Taking stock: Has the economy achieved the desired progress after January 2015?
It is necessary to examine whether the goal or goals of the present government have been achieved after one and a half years in power. According to the Policy Statement made on 5th November 2015 (PS 2015) by the government its goal is enhancement of the wellbeing of the people, meaning more jobs, real (inflation adjusted) incomes increase, poverty alleviated and so on. The last World Happiness Report ranked Sri Lanka (SL) at 132 out of 158 countries; the 2016 report ranks SL at 117 out of 156 countries; thus the people of SL may be happier now.
It could be a result of the 19th Amendment. However the rest of the work of the government appears to be in a muddle. The main reasons appear to be poor/hasty decision making or delaying decisions, absence of focusing on key result areas, continuation of appointing senior officials on political and personal affiliations instead of on merit and perhaps the re-emergence of corruption.
Decision-making
Budget 2016 and the subsequent decision to impose a low rate of income tax of 17.5 per cent on the richer classes failed to conform to the requirements of the PS2015 that indirect taxes will be reduced to 60 per cent and direct taxes should be increased to 40 per cent; the good intention behind this was to relieve the burden on the common man. The predictability and consistency of policies have not been observed as conflicting statements on the VAT and other taxes have been made by various ministers at different times confusing the private sector. To make matters worse, the private sector has been compelled to pay an increased wage of Rs. 2,500 monthly, though normally it is allowed to adjust wages on the profitability and the productivity of workers under the prevailing social market policies.
All this may be due to the failure to adopt a professional methodology of making decisions which consists of defining a problem, identifying what the problem intends to address, brainstorming with stakeholders to consider the alternative solutions, cost benefit analysis of each alternative, selecting the alternative with the maximum benefit and the least cost or disadvantage and reaching consensus. It is also evident that most decisions are not made on the basis of the overall goal of the PS 2015, which is the wellbeing of the common man, but on short term political gain.
Focusing on key result areas
Time is wasted by not confining implementation to key result areas (KRA). It is really focusing on major result areas or strategies as per the PS2015 instead of concentrating on daily routines. KRA when fully implemented could result in widespread solutions covering many other problems as in the case of greater investment. So what should the KRA of the government be? They should be just a few such as:
a) achieving budgetary and monetary balance/stability,
b) encouraging investments to create employment and produce more goods and services mainly for export,
c) achieving global or export competitiveness in production, as a country with a small market like SL could be able make higher earnings only by large scale production and value addition catering to the wider markets of the world to achieve economies of scale/ higher productivity,
d) undertaking land reform or more specifically consolidation of the numerous un-remunerative subsistence farms after granting ownership of the land to improve agricultural productivity, accompanied by industrialisation to absorb those exiting from agriculture, (a high of 28 per cent out of total employment is trapped in the sector); agricultural productivity happens to be very low in SL leading to widespread rural poverty (value added per worker in agriculture in SL was constant US$1,087 vs Malaysia’s $10,124 and Singapore’s $76,144 in 2014, World Bank); a corollary of this KRA is stringent protection of the natural environment, and lastly
e) improving the efficiency of the public service which is bloated and politicised since the constitutional changes in 1972, (this was not mentioned in the PS2015).
It is necessary to focus on these by everyone in government from top to bottom (and even every citizen), every day with determination or strong political will, after preparing an agenda conforming to the goals in the PS2015 to obtain tangible results. Now let us consider a few KRA:
Achieving Fiscal Balance/ Stability
The stubborn budget deficit can be reduced either by increasing government revenue (which is a lowly figure of around 13 per cent of GDP and by reducing expenditure and net lending (20.5 per cent of GDP) in 2015 – Central Bank figures. We already mentioned that the Budget 2016 failed to increase direct taxation. The assumption behind the low rate of income tax of 17.5 per cent could be that investors will flock in, it is not so simple, investors have other reasons for investing like the ability to make a comfortable profit with the least hassle and under the lowest possible risk especially when the domestic market of the country is small as in SL (the size of the domestic market being the main attraction for investors);more about this later.
