ECONOMYNEXT – Sri Lanka’s main opposition party the Samagi Jana Balawegaya (SJB) has proposed anti-corruption measures, debt management, continued engagement with the International Monetary Fund (IMF) on terms favourable to Sri Lanka, revenue consolidation and other measures to improve the island nation’s dire economic situation.
A policy document unveiled at an economic summit organised by the party on Tuesday February 14 listed a number of measures the party proposes to implement if it comes to power in a future election.
Other measures include import management, floating the rupee until equilibrium, interest rate adjustment and monetary policy reforms. Expenditure control through rationalised public expenditure and state-owned enterprise (SOE) reform was also proposed.
Incentivising growth through trade, industry, agriculture and services promotion, public sector management and digitalisation, energy and utilities reform and factor market reform is envisioned in the document, along with proposals to ensure equity via stronger social safety nets.
Titled The BluePrint: Out of the Debt Trap & Towards Sustainable Inclusive Development, the document was authored by economists and SJB parliamentarians Harsha de Silva and Kabir Hashim and banker-turned MP Eran Wickramaratne, with input from professor of economics Premachandra Athukorala and other economists. It also incorporates a short-medium term Common Minimum Programme developed mid-2022 by the National Movement for Social Justice (NMSJ) using proposals from the Advocata think tank, Buddhist priest Elle Gunawansa Thero, the 43 Brigade led by former SJB MP Patali Champika Ranawaka and other groups that represent various interests.
The SJB’s diagnosis of Sri Lanka’s worst currency crisis in decades attributes the situation to a number of historical causes including what it called “short-sighted, inward-looking” statist and insular policies, fiscal and current account deficits over several decades and measures to taken to address them, ideological clashes during the Yahapalana period between 2015 and 2019 that prevented IMF-backed reforms, poor management and overreliance on commercial debt and a host of other reasons.
The COVID-19 pandemic was also blamed for compounding Sri Lanka’s debt distress by demolishing forex inflows.
The party lay heavy blame on former President Gotabaya Rajapaksa for “poor policies, mismanagement and ego” and for subjecting the economy to two major policy shocks: 1) the December 2019 tax cuts which cost the state some 600 billion rupees in revenue in 2020 and a high budget deficit that was financed with money printing, leading to ratings downgrades, and 2) the Rajapaksa government’s widely criticised overnight inorganic fertiliser ban which led to more imports to meet massive shortages.
Misguided exchange and monetary policy was also identified by the SJB as significant contributors to the crisis.
“The government used forex reserves to repay debt and defend the pegged exchange rate at around LKR 200/USD, thus draining Sri Lanka’s reserves from USD 7.6 bn in end-2019, to less than USD 50 mn by April 2022. The Central Bank of Sri Lanka (CBSL) took the contradictory policy of artificially holding interest rates as well as exchange rates, putting further pressure on the rupee. Between January 2020 and December 2021, the CBSL printed money nonstop, resulting in a 41% increase in the broad money supply. Black-market rates for forex rose rapidly, at a 30% premium of the official rate. Exporters held dollars abroad and remittance inflows dried up to less than 40% of usual values,” the document notes.
“After 18 months of denial, the CBSL abandoned the LKR 200/USD rate on 7 March 2022. However, the exchange rate plummeted to LKR 365/USD by July 2022 because the CBSL did not sequence this adjustment. The weak rupee meant that the price of all goods and services shot up, prompting a cost-of-living crisis,” it adds.
The document then goes on to highlight the timeline of the crisis including the political fallout it triggered, after which it presents a detailed but by no means exhaustive list of policy proposals.
The blueprint, which calls itself “simply a plan for economic salvation and survival, and a strategy for equitable growth” presents 10 pillars of reform:
- Transparency and accountability
- Debt crisis management
- Monetary and exchange rate policy
- Revenue consolidation
- Expenditure control
- Trade, industry, agriculture and services promotion
- Public sector management and digitalisation
- Energy and utilities reform
- Factor market reform
- Stronger social safety nets
To “erase corruption”, the SJB proposes that assets illegally acquired and hidden locally or in foreign jurisdictions be pursued and recovered. It also blames the government for its alleged lethargy in passing a proposed anti-corruption bill.
