Following a significant fall in tax revenue, the government partially reversed a tax cut that was blamed for destabilising public finances that have been in poor shape for several decades. Tax revenue has been inadequate to sustain the large government sector workforce, the pensioners and losses in state-owned businesses. During the last two decades, Sri Lanka has borrowed from global capital markets to bridge the shortfall.
These decades-long policy blunders have landed Sri Lanka’s economy in a difficult-to-navigate position. The Chairman of the public policy think tank Advocata, Murtaza Jafferjee, suggests the country must fix several more areas on both the income and expenditure sides before it can begin to emerge from the crisis.
Higher tax rates, the introduction of property taxes and a simplified tax structure are required to grow income. After addressing the mispricing of fuel and electricity, cutting losses in other state-owned enterprises also needs attention. An area receiving little attention is the cost of maintaining the armed forces. Sri Lanka’s standing army, navy and airforce are similar in size to those of the UK.
How we got into this economic mess is a long and complicated story. But if you were to give us the highlights, how did we end up here?
The question has bothered me for a while, whether it was misfortune or mismanagement. Politicians debating this blame each other, but if we play the blame game, we will have to go all the way to Vijaya.
Since independence, we have been running large fiscal deficits. We had a relatively young population; there was a population explosion. We had to give social services, education, etc. So that absorbed a lot of resources at the time; we were developing human capital. Then the 30-year-long conflict consumed a lot of fiscal resources. We couldn’t grow fast enough because government expenditure was used on the military and reconstruction.
The misallocation of resources was accentuated at the conflict’s end; our debt to GDP was close to 100%. But it was all domestic debt and concessional foreign debt. What we did was inflate away the value of the domestic debt towards the end of the conflict.
However, a few years later, after the economic recovery, the growth model faltered. We were trying to grow the non-tradable sectors, borrowing international capital and allocating it domestically. However, these investments were not generating enough returns to keep paying back the loans. This was quite obvious by the middle of the last decade.
Then there was a change in government. The new government understood the problem, but they didn’t have political stability, there was a lot of infighting. They just held on with an IMF programme. The IMF did insist on some targets, like a primary balance surplus. But the growth was slow.
Misfortune also struck in 2015 and the first half of 2017 with failed monsoons. This was followed by a constitutional coup and the Easter Sunday bombings. All these shocks slowed the economy. But the debt was still there and the government’s revenues were increasing at a slower pace than we needed.
There’s one problem, the economy has to grow to generate more government revenue. Because with growth businesses will make more profits, there will be more variable bonuses and discretionary consumer spending will also rise. These consumer goods have taxation.
When the government changed again in 2019, it was a massive blunder to have cut taxes. About three months after the tax cut, the pandemic slowed the economy. So the expenditure was high, because of the costly Covid measures, the economy was slowing because of shutting down activity and taxation was declining. As a mechanism to preserve foreign exchange, the government started banning some imports, many of which, like vehicles, contributed to a large amount of taxation.
Vehicle imports used to cost us about a billion dollars, but they generated almost Rs200 billion worth of taxes in 2018. Now we were preserving foreign exchange by stopping imports, but at the same time, we were continuing to service foreign debt. This was in a climate when our credit rating had been downgraded.
Of course, we never borrowed all this money with the expectation we would pay it back. We intended to convince the next guy to lend us more to repay the guys who we had borrowed from earlier. However, by mid-2020 our bonds were trading at 70 cents to the dollar, a signal from the market that we were no longer good for the money. Our credit rating was cut further.
When our rating was cut to CCC-, it was game over. But there were a few policymakers, I refer to them as the gang of four, who provided a different narrative. Either they had some other agenda, they were in complete denial, or delusional. They kept believing that this is a short-term problem.
They kept suggesting that it was a liquidity crisis when it was a solvency crisis. So they used our reserves, which were quite substantial before Covid, to repay the foreign debt. Remember, during this time we were unable to roll over the debt. Covid was several waves, no quick way out of it. But the narrative was that it was a problem of low tourism income.
If tourism returns to normal restoring the lost $4 billion, they argued everything would be fine. Of course, this is subject to the accuracy of the tourism revenue in the first place. Tourism revenue is an estimate based on the average spend of $180 a day per visitor, which is way too high, in my opinion. They (the gang of four) have continuously assured us that this is a problem with tourism when it was not.