The other method is reducing public expenditure, especially on defence and the less important subsidies like the provision for school uniforms. People have to be persuaded (and provided sufficient but well targeted social protection and insurance for crop losses) that if these continue, the economy will crumble and the present and future generations will suffer extreme poverty, but there doesn’t seem to be any such persuasion or creation of goodwill in a language that the people understand. Another method is restructuring of state-owned enterprises (SOE) which have been suffering enormous losses estimated to be more than Rs. 200 billion every year and have to bailed out by the taxpayer.
Strangely the government has been slow in dealing with it perhaps due to lack of a strong political will or fear that there might be cries of ‘selling the family silver’. The answer to this is the allegation that politicians and officials have been ‘fattening on the family silver’ for decades leading to higher budget deficits and higher consumer prices. Actually what is needed is to explain this and use the ‘family silver’ to earn an extra income by developing/enacting a fool- proof methodology or law of restructuring them and an open bidding process free of corruption for an infusion of professional management and private capital into the SOE immediately.
Attracting investment
An effective methodology of attracting investment is not being followed apart from some ineffective promotion. Such a methodology was not spelled out in the PS 2015; making matters worse a minimum number of jobs has to assured even before investment, payment of high registration fees are to be repeated annually discouraging investment by locals and the Diaspora who have come in after the change of government.
For the SL economy to grow at about 8-10 per cent a year, it is estimated that the country needs to invest about 35 per cent or more of GDP ($82.3 billion in 2015 – CB). But domestic savings for investment were only 22.6 per cent of GDP (2015).
Thus the country is compelled to attract Foreign Direct Investment (FDI) to fill the gap; FDI unlike domestic investments could bring in scarce modern technologies, skills and access to world markets Another reason for discouraging investors is extreme red tape as indicated by the Ease of Doing Business Index (EDBI) which is based on the time to start a business, registering property, trading across borders, getting credit and electricity and enforcing contracts. The Logistics Performance Index that is based on the efficiency of customs clearance, related infrastructure, international shipments, logistics competence, tracking/ tracing and timeliness of shipments confirms this further.
All this is made worse by widespread corruption mainly in offering government contracts and in appointing and promotion of officials. The major cause for corruption could be governance issues like the politicisation of the judiciary, low quality of elected representatives, high election campaigning expenditure (financed by dubious characters who later influence government decisions) under the present district system of elections and a lax system of naming and shaming of the corrupt.
In addition to red tape there are complex labour market issues (with about 45 laws) and an acute shortage of technical and soft skills (like creativity, ability to work as a team and communication especially in English) demanded by investors due to the failure of the system of education in SL to produce them and the denial of about 80 per cent of students who sit for the GCE OL and AL exams from some quality tertiary education; this could be solved by importing such labour temporarily as done in Dubai.
The backward system of education could also be due to the insistence by some that all investments for setting up universities for instance should be the responsibility of the government as indicated by the SAITM Campus affair. The government is in a severe budgetary and debt crisis and therefore any investment by the private sector and an infusion of qualified teachers should be appreciated, especially to cater to those denied higher education. If the quality of education is a problem (the case of all public universities in SL), it should be taken up with the regulators concerned.
Global/Export competitiveness
The strategy of the government in this connection appears to be entering into trade agreements with various countries. The assumption behind this strategy seems to be that SL products do not have markets. Actually the problem is SL does not have sufficient goods and services for export due to the absence of adequate capacities/investments and the poor competitiveness of existing firms on account of heavy effective tariff protection, sometimes exceeding 200 per cent (S. Rajapatirana). Another assumption behind this strategy appears to be that foreign investors might rush to SL to export to these countries after the agreements are signed. The above analysis of the enabling environment for investment in SL disproves this assumption.
Liberalisation of trade could lead to competition among firms (and even among public and private universities), pressurising them to increase investments and to innovate to add value to attract higher paying customers, in order to increase their profits. However, liberalisation of trade is a tool that has to be used in a gradual manner as a sudden lowering may lead to closure of the highly protected enterprises without affording a chance to improve competitiveness.
Clearly the government has to get its act together to carry out the amount of work mentioned above (regrettably increased by several disasters including any damage to exports that would be caused by Britain leaving the European Union) to be carried out on the basis of KRA and a strong political will, mainly for increasing employment and the quantum of goods and services that are globally competitive for expansion of exports and reduction of imports (especially due to expansion of construction activities). The basis of all this has obviously to be the enhancement of the wellbeing of the common citizenry, as envisaged by the PS 2015.