Namal’s Economic policies The good, the bad, the ugly

9 September 2024 07:50 am Views - 57

A voluntary service pool consisting of former state sector employees will be provided with a stipend should they choose to continue their service. This policy holds merit because many retired individuals still possess substantial productive working years, along with valuable experience and institutional knowledge that can help counteract the current brain drain caused by outward migration

Promoting digital payments while discouraging cash usage will enhance financial inclusion. This shift not only increases the amount of loanable funds within the financial system by drawing in the cash in circulation, but it also generates a verifiable and shareable stream of information that improves credit underwriting. As a result, this can significantly boost the flow of credit to the subprime segment

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BY MURTAZA JAFFERJEE

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Namal Rajapakse’s (NR) English manifesto, spanning 11,809 words, appears to have been hastily prepared. It is poorly conceived, riddled with inconsistencies, lacking in specifics and heavily relies on invoking the legacy of his father, Mahinda Rajapakse (MR).

It begins by highlighting the legacy of his father, portraying the period from 2005 to 2014 as the “Golden Era” of the country’s post-independence history. The narrative praises the Mahinda Chinthana vision, with its ambition to elevate Sri Lanka to developed nation status, where unity in diversity drives the country towards becoming the fastest-growing economy. It lists various infrastructure projects, including the Lotus Tower, which is described as a “marvel to provide technology for the youth”. 

The text then criticizes the Yahapalana government for pulling the country back into a “dark age” and increasing public debt through further borrowings via International Sovereign Bonds (ISBs). This is factually incorrect for these new issuances were primarily used to refinance existing swaps and foreign holdings of GSECs in the debt stack.

It goes on to praise how effectively the government, led by his party, managed the COVID-19 pandemic, while acknowledging a few poor decisions along the way. It claims that a weakened economy, compounded by the influence of local and external forces, led to civil unrest. With the nation’s best interests in mind, they chose to step aside from the leadership.
NR does not adhere to a specific ideology but seems to advocate for a statist economic model. His economic development model is described as an integrated development approach, built on four pillars: the role of the state, innovation, investment, and freedoms. The state is envisioned to address national interests, drive economic growth, promote social progress, and ensure environmental sustainability. Innovation will be fostered across all sectors, while investments will be encouraged and incentivized in areas such as entrepreneurship, human resources, R&D, and infrastructure. The fourth pillar emphasizes the importance of allowing freedom in economic, political, cultural, and religious activities.

All his intended policies are designed to align with this framework.

NR highlights that, despite being the youngest presidential candidate in history at 38 years old, his 14 years of experience as a parliamentarian and 2 years as a minister during troubled times makes him well-suited to take on the challenge of the presidency.

As mentioned earlier, the manifesto includes a lengthy wish list. While many of these items are highly desirable, the lack of detail and funding mechanisms makes it difficult to critique them comprehensively. I will now focus on a few key items that warrant further discussion.

 

The good

• Committed to maintaining soil fertility crucial for increasing agricultural output, while also recognizing that it may not be feasible to prevent the use of synthetic chemicals in the process.
   
• Promoting a “circular economy” using a balanced approach of incentives and regulations.
   
• Numerous proposals aim to leverage information technology to enhance the delivery of public services, increase transparency, and improve the efficiency of government administration. Some key initiatives include implementing a National Identification System (NIC) with biometric data (which is already partially underway), establishing an e-procurement system, developing a public service performance management system, creating digital health records, and facilitating electronic tax filing (already possible), among others.
   
• A voluntary service pool consisting of former state sector employees will be provided with a stipend should they choose to continue their service. This policy holds merit because many retired individuals still possess substantial productive working years, along with valuable experience and institutional knowledge that can help counteract the current brain drain caused by outward migration.
   
• Increasing funding for the meteorology department to enhance predictive capabilities to reduce the impact of extreme weather events associated with climate change.
   
• Promote maize cultivation to boost the production of animal feed, which constitutes 70% of total feed costs, with maize alone accounting for 40% of this expenditure. Current maize prices are volatile due to seasonality and are approximately double that of the least expensive imports. To tackle this challenge, it is crucial to enhance maize production through large-scale commercial farming initiatives, ensure water supply through prioritized irrigation (currently deprioritized for fodder crops), and employ high-yielding seed varieties.
   