We made huge policy blunders; like low taxation and low-interest rates, which created the environment for a perfect storm. Despite import controls, people went on a spending binge in 2021. Most consumer goods categories saw record growth. By early 2022, money had run out and it was a full-blown economic crisis.
They kept suggesting that it was a liquidity crisis when it was a solvency crisis. So they used our reserves, which were quite substantial before Covid, to repay the foreign debt
You talked about the recent past here and some of the misfortune we faced. At the same time, Sri Lanka continued to access global markets for commercial debt. Are you suggesting that there was a significant misapplication of those resources? If so, what part did that play in the economic crisis?
The focus is on some of these vanity projects, like for instance the Lotus Tower which cost over $100 million. Surely those things all added up, but that was not where the major misallocation happened. The major misallocation was happening in the State-Owned Enterprises (SOEs) that were known to be pricing services below cost. So whatever we spent on Hambantota port or Mattala airport, it’s unfortunate they were the wrong priorities because they were never part of the National Physical plan.
But the greater losses were in terms of mispricing electricity, mispricing fuel, and expanding the government service. For example, the last government added 75,000 new people to state employment. We were just providing people jobs that didn’t exist; you were creating employment. This is where the major misallocation happened.
But the greater losses were in terms of mispricing electricity, mispricing fuel, and expanding the government service
Then the government was interfering in so many segments of the real economy. When you miss-price resources; for example, we have been mispricing fuel which is our largest single import, most of the foreign capital we borrowed was allocated to subsidise these loss-making state ventures. If you look at the government’s capital budget, 50% of the capex is capital transfers, they’re not investments in brick and mortar. So those capital transfers are like recurrent expenditure.
For instance, the electricity price has not been revised since 2012. The fuel surcharge on electricity introduced in 2014 was removed in 2015. So the tariffs went back to what it was in 2012.
In most South Asian countries fuel prices were 30-50% higher than they were here. Why is our single biggest import not correctly priced? You can argue that there’s a case to subsidise people who can’t afford it. But why would you subsidise, petrol and diesel?
Subsidies come in two ways. One is by selling below the world market price. But most of the time, it was a tax subsidy or very low levels of taxation.
One doesn’t understand the politics of fuel. Can we eat it? or breathe it? It’s just pumped into vehicles. The automobile is a great innovation. But the reality here is a typical man, weighing between 70-80kg kilos and a woman may be between 60-70kg, requires a vehicle that weighs about 2,000kg to move. So you’re putting an enormous amount of energy into mobility. The least you should do is price it properly.
Some of those adjustments have now been made. There’s been a significant revision of taxes, reversing most of the cuts implemented just ahead of the pandemic. How far have we now gone towards fixing the problem?
The recent price changes to diesel and petrol were in the right direction. We have finally broken this misguided notion that diesel is the poor man’s fuel, which is not true. It is not the wealthy who use petrol, because there are about 3.5 million motorcycles and almost a million tuk-tuks on the road. Those aren’t rich people’s vehicles. A lot of middle-income or low middle-income people use petrol. Now we have priced diesel and petrol similarly.
What’s happened is that there’s a shortage in the refinery market globally. The refinery margins which used to be about $5 a barrel are now about $30, which is a record level. Now that global fuel prices have gone up substantially, we may have to wait for prices to weaken. It might go up further during the summer, but once it weakens, it will be a big mistake for us to reduce the prices at the pump. What they should do instead is recover the tax discounts that they have given.
Now, there was an announcement about increasing the tax rates and there are a large number of elements to this. It is in the right direction, but it’s not the way that I would have done it. Fundamentally, they have increased the rates. Generally, a middle-income country like Sri Lanka would tax its economy, so the heavy lifting has to come from VAT. This was from an IMF document that a middle-income country like us should be collecting close to 6% of GDP from VAT. We were down to about 1.5%, which was very low. Even as a percentage of the total tax revenue last year VAT was below 20% when it should be a much higher figure. The VAT is not a distortionary tax, it doesn’t cascade because it has an input credit. And we should be at a rate of about 15%, we went down to 8%. And we have taken it back to 12%.
It’s a mistake they are making. The government should have taken the VAT rate to 15%. Sure there are concerns about inflation and what people can afford. But consider that tomato prices have gone up by 200%. So had we increased VAT by a higher percentage it may have not made a big overall impact.
