MCC and the transition to economic growth W. A. Wijewardena

Sri Lanka passed the threshold of the lower middle income country to become a higher middle income country in June 2019, hence the need to hurry and sign papers to make it eligible to receive MCC support (AFP)

The much-debated Millennium Challenge Corporation (MCC) Compact for Sri Lanka promises funding for transport infrastructure development and land access rights. The USD 480 million Grant is viewed with skepticism by some and favourably by others. Speaking to Daily Mirror, former Central Bank Deputy Governor and senior economist W. A. Wijewardena shared his insights on the MCC Compact. He said the grant could facilitate a promising national economic future through road development and upgrades to e-land titles.
 

• The MCC is a new aid disbursement agency created by the US Congress in 2004 similar to the US Agency for International Development or USAID, which has been in operation in Sri Lanka for a long time
• The Project doesn’t aim at eradicating the menace, but to provide a relief, so that the country will have a breathing space to implement a permanent solution 

Excerpts:

Q What does the Millennium Challenge Corporation (MCC) Compact stand for and on what basis is it approved for a country? 

The MCC is a new aid disbursement agency created by the US Congress in 2004 similar to the US Agency for International Development or USAID, which has been in operation in Sri Lanka for a long time. MCC provides grants to eligible countries for development projects that aim to improve the living conditions of people. A nation which remains a lower middle income country or below is eligible to receive support from MCC provided it has passed 20 tests covering three major areas, namely, economic freedom, ruling justly and investing in people. Economic freedom component has 6 sub-components, fiscal policy, inflation, trade policy, how women are treated in the economy, land rights and access, access to credit and ease of starting up business. Ruling justly contains political rights, civil liberties, control of corruption, government effectiveness, rule of law, and freedom of information. The last criterion –investing in people - has six sub components such as health expenditures, primary education expenditures, natural resource protection, immunization rates, girls’ secondary education enrollment rates and child health. A country becomes eligible to receive assistance if it has passed at least 12 out of 20. For this purpose, MCC prepares a country scorecard and what is available for Sri Lanka is the one prepared for 2019.In that scorecard, Sri Lanka has passed 13 and failed in the case of fiscal policy, gender in the economy, land rights and access, freedom of information, health expenditures, and primary education expenditures. These seven areas should be improved in the future. Sri Lanka had attempted to obtain MCC funding as far back as 2005, but failed because it could not pass a minimum of 12 tests. However, in 2016, MCC Board had approved Sri Lanka as an eligible country and, to receive the funding, the Government of Sri Lanka in 2017 had completed an analysis which a country should do compulsorily before receiving assistance known as a ‘Constraints Analysis’. This analysis is important for the implementation of any development policy because without identifying the constraints the country is facing, it cannot implement the policy. Experts on this subject say that if a country does not tackle the constraints, the constraints will tackle the countries. It should be mentioned that the past development policies have not been successful because the country had not been able to tackle constraints successfully. 

Q The MCC grant worth USD 480 million has currently become a controversial topic. What is your stance  on whether it is wise to proceed further with the MCC grant? 

We have to be clear on one thing that Sri Lanka which has now passed the threshold of the lower middle income country to become a higher middle income country in June 2019 is no longer eligible to receive MCC support. Hence, after January 1, 2019, Sri Lanka cannot expect to receive this facility. The present Compact is being considered by MCC because the work in connection with the Compact was commenced in 2016. However, there are two requirements which Sri Lanka has to satisfy before December 15, 2019 to receive this facility. One is the signing of the Agreement by Sri Lanka and having the necessary laws passed by Parliament. MCC Board is expected to meet later in December and by that time these two requirements should have been met. This is the reason for the hurry with which the present government is working. If the Government cannot do it before the deadline, Sri Lanka will lose the MCC Compact forever.

The present Compact is not what MCC has forced on Sri Lanka. Instead, it is what Sri Lankan authorities have requested from MCC after identifying the most pressing needs of the people. The present grant of $480 million is meant for two main projects, road development and land title modernisation. 

Out of $480 million, $350 will be used for road development component. It has three main components. One is the easing of the traffic congestion in the Western Province which is in fact a menace. The Project doesn’t aim at eradicating the menace, but to provide a relief, so that the country will have a breathing space to implement a permanent solution. Accordingly, the 8 main roads that feed the city of Colombo will be improved and traffic causing 132 junctions will be widened to allow traffic to pass easily. In addition, 50 places in which there are pedestrian crossings that cause traffic to move slowly will be provided with overhead or underground crossings without an impact on the vehicles passing those sections. In addition, public bus services, both CTB and privately owned, will be modernised by using advanced information and communication technology to issue e-tickets and better coordination of time tables. The third one is the development of a ring road net connecting major towns like Dambulla-Mahiyangana-Bibile-Moneragala-Rathnapura-Kegalle-Kurunegala-Dambulla with a class A road net and connecting them to Western Province where there is the major market in the country.

