by Sanjeewa Jayaweera
Most living in Sri Lanka feel like they have got into the boxing ring with Muhammad Ali. The ferocious punches thrown regularly are taking their toll, with most either on their knees or on the canvas. The final punch that will knock us out seems inevitable, but the question is when?
The pounding started initially with queues to buy milk powder for children, which then got extended to buying cooking gas, then to long power cuts, and now to queues extending several kilometres to buy petrol, diesel, and kerosene. Along the journey of suffering, we have also been penalized with hyperinflation. The saying “it never rains but it pours” seems so accurate.
The country is facing a humanitarian catastrophe of a magnitude not previously experienced. Most foreign commentators say, “Sri Lanka is facing the worst economic crisis since 1948.” In a release, the World Food Programme (WFP), the world’s largest humanitarian organization, stated, “An estimated 4.9 million people – 22 per cent of the population – are currently food-insecure and require humanitarian assistance. Reduced domestic agricultural production, scarcity of foreign exchange reserves and depreciation of the local currency have caused food shortages and a spike in the cost of living, which is limiting people’s access to healthy and affordable meals. The economic crisis will push families into hunger and poverty – some for the first time – adding to the half a million people who the World Bank estimates have fallen below the poverty line because of the pandemic.”
The latest WFP assessment reveals that 86 per cent of families are buying cheaper, less nutritious food, eating less and, in some cases, skipping meals altogether. Before the economic crisis and the pandemic, malnutrition rates across Sri Lanka were already high. Before the COVID-19 pandemic, Sri Lankan women and children suffered from far higher rates of malnutrition than most other middle-income countries: 17 per cent of children aged under five were too short because of stunting, and 15 per cent were too thin for their height (wasted). The current economic crisis will likely aggravate this further.”
The peaceful uprising, predominantly by the youth referred to as the “Aragalaya”, and the violence that erupted on May 9 resulted in the resignation of the Prime Minister and the cabinet. Thankfully, quite a few unsavoury characters are no longer in the cabinet and have remained mainly underground, although a few are making occasional media appearances to test the waters. A few less savoury but still abject failures of the Mahinda Rajapaksa regime have managed to get back into the cabinet. It is a paradox that a person who led his party to political oblivion and lost his seat is now the Prime Minister. So much for the will of the people!
However, my article is about the architects of our economic Armageddon. In a previous article, I identified them as Nivard Cabraal , P B Jayasundera , S.R. Attygalle and W D Lakshman and referred to them as the Gang of Four (G4). I have consistently advocated for the G4 to be charged and prosecuted for their actions that I would call criminal.
I am glad that recently a Fundamental Rights (FR) petition has been filed in the Supreme Court (SC) seeking appropriate action against those responsible for the prevailing economic crisis in the country, including the G4. One must hope that the SC will commence hearing the case on a priority basis and arrive at a verdict as soon as possible because most people I talk to say, “These fellows should be taken to Galle Face and be mercilessly whipped!” Although I don’t subscribe such drastic action, I understand their anger.
A few weeks back, the Committee on Public Finance (COPF) called the G4 for a hearing to ascertain the reasons for the economic collapse. Unfortunately, I have not been able to view the entire proceedings of the hearing as only a 15-minute video is available on YouTube. In that clip, Nandalal Weerasinghe, the incumbent Governor of the Central Bank of Sri Lanka, in an apparent snide remark aimed at Attygalle, said, “Responsible Government officials should refrain from engaging in politics and that the difference between a politician and an official should be properly recognized.”
It must be recalled that Attygalle was appointed as the Treasury Secretary in haste by the Mahinda Rajapaksa(MR) administration during the short-lived constitutional crisis in 2018. Some will also remember how MR immediately appointed Kapila Chandrasena as the CEO of SriLankan Airlines but had to quickly rescind the appointment due to public backlash. It was only subsequently revealed that Chandrasena’s wife had been paid US $ 2 million by Airbus as a bribe.
The belief is that many of the appointments made by MR appear to have been based on friendship and loyalty as opposed to competence. Therefore, it might be difficult for Attygalle to convince too many that he is not politically aligned with the Rajapaksas.
