The Provincial Council system in Sri Lanka is inept at its socioeconomic objectives, primarily due to its dependence on the central government for financing.
However, if responsibilities such as healthcare, education, and community services are transferred to the provincial councils without central government interference, the system can be made to work more effectively. Holding provincial council elections will not benefit the economic revival process unless some activities are delegated to the provincial councils.
Prof Abeyratne contends that political parties competing for votes are not effectively managing people’s expectations as they have failed to address the root cause of the crisis, including taxation and fiscal imbalances in the country. To address the crisis, the government needs to work on revenue creation and expenditure reduction and find a balance between the two. This lack of analysis has resulted in painful measures that disproportionately affect the minority, leading to protests and political instability, the economics professor argues.
Prof Abeyratne begins by explaining the failings of the Provincial Council system in promoting its intended socio-economic and development goals:
The reasons for the system’s failure to achieve its socio-economic objectives are numerous and complex, but a major factor is a reluctance to delegate certain functions to the provincial councils. This must be addressed, and the system should be viewed as a solution to political problems in the country’s history, rather than a hindrance.
By transferring responsibilities such as healthcare, education, and community services to the provincial councils, without central government interference, the system can be made to work more effectively. The current approach of keeping control of these functions within the central government, while also allocating some responsibilities to the provincial councils, is not optimal.
Furthermore, the mindset that views the central government as superior to the provincial councils is counterproductive. Instead, the provincial councils should be viewed as partners in governance, working together with the central government to run the country more efficiently.
The Provincial Council system was not established out of necessity or Sri Lanka’s own volition, but rather imposed upon it. Nevertheless, it was accepted as part of the democratic process. Now, the country finds itself in a situation where the political process cannot proceed without the use of this system.
It is doubtful that the system was introduced for the betterment of the country; rather, it was likely done for political reasons. However, it is now an established part of the country’s governance, and it should be utilised to its fullest potential .
How could holding the provincial council elections benefit the economic revival process?
I believe that amidst the current economic crisis and ongoing programme of necessary adjustments, holding local government elections is neither good nor bad. Presently, provincial councils are financially reliant on the central government for their responsibilities and duties, even if they are not excessive, and there are no negative consequences because the central government can take care of them. Thus, there is no compelling reason to hold elections, and they should not be held unless some of the activities are delegated to the provincial councils.
The sub-national political system in Sri Lanka is represented in the current political setup, unlike in many other countries. The primary objective of political parties is to avoid these elections to avoid testing their popularity, as the same parties compete in the general presidential election and provincial council and local government elections.
The existence of sub-national level political system elections is not necessary for the improvement of local governance or the implementation of better administrative systems. Rather, it is a means for the major political parties to prepare for the general election. Consequently, the sub-national level activities are not conducted to provide better services or promote a more competitive country.
What is your view on the economic crisis and the factors leading up to it?
As you rightly pointed out, the underlying issues plaguing the economy are decades old and have been nurtured over time. The problems range from basic foreign exchange and debt problems, which are intertwined with internal finance, to other fundamental issues. At its core, is a foreign exchange problem.
While politicians have a greater responsibility to educate and steer the nation in the right direction, it would be unfair to place the blame solely on them. Various political pressure groups and the general public have also played a role in bringing the country to its current state.
Now, as Sri Lanka finds itself in a vulnerable position that has been brewing for years, external shocks can trigger a crisis, as is currently happening. The country has faced similar crises in the past but has been fortunate enough to avoid collapse due to unforeseen events. However, this time, nothing prevented it from happening.
The Covid-19 pandemic and other policies in 2019 were the immediate factors that led to the collapse. It is important to note that while the crisis may develop gradually, collapses are often sudden, as evidenced by Sri Lanka’s situation.
While politicians have a greater responsibility to educate and steer the nation in the right direction, it would be unfair to place the blame solely on them. Various political pressure groups and the general public have also played a role in bringing the country to its current state.
The recent changes and the IMF programme are just the beginning, and more difficult reforms will be required. Do you think that political parties competing for votes are effectively managing people’s expectations?
No, I do not believe so. Even examining the political landscape, I find that many of our political leaders do not grasp the crisis or how to navigate it, based on the statements they make. The IMF cannot work miracles to solve the crisis.
Although the IMF programme has assisted in correcting some of our issues, such as the fiscal imbalances in managing state-owned enterprises, the misuse of taxpayer funds, and other economic malpractices, it does not address the root of the crisis.
This time, it has brought to light the country’s susceptibility to corruption, an area that Sri Lanka needs to address. However, simply acknowledging that the fundamental problem is the foreign exchange crisis does not provide a solution.
