Missing the bus to prosperity: Sri

Lanka should now go for

comprehensive reforms instead of
savouring Small Miracles
 Monday, 5 June 2017
Samaraweeras commitment to policy reforms

Finance Minister Mangala Samaraweera, lamenting over the

countrys missed opportunities in the past due to not making
correct decisions at the correct time, has reiterated his
commitment to introducing major reforms to facilitate the
countrys move to join the rich country club within a few decades.

Samaraweera has done so when he had commenced wearing his

other hat, Media, at the Media Ministry last week (available at:
http://www.ft.lk/article/619737/Media-Minister-requests-everyone-
s-support-without-division ).
Relying on private educational institutions

He is reported to have said that the Government will establish, as

a part of its reform program, an education authority under which
private universities would be licensed and regulated. This will
create opportunities for students to acquire quality higher
education while remaining on Sri Lankan soil.

To accommodate deserving students from low-income families in

private university education, he had opined that 30-40% of the
places at those universities should be allocated to them through a
scholarship program. The Government need not sponsor such
scholarships, since every private university, conscious of the need
for maintaining high-quality standards, would offer such
scholarships to top level students on their own to create a
competitive learning environment for students to excel in their
studies.

Such moves are known as cross-fertilisation strategies under

which students are bred within the university system to produce a
more talented output by promoting intellectual competition.

Wishes should be converted into concrete policies

Samaraweeras commitment to tough economic reforms is

praiseworthy, as this writer observed in his article in this series in
the previous week (available at:
http://www.ft.lk/article/618280/New-Finance-Minister-has-a-
Herculean-task-ahead--he-will-win-only-if-he-moves-with-
foresight). But this is not the first time politicians have made such
public pronouncements. If they are to be successful, they should
be converted into concrete economic strategies and plans that
should be pursued religiously until their goals are realised.
Pronouncements as wish lists

In the past, such public announcements were made but they had
just remained as wish lists without concrete action. For instance,
Prime Minister Ranil Wickremesinghe too made two such bold
pronouncements in Parliament when he delivered the
Governments economic policy statement in November 2015 and
October 2016.

These statements were made by the Prime Minister weeks before

the Governments budget was to be presented in Parliament in
each year. Hence, it was expected that the Budget would be
aligned to the pronounced policy package by allocating public
funds to realise them, while incentivising the private sector to
carry them forward.

However, instead of laying the foundation for taking the policy

package forward, the budgets concerned took the country mostly
in the opposite direction.
Failed tax reform

One glaring backward movement was visible with respect to

changing the existing tax structure of the country. The Prime
Minister wanted to change the structure from the existing high
weight for indirect taxes at 80% and direct taxes at 20% to a
more sustainable structure with a higher share of 40% from direct
taxes and a reduced share of 60% from indirect taxes by 2020.

This is because indirect taxes, though they generate easy revenue

for the Government, punish the poor more severely than they do
the rich. This is a regressive tax structure and the Prime Minister
had quite correctly opined that it should be reversed over a five-
year period.

However, the budget for 2016, presented immediately after the

statement had been made, had envisaged higher revenue at 87%
through indirect taxes and 13% through direct taxes. The actual
outcome had been a little better with a lesser share of 83% being
generated through indirect taxes, but it was totally opposite to
the Governments plan.

The Budget 2017 has still envisaged generating as high as 82%

through indirect taxes. Obviously, the message in the economic
policy statement had not been communicated to the Ministry of
Finance or Ministry officials had been reluctant to change their
original budget strategies.
A Government living in dissavings

The Prime Minister had also opined in the economic policy

statement that the country was living beyond its means, implying
that the country does not make enough savings to finance the
required investments. However, this charge was valid only for the
Government sector since the private sector has been saving
around 20% of its income.