When questioned about the tax cuts that resulted in a significant loss of revenue to the government, Attygalle said that due to the commencement of the covid pandemic, it was not possible to pass judgment on whether the experiment of reducing taxes was correct. However, it does not need an Einstein to predict that a country grappling with a chronic budget deficit and a balance of payments crisis would get into severe economic difficulties due to such irresponsible decisions.
I highlighted my concern over several of the tax proposals in an article written by me called “Sri Lanka’s Tax Conundrum” published in the Sunday Island of January 12, 2020. Although I am no economist, my two and half decades of working in Sri Lanka, mainly as a Chief Financial Officer in several hotels, manufacturing and retail businesses, have given me sufficient knowledge and exposure to raise concerns.
The tax cuts entailed the reduction of Value Added Tax (VAT) to 8% from 15%, reduction of corporate tax for manufacturing companies to 18% from 28%, abolishing the 2.5% Nation Building Tax, the increase in the taxable supply threshold for VAT from Rs. 12 million to Rs. 300 million, the increase in single-person tax-free allowance to Rs. 3 million from Rs. 1.2 million together with significant widening of tax slabs and reduction of rates resulting in the highest rate coming down to 18% from 24%.
All these changes were done with no projection of how much tax revenue will be lost. Neither was there any comment about how the government intended to bridge the revenue deficit. It was all so reckless and irresponsible.
The international credit rating agency, Fitch Ratings, reacted immediately and, in a release, stated that tax concessions granted are “credit negative” and revised the outlook on Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable.
These agencies are independent and skilled in their assessments. However, our Treasury Secretary (Attygalle) and the Central Bank Governor (Lakshman) released statements sharply rebuking the Fitch statement. In fact, in a TV chat show, he accused the international credit agencies of being politically biased and being part of an international conspiracy against GOSL! Furthermore, every subsequent downgrade of our credit ratings drew a sharp rebuke from Attygalle, Lakshman and Cabraal, questioning the motives of such downgrades.
For those of us who had engaged credit rating agencies on behalf of the companies we worked for, such criticisms were not valid and were downright stupid. Given the critical role that international rating agencies play, commonsense dictated that even if there is disagreement, there was a need for a far more diplomatic engagement and consensus building than releasing strongly worded rebukes and questioning their motives. The arrogance and the stupidity of the G4 are stunning.
In addition, in their infinite wisdom, the GOSL also decided that the PAYE tax at source previously collected from employers and Withholding Tax (WHT) from interest income paid by banks and financial institutions to individuals should be abolished. To say that this was a stupid and irresponsible decision is being polite.
In my article of January 12, 2020, I published a table from the Department of Inland Revenue Performance Report for 2018 setting out statistics of low compliance by businesses and individuals when filing their tax returns from 2013-14. I stated, “In such a scenario, expecting individuals to be compliant with their tax returns and payment of quarterly tax is being optimistic.”
I believe the architect of the above changes was none other than PBJ. When he was the Treasury Secretary during the period 2010 – 15, at many private sector forums, he said, “I have told the IRD to stop worrying about collecting PAYE taxes as the collection is so small.” However, he also stated, “If government servants are exempt from income tax, why should the private sector employees pay tax?” The end result was that many of us had our income tax files closed by the IRD, which was way back in 2011!
The decision to print money under both Lakshman and Cabraal led a former deputy governor of the CBSL to state that “Lakshman has turned the CBSL to a printing press.” It is believed that the G4 and others in charge of economic policy were disciples of the highly controversial Modern Monetary Theory (MMT). Many independent economists raised concerns and predicted that such action would lead to hyperinflation. Abraal arrogantly refuted these concerns.
The Island of April 27, 2021 quotes Cabraal as follows “State Minister of Money and Capital Markets Ajith Nivard Cabraal said yesterday that there was no relationship between money printing by the Central Bank of Sri Lanka and the depreciation of the local rupee in the foreign currency market. Minister Cabraal commented while responding to questions during an interview on Swarnawahini television. When asked whether the value of the Sri Lanka rupee showed a negative correlation to a surge in money printing by the Central Bank as the Opposition claimed, the state minister replied, “Generally, people say it may be because they don’t know. The issue is when those that claim to be in the know of these matters also say the same thing.”