Therefore, if the IMF programme is to aid the country in getting out of its current situation, we must work on addressing the root cause of the crisis.
We are not implementing the complete reform programme, which includes addressing taxation and fiscal imbalances in the country. Currently, we are only looking at the percentage of GDP for revenue collection and government spending and need to find a balance between the two.
We are neglecting the primary issues at hand, including the large number of tax evaders in the country. Even though we launched a system to track income and wealth, the government is expecting people to pay taxes voluntarily, which is unlikely.
India, with a larger population, is ahead of Sri Lanka in the digitization process, yet we are hesitant to adopt similar measures. Consequently, revenue generation is limited to a small percentage of the population, while expenditure reduction has not been thoroughly examined.
This lack of analysis on both revenue creation and expenditure reduction has resulted in painful measures that disproportionately affect the minority, leading to political protests.
The interest rate and inflation issues are avoidable, and improving the basics such as the manufacturing side can rectify them. It is imperative to address both the revenue and expenditure sides of the equation to bring balance to the economy.
What do you make of the recent changes to income taxes and the resultant protests?
Fundamentally I see no problem there. The real problem lies with those who evade taxes, and the government must implement a system that holds everyone accountable. We also need to make the changes to our expenditure side that we have been discussing for years but are yet to implement. However, making those changes on the expenditure side will require a lot of effort, and we have only completed the easier parts; the more difficult ones remain.
Over the years, politicians in our country have spent a lot of money on various issues, including the growth of the public sector. Despite this, our workforce has only increased by around 200,000 net in the last 15 years, while the public sector has grown by half a million from one million to 1.5 million in net terms. This is especially problematic when private investment is lacking, and the economy is not performing well.
Consequently, the government has become the main source of debt in our nation, and the public sector has become very large. We need to reduce it, but doing so is a political challenge, and without reducing the public sector, we cannot reduce the public sector salary bill.
These are difficult tasks for the government to accomplish in the short term, and to reduce the public sector and implement corrective measures for public companies, I believe we need to use a variety of approaches.
One significant area that requires change is the public sector. However, since 1977, or over the last 40 to 45 years, no reforms have been made in this area in conjunction with other policy reform processes. Thus, we must improve the public sector, but this will require making difficult decisions.
What will it take for Sri Lankans to understand that hard, painful reforms are needed?
Reforming the public sector and shifting mindsets is a formidable task due to the way public opinion has been cultivated in this nation by every political party for years. However, the current crisis presents a golden opportunity that may not come again. The majority of people recognise that the country has been poorly managed for years, and now is an excellent time to implement improvements.
Despite political party backing and public support, we have continued on a disastrous path, leading to street protests. However, these protests were against foreign investment rather than foreign borrowing, likely due to political influences and special interest manoeuvrings.
It is amusing that everyone is suddenly proposing corrective actions to help the economy recover from the crisis, but it is unclear whether they will take the necessary steps or repeat past mistakes that led to the crisis.
Do you have any hope that any one of the political parties aspiring to lead this country would have the strength to see through the painful reforms?
Even now, based on my observation of their political activity, they continue to employ the same strategies. I observed that the current economic climate requires that all income earners be included in the tax system. But you will now see that the political parties are competing with each other to increase the income tax track sold and to release a large part of the population from paying taxes and come to power on that basis. With these electoral promises, I’m not sure how they’ll fix things once they’re in power.
Over the years, politicians in our country have spent a lot of money on various issues, including the growth of the public sector. Despite this, our workforce has only increased by around 200,000 net in the last 15 years, while the public sector has grown by half a million from one million to 1.5 million in net terms
What should any plan to revive the economy look like, in your view?
To revive the economy, we must shift towards becoming an export-oriented economy, a goal which was envisioned 40 years ago but has since been neglected. To achieve this, both domestic and foreign investments are necessary, as domestic investments alone will not suffice.
However, attracting foreign investors is a challenge for democracies such as Sri Lanka and India, as recent events have shown. Despite this, Sri Lanka has advantages that can be capitalized on, including a favourable balance of payments and a competitive labour market.
To achieve sustained growth of around 8% over the next two decades, we must continue with recent policy initiatives to attract foreign investment and overcome obstacles in the labour market. It is also important to keep in mind the need to service foreign debt following restructuring. Overall, Sri Lanka has the potential to emerge from the crisis and become a competitive investment destination in the region, but it will require sustained effort and commitment to achieve this goal.
Any concluding words?
I believe that Sri Lanka could derive benefits from debt restructuring and the IMF programme initiatives. However, our core challenge lies in the imperative to enact policy changes, regulatory mechanisms, and reforms that have been neglected for decades. This includes combating corruption and instilling discipline, which are indispensable prerequisites for any country’s progress