There are three ways you can collect taxes. Taxes on what you buy, taxes on what you own, and taxes on what you earn. Taxes on what you buy is the main tax and they should be collected through VAT. We should not be relying on CESS (Commodity Export Subsidy Scheme) and PAL (Port and Airport Development Levy). CESS is an export tax. Most people don’t know what the acronym CESS stands for. How did the commodity export subsidy scheme go from the export side to the import side? The thinking was that it will tax primary commodity exports. During colonial economic times, that money was used to develop value addition.
So we still have CESS on tea and rubber. But it has now come on to the import side and is being used as a protectionist tariff, a para tariff. Then we have something called PAL, which only is applicable if you cross the border. So you’re adding a significant disadvantage to imports. So you are making a conscious policy decision that you are creating a highly protectionist economy, which is completely wrong because it’s a contradictory strategy.
You cannot effectively support exports and have protectionist taxes on inputs for those exports, at the same time. Because with most exports, you’re never going to add 100% value. In a few areas we are capable of that, say like bulk tea, but not for the large part of our exports. The value addition declines when you start packaging, etc, because that’s mostly all imported.
If you consider indirect taxes, which account for almost 80% of taxes collected, we should move towards collecting more from VAT. We should enforce VAT on as much of the economy as possible.
So, if you assume a VAT rate of 15%, and we apply it to 40% of GDP, and if you assume GDP is a measure of value addition, you will get 6%. We have a fairly large informal economy which is estimated to be 70%. In GDP, the big firms that you see are not the bulk of the economy. An industry survey done in 2013 found around 1 million establishments in Sri Lanka and about 90% of them were less than four people.
Looking at the VAT, Rs12 million was the threshold revenue for registration but the tax cut increased this up to Rs300 million, that’s 25 times more. Now they have reduced it to Rs120 million, which is still too high a threshold. Now, the argument is that the Rs100-200 million threshold will include 85% of firms, so why bother with the rest?
The first thing is from a tax culture perspective, you want as many people as possible to pay. Also due to the informality, for example, take the tourism sector and a rate of 15%; then there is going to be a big price difference between companies that are VAT-registered and everyone else. You’re distorting the industry. You may want the larger firms too to succeed because they have higher productivity and if they have higher productivity, they contribute more to the edge the country has globally.
That’s just the size of the firm. Then you have to apply VAT to as many items as possible, which I said is about 40% of GDP. It’s not about the size of the firm, material stuff like laptops, tablets and mobile phones have only a 5% PAL charge on them. There’s a big difference between a mobile phone that costs $200 and an iPhone that costs $1,000. You should have VAT on all these items. I can appreciate that you don’t put VAT on food but we didn’t put VAT on restaurants and tourism. These industries can’t complain that it’s challenging as the currency has depreciated by 75%.
VAT basically shouldn’t be doing the heavy lifting in our economy. Our tax collections have to rise to at least 14% of GDP, we are below 8% now. And I’m afraid that not enough exempt categories have been included and the revenue threshold for VAT registration is too high.
Then let’s talk about corporate taxes. So far more than 50% of corporate tax is earned from the financial sector. Now, banks have been considered a cow that could be milked, because they have an oligopolistic structure. It’s an easy target for high collection. The problem is that banks are now in serious, serious trouble.
Because they have in their balance sheets the government, Euro Bonds or what we call ISBs (International Sovereign Bonds). There’s a huge impairment that is coming.
The second thing is with this currency depreciation, that the dollar loans in rupee value have gone up significantly. So the capital adequacy ratio, between the end of last year and the first quarter of 2022 in many banks has significantly fallen. They may have still more impairments to take on their private-sector lending.
So the banks are not in a position to continue to pay a high tax burden as they do now with 24% corporate tax and 18% financial sector VAT. Now, as announced, if they take the corporate tax rate to 30%, the bank’s tax burden will rise further. Whereas this is an environment in which banks must have more internal profit accruals. They have to earn their way out, and we will have to practice regulatory forbearance because the state doesn’t have the money to recapitalise the banks. After all, it’s the state that’s defaulting. So you can’t take money from one pocket and put it in another pocket, that’s not going to work.
So the banks are not in a position to continue to pay a high tax burden as they do now with 24% corporate tax and 18% financial sector VAT. Now, as announced, if they take the corporate tax rate to 30%, the bank’s tax burden will rise further”
So we have to allow the banks to earn their way out of this. And we have to allow them not only a rate of return to cover their cost of capital but something on top of that. We can’t tax the banks at the same level anymore.