The G4 also pursued a policy of keeping interest rates well below the inflation rate. This was purported to encourage borrowing. This ludicrous policy resulted in depositors being able to negotiate higher rates for their US Dollar deposits than for their LKR deposits! One of the first actions of the new Governor was to increase the treasury bill interest rates significantly. It is a tried and tested formula to raise interest rates to curtail demand and reduce inflation. Currently, the world over, nearly all central banks have resorted to this policy. It seems that G4 are the only exception.
The decision to peg the Lankan Rupee to the US Dollar at 200 for a considerable period against the advice of many independent economists and bankers has had a debilitating impact on our economy. Undoubtedly, this has resulted in a burgeoning black/ grey market where the rate differential was significant. In addition, this has led to a substantial decrease in the receipt of remittances by Sri Lankans working overseas and also by exporters who may be keeping the funds overseas in anticipation of a devaluation. We all are fully aware of the pain now endured by a lack of dollars in the country.
Having held on to the US Dollar to LKR 200 for too long, the Monetary Board under the chairmanship of Cabraal recklessly let go of the peg resulting in a steep depreciation of the LKR by nearly 80% over just two months. This was despite the IMF’s explicit warning that any peg relaxing needs to be done carefully and systematically. A couple of members of the former monetary board have stated that Cabraal unilaterally decided to abandon the peg. This is being disputed by him, claiming that it was a collective decision. Whether it was collective or unilateral, Cabraal needs to bear complete responsibility for this reckless decision that has upended the lives of millions of our people. Lastly, I must say that my personal opinion is that the members of the Monetary Board who objected to the policy decisions of Cabraal should have resigned and made their reasons public at the time. To claim that to have resigned would have been cowardly is unacceptable.
Cabraal has recently released several public statements in which he has attempted to exonerate himself. He has stated that even now, the exchange rate is being pegged, and money is still being printed. Yes, no doubt. However, the damage done in the last two years is so immense that it is impossible to stop the rot immediately. As the saying goes, it is like riding a tiger and not being able to get off. That is the country’s predicament.
I believe the COPF meeting ended with another scheduled follow-up meeting. There has been no news of any further deliberations involving the G4. I doubt whether anything of value emanates from these deliberations. In the last couple of months, the Committee of Public Enterprises (COPE) reviews, Chaired by Professor Charita Herath, have made headlines over how poorly the state-owned enterprises are being administered and managed. However, for me, they are just theatrics as most such disclosures have been included in the Auditor General’s reports of such enterprises and have been in the public domain for quite some time. It is just that no one bothered to read such reports.
Undoubtedly, the G4 need to be charged and prosecuted for bringing this country and its people to its knees. Our lifestyle has been taken back several decades. As stated in the WFP report, millions of our people will starve and be malnourished. The youth of our country, referred to as the future, do not see any future, and most are in a mad scramble to leave the country.
The President, PM and the Cabinet are equally responsible for this dastardly state of affairs. Still, for me, the G4 bears the greater responsibility in that, as so-called experts, they failed, and their failure is due to sheer arrogance and their reckless decision to experiment with the lives of millions of people.
For me, the comment made by MP M A Sumanthiran when addressing the G4 at the COPF meeting is relevant in meting out punishment to those responsible for the current situation in our country. He said, “The former minister of finance Mangala Samaraweera, who was a fashion designer and not an economist, predicted in October 2019 that the tax proposals of Gotabaya Rajapaksa as set out in his manifesto would result in an express train to bankruptcy, default and a Greek-style financial crisis.” He rebuked the G4, saying that their so-called expertise in economic management could not foresee what a fashion designer was able to!
That is precisely my conclusion too. This is a man-made disaster, and it is a travesty of justice that those responsible are still not behind bars whilst the people of this country are on their knees.
Disclaimer: When will the Gang of Four be held accountable for their irresponsible decisions? - Views expressed by writers in this section are their own and do not necessarily reflect Latheefarook.com point-of-view