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What impedes economic revival in NE? By Muttukrishna
Sarvananthan
The Government of Sri Lanka (GOSL) lifted the economic embargo
on the rebel held areas of the North&East (N&E) province
on January 15, 2002. The economic embargo was in effect since 1990
and covered over 60 consumer goods including fuel, food, and medicine.
Some goods were totally prohibited from entering the rebel held
areas of the N&E province and some had quantitative restrictions.
The economic embargo created an informal market for these prohibited
and restricted supplies of goods in the rebel held territory, which
is almost 30% of the total land mass of Sri Lanka. The economic
embargo made the Liberation Tigers of Tamil Eelam (LTTE) rebels
to play a dominant role in the management of the economy in the
territory under their jurisdiction. This in effect created a dual
economic system in the country. Whilst the rest of Sri Lanka pursues
a private sector led liberal market economic model, the LTTE held
territory has been pursuing a command economic model in the past
12 years. Some of the salient features of such a command economy
were severe shortage of essential and other consumer goods, rationing,
hyperinflation, and LTTE run transport, trade and productive enterprises. At long last,
the economic embargo was unilaterally withdrawn by the GOSL with
effect from January 15, 2002. It is now one year since the lifting
of the economic embargo. The objective of this paper is two folds;
one is to highlight the implications of the lifting of the economic
embargo on the economy of the N&E province. The second is to
identify the factors that inhibited economic revival in the N&E
province in the past year, since the lifting of the economic embargo. After the lifting
of the economic embargo in January 2002 the economy of the N&E
province got further impetus with the opening of the A9 highway
on April 08, 2002. The A9 highway is the major road linking the
Northern Province with the rest of the country, which was closed
from Vavuniya to Jaffna for vehicular and civilian traffic for about
12 years. It is important to remember that while the lifting of
the economic embargo was done unilaterally by the GOSL, the opening
of the A9 for vehicular and civilian traffic was an outcome of the
Memorandum of Understanding (MoU) signed between the GOSL and the
LTTE in February 2002 as a result of the facilitation by the Norwegian
government. The withdrawal
of the economic embargo and the opening of the A9 highway have resulted
in the reintegration of the N&E economy with the rest of the
country. There is free flow of goods (except arms & ammunition,
explosives, remote control devices, telescopes, and pen torch batteries)
from the rest of the country to the LTTE held areas and vice versa.
However, though the GOSL has withdrawn the requirement to obtain
a pass for the movement of civilians to and from the LTTE held areas,
the LTTE still operates a pass system, albeit a less stringent one
to what was in operation before. Thus, the movement of civilians
to and from the LTTE held areas is still not totally free. The two-way
flow of goods (to/from the LTTE held areas) has its gainers and
losers. The free flow
of goods from the rest of the country (including imported items)
to the LTTE held areas has gainers and losers. Thus, the consumers
in the LTTE held areas are the major gainers and the producers in
the LTTE held areas are the major losers. On the positive side,
the free flow of goods from the rest of the country to the LTTE
held areas has depressed the prices of such goods which benefits
the consumers. However, the prices of such goods are still higher
than what it ought to be due to the taxation by the LTTE. On the
negative side, the free flow of goods from the rest of the country
to the LTTE held areas has badly affected the local producers of
the same or similar goods. Many local producers in the LTTE held
areas are deprived of their livelihood due to the inflow of cheaper
and better quality Sri Lankan made and foreign made goods. In the same
line, the free flow of goods from the LTTE held areas to the rest
of the country has gainers and losers. The producers in the LTTE
held areas have benefited from the opening of the entire Sri Lankan
market to their produce because of higher prices they fetch now.
