023: The Acid Test in Bankrupt Sri Lanka

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8 mins read

President and Finance Minister Ranil Wickremesinghe is to present his maiden full budget for 2023 in Parliament this afternoon. A lone MP in Parliament representing the United National Party, he accepted the premiership in May 2022 when the incumbent Prime Minister Mahinda Rajapaksa resigned from the post after a popular struggle against his administration. He informed the Parliament and the nation that he accepted the position, when the others were reluctant, to rescue the country’s dying economy tapping onto his experiences as premier on five previous occasions.

Then, after two months in early July when President Gotabaya Rajapaksa fled the country and tendered resignation from overseas, Ranil was sworn in as Acting President in terms of the provisions of the Constitutions. Soon after that, his position was ratified in Parliament with 134 votes in his favour. He very quickly took over the mantle of the Government, appointed a PM from the ruling Sri Lanka Podujana Party or SLPP, formed a skeletal Cabinet from leading figures in SLPP, and invited the Opposition to join hands with him to rescue the economy as a government of emergency. When the response to this last request was in the negative, he filled the vacancies in the Cabinet with other members of SLPP, introduced an interim budget for the last three months of 2022, got an amendment to the Constitution passed in Parliament, proposed a wide tax hike, and continued with the work already begun to seek a bailout package from IMF. 

There had been several preconditions imposed by IMF for such a bailout like increasing tax revenue, reforming state-owned enterprises, Central Bank refraining itself from funding the budget, tightening monetary policy, making the Central Bank independent, working towards the generation of a surplus of 2.3% in the primary account of the budget by 2025, and restructuring the unsustainable foreign debt. His Central Bank Governor and the Treasury Secretary had been working hard on meeting these goals and attained a certain level of progress except the foreign debt restructuring issue. Ranil very confidently told the Parliament last week that Sri Lanka could hope to finalise the IMF bailout by the end of 2022 with India and China participating actively in the debt restructuring program. 

This is the background to the presentation of the Budget for 2023. 

However, Sri Lanka’s economy is still not out of the woods as admitted by the Central Bank Governor recently. The major macroeconomic issues are looming over the country. On the foreign exchange side, the usable foreign reserves have now fallen to a virtually zero level. The country cannot move back to a safe import program of essential items and raw materials. The shock treatment introduced by way of banning a significant volume of imports is still continuing, killing the economy’s ability to make a quick turnaround. The official consumer price inflation is high at around 70% with the increase in food items going at above 85%. But when the overall inflation, with prices of investment goods and export goods inclusive, as measured by Stephen Hanke’s inflation dashboard, it is above 115% per annum. 

The high food inflation has threatened the food security of both low income and middle-income consumers. The food security is defined as the affordability and availability of a nutritionally balanced diet and the increases in prices have reduced the affordability side. Compounding the food insecurity issue, there is a shortage as well as cost increases of essential medicines crippling the country’s healthcare system. This is a major humanitarian crisis, and it should be resolved as quickly as possible to prevent street riots by angry crowds. The real economic growth is in the negative region with an estimated economic shrinkage of the GDP by about 9% in 2022 followed by a further shrinkage of 4.5% in 2023. 

The Central Bank expects a meagre economic recovery of about 1.5% in 2024 with a forecast of similar growth rates in the next 3-to-4-year time period. The Central Bank is working on an estimated nominal GDP of Rs. 24 trillion in 2022, up from Rs. 17 trillion in 2021. But when this is converted to dollar purchasing power by using the current exchange rate of Rs. 370 per dollar, its value falls to $ 65 billion in 2022 down from $ 85 billion in the previous year. What this means is that the economy will recede to the level which it had in 2011 with a per capita income of $ 3,000. 

To kickstart the economy growing from this depth and make Sri Lanka a developed country by 2048 as envisaged by Ranil is really a challenge. As a result, with slowing economic growth, Sri Lanka will have to remain a lower middle-income country for some time. In fact, the Cabinet of Ministers recently decided that even being a lower middle-income country is too much for Sri Lanka because it cannot have access to cheap funding from friendly countries and multilateral financial institutions like Asian Development Bank, International Development Association, and the UN System. It decided to request the World Bank to consider Sri Lanka as a low-income poor country for the purpose of securing such highly concessional and cheap loans. This does not mean that Sri Lanka will be downgraded to a low-income country in practice. If accepted, it will be regarded as low-income country for extending cheap loans. 