Fighting corruption has been a key policy focus of both the SJB and rival opposition group the National People’s Power (NPP), led by the leftist Janatha Vimukthi Peramuna (JVP), as a solution to Sri Lanka’s crisis, with particular emphasis on recovering stolen assets, though neither party has so far detailed what such a recovery process would look like.
The SJB’s new proposals include legislating the requirement to make public the assets and liability declarations of elected representatives and public officials and creating an independent public prosecutor’s office to legally pursue corrupt persons. “The independent public prosecution office will have no conflict of interest in pursuing alleged-corrupt personnel, as opposed to the Attorney General.”
The SJB Blueprint notes that Sri Lanka’s urgent priority is to manage the sovereign debt crisis by obtaining critical bridge financing, as well as continuing to engage with the IMF, and expediting the debt-restructuring process with creditor assurances. Concurrently maintaining the stability of the financial system is of utmost importance, the document says.
Presenting the document at the SJB economic summit on Tuesday, MP Harsha de Silva said that, unlike others (in a clear dig at the anti-IMF JVP), the SJB supports engaging with the IMF. He also defended a controversial remark by party leader Sajith Premadasa recently that a future SJB government under him is not obligated to honour deals made by the incumbent government.
The MP said that what Premadasa had meant was that Sri Lanka must negotiate terms favourable to the country when dealing with the IMF.
According to the policy document, any IMF-supported stabilisation program should have four pillars: (a) exchange rate, fiscal, and monetary reforms, (b) unshackling the economy from direct government intervention, (c) export development including removal of the import restriction regime and (d) strengthening social protection programs to make reforms digestible for the people; especially at low incomes.
Since imports are now mostly managed in line with current account receipts, the party proposes that bridge financing is sought from friendly nations by way of credit lines for imports, foreign currency swaps or other “innovative mechanisms”.
Referring to an ongoing delay in IMF board approval for the eagerly awaited 2.9 billion dollar extended fund facility (EFF), the SJB Blueprint attributes the delay to lack of financing assurances from all creditors. “As of February 2023, only China’s assurance is pending,” the document notes, though India has also indicated its support in writing. The party proposes strengthening diplomatic engagement with creditor countries and the Paris club to expedite the external debt restructure.
It also calls for avoiding domestic currency debt restructuring.
“There has been no discussion on domestic debt restructure even though ISB holders have specifically stated that they expect some form of ‘reorganisation’ of domestic debt.”
A centralised public debt office, which will require highly skilled and well-paid professionals is also proposed.
“The government has reached a Staff Level Agreement and obtained the consent and support of both the Paris club and India to restructure debt. However, it has failed to obtain IMF Board approval as of February 2023 pending Chinese commitments to financing assurances. This remains the key to enabling the release of funds and further progressing in debt restructuring. However, the government has not been proactive enough to get Chinese banks on board the debt restructuring plan. While this can be a challenging task with many complexities, this critical matter which was highlighted months earlier, has not been treated with urgency,” the Blueprint notes.
In terms of monetary and exchange rate policy reforms, the SJB notes that it is “essential that the government acts to stabilise the monetary environment, using measures including exchange rate and interest rate adjustment, and monetary policy reforms.”
The document recognises that the exchange rate has been stabilised around 370 rupees per dollar based on a managed float and that interest rates were raised by the Central Bank to manage inflation, though the effects on the economy are mixed. It also recognises that obtaining weekly bill and bond funding requirements from the market at market clearing rates has also been mostly achieved though CBSL continues to fund part of the requirement.
Calling for legislation to make CBSL independent, the document notes that though the cabinet has approved the bill, it has yet to be presented to parliament.
“CBSL holdings of government securities as of 10 February 2023 is LKR 2,551 bn. Central bank financing of government deficit through money printing slightly reduced in 2023.”
“Raising policy rates and therefore the entire term structure has had the desired monetary policy effect of stabilising the currency and slowing down inflation. However, it is causing the economy to shrink, resulting in business closure and job losses on one hand, and liquidity and solvency concerns for certain banks on the other,” it notes.
