Sri Lanka

Sri Lanka: Formula for Lasting Peace and Prosperity

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Insanity is doing the same thing over and over again and expecting different results – Albert Einstein

The momentum for resolving the ethnic issue that has bedevilled the country since independence has taken a fresh urgency with the President calling on all parties to convene to discuss the issue and resolve it before the 75th year of independence in 2023.

Underpinning such a resolution will be the imperative of sharing power and in this context, an end to the dominant Sinhala Buddhist polity perspective that has stood in the way of a resolution. In attempting to find a resolution, one hopes that all political parties of all persuasions call a halt to which came first, the chicken or the egg simile when it comes to the ethnic issue. Rather than a debate on who came first and who lived where, a solution based on contemporary realities would be more beneficial for the current and future generations.

If political parties accept equality of all citizens irrespective of their numerical strengths and/or the length of their history and ancestry, all closely knit in the political mess that has been created, and that diversity within such equality is what is unique, and also importantly, move away from ancient geographical boundaries that have been used to create divisions rather than unify people, a resolution will be possible.

Sinhala culture, Tamil culture, Muslim culture have been fashioned over many hundreds if not thousands of years, not just within Sri Lanka but outside it, especially when it comes to Tamil and Muslim cultures. However, the founders of the major religions, Buddhism, Hinduism, Christianity, Islam may frown and express their disappointment over the way ritualistic cultural practices have deviated their current followers from their original teachings, overshadowing the fundamentals of their teachings with such cultural practices.

Unfortunately, politicians, and many contemporary religious leaders, especially within the Sinhala Buddhist community, have institutionalized religion using ritualistic cultural practices that have no place in what Buddha taught.

In terms of political governance though, the reality is that a fundamental requisite for resolution of the ethnic issue in Sri Lanka is the recognition of cultural diversity and everything associated with that diversity and a mechanism for each group to be able to make decisions through a process of discussion, debate, compromise with other groups. In such a model, a group with a numerical majority cannot be more equal than others as it is against the very principle of recognizing equality within cultural diversity.

The challenge before politicians is whether they are willing to accept this premise, as without an acceptance, and then acting on a mechanism to operationalize such an acceptance, the ethnic issue will continue to be used by all shades of political opinion for their own political ends as they have been doing since independence.

Having said this, even if the premise is accepted, it will not be easy to operationalize it due to various politically important forces preventing the premise being implemented. Despite 74 years of prevarication, political battles, even a war, Sri Lanka has not been able to resolve the ethnic issue and it continues to be an issue that divides the country. It will not be overcome during a few meetings of the political parties represented in Parliament today. Mutual suspicion harboured by different ethnic groups will not disappear overnight after a bon homie in Parliament.

The entire governance system and the caliber of politicians who enter Parliament has to change if a lasting solution to the ethnic issue is to be reached. While the power of interest groups cannot be removed all together from the political arena, their influence can be reduced by strong legislation. These are long-term, time-consuming activities and possible only through progressive steps.

An interim political solution

In the interim, a solution has to be found which will assist in moving the political pendulum in the right direction. The suggestion to introduce a second chamber with powers to veto and/or amend bills presented in Parliament that impinge on the equal rights of ethnic groups has been made as an interim measure until a more progressive new Constitution is introduced to reflect the equality of all belonging to different races and religions, and a degree of self-determination within a unitary, sovereign country.

It is suggested that the second chamber consists of 100 members, with political parties represented in Parliament nominating, by consensus, an equal number of Sinhalese, Tamils and Muslims, and one person as the chairperson of the second chamber. None of the nominees should be members of the Parliament, and they should be persons of eminence and proven capabilities, especially in the arena of human rights and social policy development and implementation. In a sense such a body would act like a political watchdog over any basic human rights indiscretions that may be attempted by any government.

While a second chamber of this nature could bring all communities together via their political representatives as far as facilitation of legislation that do not impinge on equal rights of all races and religions, the political system and structures need to change if the people of the country are to be better served by those who the public chooses as their representatives.

A revamped Local government to be bedrock of a new constitution

In this regard, readers are referred to an article written by this columnist under the heading “An opportunity for a reformist Constitution to take Sri Lanka forward

The main thrust of that article was that local government should form the bedrock of a governance structure and that provincial councils should only be forums for local government members in each province to meet annually or biannually to discuss, debate and agree on the governance trajectory in each province. The task of a national Parliament comprising of 150 members elected by the people was proposed only to be engaged in policy development.

This to be done in discussion with local government members in each province, and of course the general public, business organisations, academics, unions, female organisations and civil society organisations.

National Planning & Monitoring Council (NPMC) mechanism and Regional Planning & Monitoring Councils (RPMC)

Finally, in respect of a political system change, this columnist also wrote an article titled “Contours for a new constitution with a difference, for the future, not the past http://www.srilankaguardian.org/2021/09/contours-for-anew-constitution-with.html) where three key features underpinning the suggested contour proposal was presented

The first one being a much-needed stakeholder participation outside of party politics through a National Planning & Monitoring Council (NPMC) mechanism and Regional Planning & Monitoring Councils (RPMC) responsible for developing a high level 10-year (minimum) National Governance Plan. The NPMC and RPMC mechanism and its influence were considered as a means of drawing more and more people from the private sector, universities, and other special interest groups into economic activity, and lessen the involvement of any government entity in activities they should not be engaged in and not competent to do anyway. It was proposed that the private sector should lead and be the engine of economic growth in the country if the future is to be different to the failures of the past.

The second, a devolved political administration via Regional Councils, that provides greater inclusiveness and participatory governance, by the people, for the people. The pivotal role of local government entities within each regional council was stressed as an important prerequisite. The central government’s role was noted as one of coordinating the implementation of the National Governance Plan developed by the NPMC and the RPMCs, once it was approved by the National Parliament.

Thirdly, the coordination of implementation to be led by a 10 to15 member central cabinet of ministers drawn from outside Parliament and appointed by the President, who will work with the relevant ministers in Regional Councils and with the local government entities for effective implementation of the National Governance Plan. This, along with the role to be played by the NPMC and the RPMCs were proposed as a means of bringing in the talent that is there in the country to move the country forward economically, socially and environmentally, more effectively and efficiently, for the benefit of future generations.

The need to change the political system is fundamental to ushering in a new Sri Lanka. It will be insanity if this is not done and if the same system and the same or similar people, some just simply Chameleons changing their political colours from time to time, are given the task of building a new Sri Lanka.

The second chamber that has been proposed as an interim measure could well be a permanent feature in a new reformist constitution, and its representatives selected by Regional Councils rather than the national parliament. Such a chamber would add to the fundamental requisite of power devolution that essentially has to be the foundation of a new Sri Lanka

Sri Lanka: Ramifications of Constitutionalism

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The Sri Lankan Tamils of the North and East have been urging for the recognition of their traditional homelands from almost the time of Independence. During the grant of Independence, the Tamils though occupying their traditional homelands in the North and East were also resident in all parts of the Country for Government jobs,  trade, commerce and what not.

The Tamils felt safe and secure under British rule. Often the Sinhalese leaders would say the Britishers showed partiality to the Tamils and they adopted a policy of divide and rule. That concept was wrong. The British had good opinion of the Tamils, not because the British wanted to divide and rule (in fact they had no reason to divide and rule since most Sinhalese leaders aped the Britishers, converted to their religion and supported the British except the Left Leaders) but because the Ceylon Tamils were hard working, duty conscious, conscientious workers and they preferred them in many of their colonies. After all the Bhagavad Gita had preached disinterested devotion to duty several centuries ago and the idea was implanted among the Hindus, whether Vaishnavites or Saivites. It was the duty consciousness of the Upcountry Tamils that made Ceylon (Sri Lanka) prosper under the British and even thereafter.

The Federal Party was formed in 1949. If we had requested the British to grant us Federalism in the first instance it would have been granted because the Kandyan Sinhalese also wanted Federalism. Maybe because most of his clients were from the South, without disturbing the demography pattern of the time, Mr. G.G.Ponnambalam, the then leader of the Tamils put forward the 50:50 request, where the majority Sinhalese were to hold half the seats in Parliament and all the Opposition Parties together were to hold the balance 50%. This request was rejected by the British.

Mr.SJVChelvanayagam left Mr.Ponnambalam’s Tamil Congress Party and formed the Federal Party in 1949. The reason for asking a federal dispensation was because power was soon going to pass on to the hands of the Sinhala majority in the Country. Since the Britishers had unified the Country’s administration in 1833, and they were leaving now, the Tamils justifiably felt unsafe among the Sinhalese majority. They had to preserve their traditional homelands and the best way to preserve their areas was by asking for self-rule in their own areas without dividing the Country.

Federalism is not dividing a Country. On the contrary, it is a way by which unity could be maintained among disparate communities. The Tamils of the North and East of Sri Lanka are the most qualified people for federalism. They have occupied continuously for over 3000 years their traditional homelands in the North and East, have had a language of their own, culture of their own and in fact kingdoms of their own before the British unified the Country for administrative reasons. Even though Eastern Province had several sub-kingdoms they were all governed by Tamils. They paid tithes sometimes to the Kandyan King. The last King of Kandy was not a Sinhalese. He signed the peace treaty with the British in 1815, in Tamil. Tamil was the language of Royalty.

The reservations among the Tamil leaders, especially Mr. SJV Chelvanayagam, was to soon prove true. First the Upcountry Tamils were disenfranchised. Then by the Sinhala Only Act, the Tamil Government servants were driven away from  State Services.Then through pogroms and riots the Tamils who lived in the Provinces outside the North and East were driven away. Ultimately by standardisation, the studious Tamil students found it extremely difficult to enter higher echelons of the Educational ladder. Meanwhile lands falling within the boundaries of the traditional Tamil homelands were soon being expropriated and Sinhalese from the South were made to colonise those areas.Many of them were Island’s Reconvicted Criminals.