Apart from this, there are several other critical issues looming over the Budget 2023. The foreign debt restructuring program has hit a snarl at this late stage. What is being proposed to restructure is only the borrowing from commercial sources and from friendly countries by the central government which has been estimated to be at $ 33 billion by the Ministry of Finance. This is only a fraction of the total foreign debt of the country which stands at about $ 80 billion. 

Even if the commercial and friendly country loans are successfully restructured, Sri Lanka has a major foreign debt repayment issue due to the lack of foreign exchange to repay other types of foreign debt obtained from international lending institutions like ADB or World Bank, borrowing by state-owned enterprises like CPC, CEB, Water Board, and SriLankan Airlines, borrowing by the Central Bank and the financial institutions, and the borrowing by the private sector. 

In the next 12-month period, the debt repayment obligations of the country as estimated by the Central Bank will amount to $ 5 billion. When the Central Bank’s obligation to pay the outstanding amount due to Asian Clearing Union at $ 1.9 billion is also included, this goes up significantly to $ 6.9 billion. Sri Lanka does not have foreign exchange to meet these obligations.

Apart from this, China which holds about 52% of the total bilateral loans by the central government has become a holdout lender in the country’s debt restructuring exercise. Sri Lanka should meet in London, known as the London Club, to negotiate its commercial loans and in Paris, known as Paris Club, to do the same for bilateral loans. China is a member of neither club. And its policy has been not to follow the normal debt restructuring that involves foregoing a part of the principal or interest or both – known as offering a haircut – but giving a new loan to the borrower to repay the old debt and restart it as new one in the books of the borrower, known as refinancing. If Sri Lanka’s other creditors find that arrangement unacceptable, the negotiations will come to a halt and so would the IMF bailout and its associated other benefits. That was why IMF, World Bank and other creditors have repeatedly warned the Sri Lanka Government that it should immediately get China on board in the restructuring exercise. I have in this column mentioned earlier that it will be a test of Ranil’s diplomatic skills to get China on board as expected. 

Then, there are two other critical issues relating to debt and foreign exchange issues which will hamper his budget 2023. One is that the Treasury is not only empty but also overdrawn as far as the liquid funds are concerned. In terms of the Constitution, the Government operates through a cash flow account known as the Consolidated Fund. All the receipt of the Government through taxation, non-tax revenue, grants, and loan proceeds are credited to this account as resources. Then, expenses as approved by Parliament are debited to this account. Since these receipts and expenses are tallied in the budget, the Consolidated Fund should balance itself except for small surpluses or deficits that may occur due to the non-synchronisation of the flows. But over the time, they should be naturally eliminated. 

But what is being experienced by the Sri Lanka Government is that the deficit in the Fund is rising month after month forcing the Treasury to finance it through temporary overdraft facilities obtained from the two state banks and a provisional advance from the Central Bank equal to 10% of the estimated revenue for the year. As such, the deficit which had been around Rs. 100 billion a few years back has now ballooned to nearly Rs. 1 trillion. With the Government revenue falling short of the estimates and the expenditure overdoing, the overdrawn state of the Fund is rising. The biggest challenge of the Budget 2023 is to eliminate this overdrawn position and make a new start with regard to budgeting of the country. That requires Ranil to use the current revenue to reduce the two overdraft balances from the two state banks that amounted to Rs. 840 billion at end-2021. With the expected meagre income level in 2023, this is an impossible task. 

The other critical issue is the negative net foreign reserve position of the Central Bank. The Bank always had a net positive position with regard to its foreign reserves but from May 2021, they fell into the negative region first by small amounts but then in leaps and bounds in every passing month. Since action was not taken to correct it at that time, it began to grow from around a shortfall of about $ 25 million at the beginning to $ 4,500 million as at end of September 2022. Since the Bank has reported its gross foreign reserves at about $ 1,700 million, the total foreign exchange liabilities of the Bank can be estimated at $ 6,200 million. 

