Effective governance and economic management need incorruptibility and competence in equal measure, a challenge for the new President Anura Kumara Dissanayake (AKD) and his government, assuming he would have one after the mid-November parliamentary polls, riding on the anti-corruption zeitgeist. 

Apart from the admirable, refreshing and timely anti-corruption stance, almost everything else in his manifesto fails to defer from the usual political establishment approach to economics, which was populist, socialist and statist for the most part. This risks destabilizing the economy by popular consent: policies that win elections but exacerbate past missteps via widening budget deficit and piling more debt. 

The AKD administration must pursue tangible anti-corruption policies to convince citizens of the painful reforms and measures to reset the economy. In other words, competent governance and policy must have an equal measure of focus to avoid another economic crash.

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The AKD manifesto lays out a plan to tackle corruption, focusing on recovery and prevention. Key proposals include the establishment of a stolen public asset recovery agency, supported by international institutions like Stolen Asset Recovery (STAR) and the United Nations Office on Drugs and Crime (UNODC), to reclaim misappropriated state assets.

The manifesto proposes empowering the Director General of the Bribery Commission with the necessary authority to implement the International Convention on the Prevention of Corruption and oversee asset recovery efforts to strengthen enforcement. Additionally, it calls for a permanent bench of three High Court judges to expedite financial crimes, bribery, and corruption cases.

On a more local level, the plan includes setting up Anti-Corruption Commission offices in every district, with a mandate to investigate complaints within six months or provide Parliament with updates on unresolved cases. The manifesto also advocates for new legislation that targets those who aid and protect individuals accused of financial corruption, treating them as complicit in the crimes.

Public awareness is another priority, with a government-sponsored campaign to educate citizens about corruption, fraud, and bribery while empowering them to resist such practices. The AKD administration proposes to review cases previously withdrawn by the Bribery Commission and the Attorney General and resubmit where appropriate.

On addressing delays in the judicial system, the manifesto proposes the creation of a Directorate of Public Prosecution (DPP), which would function independently of the Attorney General. This office would handle cases on behalf of the government and operate both nationally and at provincial levels. The manifesto further calls for prosecution guidelines and improved transparency, ensuring complainants are informed if the Attorney General chooses not to prosecute a case. Finally, it suggests appointing a special Parliamentary Ombudsman to oversee grievances related to the Attorney General.

On fiscal policy, the AKD manifesto proposes overhauling the tax system and infusing efficiency, transparency, and fairness. A new unit would design and implement tax policies, particularly for international transactions, with legal reforms and capacity-building initiatives to improve the efficiency and effectiveness of the Inland Revenue Department.

The plan also seeks to expedite tax collection by integrating key agencies, such as Sri Lanka Customs and the Department of Motor Traffic, with the Inland Revenue Department. A unique digital identification code (UDI) for citizens would streamline access to public services and improve tax tracking.

The tax depreciation allowance for machinery and equipment would increase to 120% to stimulate production. Digital Point of Sales (POS) systems and invoicing would improve VAT collection. Essential goods like food, educational materials, and renewable energy equipment would be exempt from VAT under a 0% rate. Exporters would benefit from expedited VAT rebates, and risk-based audits would replace the current discretionary system.

The manifesto also promotes an online platform for tax assessment, filing, payments, and refunds, with a mobile app to enhance accessibility. A single-window service would streamline import/export operations, and a simplified tariff structure would boost customs revenue.

Internationally, the manifesto addresses tax evasion and transfer pricing with measures such as the Automatic Exchange of Information (AEoI) and calls for a global minimum tax on multinational companies. The AKD manifesto suggests strengthening public finance through digital governance, e-procurement, and greater public oversight to cut unnecessary spending and improve accountability, but not in detail.

However, the manifesto recommends several tax concessions for selected social (arts, culture, sports) and commercial ventures, including IPOs, machinery imports and ICT sector development. It proposes tax incentives for business startup incubator programmes to facilitate market entry of selected startups. It also wants to increase the annual tax threshold for individual income tax from Rs1.2 million to Rs2.4 million and revise the tax rates and brackets to reflect fairness.

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The AKD manifesto allocates three paragraphs to state-owned enterprises (SOEs). It proposes taking strategic decisions for each SOE based on its importance to the economy, potential for growth, and impact on financial stability and national security. It also pledges to improve transparency by providing the public with comprehensive information on SOE operations. Additionally, the manifesto promotes research and development to explore emerging economic opportunities nationally and internationally.

The word debt appears 13 times in the manifesto, and five paragraphs outline a plan to tackle the debt crisis. The manifesto calls for renegotiating with the IMF to implement a more favourable programme for vulnerable segments. It also proposes new plans for efficient tax administration and government spending management to refine the revenue-based fiscal consolidation goals in the IMF programme.