There is a significant corporate sector, besides the banking sector. And we have provided generous tax concessions, without any scientific basis for the strategic ventures tax breaks they have given everybody and anybody, all these large projects. I think we have to sunset all these things. There is a school of thought saying once you sign an agreement, how can you renege on it? But when you default on your foreign creditors, you are ending a promise to pay. So here now in a revival, we have to bring the entire tax base, we have to widen the tax base of the country to capture all these entities.
And it’s not that because any way globally, now there’s a minimum tax rate of 15%. There is something called the BEPS framework (Base erosion and profit shifting) framework, to which Sri Lanka is not a signatory. But that only means that these companies which have subsidiaries overseas, if they are benefiting from a tax concession, will not be taxed in Sri Lanka. If we don’t deduct the tax here, they will have to pay the tax overseas. So it makes no sense.
So my suggestion is that we apply a minimum tax to those people who are under tax concessions or tax holidays.
We previously had something called Economic Service Charge (ESC) on revenue which can be offset against corporate tax, if you are liable. But if you have a tax holiday then the ESC you incur. Is that not a simpler way to achieve this?
If you’re losing money, you still have to pay ESC. They should try to have dual rates, depending on your business. We simply should apply this minimum alternate tax which is also there in the United States, where they have a lot of concessions. We should apply a minimum alternate tax for those entities that have received these generous tax holidays and we must apply one rate for everybody else. Now, we have several rates starting at 15%, then somebody else at 30% and someone else at 40%. Then the IT industry is zero.
The IT industry has been growing and the industry says they need more human resources to keep up. If you are growing, they are doing well. From a moral perspective, taxes are something you pay when you are successful. It is immoral not to pay taxes when you are a high-income earner. That’s the principle of a progressive rate. In Sri Lanka, 36% of the national income accrues to the top 10% of households.
The top 20% of the population receives 51% of the income. So we are exempting from corporate tax industries that are doing well and are getting dollar revenues. If these people don’t pay taxes, these are the same people who go to the government and say I need more trained people, how are we going to provide education and higher education and other public services for them to have those people? One of the other challenges the IT industry has is the need for infrastructure so that their people can travel to work or work from home. It’s a fundamental thing that everybody pays taxes.
If IT exports are in the region of a billion dollars, there are possibly several 100 million dollars in profits there to tax?
Even if you’re going to have a flat rate of tax of 24% and there are tax deductions, the government can provide tax credits, which is a much better instrument.
I’d like to elaborate on how tax credits work. The tax credit is a defined amount, a predefined amount of money that you can offset against taxes. For example, I’m going to give you a training tax credit and say the tax rate is Rs100,000. Why would the government give this? It’s because if I’m the company and I train you, there is no guarantee you will stay with the company. In fact, the moment I train you, your market value goes up. So if you leave the frim, it’s a classic market failure problem.
So companies are not incentivized to train people, because you’re generally showing them the door. With a tax credit, what you do is the government is either paying for it or subsidising it and the government can justify it because as long as they don’t leave the country, somewhere, the trained person will have to pay their taxes. That trained person is going to be a higher income earner, and therefore fall into a high-income bracket and pay taxes.
From a corporate perspective, companies should not be exempted. Everybody should be paying so that the rate can be lower for everybody. Now they have taken the top corporate tax rate to 30%. We could have maintained it at 24% and got everybody to pay, then you’d have more companies and you’re not picking winners and losers.
From a corporate perspective, companies should not be exempted. Everybody should be paying so that the rate can be lower for everybody
Take a supermarket, for instance, they play a huge role in distributing goods and in logistics, which would be categorised as trading. In terms of economic value, if you get food from the farmer to the consumer, it is a huge service; but you get caught up in the semantics of, is that manufacturing? It’s very silly because it’s a transformation of inputs to outputs. Whether you do it in a factory, or through the value chain, you’re still creating value. So the concept of having different rates is completely flawed.
Then you have personal income taxes. Now we had three bands before. We have now increased this to eight bands. And it makes no sense that you have effectively shifted some people from a 4% rate to 32%. So the problem now is how you do your business. Most establishments in Sri Lanka are not companies, they are proprietorships and partnerships. Now you could be doing the same business from a partnership or proprietorship compared to a company. But the personal tax rate is much higher now at the top marginal rate.
My advice, the takeaway here, is to keep it simple. Keep as much a flat rate as possible and get as many people to pay because it is important that Sri Lankans feel they’re paying taxes because it is said that societies that pay taxes enjoy better governance.