This does not mean that the Central Bank’s overall position depicts a state of bankruptcy since it has a positive balance of domestic assets, in the form of loans given to Government and to commercial banks. But regarding its foreign involvements, it is a state of bankruptcy. Unless the Budget 2023 takes action to correct it immediately, the problem will be compounded in the period to come with no available facilities for correction. The Central Bank of the Philippines underwent such a trouble in 1993 and eventually was liquidated paving the way for the establishment of a new central bank with support from IMF, Government of Japan, and the US Treasury. This state of affairs within the Central Bank will not be viewed kindly by outside creditors. 

Then, there is this domestic debt restructuring issue which is also peeping over the Budget of 2023. Previously, Sri Lanka’s domestic debt was not unsustainable and therefore, the issue did not arise. However, a debt unsustainability is a situation where a country can repay its debt and pay interest only by resorting to extraordinary measures and it is not left with an option except defaulting it. As long as the Government can borrow money from the market to service its domestic debt, its debt is sustainable. However, if it is unable to borrow from the market the entirety of its fund requirements and it must borrow from the Central Bank and the banking sector to finance it, its debt is unsustainable. 

The Central Bank’s new management is trying its best to avoid this possibility by increasing interest rates and eliminating the new lending to the Government. But with increases in interest rates from 12% to 30% plus, the current success rate is not encouraging. If the foreign creditors ask for a domestic debt restructuring as well, it will be a death blow to the country’s financial system. 

The Budget 2023 should address all these issues. With that only RW can show that his magic wand will be working. 

A version of this article originally published in Daily FT

Global South is facing double jeopardy – Sri Lankan Prez at COP27

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5 mins read

President Ranil Wickremesinghe addressing the COP 27 Climate Change Conference in Sharm El-Sheikh, Egypt said that unbridled industrialization of the developed countries is the root cause of climate change, leaving the poor to suffer the consequences. He said that the problems facing poor countries are augmented due to the absence of adequate funding.

As a result, these countries are facing double jeopardy – struggling to develop economically while fighting to protect the living standards of their populations.

Therefore, President Wickremesinghe said that the developed countries must deliver on their pledge in Glasgow – by doubling their funding to compensate the developing countries for loss and damage.

Accordingly, he said that as proposed by the Climate Vulnerable Forum, commissioning a Special Report on this aspect to strengthen international awareness for future responses would be appropriate.

President Wickremesinghe thus proposed that before COP 28 in Dubai, like-minded nations should meet at Ministerial Level to discuss the way forward on all aspects of climate finance.

He also noted that this should be followed with a meeting of the Heads of Government of these countries on the margins of COP 28 to display a collective frame of mind to stave off the calamity.

Following is the full speech delivered by President Ranil Wickremesinghe at the Cop 27 Climate Change Summit;

“The salubrious environs of the green city of Sharm El-Sheikh will undoubtedly inspire our discussions at COP 27 to a successful conclusion. I sincerely thank the Government of Egypt for your warm welcome and hospitality.

Sri Lanka is replete with biodiversity and has consistently addressed the challenges of climate change. Let me record the action of Sri Lanka in this regard:

Sri Lanka

• Commenced the process of reducing carbon emissions by 14.5% by 2030

• Initiated Marine Spatial Planning

• Recently established a Climate Office

• Spearheaded the UN declaration of the 1st March, as World Sea Grass Day

Sri Lanka is

• Employing the National Policy for Conservation and Sustainable Utilization of Mangrove Ecosystems

• Implementing the Commonwealth Pilot project for Climate and Ocean Risk Vulnerability

• Led the Commonwealth Blue Charter Action Group on Mangrove Ecosystems and Livelihoods

Sri Lanka

• Will not increase further energy capacity via coal power

• Will phase out fossil fuel subsidies

• Will aim for 70% of renewable energy for electricity generation by 2030

• Will join the recent Global Methane pledge made in Washington

Yet, for climate action to be successful, wide-ranging measures to complement the UNFCC and Paris Agreement must be pursued.

The lack of capacity is the biggest obstacle to the implementation of Climate Action plans. Therefore, capacity building is vital in this regard.

To overcome this obstacle, we propose to establish an International Climate Change University in Sri Lanka, with an ancillary institution in Maldives, which would be the first of its type.