Vis-a-vis revenue consolidation, the SJB proposes the following:
- Both personal and corporate income taxes have been revised. Personal income tax threshold and slabs were reduced, and marginal tax rates revised upwards. The VAT rate was increased, and the threshold was revised downwards, helping expand the tax net.
- However, the revised personal and corporate income tax rates are much higher than in the 2017 Inland Revenue Act. The significant increase in personal income tax via PAYE during high inflation has imposed significant burdens on most professional groups. Tax slabs should be broadened in such a way that professionals (perhaps earning up to LKR 500,000 per month) are subjected to a top marginal tax rate of around 25% with the highest marginal rate going up to around 40% for the very high income earners with a temporary surcharge).
- It must be noted that the government’s estimate of LKR 100 bn in PAYE tax collection for 2023 is highly questionable given the recent statements in Parliament by the State Minister of Finance that only 120,965 persons were liable to PAYE tax from over 1.1 mn registrations at the end of 2019. An urgent study must be conducted on this discrepancy and steps must be taken immediately to ensure those who are liable to pay taxes, pay.
- Beyond PAY, it is essential that citizens of all walks of life who by various means avoid paying taxes are brought into the tax net. The only way to meet the objective of a genuine and stable increase in taxes is by expanding the base, not by squeezing to the bone the few who pay.
- Create a taskforce to assess government assets and identify opportunities to increase non-tax revenue. Increase revenue on government-owned assets, fees, and returns from government organisations. Ensure service quality is improved at the same time. Where agency-specific funds exist, flow through to Consolidated Fund.
- Abolish the Social Security Contribution Levy (SSCL), which is a tax on tax. An announcement could be made on the date of its implementation.
- Formulate long term, stable tax policy with investment credits instead of tax incentives for FDI. Halt giving out Strategic Development Projects (SDP) status for new investments, which will be subject to pay 15% minimum alternative tax
- Improve tax collection mechanisms, including:
- Fixing issues with the RAMIS system and strengthening the IRD’s IT capabilities.
- Reforming the IRD’s tax collection reward schemes.
- Strengthening the investigation department of the IRD to reduce tax evasion.
- Streamlining the tax appeal process.
- Improving coordination between revenue collection agencies and the Attorney General’s Department.
- Strengthen the tax and other levy collection by local government bodies.
- Bring local government bodies and provincial councils within the scope of Fiscal Management (Responsibility) Act and make them accountable to submit quarterly reports on revenue and expenditure.
- Become signatory to Base Erosion and Profit Shifting (BEPS) Digital Economy frameworks. Introduce 15% minimum alternative tax for multinational companies (Pillar 2).
- Introduce customs reforms such as enhanced risk-based investigations, reform of customs officers’ rewards schemes and rationalisation of penalties to address perverse incentives.
- Streamline duty under three bands; starting with higher rates and reducing it in the medium- long term to curtain revenue impact.
- Phase out para-tariffs gradually, aiming to eliminate them in 3-5 years. Initiate the para-tariff elimination with PAL and gradual reduction of CESS to minimize revenue loss.
- Phase out para-tariffs gradually, aiming to eliminate them in 3-5 years. Initiate the para-tariff elimination with PAL and gradual reduction of CESS to minimize revenue loss.
- Establish a separate government service to recruit officers to a unified revenue administration agency, with salary levels on par with the CBSL.
- Establish a tax academy/department with degree awarding status to teach taxation. Include lessons about taxation in the school curriculum.
Speaking at the event, de Silva said the party supports progressive tax and that the highest earners should even pay as 39 percent if not more. He also took a swipe at the NPP which recently proposed that the tax threshold be increased to 200,000 rupees a month and the highest tax rate be capped at 24 percent.
However, the document notes that the government has conducted tax reforms, but in implementation has imposed too high a burden on Sri Lanka’s middle class, and disincentivised exporters.
“Decreasing the VAT threshold has helped to expand the tax net, but revised income tax rates are much higher than in the 2017 Inland Revenue Act. Higher tax rates and revised tax slabs have significantly reduced the disposable income of many tax-paying professionals. Revenue consolidation efforts, particularly upwards revision of taxes, should be carried out cautiously in a shrinking economy. When carrying out tax reforms, the government needs to account for inflationary impact during the last two years, and long-term social implications such as skilled migration. Furthermore, tax revisions must be accompanied with measures ensuring transparency and accountability regarding the ways in which tax money is spent. Almost all these integral parts of sustainable tax reforms are lacking in the government’s recent actions.”
