The Govt must get the budget deficit down

In the name of development, we cannot sacrifice the environment

• The management of the pandemic right from the beginning had some big flaws from the management perspective
• We introduced a new Inland Revenue Act: a rationalised taxation
• The consumer didn’t get a single cent benefit on the sugar price
• In 2015 when we took office the Govt revenue was at its lowest. It was 11% of the GDP

In an interview with Daily mirror, a well-known economist, banker, and former State Minister of Finance, Eran Wickramaratne, a National List Parliamentarian from the Samagi Jana Balawegaya (SJB) speaks about the economic status in Sri Lanka and persisting environmental issues in the country. Excerpts:

  Q    Do you think that the present Government is successful in handling the Covid-19 pandemic in Sri Lanka, especially the new variant?

 I wouldn’t like to comment on the variant itself because I am not a virologist or a doctor. Certainly, I can comment on the management aspects. The issue on the management of the pandemic right from the beginning had some big flaws from a management perspective. The first thing you do is when you are facing a situation like this you will identify who are the people who have the knowledge and the understanding about the problem. 
There is a difference between having facts and knowledge. The Government hasn’t understood this difference. That’s the tragedy of this Government. What they should have done right from the beginning is even when they created the committees and the task forces, prominence should have been given to the people in the health field because this is a virus which the virologists, doctors, researchers and scientists deal with. 
The administrators and the people who strengthened the administration like the police and tri-forces would come to help. Though initially, people started to say how successful this was right from the beginning I raised these questions. 

I said don’t be too quick to say that because if you haven’t got your framework and properly place the management framework for it, the chances are that you are going to get a bad result. 
And the other reason was that if you test little you don’t know how widespread the issue is. 
We had minimal testing in the first round. Then we had the second round that came and now we are beginning to talk about the variants that are there. From the layman knowledge that I have what the variants seem to be saying is that it increases the speed at which it spreads. So far there doesn’t seem to be or too early for the medical scientists to tell us whether these variants have other health impacts, but they have told us the speed of spreading has increased. 

  Q    Has the Govt been able to provide sufficient relief to those affected by the pandemic especially their families?

 The relief that has been provided to the affected and their families is minimal. Regarding relief, one is the willingness and the second is the ability to provide it. In terms of the ability to support the affected and their families, the ability to support comes from your financial muscle or your fiscal strength. Before the Presidential Election in November 2019 then Opposition the present Govt members went around the country saying that the former Govt or the then Govt was increasing Govt revenue using taxation for it. 

They said they were going to reduce taxation when they come to power. That was the biggest mistake they made. They came to that conclusion without understanding and studying the situation in the country. 
In 2015 when we took office the Govt revenue was at its lowest. It was 11% of the GDP. Virtually, almost every country in the region had a revenue of 19%- 21% of the GDP. Sri Lanka didn’t follow that, and we were very low. What happened was, as we came into power, we set about trying to correct that and were able to push the Govt revenue as a percentage of the GDP by about 13.5% when we left office. We introduced a new Inland Revenue Act: rationalized taxation. It removed or reduced the discretion of political authority-- the minister to arbitrarily decide on the taxes. That is one of the things the Inland Revenue Act did. This Govt came in and said they reduced taxes. 

They didn’t do any study and didn’t understand the fiscal issue and immediately the Govt revenues slumped. So, the Govt revenue dropped in 2020 by about one third. When the Govt revenue drops like that there is very little space to do the regular things but if you have unforeseen situations like the Covid-19 pandemic the Govt has no space at all. So, the ability to face up the pandemic had disappeared even before the pandemic came. 

"And the other reason was that if you test little you don’t know how widespread the issue is. We had minimal testing in the first round. Then we had the second round that came and now we are beginning to talk about the variants that are there"

  Q    What about the businesses directly hit by the pandemic like the hospitality and tourism sector?

 The hospitality and tourism industries naturally were driven largely by foreign tourists coming into the country. When we took office, about 1.5million tourists were coming into the country and we gradually increased it to about 1.9 million. It was a gradual increase. Everything was going in the right direction. Then of course you can’t blame any government for the pandemic because it is a health issue. 

Most countries in the world are facing it. Where you can blame the Govt is more in terms of how the Govt has responded and how they have managed, not the pandemic itself. Recently, the Govt brought Ukrainian tourists into the country. Clearly, there is no issue with who you bring if the people you are bringing have the money to spend. The real issue is the management issue. When this decision was taken to test out the tourists in a bubble, the government put the wrong people in charge. This individual Udayanga Weeratunga was somebody who had been extradited to Sri Lanka on other charges. When you are going to test something as important as tourism which is one of the biggest revenue earners to the country you should have put it directly in the responsibility of the Tourism Development Authority. 

  Q    Once you referred to the alleged sugar scam amounting to 10 billion rupees. How has this affected the consumer and the economy as a whole?