This seat of learning can be a trans-disciplinary global centre for green and blue studies – for scientists, environmentalists, researchers, policymakers, development practitioners, and of course, students the world over, to interchange knowledge transcending national and disciplinary boundaries.

The envisaged Climate Change University will offer both short-term courses and postgraduate academic awards to build capabilities for mitigating and adapting to climate change.

The University will also expedite the skills of the new generations to deliver the political, economic, social, cultural and digital transformations required to prevent a 1.5-degree world.

It will be the vehicle to enlighten domestic climate change challenges and prospects.

The collaboration of multilateral institutions and organizations such as the Commonwealth, World Bank and the ADB amongst others, will be sought for the establishment of this institution of higher learning – making it a multi-stakeholder partnership transcending – national boundaries.

I hope Sri Lanka’s proposal will receive extensive support and endorsement from the international community.

Since the prescriptions for addressing climate change have to be dispensed in the global domain, we will meet again next year, charged with high hopes.

However, the chequered implementation of previous decisions, including those of COP 26 is extremely disheartening.

Regrettably, the ground reality is that the fossil fuel-based industrialized countries of G7 and G20 who have been the main promoters of green hydrogen are now backtracking to use of fossil fuel.

In the last year, Carbon Dioxide emissions increased by 2bn metric tonnes – from 34.3bn to 36.3bn metric tonnes.

Such double standards are unacceptable. Developed nations should be given leadership to overcome climate challenges rather than abdicating their responsibilities.

It is no secret that climate financing has missed the target.

It is ironic that the 100 bn dollars pledged annually, have not been available in the coffers to finance climate challenges – as many developed nations deem it fit to renege on their climate financing contributions.

These countries who are also on both sides of the Ukraine war seem to have no qualms about spending for a war which will finally exceed $350bn. A conflict waged purportedly for the security interests of the combatants.

The only security at stake is food insecurity, acerbated to levels not experienced before the war. Many living both in the developed and developing world are outside the scope of three meals a day.

It is estimated that between 30 to 40 million people are being driven into hunger, especially in Africa. This war has also resulted in the upward spiralling cost of living, and shortages of oil and gas supplies, and it has brought the fight against hunger to our homes.

Expectedly, it has led to the curtailing of much-required climate finance pledged by these very same countries.

The issue we have is not finding the party responsible for the war, but the party that will end the war.

Why do we need this funding? It is a known fact that the practice of colonialism transferred the rich resources of Asia and Africa to Europe and was used to industrialize their countries. We became poor from this plunder.

The unbridled industrialization of the developed economy is also the root cause of climate change, the consequences of which, we the poor countries are forced to suffer. Our problems are augmented due to the absence of adequate funding.

Therefore, those in the South are facing double jeopardy – struggling to develop economically while fighting to protect the living standards of our populations.

It is therefore imperative that the developed countries deliver on their pledge in Glasgow – by doubling their funding. Adding insult to injury, damages caused by extreme weather conditions are increasing, and their impacts are exceedingly costly.

Developing countries which are the worst affected by the rise in emissions from the industrialized world, need to be compensated for loss and damage.

While the issue of loss and damage is now included in our formal agenda, we have to ensure that the emitters contribute financially to those affected. As proposed by the Climate Vulnerable Forum, commissioning a Special Report on this aspect to strengthen international awareness for future responses would be appropriate.

Considering the failure of the developed world in bringing about the much-discussed relief, it is proposed that before we get to Dubai for COP 28, like-minded nations should meet at Ministerial Level to discuss the way forward on all aspects of climate finance.

This should be followed with a meeting of the Heads of Government of these countries on the margins of COP 28 to display a collective frame of mind to stave off the calamity.

In conclusion, let me recall the UN Secretary-General’s recent words, “The choice is between collective action or collective suicide”.

The vacuum created due to inaction now requires the global display of sustained political will through dynamic action and constructive cooperation on the part of like-minded countries to prevent this catastrophe.

Let us traverse this path urgently.”