Contrary to this, the Government has always been consuming

more than what it earns generating what is known in economics
as dissavings in the budget. Hence, the correct strategy has
been to keep a check on the expansion of the government sector
so that it did not have to spend more money on consumption.
New capital projects without proper screening

However, the budget for 2016, presented in Parliament in

November 2015, had proposed a number of new capital
expenditure projects which entailed continuous high recurrent
expenditure by the Government.
Another state sector university when existing ones
needed more funding

One such proposal was to establish a new university in Malabe

called Mahapola University in honour of the founder of the
Mahapola Program, the late Lalith Athulathmudali.

This displayed that the Government, at least the Ministry of

Finance, did not have a clear policy on higher education. When
the Government could not fund even the existing university
system due to lack of resources, establishing another state
university would have been a severe burden on the budget.

It was also unfair by the existing universities which had been

starved of funding for both recurrent expenditure and
development expenditure programs. The establishment of new
universities by the state should not be done in an ad hoc manner
but in accordance with a national policy of promoting higher
education in the country.

The current challenge of the countrys higher education system is

not the establishment of new universities, but the consolidation of
the existing universities and upgrading their teaching and
research qualities.

If the Government is desirous of honouring the late Lalith

Athulathmudali, the best course of action would have been to
create a Chair in his name in a law faculty of an existing
university or establishing a new School of Law named after him.
An import-export bank

The other was the proposal to establish an import-export bank as

a public-private partnership, obviously on the presumption that
the existing banking sector did not cater to the external trade
sector.

This was not correct since the existing banking sector had been
meeting the requirements of the external trade sector by
providing working capital in the form of packing credit and post-
shipment credit and investment capital trough medium- and long-
term credit. However, the establishment of a specialised export-
import bank would have served its purpose when Sri Lanka would
have moved from short-term financing of exports to long-term
financing. That would be some time in the future and not at the
present state of the countrys economic development.
Past episodes of failure

Sri Lanka had experimented with such new banks by establishing

an infrastructure bank called the Lanka Putra Bank or LPB and a
bank to cater to small and medium enterprises called the National
Enterprise Bank or NEB. Both banks became insolvent due to
heavy amounts of non-performing loans, granted at the instance
of politicians, and eventually had to be rescued by the Treasury by
using taxpayers money. In this background, the proposal to
establish another bank with state funds meant that the
Government was putting good money after the bad with no clear
cut policy on the countrys banking sector.
Controlling private banks through state-managed funds

The previous administration had already acquired controlling

interests in major private banks by using state or Central Bank
managed funds. It had enabled the Minister of Finance to appoint
his own nominees as directors and Chairpersons of these banks.

When the new Yahapalana Government came to power and

upheld the policy of allowing the private sector to take the lead,
the Minister of Finance was expected to make an announcement
that the Government would allow private banks be run by private
people. Instead, the Ministry of Finance seized on the opportunity
and continued to appoint its own nominees to those banks giving
a wrong as well as a confused signal to the private sector.

At a time when the Government was seeking private sector

involvement in economic development, such a bad signal dented
the countrys incentive system.

Hence, if an Export-Import Bank would have been needed, the

correct policy action would have been to encourage the private
sector to set up such a bank.
From wish list to concrete action

Thus, Samaraweera should now ensure that what he has

announced is not a mere wish list but something that would be
pursued by the Government with dedication. What he should do is
to come up with a comprehensive plan for economic reforms and
economic strategies for the Government to follow.

So far, no such plan has been devised by the Government to take

the economy forward. However, there are only three more
years left for the Government and, therefore, this has to be done
pretty fast.
 Preparation of a five-year plan before the
General Elections

This writer is aware that just before the last Parliamentary

elections in August 2015 such a policy package was designed by a
team of private economists under the direction of Dr. Harsha de
Silva, the Deputy Minister of Economic Affairs at that time.

He even made a pre-announcement of this package in June 2015

when he addressed the CIMA Business Leaders Summit in
Colombo (available at: http://www.dailymirror.lk/76735/-90 ).