 The basic thing that happened there was that in 2017 we had put a sugar tax of 35 rupees per kilo. It was there till 2020. Then the present Government increased it to 50 rupees per kilo. But in October 2020 they suddenly reduced it to 25 cents. The logic behind increasing from 35 rupees to 50 rupees was to promote domestic agriculture production and manufacturing and to become self-sufficient. None of that happened. Particularly sugar I have personally looked at this. We need to be careful when we talk about self-sufficiency in sugar because the sugar cane plant absorbs an unusual amount of water. So, if we are promoting sugar cane plantation, we should do it in areas where the local population will not be threatened in terms of water. So, this has some limitations. The limitations are mainly soil and water-based limitations. In October last year, the Govt realized this was not working probably and decided to reduce taxes from 50 rupees to 25 cents. Then difference would translate to the consumer. The consumers’ price will fall by the tax you are foregoing. Then the consumer should have got that benefit. But the consumer didn’t get a single cent benefit on the sugar price. But the prices were still sky-high then the Govt imposed a price control. If the taxes are taken away any industry become more competitive. When the industry becomes more competitive the prices naturally fall. But the Govt had got a price control. what happened here is that the Govt lost tax revenue. Consumers didn’t get a price gain and that benefit shifted to somebody else. When you inquire it appears to have immediately shifted to the multinational importers and maybe people who relate to those importers. 

  Q    There are a lot of protests from environmental activists and other concerned groups on certain development projects which are considered detrimental to the environmental. What is your opinion on that?

 Today among younger age groups there is a much better understanding of the environment and the Environmental Impact Assessment (EIA). Today the youths are very conscious of the environment. While being signatories to the UNESCO Sri Lanka has its own ordinance for the protection of forests. Marine is one area that has been affected due to the Norochcholai coal power plant. when it comes to the environment my personal view is that we cannot leave the monitoring role to the local government or a provincial Council only. Because the environment is a wider area that affects everyone. The plan to put a next 300MW EIA was to be done by the northwestern provincial environmental authority. So, the 2008 EIA was already in violation and now the new plan was also going to be approved by the provincial environmental authority. 

Presently the fly ash levels of all three plants are about five tons a day which is 1800 metric tons per annum. Over 40 to 50 years it could become so disastrous. If you take the rest of the world, energy production is shifting to renewable energy. We need to emphasise that in the name of development we cannot sacrifice the environment. 

"From the layman knowledge that I have what the variants seem to be saying is that it increases the speed at which it spreads. So far there doesn’t seem to be or too early for the medical scientists to tell us whether these variants have other health impacts, but they have told us the speed of spreading has increased"

  Q    The East Container Terminal of Colombo’s Port was the talk of the town a few weeks back. Now there is a proposal to give the West container terminal. How does this affect the sovereignty and economy of Sri Lanka? Have we become a victim of geopolitics?

Foreign relations and foreign diplomacy become relevant here. Major powers will shift from time to time. Because 50 years ago there were two superpowers in the world-- the USSR and the USA. Today we have only one superpower which is the USA. Then we have rising Asian powers like China and our immediate neighbour India. These two Asian economies and their market share in the globe have increased tremendously for the last 25 years. 

So, the centre is moving towards Asia. That is the reality and then Sri Lanka becomes more important in the wider context of that. If we come specifically to the Port issue it is Chandrika Kumaratunga’s government that gave the first container terminal to the private sector and foreign shipping interests, the SAGT. The second one was given by former President Mahinda Rajapaksa. It was CICT--the Chinese company. 85% per cent of these terminals is owned by foreign parties. Sri Lankan ownership is about 15 per cent. Then the third one was the East Container Terminal and that was negotiated by the then Govt. we were going to hold 51 per cent while the foreign participation was 49 per cent. The 49 per cent was between India’s and Japanese interests. Then the Govt got changed and this Govt was also proceeding on the same basis. A view emerged that why should we give it at all, and we can own 100 per cent of it. There appears to have been a conflict within the Govt. Some parts of the government were saying ‘we should stick with the 51%and 49% solution’.

 There was already an understanding and it is a very forward-looking way of going because for the capital investment we had to put only about 51%. On economics, there is the view that we have saved so that we can 100% of the investment. I think we should be more strategic than that. It is not only the east terminal we can have but also the west terminal and build the northern terminal and a few more terminals because SL is strategically placed over the next 30 years to increase our share of the east-west trade. You need to invest in that. If you are to rapidly grow, for a country whose savings are always low, you will always have to depend on foreign savings. In 2020 SL had net negative savings, not even savings. So, these things cannot be looked at from the institutional point of view it has to be looked at from a macroeconomic point of view.

Some of the questions that this issue raises are ‘Was there a third-party interference in generating the opposition to what the Govt had already come to an understanding about?’ ‘Was this Govt manipulated or has this Govt willingly subjected itself to third party manipulation?’
 Those are the questions most analysts will have on their mind. ‘Were politicians bought over in the ruling party and were trade unionists also bought over in the ruling party?’ These are the question that analysts will keep asking. In the foreseeable future China and India, being one of the two Asian economies, will be interested in extending their global commercial interests and Sri Lanka will be part of that. SL Govt must stand strong and should deal with both these economic powers even-handedly. The Govt should not succumb to any pressures. 