In 1956 Mr.SWRD Bandaranaike when he brought the Sinhala Only Act, did not foresee what he was going to do to the Country. He knew he was being unreasonable to the Tamils who occupied a distinct area, had a language of their own, culture of their own and belonged to religions other than that of the majority. For political reasons, to defeat the UNP, he formulated his policy of Sinhala in 24 hours. But he thought he could bring in the Reasonable Use of Tamil Act and assuage the Tamils. But he had released forces by his political short-sightedness which he just could not control. The Buddhist Priests stormed his residence at Rosmead Place and had him tear up the Reasonable Use of Tamil document. The same unleashed forces ultimately murdered him.

Lee Kwan Yew when he met SWRD, the Prime Minister, the latter had boasted, puffing at his pipe, that he had made the language of the majority the State language of Ceylon! Lee had warned him that it was wrong. In fact, he had made four languages, Chinese, Tamil, Malay and English, the State languages of Singapore and Singapore today prospers while Sri Lanka is bankrupt! 

Political, Social and Economic mistakes have been made in this Country. Costly mistakes! Mistakes devoid of common sense.Mistakes merely to get the votes of People at the next election. But the wise would not cry over spilt milk.They would ask how best could we change the situation and improve our lot.

Let me come to your question now. Yes!  I did say that unless the President consents to a Constitution other than a Unitary Constitution for Sri Lanka it would be purposeless having talks with Leaders of Tamil Parties. Under a Unitary Constitution, the majority community rules the roost. They predominate in everything. They decide what is good for minorities. They had the power to obstruct the progress of communities other than theirs, as we have seen in the case of the Northern Provincial Council. Projects beneficial to the People of the North had been sabotaged. We were not allowed to have the Chief Minister’s Fund when other Provinces had. All Provinces have seen modernisation in this Country except the Northern and Eastern Provinces. Only those who would go and cringe and beg the members of the majority community were found worthy of condescension by the powers that be.

We have not been allowed to run our own schools. Our fishermen are unable to fish in their traditional fishing areas. The Military controls everything from land to sea and may be air too! The Military are stationed in the North and East from the time of the end of war continuously. Expropriation of our resources by the South takes place daily. Appropriation of our lands by various Departments and most notably by the Mahaweli Authority takes place continuously. Buddhist places of worship are coming up illegally in places where there are no Buddhists living. Chinese influence is maintained in Tamil areas with ulterior motives. I once heard a Government Official tell some Chinese officials that they were close to the Chinese because of the closeness of their religion and that the Tamils are Hindus, meaning the Tamils are close to India.

I could go on enumerating the woes of the Tamil speaking of the North and East.

But the fact remains that talking reconciliation and making ad hoc changes to the existing Constitution as it is today being a Unitary one, would take us nowhere. The Tamils need to be freed from the yoke of Sinhala dominance. Even though the LTTE had asked for a separate State, our Voters have brought us into Parliament on the basis that we agitate for a Federal / Confederal Constitution so that we could live within our traditional homelands in amity with other communities, still continuing to be Sri Lankans. My Party alone asks for a Confederation because we want to minimise interference by the Central Government in the areas of our residence.

Unless we divide Power amicably among the different communities in consonance with the areas of their residence we cannot live in Peace and Unity. Always the majority Community would want to interfere and sabotage the activities of others if they feel unequal to the others. The Sinhalese though the majority in this Island suffer from an inferiority complex. The fact that a large contingent of Tamils live close by in South India might be one cause. The fact that Tamils are more hardworking and industrious is another reason. After all the Tamils who were driven out from Sri Lanka have proved their mettle in far-off lands. It took over twenty countries to coalesce to destroy Prabhakaran. He kept the North and East under his control for almost thirty years against a Sinhala Government all-powerful!

You would realise why a constitution other than a Unitary Constitution is necessary. We could discuss the difficulties that we may face in bringing about a federal constitution but certainly to continue with a Unitary Constitution will only bring misery to all.

Views expressed are personal

Sri Lanka: Restructuring of Public Debt and Fiscal Policy – Field Note 1

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This series is based on the excerpts of the first report of the Sub-Committee in identifying short and medium term programmes related Economic Stabilization of the National Council tabled in the Parliament by Patali Champika Ranawaka as the Chair.  Composition of the Sub-Committee in identifying short and medium-term programmes related Economic Stabilization of the National Council,  Patali Champika Ranawaka (Chair), Naseer Ahamed, Tiran Alles, Sisira Jayakody, Sivanesathurai Santhirakanthan, Wajira Abeywardana, A. L. M. Athaullah, Rishad Bathiudeen, Palani Thigambaram,Mano Ganesan, M. Rameshwaran; all are members of the house representing various political parties – editors

It is a well-known fact that our country is currently facing an unprecedented economic crisis. The public debt is no longer sustainable owing to the absence of public financial discipline over a prolonged period and reliance on highly risky foreign commercial loans. The payment of loan installments without taking necessary steps to restructure the debt in spite of the understanding that the debt is not sustainable anymore had emptied the official reserves and the net foreign assets in the banking system. Due to the lack of foreign exchange reserves, the essential imports such as fuel, food, and medicine and import of raw materials required for the manufacturing process have to be restricted. The burden of cost of living has risen to an unprecedented level and real income and food security of people have deteriorated. According to the official data, total inflation in September 2022 stood at 69.8% whilst food inflation was recorded at 94.9%. The transport inflation was 150.4%. Furthermore, the World Bank has predicted that poverty, which was 13.1% in year 2021, will increase up to 25.6% by the end of year 2022. It has also been predicted that the economy, which contracted by 4.8% in the first half of 2022, will further be contracted by 9.2% in year 2022 and 4.2% in the year 2023.

According to the World Bank Report issued in October 2022, it has been emphasized that the cause of the economic crisis is not Covid-19. There had been shortcomings in the economic structure and economic management policies for a long time. It has been reported that the weaknesses in the competitiveness of the export market, Central Bank Monetary Policies that have been maintained without discipline from time to time and the exchange rates that have been forcefully maintained were fatal blows to the economy of the country. The decline of the government revenue is the main reason for the fiscal instability and the increasing indebtedness of the country. Owing to all these factors and the unnecessary tax concessions given in year 2019, the amount of public debt and government-guaranteed debt as a percentage of Gross Domestic Production which was 89% at the end of year 2019 has risen up to 110% at the end of year 2021.

The amount of public debt stood at 122% of the Gross National Production by the end of June 2022.

Debt Restructuring

  • The International Monetary Fund has declared that Sri Lanka’s debt is not sustainable. The fact that the International Monetary Fund has declared in March 2020 that the debt is unsustainable and urgent action is needed has now been revealed.
  • The Rating Agencies have declared that Sri Lanka is still in bankrupt state. (Downgrade from Selective Default (SD) to Restricted Default (RD))
  • After the Ministry of Finance declared the interim loan repayment arrangement (suspension of loan repayments) on 12th April 2022, assistance has been obtained from the International Monetary Fund.
  • Lazard Freres STS and Clifford Chance LLP have been appointed as financial advisor and contract law consultant respectively in order to have negotiations with creditors.
  • The negotiations were commenced in March 2022 with the International Monetary Fund and a staff-level understanding has been reached in September 2022. The Central Bank of Sri Lanka and the Ministry of Finance have expressed confidence that the approval to the understanding concerned will receive the approval of the Board of Directors of the International Monetary Fund in December 2022. If it is proved successful, the assistance of the International Monetary Fund will be available for the next four years (2023–2027) and funding amounting to US $ 2.9 billion is to be received in tranches based on progress.
  • During the final quarter of 2022, basic information is shared with all creditors (Under non-disclosure agreements) and discussions will be held with the International Monetary Fund with regard to obtaining their technical assistance (DSA – Debt Sustainability Analysis).
  • It is expected to conclude the negotiations and implement the agreements officially during the second quarter of year 2023.
  • The principles accepted during the negotiations with the creditors are Transparency, Good faith for a Collaborative Process, Fair and Comparable Treatment to all Creditors.
  • Furthermore, most of the Economic Analysts point out that the restructuring of domestic debt is mandatory to confirm the debt sustainability.
  • At the first glance this seems like a difficult task and, in light of the stance taken by the government not to restructure domestic debt, the target is more difficult to achieve.

New Economic Equilibrium

  • At present, the government has achieved a difficult, unstable, temporary and unsustainable financial equilibrium through strategies such as the imposing of strict restrictions on importation, foreign exchange conditions and controlled exchange rates.
  • The financial equilibrium has been achieved on the basis of the decision taken for non-repayment of debt and the debt concessionary package amounting to US $ 3.8 billion granted by India. This cannot be done in the long term. The importation of investment and intermediate goods including the fuel has also been restricted. (The fuel consumption has been decreased by 40 %.) This affects adversely to the industries and the services in mid-term, and, as a consequence, to the employment and economic growth. The restrictions have been imposed on imports in the western world and in Europe as a result of the economic recession, which affects the remittances in turn. On the other hand, higher fuel prices can be expected in short term in time to come (especially in the winter).
  • The policy on shrinking the foreign trade by the Ministry of Finance and the Central Bank could adversely affect the domestic trade, domestic job market and particularly the income level of the low-income earners in the mid and long term and also the period spent for the recovery of the economy would be prolonged.