Harsha was quoted in the report under reference as saying: A

renowned economist in the likes of former Central Bank Deputy
Governor Dr. W.A. Wijewardena, former Central Bank Assistant
Governor Dr. Anila Dias Bandaranaike, Verite Research Executive
Director and Head of Research Dr. Nishan De Mel, JB Securities
CEO Murtaza Jafferjee and Sampath Bank Plc Director Deshal De
Mel are currently involved in designing the five-year policy.

He had also revealed that the proposed five-year policy would be

released as a white paper to generate public consultations, then,
it would be tabled in Parliament and professional views would be
sought to buy in all stakeholders to implement it. He had said
boldly that the objective of the Government through this strategy
was to create the most competitive economy in this part of the
world.

The steps announced by Harsha have indeed been in accord with

how such an important plan should be introduced in a democracy.
The plan disappearing off the radar

This plan was submitted to Prime Minister Ranil Wickremesinghe

before the elections. He is reported to have readily agreed to it.
But after the election, with Harsha moving to the Foreign Ministry,
the plan disappeared from the radar and it just became a thing of
the past. Harsha was destined to live with an unfulfilled wish list.
An economic forum leading nowhere

The Government tried to come up with a new plan in January

2016 by hosting the Sri Lanka Economic Forum with the support
of the Harvard Universitys Center for International Development.
The forum was attended by bigwigs in the field like Nobel
Laureate Joseph Stiglitz, global investor George Soros and Harvard
economist Ricardo Hausmann.

The critics immediately pointed out that the participation of local

economists in this venture was minimal and it was purely a
Harvard affair. For instance, the Sri Lanka Economic Association,
the main body of Sri Lankas economists, was nowhere to be
seen. The forum was held for two days but no development plan
came out of its deliberations. Thus, it was another discuss-and-
forget event that took place in Colombo.
The need for a new plan today

Now that Harsha has returned to the Ministry of Economic Affairs,

it is time to restart working on such a plan since the original plan
would have become obsolete after two years. But of course, now
Harshas Ministry cannot do it alone since there is the need for
involving the Finance Ministry as well. Samaraweera has to take
the leadership in designing this plan fast.

The trio which should work toward this end are Mangala
Samaraweera, Minister of Finance, Eran Wickramaratne, State
Minister or Finance and Harsha de Silva, Deputy Minister of
Economic Affairs.
Harshas wish to go after small miracles

Harsha is trying to keep himself occupied by concentrating only

on the Colombo Port City Financial Project (available at:
http://nation.lk/online/2017/06/03/financial-city-my-biggest-
challenge-dr-harsha-de-silva.html ).

But what the country expects from the Deputy Minister of

Economic Affairs is not just continuing to feast on a small miracle,
but come up with a comprehensive policy plan to drive the
economy toward eventual prosperity. Time is running out for
Samaraweera, Eran and Harsha as well as for the nation.
Engaging private policy tanks a must

Who should assist Samaraweera in designing such a policy

package in a hurry? There are two potential candidates. One is
the Advocata Institute, the newest policy think tank functioning
under the direction of Prof. Razeen Sally, presently Chairman of
Institute of Policy Studies, known as IPS. He is in a position to
marshal the resources of both IPS and Advocata Institute for this
purpose.

The other candidate is the Verite Research which had helped

Harsha to come up with his first five-year economic plan earlier.

Sri Lankas state sector suffers from a talent deficiency for coming
up with a comprehensive reform program at the speed at which
the Government should work now.
Hence, Samaraweera should consider engaging one of the above
institutes or all of them to help him attain his goal. However,
whoever who is to prepare the plan has to work in close
collaboration with the Central Bank.
Desist from feasting on small miracles

Otherwise, Sri Lanka would continue to take pleasure in enjoying

small miracles as it had been doing in the past. It is now time to
desist from feasting on small miracles and go for the overall big
thing that would deliver prosperity to the nation.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank

of Sri Lanka, can be reached at waw1949@gmail.com)
Posted by Thavam