The biggest asset class in Sri Lanka has been real estate property. In the Colombo district since the end of the conflict, real estate prices have gone up to 200%. It’s only local taxes that are collected through rates and taxes. Here is a large capital asset that should be taxed. Because, how do you pay for the physical upkeep of the city and have better roads and infrastructure? Somebody has to pay for it.
You get the user to pay. But unlike on a highway where you have a toll you can’t be putting tolls on every flyover and every roundabout. That would cost an enormous amount of money. So we have to move toward taxing what we own.
As I said 36% of national income accrues to the top 10% of households. I would guess that 50% of the wealth is amongst the top 10%. So that’s my thinking on this tax issue.
There is also non-tax revenue and there are three forms of non-tax revenue. Fee income is the first. If you take highways, they generate fee income. They haven’t revised the highway tolls for many years. Consider the fuel cost. If you drive from here to Matara, the fuel cost for that trip is significant and the highway charge is still a small amount. So people who can afford to pay more should be paying. That’s just one example.
Then you have this habit of giving things at discounts should stop. The government owns 84% of the land. We ask the government, what is the return that you’re getting on your property, you’re sitting on the largest asset in the country. So if you’re going to tax private property, you must at least ensure that state land is generating a return. Let’s suggest half of the government’s land cannot be used because they are the mountains, the rivers and the roads, etc. But what about the rest of it?
What about capital gains tax?
If you assume an entity goes on accumulating its retained earnings, its value will go up. So if you say that you have to pay for capital gains, you are then taxing it two times, because the earnings have already been taxed. So my view is you shouldn’t be putting capital gains tax, certainly not on shares and there shouldn’t be dividend tax because dividends are declared from after-tax profits. Why tax again.
What you’re doing is you want more risk capital in the economy. Tax proposals are for dividends to have a withholding tax of 14% when the underlying earnings are taxed now at 30%. In most categories, interest will only have a withholding tax of 5% which is deductible.
There are different classes of capital. The higher risk capital here is being disadvantaged massively. In terms of seniority, debt capital is a senior capital and you are allowing the entire interest to be deducted and the interest in the hands of the owner basically will only have a 5% withholding tax, which is the final tax.
If you look at real estate, this has been a favourite investment asset for fairly wealthy Sri Lankans who have the liquidity to buy and hold. Wouldn’t a capital gains tax as a revenue measure work better there?
In that particular case, unlike in the case of companies, the value is underlying, it’s not the accumulation of earnings. In that particular case, a capital gains tax is fine. But most countries allow an inflation adjustment (indexation allowance). That’s only if it’s an investment property. If a property is part of your business, and you sell the property, it will be considered as business profits. There has been a huge appreciation in land prices and we already have a 10% capital gains tax. I don’t know how many people are paying, because it’s grandfathered up to 2017 prices.
But there is a case for capital gains or land, there isn’t a case for capital gains on shares unless it’s very short-term profits or the speculative type.
We’ve discussed revenue extensively. But that’s only half the challenge?
So on the expenditure side, something that is never discussed is that our single biggest line item is defence and law and order, it’s more than 400 billion rupees. As a citizen, I’d like to ask this question: 13 years after the end of the conflict do we need such a large military?
The Sri Lankan army is bigger than the British Army and the UK is over three and a half times the size in terms of population and landmass and it’s a global power. Why do we have such a large military? It’s a large standing army and a large navy. Are these people being maintained in defence of the nation, or they’re doing other stuff? Either way, this is all high-cost labour.
Now, if you’re using the military to do construction, a comparative person working outside the military would be earning significantly lower. The total cost because there are pension benefits, they’re kept in camps, they’re fed uniforms, everything. So money going into armaments and defence capabilities is a lot of salaries. Somebody had done the analysis that the entire defence establishment accounts for a third of the public sector, and at that time the public sector was about 1.3 million. Now the number has gone up to about 1.5 million. But the whole defence establishment and the police put together account for 50% of the public sector wage bill. We have to reassess if we can afford to maintain such a large defence and law and order establishment?
How does this impact GDP growth, if we freed up that money, can it generate growth for everybody else?
There is a male labour shortage and those in the defence sector are in their prime age. There is a crowding-out effect of taking people away from the real economy and there are certain segments of the private sector, like construction that have a shortage of labour. So the first benefit is that if you downsize the military, the sheer number of the standing army, who can go to reserves you will create more availability of labour.