Budget (as per Appropriation Act 2023)

  • The new taxes (direct and indirect) have been introduced with a view to increasing government revenue. However, no proper process has been introduced for the control of recurrent expenditure and capital expenditure of the Government. The purpose of increasing revenue is the meeting of expenses. As a result, in addition to the social strata already affected during the first round, the middle income earners are also subjected to tremendous pressure. This will lead to short-term social apprehension and loss of trust, accompanied by the risk of disruption of large-scale industries and services (due to increase in financial expenditure, tax expenditure, fuel expenditure and other expenses) in addition to the medium scale industries and services as well as a trend of poverty, unemployment and emigration. Therefore as to whether the expected incomes from them will be accrued is something which must be taken into consideration.
  • According to the proposed Appropriation Act (presented on 5th October 2022) the revenue is estimated at 3456 billion (11.4% of Gross Domestic production (GDP). Out of the expenditure of Rs. 5860 billion (19.4% of Gross Domestic Production), Rs. 2441 billion is for interest on loans while Rs. 1220 billion is for capital expenditure of the government. Similarly, the overall loan installment is Rs. 2025 billion, which brings the total expenditure to Rs. 7885 billion. When the revenue of the government for the preceding years, the new taxes and the present GDP contraction is taken into consideration, it is doubtful as to whether the expected revenue target can be met and unless a saving of 10% can be exerted on the recurrent expenditure of Rs. 2441 billion exclusive of interest payment together with a cut down of 60% on the capital expenditure of Rs. 1,220 billion the year 2023 will not see an approach leading to government fiscal stability even in a backdrop where debt repayments have been suspended.

Control of inflation, interest rates and businesses

  • A record inflation is reported to have resulted due to a rapid increase in the new money supply into the market (nearly three trillion in 2020 – 2022) and the slowdown in the production of goods and services. The interest rates have been increased by the Central bank to control the inflation and the treasury bills are sold in the primary market at increased rates over 30%. The high interest rates, new taxes (Value Added Tax (VAT) –, Social Security Levy and high personal and corporate taxes along with the inflation have almost destroyed the local businesses. As a result, there has been a situation of non-payment of loan installments, non-payment of lease installments, dismissal of employees, closure of companies and institutions. The high interest rates for deposits, non-issuance of new loans and the inability to recover loan installments have endangered the banking sector. The risk of defaulting of public debt is another threat faced by the banking sector.

Solutions and proposals

A change in the existing system

The need has arisen to change the legal and undeveloped systems, radically in every sector. It is a necessary condition for economic growth and a prime condition for building public confidence. Although financial stability is essential at this time, there is a danger of collapsing the economy in an attempt to establish strict financial stability. Therefore, a balance must be struck between financial and economic stability.

  • A collaboration of both the diplomats and the officials to accelerate the process of debt restructuring is essential.
  • The changing of the maturity periods of loans, the loan interest and the initial loan payments by paying attention to the factors such as the total debt amount compared to the GDP, the Gross Financial Need (GFN) rate to the GDP, foreign debt repayment to the GDP in keeping with the international standards on the debt and debt repayment ability of Sri Lanka at least during the next three years and the next decade is necessary in restructuring the debt.
  • The income and expenditure, foreign exchange earnings, control of balance of payments and a full financial and managerial restructuring of the public sector is mandatory to Sri Lanka in order to fulfill the difficult task of obtaining the concurrence of the creditors for the debt restructuring.
  • It has been reported that the government had taken a decision to restructure domestic debts. The liquidity of domestic debt had been contracted by over 60% due to the inflation. If the debt restructuring is continued in spite of the above situation, it is emphasized to reach a collective agreement among the depositors of the local banks and of the Employees’ Provident Fund and the

local investors after having formal negotiations whereby the trust will be built up among the foreign creditors on the restructuring of the foreign debt.

  • It is necessary to amend existing laws and bring new laws to establish responsibility and accountability in the financial sector to prevent the recurrence of the economic bankruptcy that occurred.
  • A new Public Finance Management Law must be adopted immediately, which binds the responsibility and accountability of the Ministry of Finance and its authorities for the stability of income, expenditure and debt, and the provision for debt management and Fiscal Management (Responsibility) Act (2003)) should be updated. .
  • A new Financial Regulation Act (Monetary Law Act 1950) which ensures accountability of inflation and financial supply should be prepared in line with the old Act and thus the independence of the Central Bank should be assured.

The Monetary Board and the Governor of the Central Bank and the top management should be made responsible and accountable for the financial situation.

  • A new independent agency should be set up for public debt management. The Central Bank and the Treasury can work together in its front office and back office functions and the debt management strategy should be managed by the middle office.
  • A new strong Act should be introduced to prevent corruption and it should ensure:
  • Professionalism for investigations.
  • The confidentiality of the complainant.
  • Efficiency and impartiality of investigations and litigation.
  • Independence, impartiality, and non- partisanship in litigation.
  • Active relationships with international parallel organizations.
  • The assets and liabilities of politicians and higher-ranking officials in Ministries should be declared to the public.
  • An independent, impartial, and efficient National Procurement Commission should be appointed for regulation and appeal with regard to procurement. It should consist of professionals who have experience in every field.
  • The Department of Census and Statistics should conduct a formal census on the social impact of economic reforms (closure of industries and services, foreclosure of property, losing employment, losing income, poverty, malnutrition) in every three months and economic reforms should be changed as necessary based on that data.
  • There should be an independent Bureau to identify civil groups, families and persons subject to social pressure, based on census data, and to direct local and international donors to projects aimed at them.
  • The prices of all food items, essential services, medicine and health care should be brought to a digital platform and any service supplier and consumer should be given the facility to access it. The consumer will receive the best service for the lowest cost and market competition.
  • The public entities should be restructured to gain the public’s confidence.
  • 2200 number of public entities audited by the Auditor General should be subjected to a proper management audit.
  • The nominal institutions should be closed.
  • The public entities should be amalgamated and separated under the theme
  • “one institution for one task.” Separate institutions should be amalgamated. (Eg:- Research institutions to universities)
  • To conduct a Work Audit in the institutions, and non-essential workers should be allowed to go abroad, self-retire, take no-pay leave or resign from the service after obtaining an allowance.
  • The public sector recruitment should be done only for the essential service category and should be done only on a competitive basis.
  • The professionals with proven capabilities should be appointed to the Chairmanship and the Board of Directors of strategically important public institutions after an open call.
  • Every state institution should be given annual, monthly, technical, and financial targets in the supply of their services. The work efficiency and financial efficiency of the public sector (recurrent expenditure savings) can be improved through that.
  • The Key Performance Indicators (KPIs) should be introduced to all public entities including Ministries.
  • The promotions and salary increments for the higher- ranking officials should be based on their performance evaluations as well as seniority.
  • Those who violate procurement procedures and are connected to corruption should be deprived of their right to hold a post again.
  • A new system should be introduced to pay dividends for commercially successful enterprises.
  • After a proper Assessment of Needs and Finances:
  • Public enterprises that should be alienated;
  • Public enterprises that should be made into joint ventures with the private sector;
  • Public enterprises that should be subject to private sector management with the state owning the enterprise;
  • Public enterprises in which public management should be restructured

Such Public Enterprises should be identified, and the necessary strategies should be implemented after an open discussion with the employees.

  • The Department of Inland Revenue, Excise Department and the Sri Lanka Customs which are the main institutions of collection of public revenue, should be digitalized and restructured.
  • All professionals who provide their services on cash basis should conduct their transactions on an open internet platform and they should be open for public revenue institutions of the government.
  • No large-scale project should be commenced outside of the National Physical Plan. Moreover, no capital expenditure should be made without the approval of the National Planning Department.
  • As there is no war situation in the country, the following things should be done by a Special Public Security Management Committee;
  • Preparation of strategies on public security
  • Preparation of basic criteria on the number of soldiers, equipment and training,
  • Introduction of new economic activities for the soldiers, who are not essential for the service,
  • Preparation of an expeditious Programme for manufacturing military equipment and accessories locally and for finding foreign markets for trained soldiers and equipment.

Source: Sri Lanka Parliament

Sri Lanka: Repeal the PTA and Release Prisoners Held Under It

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Voices for democracy are reverberating in many countries, where people’s rights and freedoms are being usurped by fundamentalist and autocratic regimes around the world. They are openly and covertly resorting to desperate attempts at repressing and destroying democratic movements. In some countries people have succeeded in thwarting them. In others the autocrats have prospered. In a few instances, people themselves have brought autocrats to power. Some recent examples were in the United States and Brazil. Sri Lanka and Iran are currently engaged in increasingly repressive measures against the democratic wishes of their respective populaces in order to prop up their increasingly untenable regimes.

Repressing dissent is not new in the history of Sri Lanka. The repressive dragnet has not only entrapped innocent peaceful protestors on the flimsiest of judicial excuses, but also those who have nothing to do with protests. Currently, protest leaders like the convenor of the Inter University Students’ Federation, Comrade Wasantha Mudalige; the convenor of the Inter University Bhikkhus’ Federation, Venerable Galwewa Siridhamma Thero are still being held under the all-encompassing undemocratic and opaque Prevention of Terrorism Act (PTA). They have been held for close to three months so far.

Human Rights Organizations both local and overseas, Trade Unions and Civil Society Organisations have been asking for their release, but so far to no avail. Already many in the international community including the United Nations have condemned such attacks. When the European Union raised concerns about the regime’s use of the PTA, Sri Lanka assured them that only in extremely necessary cases that the PTA had been evoked, though many cases have shown that it isnot true. In Australia, the Victorian Trades Hall Council has expressed its solidarity with the victims of repression. Even the Human Rights Commission of Sri Lanka has said so. The arrest, detention and continued incarceration of both the convenors from August 18 onwards under the PTA is described by the Commissioners as: “unreasonable and without justification.”