  Q    Why can’t the local investors be given the priority as investors for these terminal projects?

The local investors can be given priority at any time. When the SAGT was started, former President Chandrika Kumaratunga opened it for local investors as well. One of the local investors continued investing in the SAGT. The local investors can be given the opportunity no matter what Govt is in power. But the Govt must be wise because we are not talking about foreign interests working through local agents. Govt must be wise how they deal with them. If they are genuinely local, they can be given the opportunity. 

  Q    What kind of an economic policy should the government implement at a time the SL economy is shrinking?

The big investors if you see certain groups in the Sri Lankan economy are making substantial profits now. They are not based on production. They are not based on GDP growth. The GDP growth in 2020 the Govt has not told a growth figure but they will massage it down to less than 4% but the World Bank says it is more like -6.7%. So, you have -6.7% growth and a stock market that has grown and corporate businesses which are making large profits. This profit-taking is not often based on the real economy. These are money profits.

 Answering the question of what the solutions are and what can Govt do I would say there are short term and long-term solutions. Speaking about short term solutions ‘are we in a crisis?’ ‘Is the problem we are facing is a cash flow problem or a solvency problem. Govt is trying to make it out that it is a cash flow problem and not a solvency problem If it is a cash flow problem it could be handled. One way is stocks and generate cash flow from it. In terms of the short term, they may solve it but in the long term, they may have a serious problem because ultimately you have to settle it. But in terms of long-term solutions, the economic fundamentals should be in place. The Govt must get the budget deficit down. Now with regard to the 2020 budget deficit, the Govt is trying to make it out that it was around 8.7%. Some analysts have pointed out the budget deficit was more than 11% because by changing the accounting from cash accounting to accrual accounting they took some of the expenses in 2020 and moved it to 2019 and then what happens is the budget deficit in 2020 comes down. The Govt will certainly need to look at getting the deficit down and increase the Govt revenue. Your return has to increase-- the return on labour and capital. Without the reforms, they have been also looking at the non-tradable. By building highways and infrastructure the GDP growth can be kept high. But that doesn’t translate into per capita income generation. That is another problem Govt will have. Despite that, one positive aspect is the present Govt is looking at the free trade agreements. They have just appointed a committee. 

  Q    Once you mentioned in one of your Parliamentary speeches that media should be free from the influence of the government. How is this possible when the government is trying to bring its own agendas to the forefront?

You raised a valid question in the present context. If you wrote from the period from 2015 to 2019, I don ‘think you will not ask the question. Such questions were never asked in the 2015- 2019 period because there was media freedom. The state at that time didn’t threaten the media to articulate a particular line. Neither we threatened nor felt inadequate when we were criticized by the media. People who fear and feel inadequate are the people who threaten or harm other people. If you are self-confident in what you are doing in your policy and action you will never feel threatened by other people. The media should be independent of government and business interests also

"In 2015 when we took office the Govt revenue was at its lowest. It was 11% of the GDP. Virtually, almost every country in the region had a revenue of 19%- 21% of the GDP. Sri Lanka didn’t follow that, and we were very low. What happened was, as we came into power, we set about trying to correct that and were able to push the Govt revenue as a percentage of the GDP by about 13.5% when we left office."

  Q    People seem to have lost confidence in successive governments. How do you build that trust if your party comes to power?

If you compare SL with other countries in the world and even with Asia, over the 73 years of independence, people should be rightfully frustrated. Because so many countries have done so much better than us. It is rightful that they should be frustrated. But if you are comparing the different governments within 73 years period with each other then we are talking about which has done relatively better. People have to decide who has done relatively better. I would say something like this. 

We need to ask ourselves, for anything to be successful it depends on leadership, policies, and implementation. If you look at leadership and compare the leadership this country had during the 73 years with leading some of the successful countries had, they have had leaders who were educated and knowledgeable and who had experience and who had management skills. 

You can compare the leaders in the successful countries in Asia with our leaders and you will see that our leaders haven’t had that. Most leaders have never worked in an organizational setup and they have never had the management experience and we are expecting them to give us a different result. That’s never going to happen. They are driven by populism to get votes. 

The next thing I will leave as an open question is in the 73 years, we have had, about 30 years, cabinet government. Now we have, for 43 years, a Presidential government. Now we can probably compare and see whether this system we have has delivered the results and the answer is no. And how does it stack up against the previous thirty years? I am asking a more fundamental question really has this Presidential system worked for us because we have grown up to believe that some superman is going to arrive and deliver the solutions to us and put all the supermen there and look at the results we have got. What is the calibre of the leader if that does not work? Society is far more complex than it was 40 years and you need a collection of skills to succeed. 
And which system actually is more likely to help you to give that result? I am not saying a conclusion, but I am raising a question now that it is not constitutional reform of what is being contemplated that we need, it’s really questioning the system itself. This may be the point at which to compare it.