The second thing is the amount that you spend. You can repurpose this. I’m told that there are 400 army camps. Do you need so many? Obviously, we can be in a good place if we put this for education and healthcare, which is significantly underfunded.
How can we generate growth in the economy? Do we shrink to fit the challenge, or can we try to grow out of this?
Growing out of this is the only solution, you can’t cut yourself down to size. There are two ways to grow. Either you create more jobs or you get more people employed. We must have massive job creation and have a massive productivity revolution in this country.
First, there is the agricultural sector, which employs over a quarter of the population. Hugely low productivity. If you take all crops, say paddy, tea, rubber, coconut, etc, our land yields are significantly lower than our neighbours. To cite an example, the yield on rubber plantations even with the smallholders is only about 950 kilograms per hectare, while the Southeast Asian average is close to 1500 kilograms per hectare.
What’s so different about Thailand, Vietnam, Indonesia, Malaysia and us? Why is a rubber plantation in those countries yielding 50% more than ours? Are we doing something wrong? Either the trees are too old or the methodologies are wrong.
During the last two years, we’ve had very good coconut harvests. But if you compare it with India they produce 30% Public finance more nuts per tree. This is a national average I gave you. But you will find rubber plantations that are more than 1,500kg per hectare. There will be coconut trees that will give you better yields. It would depend on the species, it depends on the soil conditions, and the management.
So we have high productivity ventures here and low productivity ones alongside those. You will find that in many parts of the economy.
It’s not dreaming of having electronic factories, that will help in the margins as new areas we have to go into. Consider we have half a million people in a labour force involved in transportation according to the labour force survey. If you take out the bus drivers and the conductors and the lorry drivers, they’re probably close to about 400,000 people whose primary employment. We have to create new jobs that move people away from these industries, because there may be limits to improving productivity. Uber and PickMe have certainly improved productivity by reducing idle time.
Take the construction sector or retail and look at the efficiency. In a family grocery store, the entire family’s probably occupied. I’m sure that revenue per square foot or revenue per person at a supermarket is greater by a factor of times than the average grocery store in Sri Lanka. So there’s a whole segment of brownfield segments of the economy including the government with very low productivity.
We have to create a massive productivity revolution in this country, and the key driver of productivity is competition. The consumer is going to benefit from lower prices, which is one of the things that supermarkets are trying to do, because as long as they can’t price gouge, and there’s a lot of competition, they can’t retain those gains.
We have to create a huge productivity revolution and we have to create a lot of new jobs, the new jobs have to come from greater female participation in the labour force
Sri Lanka’s economy is likely to shrink, how should we approach this? Should we shrink very fast and establish stability?
I sense we need to have a strong social safety net because the bottom 10% of the population only accounts for 2% of the national income and the top 10% is 36% of income. Those at the bottom are quite literally destroyed.
We must ensure that there is a social safety net for cash transfers, not price-based subsidies, to ensure that everyone will get through this crisis. All these adjustments must be done quickly.
Now even if you take the case of the VAT, in my opinion, they should have gone all the way and raised it to 15%. We had NBT on top of VAT. So that was a further 2%, but if we get back to 15% at least, it’s fine, while widening the tax base.
Are incentive structures aligned to shift people into more productive areas?
There is an issue, economists call this competitive neutrality. Your taxation and regulatory systems should permit a level playing field so that more productive units in the economy succeed. Now, there is a misplaced notion about the big guys trampling the small guy, but that’s only on the production side. But we all are consumers.
If productive entities in the economy succeed and provided there is sufficient competition, we are all going to benefit as consumers. That is the only way to drive down prices, you can’t drive down prices through price controls.
We have to create a huge productivity revolution and we have to create a lot of new jobs, the new jobs have to come from greater female participation in the labour force. If you can raise the female participation in the workforce to 50%, and Southeast Asian countries are around 60-70%, there are a million more people who will join the labour force. That will create a lot more economic output.
That many new people in the labour force will result in new industries, new foreign direct investment, and Sri Lanka creating a whole bunch of new products and services for export. Because one problem is that Sri Lanka’s export basket hasn’t changed over the last 20 years, it’s the same products; the value has gone up. But we haven’t transformed ourselves.
If you look at Vietnam, which has a stellar success story, the products that dominated the export basket 20 years ago are no longer the products that dominate today. Today, mobile phones are their biggest export item.