The draconian PTA in its embryonic stage came into the scene in 1972[1] under the coalition regime led by Prime Minister Sirima Bandaranaike, with the enactment of the Criminal Justice Commissions Act, which reversed the important tenets of the principles of natural justice – the presumption of innocence until proven guilty. With it commenced the degradation of the country’s criminal justice system. Following this, the UNP regime led by President J R Jayawardene first adopted the PTA in 1979 as a ‘temporary’ measure and included various provisions that contravened international legal standards.

It was made a permanent legal tool in 1982 and was used in 1988/89 period against the JVP and the LTTE, in 2019 following the 2019 Easter Sunday bombings and now against the “Aragalaya” protest movement. This enabled arbitrary detention and torture repeatedly targeting political opponents of the regime, personal opponents of some of their leaders. and specifically, against the many in the non-majoritarian communities.

Due mainly to the international pressure, amending or repealing the PTA has been in political agenda for several years. In March 2022 it was amended via the Prevention of Terrorism Act (PTA) Amendment Bill, but without touching the provisions that led to its arbitrary use of psychological and physical torture. The regime declared a de facto moratorium of using the PTA in March. This moratoriumcame to a griding stop inAugust this year with President Ranil Wickremesinghe using it to detain three student leaders of the protest movement.

People are demanding the government acts with transparency, accountability, and respects their rights. They also demand opportunities to define their identities, set precedents for inclusive political processes, and create a constitution that represent their aspirations. After Mr Wickremesinghe was selected and installed as President by a discredited parliamentary majority, the regime launched an all-out terror campaign to root out the protest movement. The sites that were used for peacefully assemble, express and protest were destroyed using political thugs and special forces. Almost every protest was attacked with tear gas, batons and clubs. In doing so, the regime also used the PTA and the Police Ordinance to hold those who have not committed any violence.

The recent protest wave, unlike earlier ones, was able to force the resignations of the Prime Minister, several Ministers and ultimately the President. The protestors like much of the country were demanding the government of Sri Lanka address the issues that gave rise to the current economic and political crisis, a crisis created by the political and business elite. This elite does not want to change their corrupt and incompetent behaviour and institutions; hence they need to find scapegoats to hide their lack of accountability and transparency. While holding protest leaders behind bars unjustifiably and under inhumane conditions, the ruling elite carries on with their authoritarian and corrupt practices. They are trying to force the burden of alleviating the debt (without reform) on those who can least afford to carry the burden, the people. This needs to be vigorously exposed and resisted.

Mr Wickremasinghe has wantonly and wilfully used the dictatorial powers vested in the executive presidency, buttressed by the emergency powers and the PTA, to supress dissent and arrest peaceful protestors in an attempt to root out their leaderships. In doing so, he is erroneously and cynically branding them, terrorists. These tactics have been used many times in the past, so as to direct people’s attention away from their incompetence and misdeeds. The regime is now trying to employ new tools of repression such as the Rehabilitation Bill, which can be arbitrarily used to arrest and hold any individual who has the potential to become a political adversary.

Individuals are imprisoned without judicial orders, under the ruthless PTA. They have been held sometimes for years. many without any legal basis to do so. So far, the regime has arrested and detained about 4000 people. Most of them were released on bail, but there are no justifiable reasons for their arrests in the first place as they have not violated any law of the country. Under the current unaccountable system that is in place, they are unable to challenge the use the PTA to prevent legitimate opposition tocurrent discredited government’s arbitrary and corrupt rule. They have done so, for the last 44 years and will continue to do so, unlessthese repressive legislative mechanisms and institutions are repealed and abolished.

The universally accepted basis for anti-terror legislation istoprevent terrorism. Terrorism is said to be about using threat, force and/or violence targeting civilians or a community of people for the purpose of spreading fear in pursuing political, ideological or religious causes. An apt description of what the current regime and the regimes in the past have done to their critics and some sections of the population. Like repressive regimes the world over they have illustrated that when the legitimacy of a regime is questioned on their unlawful, corrupt and unaccountable behaviour, they resort to scapegoating and repressive actions to prop up their increasingly illegal regimes. Sadly, Sri Lanka is not an exception.

Those held under such legislation like the current protestors, undergo huge losses in terms of family and resources for obtaining assistance including legal advice and advocacy. The PTA legalises torture, and judicial recognition of admissions made under torture. Any protections said to be available do not prevent torture or violation of an individual’s right for due processes.

Contrary to the expectations of the rulers and the bureaucracy such incarcerations could make some prisoners more popular. If these cruel and unaccountable processes and conditions help create a Sri Lankan Nelson Mandela, people will come to know that the regime who tried to demean, degrade and denigrate are genuine individuals who are fighting on behalf of the people; that they are trying to protect the fundamental right to express their views on how they are governed and hold their rulers accountable for their actions.

How can the actions, that led to pardoning individuals like those who abducted school children in Trincomalee for ransom and murder, particularly, doing so after being charged in a court of law? If there is no evidence to charge them in a court of law, the only assumption one could make is that they are been held as ransom for legitimising and maintaining or extending duration of the regime and power of the ruling elite.

Use of such legislation has misguided and brutalised society. It has not helped to heal divisions, ensuring dignity of and respect for people, or restoring a humane society. Some of those recently “pardoned” prisoners had been behind bars longer than the sentences they had been convicted for. For example, two prisoners sentenced to five years by the courts had served 14 years, and they were given “presidential pardons”! Rather they should have been set free, at the end of their periods of conviction.

How can the regime justify its so-called pardoning, after holding them illegally for a period more than they had been convicted for? This is nothing but abuse of power and a violation of human rights. A government that can appoint committees and commissions whenever and whatever happens in the country, has so far done nothing to look into what happened or why this happened. Are there any more to be given the so-called presidential pardon?

For example, A graduate engineer Sivalingam Arooran was pursuing his postgraduate studies at University of Peradeniya, when he was kidnapped in 2008. After subjecting to beatings, he was indicted five years later. He was recently bestowed the award for best Tamil literary novel “Athura-salai” (Hospital) and has been held for 16 years under the PTA. How he has been detained should be an open and wide discussion in society, as no human being deserves such treatment. How can any regime justify such illegal and undemocratic behaviour? About 120 Tamils are still being held in detention under the PTA. After the 2019 serial bombings, more than 200 Muslims were detained. What has happened to them?

We cannot say that pardoning and releasing those who have been held under the ignominious PTA will help Reconciliation. Such measures have caused irreversible harm to society. Releasing those who are being held under the PTA without any evidence orbeing charged in a court of law, is essential. It should not be done in a piecemeal and unaccountable way like Presidential pardons or amnesties, but with apologies and compensation. If they were held for questioning the legitimacy of a system, that has bought the country to economic ruin as amply evident today. It is ruling elites who should be brought under the ambit of scrutiny for their actions in causing this social and economic collapse.

In reality, the president and government are presiding over a powder keg of economic deprivation and sense of injustice experienced by the masses. Those in the protest movement are well aware that many of their fellow protestors have been arrested and are in prison. Their sense of injustice rankles when they see government-affiliated hoodlums who instigated and took part in attacks against peaceful protestors continue to enjoy their freedom and engage in their corrupt practices. The double standards being practiced continues to erode the credibility of the government and its leadership and can act as a lightning rod to mobilise future protests.

It is high time that the government take urgent measures to release all those held under the PTA, against whom thereare no evidence found and no charges laid. Also, not to use the unaccountable power of the presidency and an increasing suite of repressive measures and legalisation to further their increasingly illegitimate, corrupt and incompetent rule. All those held in detention under the PTA without being charged at a court of law should be released unconditionally,at least now!


[1]This was drafted using the South African Apartheid legislation and the British anti- Irish laws at the time, and repealed under the Criminal Justice Commissions (Repeal) Law, No. 12 of 1977.

Sri Lanka: Chamber says budget is in right direction

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The Ceylon Chamber of Commerce observes that the National Budget for 2023 contains many laudable reform proposals which, if implemented in a timely manner, will complement the ongoing fiscal reforms outlined prior to the Budget. It is refreshing to see that the direction of the budget is toward reforms as compared to unsustainable relief measures seen in past budgets. However, the budget for 2023 falls short in outlining specific and concrete measures to curtail discretionary recurrent expenditure and provide greater accountability for government spending, which the Chamber has highlighted in its recent statement in response to the proposed tax hikes. The reduction in allocation towards discretionary expenditure could have also facilitated a greater allocation towards social protection programs.

The lack of implementation of budget proposals in successive national budgets has reduced the credibility of the national budget process and limited the reform process only to the speech. The implementation of the National Budget 2023 with set timelines and goals will provide credibility to the budget process as well as the success of reforms. We hope the proposed Presidential Task Force established to monitor the implementation of budget proposals will be proactive in sharing updates on a timely basis with the public providing accountability and transparency.

The Budget aims to address many of the issues faced by entrepreneurs and investors related to land, labour, productivity and tariffs. We welcome the plans to establish several new economic zones to attract foreign investment and suggest that infrastructure development and management of these zones are entrusted to the private sector under a PPP framework. Leasing out unutilized and unproductive land belonging to JEDB, SLSPC and LRC to grow exportable crops is also a positive move to release more land for economic activities that can boost forex inflows.

There is a significant focus on tax administration in line with the Chamber’s pre-budget proposals such as the appointment of a Tax Ombudsman and the introduction of a Charter covering the rights and obligations of taxpayers. We feel the output from the proposed Presidential Taxation Commission as recommended by the Chamber will assist in avoiding ad-hoc changes in taxation as seen in the last few years. Proposals on rationalizing the tariff structure including the phasing out of para tariffs will also be key in driving trade and investment.

The reiteration of the commitment made in the interim budget to introduce a new, updated and unified labour law balancing the interests of both employers and employees is noteworthy. We also welcome the proposals to establish an unemployment insurance scheme and a health insurance scheme for private sector employees through the Employees Trust Fund. Reintroduction of paying wards in government hospitals is also a step in the right direction.