In the case of land title modernisation, moneys will be used to convert the present paper based title deeds to e-titles and improving the valuation capacity of the Valuation Department. 

This project will not increase the country’s growth rate immediately. It will simply address solutions to some of the most critical constraints, which the country’s economy faces today. It is a facilitator and not a final solution provider.    

Former Central Bank Deputy Governor and senior Economist W. A. Wijewardena

Q What does the MCC entail in terms of benefits for Sri Lanka? 

As mentioned above, the project will ease the current traffic congestion in the Western Province. For instance, at present, a commuter has to spend about 2 hours to travel from Homagama, just 24 km, to Colombo. This is expected to bring it down to about 1 hour. Ease of travel will help people to make a better and more productive contribution to economic growth. Similarly, when the major outstation towns are connected with the larger market in the Western Province, the improved market access will help those living in those provinces to sell their products easily. E-ticketing will help bus operators to collect fares easily, while helping passengers to make payments and better coordination through improved bus time-tables. E-land titles will help all those who own land to keep the titles safely and pledge them to banks if they are to apply for bank loans. 

Experts on this subject say that if a country does not tackle the constraints, the constraints will tackle the countries. It should be mentioned that the past development policies have not been successful because the country had not been able to tackle constraints successfully 

The present Compact is not what MCC has forced on Sri Lanka. Instead, it is what Sri Lankan authorities have requested from MCC after identifying the most pressing needs of the people

This project will not increase the country’s growth rate immediately. It will simply address solutions to some of the most critical constraints, which the country’s economy faces today

However, if US Administration wants to compromise on national security of any country, it does not have to work through an aid agreement. In this technology driven world, it is very easy for them to gather data and information from any country

Q Could national security concerns arise by signing the MCC as suggested by those opposing the grant?

I have gone through the agreement and could not find any provision that would compromise the country’s national security. This fear is the normal Fear of Americans which people of the third world has about USA. The past extremely selfish actions of US authorities too have contributed to establish this fear firmly in them (other countries). However, if US Administration wants to compromise on national security of any country, it does not have to work through an aid agreement. In this technology driven world, it is very easy for them to gather data and information from any country and use such big data for analysis and offensive or defensive action. Their information gathering capability is so advanced they say that when a Russian goes out of his house, they could even take a photo of a fly sitting on his nose in real time. With such a giant, it is always better for small countries like Sri Lanka to collaborate rather than confront.

Q The MCC Compact mainly focuses on the improvement of Transport Infrastructure and Land Rights and Access to Land. How optimistic are you about Sri Lanka realising these goals with the assistance of the MCC Grant?

The success would depend on the implementation machinery which Sri Lanka possesses. Five years is a long period and if the country starts work with a proper plan, it is not difficult to realise the goals of the project within that period. For projects that have progressed half-way by the closing date, MCC has given marginal extensions to enable those countries to complete the same. Sri Lanka should not resort to that strategy, but implement a proper plan to complete the project within the permitted time period. 

Q The main objective of the MCC is to reduce poverty through economic growth. In your opinion, what are the positive and negative impacts the MCC may have on Sri Lanka’s economy? 

This project is a facilitator for poverty reduction through increased economic growth. Hence, there are more areas which the Government has to concentrate on using the facility to accelerate economic growth. As it is road developments and e-and titles bring only positive results to the economy. 

Q If the MCC agreement ceases to exist after 5 years and if the development projects funded by the MCC have not been completed within the set period, what would happen to such development projects following the completion of the five years time-frame? 

I have mentioned earlier that there is scope for applying for marginal extension of the project if the country is unable to attain all the goals set in the project within the given five year period. 

Q Do you think that the allegations levelled against the MCC by the opposition stand true and if yes, why?

It is usual that opposition parties always voice their criticisms against important projects. But it leads to the generation of a public debate which is beneficial. Besides, going by the past experiences, one can safely infer that those critics, once they are in power, would take a different course of action regarding the projects which they have criticised. For instance, in 1970, SLFP led by Sirimavo Bandaranaike vehemently attacked the Dudley Senanayake Government for selling Sri Lanka to the World Bank when the agreement relating to the Mahaweli Project was signed. However, after SLFP came to power in 1970, the Sirimavo Bandaranaike Government implemented the Mahaweli Project vigorously and rigorously. 

But the difference here is if MCC Compact is not approved before mid December, it is lost forever because Sri Lanka with its higher middle income status is no longer eligible for MCC funding. Hence, if the country feels that the project goals are still desirable, it may have to raise funds through commercial borrowings adding to the country’s already disturbing external debt problem.