Further, the manifesto suggests preparing an alternative Debt Sustainability Analysis (DSA) to ensure debt restructuring efforts align with maintaining manageable interest rates. It proposes a detailed debt audit on foreign loans to ensure transparency, with legal action against those who misappropriated funds. Finally, the manifesto emphasizes the need to improve public financial management and financial discipline to improve the sovereign credit rating and stabilize the banking system.

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Corruption is a complex problem. According to the Chief Executive of Advocata Institute, Dhananath Fernando, we may fail to apprehend the corrupt and their stolen asset. He recently wrote, “If you ask the average person the reason for our economic crisis, they would probably say one word: corruption. The idea of corruption was the rallying call of the popular protest movement – the Aragalaya. However, the truth is a little different, Fernando points out.

It does not mean there has not been corruption; it means corruption is more of a symptom than the root cause. Corruption is like a fever, while the infection lies elsewhere. Here is the problem: we do not fully understand how corruption occurred, Fernando said, adding: if we do not know that, it is unlikely that we can fix it”.

He asserts that most people wrongly calculate corruption by comparing the total debt to the value of infrastructure projects. “However, most of the money we borrowed was not for infrastructure. In fact, since 2010, about 47% of the loans went for interest payments, and another 26% of the debt increase came from currency depreciation. Therefore, comparing the value of infrastructure projects to the total debt does not give a clear picture of corruption because we have been borrowing mostly to pay interest. As a result, the debt keeps growing, and we remain stuck in the same place”.

Corruption manifestly exists. For instance, in procurement, projects are inflated well above costs, resulting in borrowing more and compounding interest payments, Fernando argued. He avers that anti-corruption efforts often focus on the aftermath, but the real need is for transparency upfront through competitive bidding and digital procurement systems. “Without this, recovering stolen funds is challenging because we do not know the true values”. Further, the debt gets exacerbated by State-Owned Enterprises (SOEs) like Sri Lankan Airlines and the Ceylon Petroleum Corporation. The economic crisis stems from borrowing too much at high interest rates for projects that do not generate enough revenue, causing a vicious cycle of borrowing, mostly to pay off interest. “As a result, the interest compounded, and we have been continuously borrowing to pay off that growing interest, leaving the debt in place and forcing us to keep borrowing,” Fernando said.

Fernando argued that the recent Presidential election manifestos fail to address the root causes of corruption. Instead, they focused on reforms like boosting exports, the business environment, social safety nets, and debt restructuring rather than solely on corruption. And this is true of the AKD manifesto, which the NPP will exploit in the November parliamentary election. It proposes a slew of spending measures and tax concessions to revive the economy but little on spending cuts to balance the budget.

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Acute fiscal problems remain. The Public Sector Pension scheme currently supports approximately 700,000 public sector pensioners, representing a significant financial strain on the government budget. In 2023, pension payments totalled Rs372.3 billion, accounting for 7.9% of recurrent expenditure and 12.1% of government revenue. The number of pensioners increased by 4.2% in 2023, contributing to a 20.5% rise in total pension payments.

For 2024, estimated tax revenue is Rs3.8 trillion, while recurrent expenditure is Rs5.3 trillion, including significant outlays of Rs1.1 trillion for public sector wages, Rs2.6 trillion for debt servicing, and Rs1.2 trillion for subsidy transfers. Compounding the problem is the burden of State-owned Enterprises (SOEs), which incurred losses of Rs744.6 billion in 2022 alone. According to Advocata Institute, the losses represent a per capita cost of Rs1.7 million for each registered taxpayer, Rs33,949 per citizen, and Rs141,809 per household, underscoring the deep financial strain that the AKD administration must confront with concrete solutions. 

Will the AKD administration have the resolve to broaden the tax base as proposed by Verité Research in its 2023 paper, The Alternatives to Universal Tax Registration in Sri Lanka? The report highlights a critical gap: many government servants, particularly those in higher pay brackets, are exempt from income tax on their official salaries. However, many likely receive substantial income from other sources, including non-salary payments for attending meetings or serving on boards and income from property or businesses. Also, officials enjoy pension benefits, which are currently untaxed and add significant value to their overall remuneration. Proactively registering this group for tax purposes could notably contribute to expanding the country’s tax base, Verite Research argued.

The think tank also noted that data from the past two decades shows that income from self-employed professionals and those working through partnerships or small companies is often under-reported in tax filings. Many professionals are already required to register with regulatory bodies or associations to practice their profession or run certain businesses, such as the Sri Lanka Medical Council for medical practitioners, the Sri Lanka Institute of Chartered Accountants for accountants, and the Sri Lanka Export Development Board for exporters.

Requiring all professionals registered with these bodies to obtain a Taxpayer Identification Number (TIN) and file a tax return would significantly improve compliance and widen the tax base. By addressing these gaps in the tax system, the AKD administration could have a more equitable and effective tax system to strengthen the fiscal foundation. However, will it confront the influential and vocal public sector trade unions? An effective anti-corruption drive will give it the political mileage to do so. Eradicating corruption will not end the economic crisis, and this is the narrative the new administration must pursue.