The proposed growth of 64% in Government revenue will require economic activity to rebound and complement the improvement in tax administration and higher tax rates. As such, proposals with a view of enabling growth to reach a sustainable path and improving capital formation would have been desirable in the budget.

As the premier body representing the private sector, the Ceylon Chamber of Commerce stands ready to assist the government in driving a progressive reform agenda and engaging with the proposed Taskforce for the implementation of the budget. We hope that many of the reforms outlined in the budget will move forward the discussions with the IMF and creditors as well as drive economic growth and development trajectory of the country.

Colombo Chamber of Commerce

Sri Lanka: False promises at the cost of working people

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The following statement issued by the Feminist Collective for Economic Justice Statement on Sri Lanka’s Proposed National Budget for 2023

The Government’s budget presented on 14th November, 2022 is incredibly callous. It fails to acknowledge the suffering Sri Lankans are enduring due to the economic crisis. The budget speech refers to ‘rapid economic growth’ and ‘economic modernization’ as the way forward, which are unrealistic in the current scenario. While many Sri Lankans are experiencing hunger, it received no mention in the budget speech. At a time when proposals ought to be overtly people centered to mitigate the humanitarian impact of the crisis, the budget reflects a serious disconnect from the realities of ordinary people of this country.

We are appalled that while admitting to the failure of economic policies since the late 1970s, there is a direct laying of blame with the people. Demonstrating a complete lack of awareness of people’s lives in the past and present, the budget speech says, “We got lazy day by day. People got used to getting everything from the government,” casting hardworking people as lazy and discrediting their contribution to the economy. It is timely to recall that the shift to the liberalisation model pushed Sri Lankans into employment under harrowing working conditions to be exploited as cheap labour. The Sri Lankan economy has and continues to survive upon the shoulders of the workers, primarily women, in these sectors of unfair labour – garments, migrant labour and plantations.

It is an abject failure of the government to take responsibility for the crisis that the working poor in Sri Lanka find themselves in today. The crisis is a direct result of ill-conceived economic policies over the years by the ruling class, including by investing foreign debt into projects that did not benefit the working people.

Women’s Labour

The proposed budget fails to acknowledge the burden of the crisis on women and only refers to the elusive category of ‘young women entrepreneurs’. Thousands of women are leaving as migrant workers to send hard earned remittances to the country. Where are they in this budget?

An entrepreneurship model based on microfinance loans is already established as deeply problematic. For years, this country has failed to provide solutions to the widespread and overwhelming household debt cycles that the poor have been thrown into, as a result of these loans. Those affected by microfinance loans, some of whom have taken their own lives, have made the horrors of these loans well known through long standing protests. The budget also fails to recognize the increase of violence against women this year. Women are bearing the brunt of this crisis and this budget attempts to transfer the burden of economic recovery squarely on to women as well.

Unemployment

Given the contraction of the economy by almost 10% of GDP is expected this year, widespread unemployment is inevitable. The solution to the looming unemployment cannot be resolved by entrepreneurship and foreign employment. Instead, in order to stimulate the local economy, the Government should be committing to investing in key sectors such as agriculture, fisheries and local industries and strengthening public services. No such commitment is reflected in the budget.

Dependence on attracting foreign investments amidst a rather bleak global economic scenario is risky. Furthermore, plans for more economic zones signals expansion of precarious, cheap labour that particularly targets women. We are well aware of the disregard for labour laws by employers in export processing zones. The budget proposes more labour reform which raises alarm bells for workers’ rights.

Food security

Food security has not been given priority in the budget, even though recent reports suggest one third of the population are food insecure, over 70% of households have changed food intake habits and harvests have reduced by 33.7% (a 50 year low). We are not going to emerge from the serious food crisis without a robust plan to recover the food production and distribution system.

An allocation for nutritional supplements for children in risk of malnutrition is a welcome aspect in the budget. However, we note that the amount is inadequate to address the severe malnutrition reported among children. Given the very real danger of starvation deaths, the budget should have prioritised a food distribution system and a universal school meal programme.

We are concerned that the language of ‘underutilised’ and ‘unproductive’ land has led to displacement and eviction of the poor and workers in the past. We are well aware, the fertiliser ban in 2021 and increased costs have led the farmers to abandon cultivation. There is an urgent need to revitalise farming by supporting small farmers as a way to build sustainable futures for themselves, their families and for the food needs of the entire country. On the contrary, the budget enables formalising and justifying land acquisition by multinational corporations. This will further deteriorate rural economies by turning farmers, especially women into daily wage earners and no progress will be made in finding sustainable solutions to fulfill Sri Lanka’s food needs.

No relief has been provided to fisherfolk who are hard hit by sharp increases in kerosene prices in the budget, leaving the main source for protein Sri Lankans rely on in a precarious state. The plantation sector workers, who have been deprived by the state for decades, are yet again ignored in the budget.

Social Security

The budget proposes a ‘social security and open economy’ approach which is nonsensical. Looking at the social security items of the proposed budget, it is clear that there is no expansion of social security. Analysis of the exponential increase in poverty and an acknowledgement of the impact of inflation on the cost of living is absent. Even the inadequate relief can only be viewed with skepticism, given that registered beneficiaries are yet to receive the relief promised in the interim budget of September.

The budget refers to the meager amounts of relief provided to specific categories identified as vulnerable groups. Such an extremely limited focus on social security is illogical when even conservative predictions are that almost half of the population are in danger of falling into poverty. The failure to consider universal social protection in these dire circumstances is a stark gap.

Education and Health

The budget has no mention of the major disruptions to schooling due to Covid-19 and thereafter, the economic crisis. It does not address learning loss or propose a plan for education to help an entire generation that has been impacted. The proposal to introduce paid wards to government hospitals is deeply concerning. Instead of addressing the frightful conditions of hospitals, such as lack of essential equipment, infrastructure, and trained staff in rural districts, the proposed paid wards will allocate the remaining limited resources to the people who can financially afford them, further marginalising the poorest. We are well aware that these are initial steps towards eventual privatisation of the health system in Sri Lanka, thus, ridding the country of its proud accolade of being the only nation in South Asia with a functional public health system.

The allocations made to vital sectors in comparison to the allocation for Defence is telling of the Government’s priorities. The budget allocation for Defence is Rs. 539 billion while Health is allocated Rs 322 billion and Education Rs 232 billion.

Revenues

The Government is relying heavily on indirect taxes (VAT) for revenue generation. We can expect the cost of living to continue to remain high in the coming year, given no wage increases are in sight. It is the ordinary people who have to bear the burden of the proposed tax scheme and be expected to shoulder economic recovery. Demands for a wealth tax have gone unheard. We, as FCEJ, have called for redistributive justice via a wealth tax to increase government revenue without making the lives of ordinary citizens even harder.

Economic recovery?

The budget does not address the immediate humanitarian concerns of preventing a food crisis. Nor does it put forward an economic recovery programme that is people centered. Instead, disjointed policy prescriptions that hark back to the failed policies of an earlier era have been regurgitated. The budget, no doubt, will deepen the impact of the crisis for ordinary people. It is time for people to rise and demand for economic justice.

The Feminist Collective for Economic Justice is a collective of feminist economists, scholars, activists, university students and lawyers from across the country that came together in April 2022 to understand, analyse and give voice to policy recommendations based on lived realities of communities they work with in the current economic crisis in Sri Lanka. 

Sri Lanka: Consequences of Lawlessness

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The following article is based on a talk given by Rajan Hoole at the release of the book, Democracy Stillborn, at Trimmer Hall, Jaffna, on 11 November 2022. The meeting was chaired by Mahendran Thiruvarangan

“The rule of law is in decline and has provoked much discussion, even in developed countries, where it has been the norm for over a hundred years. The West, which continually championed democracy and the rule of law itself, is facing a major crisis as populist right-wing politics make inroads into the mainstream. In the US, the legitimacy of institutions, which are crucial for accountability and the rule of law, are questioned, and conspiracy theories of utter distrust of authority become the fare among the masses. This crisis can lead to many upheavals.  We may eventually overcome and stabilize with more meaningful and broadened democratic formations. But the path towards that may not be smooth and the trend shows the moral high ground is ill-defined.

But, as an island nation, we have gone through major crisis after crisis and in the process have ruined and bankrupted our country. Many youths are now looking for the root causes for this plight. Our modern history is one of cohabitation with dominant colonial powers. During the British period, a cause of major social transformation was the colonial state formation. The vested interest of the British Colonial project, brought in institutional mechanisms and nurtured a political class to manage them.  The question is how the ruling elite of Ceylon used those institutions. In the balance, was it to enhance the interest of the people, or in pursuit of their short-term interests? Did their hold on power unleash forces which, of their own nature, created a series of fault lines by a perversion of nation building? In addressing these, we need to charter a new path. Of course, this cannot be done in isolation but it is necessary to identify the internal developments, and form broad solidarities that would get us out of this impasse.” End of message.

About Social Democracy

Arunachalam, was the first civil servant who radically stood for social democracy. He wanted the British officers, responsible for excesses during the Sinhalese-Muslim riots of 1915, punished, according to the law. In 1920, the British authorities, supported by Sinhalese nationalists, undermined the man hitherto deemed indispensable, and put him out to grass. Provoked by the economic collapse of 201, the Aragalaya protesters realised the state of acute lawlessness and got rid of the President and Prime Minister. We have Mahinda Rajapaksa finally admitting his mistakes, all implicitly permitted under the Constitution, and pleaded for another chance. Mahinda Rajapaksa comes in a line of leaders charged with murder, not only of journalists but also of war crimes and robbery. There were, of course, two parties to the war. But the Government’s intransigence made it intractable.