The central bank must focus on its mandate to ensure sound money. Now what has happened is the value of our money has been destroyed; the soundness of the money is completely gone
We’ve covered a broad perspective here. Is economic governance something that should be part of the mix of strategies or policies that will help Sri Lanka out of this crisis?
It is fundamentally that’s why we have gone wrong. We need the right people and we should have the right system. The right system means how they operate the accountability mechanism and the transparency.
We are a parliamentary democracy, and pretty much everybody in this country has figured out that this presidential system is a disaster. The executive presidential system is not suitable for Sri Lanka, it simply has not worked
Let’s take it for granted that is going to change. Then your parliamentary system itself will hopefully drive better economic governance because the government has to come to the Parliament and be answerable. The President does not come to Parliament, he’s only coming by invitation. The second thing is a few months ago, the opposition was saying the finance minister hasn’t come to Parliament for three months.
If you look at the British tradition, there is something called question time on Wednesday. The Prime Minister and his entire team have to come in front of the opposition and answer and debate. We don’t have that type of accountability. That’s the first thing. If Parliament is supreme in a country, then we have to restore the parliamentary system; we have to have certain independent institutions.
Now one reason we got into this mess is printing excess money. We need to have a new Monetary Law Act, which is already drafted, it was on the parliament’s agenda in 2019. However, it didn’t go through, but we need an independent central bank. The central bank must focus on its mandate to ensure sound money. Now what has happened is the value of our money has been destroyed; the soundness of the money is completely gone.
We need these independent institutions. On the audit side, we need a better audit function and an independent budget office, because if you look at all the budgets in Sri Lanka during the last 20-30 years, all the revenue forecasts are wrong. And the expenditure is always higher than estimated. You need an independent budget office for any policies that you don’t have government bonds, this budget office will act as a think tank that tells you what the consequences are of various choices. It’s also a source of research and education so that your legislature is better informed.
The next thing is the right people, the way we select our MPs. We don’t know who our MP is anymore. Because under this manapa-based system, you are competing at a district level. So you don’t have, in essence, a local MP. We need to get back to that local MP system where there is greater accountability based on geographic location.
So small electorates, and first past the post?
For two-thirds of the seats. I believe the German system has some things we can borrow. So with one of your votes, a third of the legislature is elected from the PR system. The other two-thirds are elected by a second vote cast on a first-past-the-post basis.
The two-vote system allows you to keep your party vote different to the local vote. I feel there is a lot we can gain from such a system. If I believe in a particular philosophy or ideology I will vote for a party. But my local MP could be somebody from outside my party.
When you have smaller constituencies, for instance, Colombo has 2 million people. When you have smaller electorates, around 100,000, instead of two million, the amount of money you need to campaign will be far less than the hundreds of millions now needed. The amount of money you need will be small. Everything will be in a smaller number. And you’re not competing with people in your party to get preferential votes, which is the manapa-based system.
Hopefully, first past the post will encourage a different calibre of people to run for office. They could even run as independents. They don’t necessarily have to come through political parties.
Anything you want to add?
This is the greatest opportunity in my lifetime. If we mess this up, I’m afraid we will fall way behind all the other nations. Other countries have gone through similar crises. What happened during the Asian financial crisis in 1997, for example in Thailand, had a massive crash. Their crisis was different to ours. The Thai population was willing to change.
People like myself who are involved in a think tank, have a large role to play to get our message out and educate the population so that we influence the formation of the right system. A prerequisite is that we as a country need to come together for what our real ethos is because throughout our post-independence history, let’s face it, we have been divisive, our communities are not together, and there have been so many conflicts including the ethnic conflict.
Our leaders and the population have to come together and identify a national ethos, as citizens that this is a country for all. If everybody agrees that we have to work together to build Sri Lanka, then we have to set the right system that works.
We have to get our constitution, institutions and our public service, everything to work. We have to change the public service and go back to the old independent civil service model. You attracted the best people in your country to join the civil service. Politicians couldn’t meddle with the civil service. The civil service ran the country, whereas now the civil servants are servants of the politician; they are not servants of the people. So we cannot afford to allow this opportunity to pass.
What happens in the next year will be crucial. As we continue to suffer the economic crisis we have all to step forward to fix it, as people who benefited from this system are not going to change easily.
What happens in the next year will be crucial. As we continue to suffer the economic crisis we have all to step forward to fix it, as people who benefited from this system are not goi