Sri Lanka: Wickremesinghe’s Machiavellian skills

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During the month, the government’s preliminary talks with the International Monetary Fund (IMF) on structuring its economic recovery continued. However, debt restructuring continues to be delayed with China due to its preoccupation with the 20th NPC meetings of the Chinese Communist Party (CCP). Even negotiations with India and Japan are moving at a slow pace. Perhaps, this is due to their lingering doubts about the Wickremesinghe government’s ability to see through the structural reforms.

In this context, President Wickremesinghe must be heartened by the show of solidarity for his actions by the US and some of the EU members, despite the use of high-handed methods to suppress public protests. Internally, the passing of the 22nd Constitutional Amendment (originally introduced as 21A) to improve executive president’s accountability, the use of the Prevention of Terrorism Act (PTA) to curb Aragalaya activism and the launching of the Rise Together (Ekwa Nagitimu) campaign at the grass roots to recoup the image of the Rajapaksas were key highlights of happenings in October 2022.

The events leading up to these important internal developments showed existing differences, not only within the ruling Sri Lanka Podujana Peramuna (SLPP) and its cohorts, but also within the opposition parties as well. Of course, during the month political leaders continued to ride their time-tested political hobby horses – new constitution, electoral reforms, call for general election and the not be missed late entrant “investigation and follow up into the Easter Sunday terrorist attacks.” The government used the familiar gambit of appointing parliamentary select committees and presidential commissions to tackle the opposition moves. So, everybody continued to be busy doing something.

Strategizing economic recovery

However, President Wickremesinghe appears to be leveraging lack of unity within political parties to adopt transactional strategies to push through actions to achieve targets set in the 2022 interim budget for increase in government revenue and debt reduction. The actions taken so far, include reducing government spending, tackling public corruption, energy reforms to open retail distribution of fuel to private firms, privatise wasteful state-owned enterprises and promote foreign investment avenues. Normally, these issues are considered politically explosive. Despite paying lip service, political parties in power have seldom considered seriously implementing such measures. Given this dismal record of political parties, Wickremesinghe government’s actions do not seem to have animated the media. The Aragalaya movement has by and large eroded public credibility in political parties.

Inspite of the lack of credibility in the government, some progress seems to have been made in improving the business climate as indicated by the LMD-NielsenIQ Business Confidence Index (BCI) for October. Reporting on the state of business, Sri Lanka’s online business magazine LMD said the BCI provided “a semblance of relief; it has climbed a heartening 13 basis points to 89” during October from September’s 76. However, it quoted NielsenIQ Director-Consumer Insights Theirca Miyanadeniya’s assertion “concern over the socio-political status of the country is waning as business and people are in a race to survive against a backdrop of extreme hardships.”

With the major economies expecting a period of global recession in the coming months, it is essential that Wickremasinghe government survives to see the country through the period of economic privation in the coming months. Under such circumstances, the passing of the 22nd Amendment to the constitution 174 votes in favour and one against, may be considered as an indication of grudging acceptance of President Wickremesinghe’s leadership by over two-thirds members of parliament. The amendment was passed despite some pro-Basil Rajapaksa members of the ruling SLPP objecting to the clause on not allowing dual citizens to become members of parliament. This indicated two things: the decline of Basil Rajapaksa’s influence within SLPP and the Rajapaksas continued support to President Wickremesinghe.

The 22A is a compromise between the Yahapalana government’s 19A to curb the sweeping powers of executive presidency and Gotabaya’s 20A to restore the powers of the executive presidency. The bill was much debated by parliament members and the public and its present form represents a compromise solution reflecting some of the key elements from both the earlier amendments on the subject. For instance, it has retained the 20A clause on the powers of the president to dissolve parliament after two and half years, as against four and a half years stipulated in the19A.

On the other hand, 22A has reintroduced 19A’s clause prohibiting dual citizens from contesting elections which was allowed by the 20A. The 22A reduces some of the powers of the president enjoyed earlier under 20A, regarding appointments to high officers of the state including the Chief Justice, judges of supreme court and appeals court, chairmen of the election commission, human rights commission, and police commission and the IGP. The constitutional council created now has the power to make these appointments. The president and prime minister enjoy some influence in picking members of the constitutional council, which will have three members from civil society.