The law was simple, but we have muddled and obscured it. Had we followed it, we could have avoided this present impasse. Article 29 of the Constitution of 1948 had the provision, not to ‘Make persons of any community, or religion, liable to disabilities or restrictions to which persons of other communities or religions are not made liable …’ Quite simply it means treat everyone equally. The Government, being in a minority after the 1947 elections, used threat and bribery to disqualify Plantation Tamils from citizenship. What we may forget today is the Sinhalese opposition, left and liberal, for example H. Sri Nissanka, were united and firm in standing by the Plantation Tamils.

Britain’s gift to the Sinhalese leaders of cancelling the 1941 elections, gave them an eight-year free ride of power without an electoral mandate from 1940, during which time they were allowed to colour the future constitution. It led to indifference and apathy among opponents of the Citizenship Bill. Neither the Government nor the Supreme Court offered a cogent reason for the disenfranchisement of estate workers. The Supreme Court held that since Article 29 had no reference to race, taking away the franchise of a community was not a violation of Article 29, it was administrative. The Government was nervous when the Plantation Tamils appealed to the Privy Council.

The Privy Council first retreated because Parliament by defining citizenship indirectly by ancestry, had evaded the principle of equality in 29 (2). It however passed the Bill misquoting the Soulbury report which actually made clear that over 80 percent of Plantation Tamils were in 1941 either born in Ceylon or had resided over 10 years.

Lanka is a beneficiary of common laws, the Roman-Dutch and English. Good common law whatever its origins is transposable. Lanka learnt nothing from them. Answering the challenge to the Citizenship Act in 1951, Chief Justice Edward Jayatileke rejected equality and ruled that whatever Parliament passes has to be obeyed. However, Chief Justice Abrahams replying to DSG Wijewardene asserting Parliament’s supremacy in 1937 said, that a new law must accord with those that preceded it ‘so that there be no repugnance but a concordancy in all the parts thereof.’

Bills against the Plantation Tamils

We had Roman-Dutch law and English common law, both of which with different emphases, stood for common right. Both sets of law rejected the Citizenship and Franchise Acts from several angles. Having accepted the Donoughmore Bill in 1929 which promised the vote to everyone, we had 19 wasted years, no industrialisation, but demolish the voting rights of the Plantation Tamils. Nihal Jayawickrema gave a potent reason for treating the term community in the citizenship acts with respect: ‘Parliament must not discriminate against a particular community already resident in the country.’

We had in 1937 Chief Justice Abrahams upholding Habeas Corpus, no detention without the order of a judge, and freed Bracegirdle from deportation. The reversal, to detain without warrant, was legislated in the 1947 Public Security Ordinance, the last Bill passed under colonial rule. These were signposts on our march to independence and beyond.

Emergency permitted murder in ‘good faith.’ Although a British precedent was claimed for the Bill, in Britain actions under emergency became judicable once the emergency was lifted. The real fear in Ceylon was strike action by the combined unions over the Citizenship Bill of 1948. However, strike action was deterred by the ‘smash up’ of the 1947 general strike.

Ceylon Constitution and the Citizenship Bill

Britain co-drafted a very fragile constitution to gain the Sinhalese leaders’ support during the Second World War. They cancelled State Council elections due in early 1941, jailed the Left and as pointed out, allowed Senanayake to rule eight years without a mandate prior to independence and determine the colour of the Judiciary. During this period. Left leaders N.M. Perera and Philip Gunawardena, then vocal advocates of the Indian Tamil equality, were cast into prison. Just before, the State Council in 1941 passed the Registration Bill, the precursor of the Citizenship Act of 1948. All Sinhalese, barring the imprisoned Left, voted for the Registration Bill. It required all qualifying as Ceylonese to have domicile of origin – produce father’s birth certificate – it was impossible for many in Ceylon, be it Sinhalese or Tamil, but Plantation Tamils were singled out for exclusion!

Carrot and stick on minorities to betray a fellow minority

The Muslims and Tamils were goaded to support the Citizenship Bill. Most of the Tamil elite, including prominent Youth Congress veterans, wanted the Tamils to support Senanayake. Out of 13 Ceylon Tamil MPs, a minuscule group of two opposed the Bill, S. Chelvanayakam and K.V. Nadarajah. Ponnambalam, however, voted against to avoid a split in the Congress, the remaining five MPs were absent on his instruction. The two Senators E. Naganathan and S. Nadesan, too, opposed the Bill, tooth and nail. For the Tamil minority it was suicide. Had it shown greater conviction the Muslims and the six government appointed members need not have supported the Citizenship Bill.

What we are left with is the Pollution of Administration of Justice by ignoring the principle of legality. The principle states that when we legislate to the hurt of a minority, it should be stated in clear unambiguous terms, acknowledging the political cost. This was never done in Lanka, although the cost was heavy. The new politics was exemplified in arm-twisting T.B. Jayah, champion of the underdog, to join the Government. But is that a way to build up a united nation?

In the 1950s any bill passed by a simple majority and signed by the Speaker was accepted as law, ignoring the two-thirds majority requirement for bills that violated the Constitution. Thus, Sinhala Only became law with 66 voting for and 29 against, short of a two-thirds majority. No one challenged it in court until Ranasinghe in the early 1960s, over something unconnected, the Bribery Tribunals Act. The Privy Council ruled that the Act required a two-thirds majority the Government did not show, and ruled in favour of Ranasinghe.

Giving judgment on 5th May 1964 for Ranasinghe’s case, nine days after de Kretser’s ruling Sinhala Only unconstitutional in the Colombo District Court as violating Article 29 (2), Lord Pearce reaffirmed the long ignored ‘fundamental conditions,’ or equality, stressing Article 29. By this time the SLFP-Left coalition and the UNP wanted the Privy Council and the Soulbury Constitution out. The mutual embarrassment had become heavy. This was accomplished in the new 1972 constitution, ridding our final toehold on the rule of law.

By the time Lord Pearce ruled for a correction in 1964, the Left and the Sinhalese right had rejected reform. The tested and potent Magna Carta right of detention only on the sufferance of a Judge was gone in 1947 and reaffirmed in the 1972 ‘progressive’ constitution. The erosion of law made communal violence, the worst manifestation of barbarity, to savage and kill an innocent person on the basis of race, acceptable. The State failed to punish and the Sinhalese were apologetic in a half-hearted way – Sinhalese they said protected Tamils.

An uneasy calm prevailed until 1977. The Muslims regarded themselves fairly safe while Jayewardene opened all stops of the 1972 Constitution. As for the criminal intent of our laws, Dr. Rajasundaram, like many Tamils, approved of the militancy only for a defensive purpose, against state-initiated attacks on civilians. The Sansoni Commission report gives several examples of such in 1977. Having committed himself to rehabilitate Tamil refugees, Rajasundaram had to face the violence of the State. What he did was far from terrorism.

He was detained under the PTA on the gossipy charge of trying to make peace between Maheswaran and Santhathiyar. When the tortured victim was produced in court, Judge Bandaranayake, instead of discharging him, announced an indefinite postponement of the hearing. Six days later he was killed in the infamous Welikade Prison massacre on 25th July 1983. While proof will never be found, it is quite certain that the massacre was organised by the Kelaniya mafia, still a major force in government, the seed planted by the PSO. This was about the time the Government viciously accused the JVP of responsibility for July 1983 and forced it underground, just when it democratically contested the Government’s foul play over the 1982 referendum. The damage was far worse than recent scams that provoked protests.

The Tamils professing to fight for liberation were also infected with the vulgar legalism inherited from the State – its constant demand for proof over complaints about missing persons. In Jaffna, the university students spontaneously went on strike in 1986 charging the LTTE with the disappearance of student Vijitharan. The LTTE leader Kittu came to discuss matters in the University of Jaffna common room. When confronted with the allegation, he responded, “Where is the proof?”

The Government tried tactical evasion by introducing a Bureau of Rehabilitation law that was disallowed by the Supreme Court on 20th October 2022. The state of our laws flows directly from the Citizenship Act. No Government has tried to put us right. All worked in the same culture to our detriment. The Language issue is but a by-product of the Citizenship Act.

Sri Lanka:  Correct The Price Distortion for A Sustainable Development – Part 3

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This is the third and final part of this series by the author, Click here and here to read previous parts -Editors

Excess Staff in the Public Service 

Compared to developed and developing countries, Sri Lanka has extensive public service, with about 1.5 million employees for a 22million population, which means one public servant for every 14 people and 19% of the country’s workforce. According to the Central Bank Statistical bulletin, 84.6% of the government tax revenue (Rs.1.1 trillion) of the year 20221 has been spent on public servants’ salaries and pensions, leaving little room for other recurrent expenditures and capital investments. This figure doesn’t reflect the salary bill of the semi-government institutions. Currently, there are 675,000 pensioners, and this number keeps increasing every year, and at a point, this will exceed the number of serving public servants. Most public sector workers have no sufficient work but enjoy the total salary and all other fringe benefits. If we estimate 40% is redundant, 40% of the Rs. 1.1 trillion (Rs.0.44 trillion) is a wasteful expenditure annually, which amounts to another massive subsidy for a privileged group who otherwise could have been unemployed.  If the government employs someone at the age of 18 years, serves for 42 years and lives for 81 years, the government will have to maintain him for 63 years. After his death, if the dependant lives for another 21 years, altogether government is committing to 84 years to obtain his services for 42 years. The above simple example is sufficient to understand the gravity of the problem created by the oversized public service.