On expenditure control, the party notes that capital expenditure on long term projects has been reprioritised to a certain degree.
“However, the government has failed to sufficiently rationalise other recurrent expenditure or impose budget constraints on SOEs. Examples include providing bonuses to employees of loss-making SOEs and spending exorbitant amounts of public funds on Independence Day celebrations. Such actions raise serious concerns about the government’s commitment to rationalise expenditure.”
On industry and service promotion, the SJB says the government’s commitment to trade facilitation reforms remains minimal. During the last six months, the blue print notes, the government continued to revise import control regulations frequently without any medium- or long-term considerations.
“Research shows that import controls were implemented without any substantial analysis which created an uncertain business environment. Although trade reforms remain the key to long-term growth, government actions have taken the country in the opposite direction. Instead of beneficial reforms, the government’s constant and arbitrary revision of import and customs regulations has made it even more difficult to engage in international trade.”
Public sector management and digitalisation is also high on the agenda for the SJB.
In terms of energy and utilities reform, though cost-reflective and market-based tariff revisions have already taken place, the party notes that there is a total lack of transparency in the methodology used. Further, these revisions should not be decided by politicians: the existing regulatory mechanism must be used for its purpose and public consultations must take place as per the existing law, the blueprint notes.
“While allowing utility providers to charge cost-reflective tariffs (free of wastage and corruption costs) from the consumer so that the utility could at least break-even, it is the government’s responsibility to ensure targeted subsidies are provided to those who deserve it, as transparent line items in the budget. This policy change will immediately shift the overuse of resources and the volume of subsidies for the rich (current practice) to those who need help (socially equitable).”
The SJB acknowledges that some progress has been made in restructuring energy and utility SOEs. “Unbundle the CEB and introduce competition in generation and distribution. Separate the transmission grid to allow the necessary investments to permit the absorption of wind and solar and to introduce services such as wheeling.” The party also calls for investment in public transport that uses renewable energy.
The blueprint goes on to detail the party’s proposals for factor market reform including proposals to promote technical education, English-language based education and female labour force participation.
Stringent social safety nets are also proposed.
“The government, with the support of the World Bank, has initiated the process of setting up a consolidated welfare scheme under the WBB and building a united beneficiary database. This process needs to be expediated given the urgency of the need to provide direct cash transfers to the poor and vulnerable. However, it is important that the government focuses on long term poverty alleviation by creating an environment that encourages job creation. This will provide long-term employment opportunities for those who benefit from safety nets in the short term. Those reforms should not be left to the future – this is a mistake Sri Lanka has made many times in the past.”
The document ends by proposing a social market economy, a familiar refrain during the Yahapalana days in which de Silva was a state minister, looking beyond stabilisation to growth, and ensuring equitable development.
“At independence, Sri Lanka was one of the most prosperous countries in Asia, with per capita income above even South Korea and Thailand. Yet over the next 75 years, we fell further and further behind, eventually ending up in a sovereign debt crisis with the stigma of being the only Asian country to default on foreign debt in half a century. Our mission is to make this unprecedented crisis the springboard for lifting Sri Lanka onto a sustainable growth path, to regain our lost paradise. We are committed to transforming the closed ‘twin deficit’ economy characterised by stop- start growth and periodic macroeconomic crises, into a dynamic, outward-oriented economy that delivers sustainable, shared growth for all its citizens to enjoy. This requires achieving a strong, sustainable fiscal position through government revenue and fiscal reforms; incentivising openness, exports and GPN linkages; undertaking complementary monetary, exchange rate, factor market, and competition reforms; and underpinning all of this with a coherent, well-targeted social welfare net and strong anti-corruption legislation.” (Colombo/Feb16/2023)
Disclaimer: Sri Lanka main opposition SJB unveils economic policy document ahead of local polls - Views expressed by writers in this section are their own and do not necessarily reflect Latheefarook.com point-of-view