• Establishing economic zones along major expressway exits. Creation of zones is with merit; the suggested locations may not be optimal. The creation of new zones, particularly through public-private partnerships (PPPs), allows the state to provide land and minimizes the uncertainty and time needed for approvals, as many of these can be pre-approved during the zone’s development.

This approach also facilitates the provision of superior infrastructure, driven by a greater concentration of economic activity that leverages economies of scale. The optimal placement of these zones should be near population centres with a surplus of labour suitable for employment, even if these locations do not offer the lowest logistical costs.

• Promoting digital payments while discouraging cash usage will enhance financial inclusion. This shift not only increases the amount of loanable funds within the financial system by drawing in the cash in circulation, but it also generates a verifiable and shareable stream of information that improves credit underwriting. As a result, this can significantly boost the flow of credit to the subprime segment.
   
• Focused effort on developing the railway system by employing new trains, building new tracks parallel to highways, encouraging goods transportation and deploying IT to digitize the sale of tickets. 
   
• Since independence, successive governments have deprioritized investment in railways. Although there have been some investments to refurbish tracks—such as the Indian line of credit for the Northern Line, double-tracking parts of the Southern Line after the tsunami, and the track extension from Matara to Beliatta initiated during Mahinda Rajapaksa’s administration—these efforts have been limited. Additionally, initiatives launched under the Yahapalana government, like the Colombo light rail and improvements to the Kelani Valley line, were canceled by the Gotabaya government for political reasons.
   
• Transporting goods and people over long distances by train is far more energy-efficient than by road due to more consistent speeds, lower rolling friction in the wheels, and superior aerodynamics. Electrifying trains—particularly with renewable energy—can further reduce energy costs and emissions.
   
• Despite compelling evidence for prioritizing investments in railways, the sector has been neglected. Ceylon Government Railways, which remains a government department (having been converted into a corporation during Ranil Wickremesinghe’s 2002-2004 government before being reverted by Mahinda Rajapaksa), operates at a substantial loss due to unviable ticket prices, leading to poor service quality. The physical infrastructure, including a significant endowment of land and tracks, is underutilized. Additionally, powerful labour unions have resisted previous reform efforts, including the introduction of private train operations.
   
• The text highlights the necessity of establishing permanent ministry secretaries to ensure continuity in policy implementation. Under the former Ceylon Civil Service, permanent secretaries were appointed by the civil service commission and operated independently of ministerial direction. If the intention is to revert to this previous system, a constitutional amendment would be required, as the current constitution decrees that ministry secretaries are appointed by the president and must function under the direction and control of the minister.

 

The bad

•  NR aims to grow the economy to a GDP of USD 180 billion within a decade, representing an 80% increase from the current forecast of USD 100 billion. To achieve this, the economy would need to grow at an average annual rate of 6% in nominal USD. He also projects per capita GDP to surpass USD 8,000, which implies a stable population. This means that rising female labour participation, low unemployment (targeted at 2%), and productivity gains would need to compensate for stagnant population growth and the challenges posed by an aging population. Additionally, the sectoral shares are projected at 10% for agriculture, 25% for manufacturing, and 65% for services.
   
•  However, there are several issues with these targets. For example, the projection excludes the share of taxes less subsidies in GDP and confuses manufacturing with industry (the latter being a broader category). Furthermore, even with agriculture’s current share of GVA at 8.83%, the sector would need to grow at over 7% to reach the proposed target, which is unrealistic. While increasing agricultural productivity is important, structural transformation in a fast-growing economy typically reduces agriculture’s share of GDP as output share shifts towards other sectors.
   
•  It’s clear that these targets are more aspirational than grounded in careful analysis and should be viewed as such.
   
• He is committed to staying within the IMF program, including adhering to revenue and expenditure targets. At the same time, he plans to provide tax relief by systematically revising VAT and personal income tax, though it is unclear whether he intends to adjust the base or the rates. Any revenue losses from these tax policy changes are expected to be offset through improved tax administration measures. While the goal of tax relief is appealing, the lack of specifics on how these adjustments will be implemented undermines the feasibility of the plan.
   