Conclusion

The writing on the wall is clear: Sri Lanka must achieve targets presented in the 2022 interim budget for increase in government revenue and debt reduction to overcome the worst ever financial crisis it is facing now. Otherwise, Sri Lanka’s debt will be unsustainable; international financial bodies like IMF and World Bank do not assist the economic recovery of such countries. Obviously, lack of understanding among the political parties in tackling long pending critical issues, has stood in the way of evolving a coherent national political and economic narrative to restore Sri Lanka’s credibility both at home and abroad. It will not be pragmatic to expect the political parties to give up their pettifogging and bury their hatchets to see through the crises. They are accustomed to using the economic crunch and hardship faced by the people to improve their poll prospects.

As a seasoned politician, President Wickremesinghe is using his Machiavellian skills to use factionalism existing within almost all the parties, to push through legislation to restore the economy. So far, political parties by and large are grudgingly accepting his rule for want of a better alternative. How long he survives this perilous journey will determine the future course of events in Sri Lanka. One advantage he only seems to enjoy is the moral, political, and even economic support of most of the major Indo-Pacific powers including India and China. But much would depend upon how President Xi Jinping will handle China’s economic downturn, that could have its fall out on Sri Lanka.

Tailpiece: Contact with BJP?

A columnist writing in the Colombo weekly Sunday Times said a group of former LTTE cadres identifying themselves after rehabilitation as the ‘Democratic Cadres Party’ were in New Delhi in India recently. They took part in “an event organised by a group that maintains close ties” with India’s ruling BJP. They are said to have had discussions with various influential political actors and policymakers in New Delhi. Their requests to Indian authorities included lifting of the ban on LTTE proscribed in India since 1991 and full implementation of 13th Amendment. The article said their allegations that Hindu shrines were being acquired by the Archaeological Dept and WildLife Dept under questionable circumstances seemed to have struck a chord with the audiences, “given the BJP’s aggressive campaigns based on Hindutva ideologies.”

[Written on October 30, 2022.]

Sri Lanka: Oh boy, Who Really Tyrant Is?

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Editorial

A self-claimed political analyst had written a hollow rant on the Aljazeera website describing President Ranil Wickremesinghe as a tyrant. This is not just about enjoying the privilege of “freedom of expression”. Eventually, the channel will not care to publish the other side of this bleak blabbering though most of the journalists working for Al Jazeera based in Qatar is an exceptional group of journalists who have a quantitative understanding of the real tyrants and their behaviours. But this person of Sri Lankan origin has tried to mislead the target audience by distorting the ground reality in Sri Lanka in a repulsive manner to appease his narrow political desires.

The Sri Lankan people are struggling to recover from the hell they fell into. Ranil Wickremesinghe was the only one who accepted the unprecedented challenge faced by the country and the people despite the callousness of serious political opponents. We have politicians who talked and walked but hardly find anyone who will take the national responsibility on their shoulders. But Wickremesinghe proved the opposite. His intervention averted the worst social consequences we were about to face. The situation has been significantly managed by him. But within a few days, the severe penalty he had to pay was the loss of his house, which was razed to the ground by a mob. Many rhetoricians, including this so-called political analyst, do not say a word against the murderous behaviour of those violent groups.

There is a reason for that. This person, among others, has made great efforts to stand out as an active person in the political gang called “Aragalaya” against the state, which was launched by some organized group a few months ago.  We don’t care how successful it is because it is his personal ambition. But what matters to us is the gambling that such crooks are doing with the national interests of the country and the sentiments of ordinary folks. Such immature minds have no choice but to present dreadful narrow political views to ensure their existence in the face of intense competition in a decaying western market.  This is nothing but a malicious attempt to harass the Sri Lankan leadership at the international level by hijacking public sentiments.

Go on boy! Not only you but also many other opportunists should hammer this nation even harder. It was what we called “seizing the opportunity” in the midst of a national calamity. Ideological charlatanism of reckless immature “political analysts” is not a new experience but common behaviour in politics and elsewhere. Hyperbolism is their impetus. When we encounter such rotten minds, our humble suggestion is loud and clear. My boy; instead of barking up the wrong tree, try to learn something substantive and original. Don’t you think this is a good time to try to define the real tyrant and their putrid behaviour? You heard us, right?