 In 1990, recruitment to the public sector was frozen, and a voluntary retirement scheme (VRS) was introduced to reduce the size of the public service. Most of the excess cadre was unskilled, who couldn’t be employed anywhere else for that remuneration. Therefore, many did not agree to early retirement, which could have resulted in a low pension for the lifetime and dependents after their deaths. However, the opportunity availed under VRS was capitalised by essential categories such as nurses, engineers, accountants, science and mathematics teachers, and technicians of various fields, creating a vacuum of those skills in the public sector. The government was compelled to fill those vacancies again with qualified but inexperienced people while paying the pension for pre-mature retirees. In 1995, 2005, and 2015, the size of the government service jumped upward due to political reasons.

In 2022, in place of VRS, the government adopted a new approach. According to the circular issued by the Ministry of Finance, public sector employees can avail of no-pay leave to work abroad for a maximum of five years without affecting their seniority and annual increments. This has created great enthusiasm among the employees. However, unwanted cadres (unskilled) may face difficulties securing foreign jobs. Professionals in various fields have a good demand, and heads of departments may find it challenging to prevent them from obtaining five years’ leave. Like in 1990, a vacuum may create again in the essential cadres of public service, compelling the government to do new recruitments. As employees are not retiring under this scheme, vacant positions can’t be filled without creating additional cadres. If that happens, while the new cadre is in the service, employees on leave also shall accommodate after five years, doubling the burden. 

Instead of attempting to reduce the size of the government service in general, a scheme targeted towards unwanted cadres may produce better results. For instance, heads of institutions shall identify such people by name, and provisions of the circular shall apply only to them. Until they find foreign or private sector jobs during the five-year leave period, allow them to stay home with half the salary.  Half of the salary, overtime payments, electricity, telephone bills, and office space will be saved in that case. As a by-product, traffic congestion will be reduced, and the efficiency of the remaining workers will be improved.  Another solution is establishing a combined service for all SOEs, like in the public service. Then employees may be transferred to needy institutions from excess institutions without new recruitments. That would prevent unwarranted competition among institutions for salary and promotion schemes. Also, Politicians will not be able to overload the staff with unwanted cadres. Moreover, excess staff from SOEs may be transferred to public service vacancies instead of new recruitments. Further, in establishing new institutions and expanding the operation of existing institutions, excess staff may be transferred to those places without new recruitments.

Fraudulent Practices

According to various media reports, from time to time, governments write off unpaid taxes and duties from companies. In addition to the above-discussed futile expenditure, many public funds are being drained from public coffers due to the above tax alienation.  However, I don’t have data to highlight the seriousness of the issue.  But the importance of the problem can’t be underestimated. Even with the tax reduction in December 2019, the revenue loss was about Rs500 billion per annum, which continued until the tax revision in 2022. Unpaid accumulated indirect taxes, such as customs duties, excise duties, VAT, etc., are also being written off from time to time. Consumers pay indirect taxes, and companies are only tax collectors. Therefore, companies have no right to keep those; they should pay those to the government or return them to the consumers who paid. But governments have allowed companies to keep these silently, which amounts to fraud. Authorities are allowing tax evasion and accumulating unpaid taxes, compelling the government to costly borrowings to fill temporary gaps. Tax alienation, as well as allowing tax evasion, amounts to a significant subsidy in disguise to a few privileged/corrupt individuals and companies.

Poverty alleviation

The Samurdhi program was launched in 1995 and implemented over the last 28 years as the national poverty alleviation strategy. Conceptually, it has several components for sustainable poverty alleviation. (Income transfer, credit for self-employment, infrastructure rehabilitation, social welfare, awareness building, etc.). As of 2020, 35% of the households (1.8 million) were receiving Samurdi benefits, and another 800,000 were on the waiting list. Including them, it will come to 51% of the households in the country.  While the number of families below the official poverty line has come down to 4%, Sumurdhi relief recipients remained at a very high level of 35% of the total families. It has created a permanent dependency, and no one wants to get out of the program. There are many criticisms about the targeting of the benefits. While non-eligible families are receiving benefits, many eligible families have denied them. Also, there is no regular exit and entry mechanism for the benefits. The government spent 52.47 billion on samadhi relief payments in 2020, which accounts for 0.35 % of the GDP.

Under the Samurdhi banking system, assistance is extended for self-employment/micro-enterprises. But rarely someone comes out of poverty. While a large majority who can work receive the relief grant, the vulnerable without breadwinners in the family are receiving insufficient amounts to meet their basic needs. Self-employment is a mythical solution for most unskilled people. It will help only a few people with entrepreneurial skills and attitudes. Others must be employed for monthly or weekly wages to escape poverty.  

Most Samutdhi recipients can be easily diverted to an Employment Guarantee Program (public work /cash for works program) to maintain public properties, which are hitherto neglected due to a lack of funds. (Irrigation schemes, provincial and local authority roads, landscaping, schools, hospitals, etc., and various local government functions). The issue of targeting or selecting beneficiaries does not arise as only the unemployed, and the absolute poor will participate in such a program. Under such a scheme, the number seeking the Samurdhi relief grant will decrease drastically, and the public assets will be maintained.  Suppose a reasonable percentage of the above-discussed fruitless expenditure is saved through appropriate strategies. In that case, sufficient funds will be available to implement a National Employment Guarantee Scheme (cash for work) and adequate assistants to vulnerable families to alleviate absolute poverty.

 Conclusions

The above is a brief account of significant subsidies and wasteful expenditures, resulting in price distortion in the market and mal allocation of scarce resources. There may be many more such futile public expenditures contributing to the problem.  As people do not pay the actual economic costs for many things, they have gotten used to an artificial style of living, which is unaffordable to the overall economy. If we can correct a significant percentage of these distortions and unproductive spending, adequate resources can be generated to invest in a rapid growth phase and support the poor without many public debts. The government must allow SOEs to sell their products at a cost-reflective price with a reasonable profit margin, enabling them to sustain and invest further. The poor, who cannot afford market prices, should be supported sufficiently to satisfy their basic needs. Overall savings from economic reforms would be adequate for that purpose. However, cash grants will go to the wrong hands, like in the Samurdhi. Therefore, launching an employment guarantee scheme is more advisable and manageable. Then the cash grant should cover only vulnerable families. However, over the decades’ distortion of market prices and subsidies have been used as bait to lure voters, and now it is a structural issue, embracing the whole economy and the gamut of life, creating a cancerous effect. This needs far-reaching reforms, but such an attempt may backfire on the government. It shall be done with a cautious approach, step by step, with a holistic approach.

Concluded

Sri Lanka:  Correct The Price Distortion for A Sustainable Development – Part 2

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This is the second part of this series by the author, Click here to read the first part -Editors

Water Supply

Providing safe drinking water and improved sanitation services have been the government’s priority for many decades. In 1975 National Water Supply and Drainage Board (NWSDB) was established, and the responsibility was transferred to it. Before that, it was a local government function, and cost recovery was not considered an important issue. The local authorities provided Dug wells in rural areas, and the pipe-boned water supply was limited to urban areas. Their priority was to roadside public stand posts for free water, and the domestic connections were charged a nominal amount. Hence water was considered a free public good without a price.  Irrigation for agriculture is still a free public good with no price.

With the introduction of the Community Water Supply Projects, pipe-borne water supply was expanded to many rural areas, and today 58% of households have access to pipe-borne water. Gradually NWSDB expanded its operation to rural areas with high population density. The capital costs of projects are now shared 50:50 between the treasury and NWSDB. Still, domestic water is considered a government responsibility and only a part of the cost is recovered from the poor. Yet 25.8% of the total production falls under the non-revenue water category, which is put into the water supply system but not billed. This is mainly due to poor maintenance, leakages, and management issues such as water thefts, calculation errors, etc.

The average unit cost of producing potable water has increased from Rs.48.87 in 2020 to Rs. 60.63 in 2021 (Economynext 05.06.2022). According to the Water Tariff Revised in 2022, water is billed under 12 different categories for different purposes at different rates. Samurdhi beneficiaries are charged a nominal tariff of Rs.5.00 per unit for the first five units (5000Lt.), Rs. 10.00 per unit for the second 5 units, and Rs. 15.00 per unit for the following five units. Accordingly, 15,000 Lt. per month is highly subsidised for them, and the subsidy element (tariff below the cost of production) exists for up to 25 units (from 16to20 units Rs. 40 and 21 to 25 units Rs.58 per unit). In contrast, Domestic(other) Category consumers will have to pay four times higher than the Samurdhi recipients for the first five units (Rs. 20.00 per unit), and the subsidy element exists only for up to 15 units. Beyond that, an exceptionally high punitive tariff, which increases with the usage from Rs.86.00 up to Rs. 238 .00 per unit, is being changed.

There are four other categories where the tariff is much below the cost of production, namely, (a) Non-Samurdhi Tenement Gardens, (b)Public Stand Posts, (c)Schools, religious and charitable institutions, and (d) Local Authorities.  It means that out of 12 categories, 5 have a substantial subsidy. The tariff for the other seven categories (production-oriented) is much higher than the cost of production. In addition to the usage charge, a monthly service charge, increasing parallel to the consumption, is also levied from those categories. Therefore, the tariffs applicable to production-oriented and non-samurdhi household categories are punitive and discouraging. For instance, tariffs for the port and shipping, SOEs, BOI companies, and industries are Rs670, Rs.116, Rs.85, and Rs 82 per unit, respectively.

However, the NWSDB has demonstrated that it can recover a considerable portion of the subsidy cost through punitive tariffs from production-oriented and high-user domestic categories. According to the 2019 Annual Report, the losses for 2018 and 2019 were Rs. 1,176 and Rs. 580 million, respectively. According to the Economynext-05.06.2022, the NWSDB had posted a profit of 507 million rupees in 2020 but again lost 3,087 million in 2021, with salaries rising 19 per cent. If not for the salary increase, the NWSDB could have remained at least at the break-even point in 2021. With the tariff revision in 2022, it may reach the break-even point. Unlike other SOEs, NWSDB delivers essential public goods without a massive loss. This is mainly due to the capital costs subsidy granted by the treasury and the tariff structure to charge more from whom it is affordable to pay. But NWSDB is also overstaffed, and remunerations are relatively high.