• NR recommends recruiting 10,000 female police officers to ensure that each village has a dedicated female presence. Currently, the police force comprises 90,000 officers, with one-third allocated to providing personal security for politicians , ex-politicians and certain members of the judiciary. While it is reasonable to justify security for the head of state and senior judiciary officials, the necessity for extensive security for most politicians, who are ultimately public representatives, is questionable and unaffordable. While the push for more female police officers is understandable, this should be achieved through reallocating existing personnel rather than expanding the overall force.
   
• While increasing public sector pensions to keep pace with inflation is a desirable goal, it is currently unfeasible due to resource limitations. The exceptionally high inflation rate experienced last year served as a form of inflation tax necessary for stabilizing the economy; by diminishing real purchasing power, it significantly curtailed demand to align it with supply. Moreover, the existing state sector defined benefit system is now entirely unsustainable as we undergo a demographic transition towards an aging population. In the future, there will be more individuals retiring and living longer, making the cost of providing inflation-adjusted pensions nearly impossible to sustain.
   
• The manifesto highlights the necessity of providing incentives and special credit facilities for constructing both large and small hotels to accommodate the growing number of tourist arrivals. However, the banking system is currently facing high delinquency rates in lending to the lodging industry, largely due to the challenges of the past four years and an influx of inexperienced new investors entering the market. This raises questions about the need for policy intervention through incentives or concessionary credit for new developments. What is truly needed is the removal of high protective tariffs on building materials, which inflate construction costs significantly.

 

The ugly

• The manifesto explicitly states that the sale of public assets, including state-owned enterprises (SOEs), is not on the agenda. NR asserts, “Our policy focuses on generating profits and benefits for the people and workers by innovating and streamlining the management of state-owned lands, natural resources, and enterprises.” To facilitate change management, entrepreneurial executive boards will be utilized. However, there is a noted contradiction for he acknowledges the need to collaborate with the private sector for capital and technology which raises questions about maintaining state ownership.
   
• Retaining commercial state-owned enterprises (SOEs) within the government poses significant corruption risks, as these entities have historically been used for economic and political extraction. Additionally, it is fundamentally inappropriate for the government to engage in business activities, as this conflicts with its essential role as a policymaker and regulator. There are also concerns about competitive neutrality, as state ownership provides unfair advantages when competing with private enterprises, leading to distortions. They also distort upstream and downstream industries (such as in the case of electricity). Moreover, a fiscally strained treasury lacks the resources necessary to support and sustain these businesses effectively.
   
• Subsidies will continue to be managed through the existing Samurdi program. The text also suggests a redefined purpose for Samurdi; however, there is no detailed explanation of the specific changes being planned. Throughout the document, there are numerous references to the necessity for price-based subsidies, including those for fertilizer.
   
• After a delay of more than 20 years, the Welfare Benefits Act was finally implemented in 2023. Under this act, eligibility for subsidies is determined using a deprivation score derived from 22 indicators across six dimensions. This objective criterion is argued to be more effective in targeting assistance, reducing both exclusion and inclusion errors while minimizing corruption risks. Relief will be delivered through a unified cash transfer program called Aswasuma, which aims to minimize leakages by facilitating direct cash payments to bank accounts. However, the program is still a work in progress, and it will require several iterations to enhance its effectiveness.
   
• Price-based subsidies are problematic as they distort relative prices, leading to inefficient resource allocation, and are ineffective at accurately targeting those who need assistance.
   
• There is absolutely no justification for discontinuing the program and reverting to Samurdi.
   
• In the body of the document, there is a section where NR refutes the accusations of fraud and corruption within government administration, describing them as mere political slogans that lack substantial evidence. He suggests establishing an international standard procurement system, promoting competitive bidding for tenders, and implementing an investment appraisal system akin to those used in the corporate sector to determine investment priorities. Additionally, he proposes the formation of a parliamentary committee comprising opposition MPs to scrutinize major investments, requiring their approval before proceeding.
   
• There is no reference to the findings from the IMF governance diagnostic, nor is there any acknowledgment of the implementation of any—let alone all—of the 16 primary recommendations. This raises questions about whether he has even read this document, let alone mastery of it which is an absolute necessity for anyone aspiring to the presidency and implement “system change”.