Due to the scattered nature of housing and settlements, the capital cost of water distribution in rural settlements is very high. Many rural water supply schemes are found in hilly terrain in the wet zone, where water sources are abundantly available in good equality. Still, due to the hilly terrain, the capital cost of the distribution network is high. But in contrast, drinking water is a critical issue in the dry zone, covering about 70% of the country’s land area. This is the area chronic kidney disease is prevalent and suspected that the cause is poor-quality drinking water. Unlike in the wet zone, water sources are not found easily, and the quality is also unacceptable. Dry zone communities face many inconveniences and opportunity costs, such as risky long-distance travel and consuming many hours of the day to collect a pot of drinking water. If they purchase potable water from the market, they will have to pay more than Rs.50.00 a litter. Under this scenario, selling one unit (1000 litres) of water for Rs. 5.00 or Rs 20.00 in the wet zone and urban areas can’t be justified on humanitarian grounds. Therefore, financing potable water for the dry zone is justifiable, even at a higher cost, considering social justice and equal access to safe water. Further, the NWSDB must take serious action to reduce the 25.8% non-revenue water supply to a technically acceptable minimum level to increase its revenue. Currently, six tariff categories are below the cost of production, which seems highly irrational.

Instead of ad-hoc political decisions to revise the tariff for electricity and water from time to time, it is more logical to commission an in-depth study to restructure the tariffs to make water and electricity prices affordable to domestic users, discourage excessive unproductive use of subsidised products and remove punitive tariffs from the production-oriented categories.

Aviation

The national carrier rebranded as Sri Lankan in 1998 following its partial acquisition by Emirates. In 2008, the government re-acquired all the shares and management rights from Emirates. Then the accumulated profit of Sri Lankan was Rs. 9.288 billion (Wikipedia). In any case, Sri Lankan was not a burden to the treasury; instead, a share of the profit was paid to the treasury from time to time. It was revealed at the COPE meeting in July 2022 that the loss of the Sri Lankan as of 31 March 2021 from the day it was taken over from the Emirates was 372 billion, and the daily loss is about Rs 84 million.  Mihinlanka, which commenced its business in 2007, also amalgamated later with Sri Lankan with an accumulated loss of Rs 13 billion.  In 2020 Sri Lankan’s debt obligation exceeded Rs 372 billion. Also, its net worth was negative Rs.262 billion. Most of the above debts are to the Bank of Ceylon, the People’s Bank, and the CPC. Further, it had sovereign guaranteed internationally issued bonds worth UDS$ 175 million. If the government declares insolvent or shuts down the airline, the two banks and the CPC must write off all debts. This will severely affect the two banks’ liquidity, sustainability, and profit. The CPC is also heavily indebted to the above two banks. So eventually, that burden also will pass to two banks. The government owns two banks, and finally, all these responsibilities fall on the shoulders of the taxpayers. Moreover, the government could face multiple jurisdictions worldwide regarding the non-settlement of foreign liabilities.

Subsidising essential services is understandable. But subsidising foreign travel by affluent Sri Lankan citizens and foreigners has no meaning for the taxpayers. More than 99% of taxpayers do not benefit from this colossal subsidy. Many airlines provide services from and to Colombo to many destinations, even at a lower price than Sri Lankan. So, Sri Lankan does not fill any service gap too. If there is any justification for continuing the operation of Sri Lankan with subsidies, it would be to support tourism and strengthen linkages with foreign economies. In any case, earning from tourism cannot compensate for such a colossal loss/subsidy. It may be possible to justify the operation of a national carrier for national pride. If so, the airline must be restructured and scale down its operation to match that intention without a loss, at least on a cost-recovery basis.

 However, the establishment of Mihinlanka Airlines, re-acquiring Sri Lankan from the Emirates, and pumping public funds to Sri Lankan to expand its operation without a well-thought business plan are economic crimes for which the decision makers are responsible.

 Lose-Making SOEs

Subsidising the losses of state-owned enterprises (SOEs) and selling their products below the cost of production also amounts to direct subsidies to their employees and indirect subsidies to consumers while distorting the market prices. Sri Lanka has 527 SOEs. Of which 52 have been classified as “Strategically Important “enterprises by the general treasury. But some strategic enterprises, which are involved in purely commercial activities, such as CEB, CPC, CWE, CTB, Sri Lankan, Hotel Development Lanka Ltd, etc., have been running as loss-making enterprises for many years.

 Out of the non-strategic enterprises, 287 SOEs are also commercial ventures that can be run more efficiently by the private sector. According to the information available from the Department of Public Enterprise, out of 527 entities, only 57 are self-funding. In 2019, the total losses sustained by 52 SOEs amounted to Rs 151 billion. According to the above information, budgetary support amounting to Rs. 49 billion has been provided to loss-making institutions, of which Rs. 20 billion was for recurrent expenditure. Most SOEs’ pricing is not cost-reflective and sells their goods and services below the cost of production(subsidising). Perhaps, if the price becomes cost reflective, their products may be unaffordable to the people because the cost of production is very high due to inefficient management, wastage, and corruption.

 The private sector may produce those at a lesser cost resulting in lower selling prices and tax revenue for the government. According to the Advocata research team, the total accumulated loss of strategic SOEs from2006 from to 2020 amounted to Rs 1.2 trillion. As per the Public Finance Data, the top five losers, namely, CPC (Rs.628 bl.), Sri Lankan (Rs.248 bl.), CEB(Rs.47 bl.), Airport and Aviation Services (Rs.6 bl.), and SLTB (Rs.1 bl.) have recorded a total loss of 930 billion for the first four months of 2022. The government revenue for the same period is only Rs 543.6 billion. SLTB has a loss of Rs.1 billion in providing transport facilities for many middle- and low-income commuters. But Sri Lankan has a loss of 248bl., which provides aviation facilities to a minimal number of well-to-do Sri Lankans and foreigners.

When SOEs in short of funds or on the verge of bankruptcy, they do not follow the due process to borrow, liquidate or re-structure the business. They borrow inputs from other SOEs or borrow money from state-owned commercial banks. But it is done not on the strength of their balance sheets but at the request of the treasury, sometimes on verbal instructions, even without a treasury guarantee.  They continued to do so for many years. For instance, Sri Lankan, GCR, and CEB borrow their inputs from the CPC and keep accumulating debts.  The CPC borrows from the Peoples Bank and Bank of Ceylon to fill that gap. If CPC can’t borrow further due to cumulative outstanding debts, the treasury issues a long-term financial instrument to the CPC and passes the liability to the next generation. The CPC trade it and settle previous loans, and continues borrowing. This is a big cross-subsidy between SOEs. This amounts to a pyramid operation by the government. This can’t continue forever, and all resources will get exhausted and may collapse all institutions at once. It is advisable to allow major institutions to operate independently. Then who can sustain will sustain on its own strength. Others may get a boost to adopt sound management practices or restructure/privatise/liquidate.

But trade unions and politicians argue that those enterprises should come under state ownership to ensure the national interest and to prevent exploitation. As discussed above, the exploitation of consumers and taxpayers is very high under state ownership. However, policymakers may have a genuine interest also to keep essential services like energy, transport, health, education, etc., under government control to ensure the national interest/national security, respond to disasters, and assist the poor. But there are many low-cost and efficient solutions to achieve such objectives.  For instance, petroleum infrastructure and regulatory power may be kept with the CPC while allowing the private sector to import and sell fuel competitively. Railway Department can own the railway infrastructure and regulatory authority, while the private sector is running trains. Such arrangements ensure the government’s control over the service while the advantage of quality and price competitiveness passes to the consumers.

The impact of subsidising the loss of SOEs is not trickledown down to the large segment of the population, the consumers, and the taxpayers. But some groups with a vested interest have developed private sector phobia and hold the taxpayers and consumers to ransom for their economic, political, and power gain. Employees want to keep those under state ownership to secure higher income and fringe benefits with little or no work. Trade union leaders want to maintain SOEs at any cost to demonstrate/excise the power and authority and strengthen linkages with the upper echelons of political parties. Politicians wish to use the employees and other resources free for election campaigns and give jobs to their supporters. Further, they can support campaign funders by appointing them to management boards and promoting business linkages such as contracting, outsourcing, granting business permits, etc. Also, sometimes they can financially benefit by being involved in corrupt practices in procurement, service delivery, and recruitment.

But the public is happy if the quality of goods and services is satisfactory and reliable at a reasonable price, regardless of the ownership of the business. For instance, if a reasonably priced, reliable power supply is available, the customers don’t want to verify whether it is by the CEB or a private supplier. The customers don’t consider whether the fuel is from the CPC or Indian Oil Company if it is reliable, convenient and reasonably priced. But without knowing the facts, the taxpayers and the consumers also fight against the privatisation of loss-making entities.    

In the case of infrastructure or capital expenditure, passing the liability to the next generation is justifiable because they also become beneficiaries of those investments. But recurrent /consumption expenditure incurred by SOEs like SLTB, Sri Lankan, and Railways is only for the benefit and convenience of the present generation. Accumulating losses, defaulting and long-term borrowings for such expenses means passing the liability of luxurious consumption of the present generation (politicians, employees, trade unions) to the next generation, for which decision-makers have no rights. It is an unforgivable, very dangerous economic crime. If the private sector runs those commercial activities, the government can collect more revenue as taxes instead of subsidising the losses. Also, the government will have more time and resources to do its primary function, governing the country, which has been neglected hitherto by all governments.

To Be Continued

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

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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

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