On the other hand, the consumers in the LTTE held areas have lost
out because of higher prices they have to pay now. During the time
of economic embargo perishable agricultural produce including vegetables,
fruits, and fish were very cheap in the LTTE held areas due to over
supply. But, the prices of these perishable food items have shot
up since the opening of the A9 highway. As a result the consumers
in the LTTE held areas are worse off now than before. In sum, the lifting of the economic embargo and the opening of the A9 highway has costs and benefits to the economy and people of the N&E province. The main challenges in the province are for the local producers (who have lost out due to the influx of goods from other parts of the country) to become competitive or find alternative productive activities, and the local consumers to find means of increasing their income in order to afford to purchase the higher priced local food produce. Unfortunately, alternative productive activities and increasing the income levels of the consumers are slow to come by due to a variety of factors. Although trade between the N&E province and the rest of the country has expanded enormously, not many new productive activities have taken place in the past one year. This has, quite naturally, resulted in disenchantment among the masses. It is important to remember that the present situation is a pause-in-conflict rather than a post-conflict situation. Historically,
agriculture was the mainstay of the N&E economy, specifically
food crops, cash crops (such as chillies, onions and tobacco), and
fisheries. There seems to be fundamental institutional impediments
to kick start productive activities in all sectors of the N&E
economy. The major objective of this paper is to identify these
institutional impediments to economic revival in the N&E province.
The process by which these institutional impediments were identified
was through study tours to 6 out of 8 districts in the North&East
province (including both the government held and LTTE held territories)
in the past 10 months by the author. These study tours entailed
meeting government officials (central, provincial and local), LTTE
officials, non-governmental officials (local, national, and international),
learned people, entrepreneurs, and the general public. Impediments Moreover, the
Sri Lanka army occupies almost half the city centre of Jaffna. It
is important to remember that Jaffna is the commercial hub of the
N&E province. The occupation of prime commercial properties
in the heart of the city is one of the major obstacles to business
development in the peninsula. Several hotels and other private and
public properties in the city are still occupied by the Sri Lanka
army. Ironically, while security barriers and checkpoints in the
city of Colombo have been removed since December 2001 the city of
Jaffna still resembles a theatre of war. Further, certain
time and geographical restrictions on fishing still exist in the
Northern Province, particularly in the Jaffna peninsula, despite
some relaxation in the past one year. Fishing is one of the primary
economic activities in the N&E province, and during the pre-war
times used to account for two-thirds of the total fish catches of
the country. However, due to severe restrictions on fishing, Sri
Lanka has become a significant importer of fish in the past two
decades. The restrictions on fishing in Sri Lanka have resulted
in fisherpersons from India, Japan, Taiwan and Thailand encroaching
the Sri Lankan seas. The A9 highway
is opened for vehicular and civilian traffic for only 10 hours a
day (7.30am to 5.30pm) and six days a week. This highway is closed
on Sundays. These restrictions are another major impediment to economic
revival in the Northern Province. The entrepreneurs in the Jaffna
peninsula complain that it takes 3 days for goods to arrive from
Colombo via the A9. This is not only because of the restricted access
to the highway, but also due to checking at four points by the Sri
Lankan army and the LTTE (two points each). The entire consignment
is offloaded, checked and reloaded into lorries and trailers at
each point. The Sri Lankan army checks the flow of goods via the
A9 in order to ascertain whether banned items are being transported,
whereas the LTTE checks are primarily for the purpose of taxation.
These delays in the transport of goods via the A9 increase the transaction
cost of businesses. The businesses
in the N&E province are not entitled to engage in import/export
trade directly. That is, businesses in the N&E province cannot
open Letters of Credit (LC) at the banks in the province. Hence,
the traders in the province have to purchase imported goods from
Colombo-based importers, which increase the transaction cost and
consequently the retail prices. This is a major hindrance to external
trade development in the province. The banks in
the N&E province are stringent in the disbursement of loans
to farmers, fisherpersons, and traders. The collateral requested
by banks in the province seems to be higher than what is required
in other parts of the country. Although many private banks have
ventured into the N&E province in the past one year, the primary
motive seems to be tapping the savings of the masses in the province.
Thus, the lack of access to bank credit is identified as one of
the major impediments to economic resurgence in the N&E province. Another reason
for the lack of bank finance for businesses in the Jaffna peninsula
is that since the peninsula was cut off from the rest of the country
for a long time a lot of new businesses established in the past
20 years are unregistered with the GOSL. Most of these unregistered
businesses may have wilfully done so in order to avoid paying business
taxes to the GOSL, because they do pay taxes to the LTTE. In the
Northern Province it has been easier to evade government taxes,
but not the LTTE taxes. It is extremely difficult to pay taxes to
both the government and the LTTE and keep the business afloat. Therefore,
most of the new businesses opted to be unregistered and be in the
informal economy. This non-registration deprives them of access
to bank loans. (ii) LTTE
side These taxes
are not only imposed in LTTE held areas but also in government held
areas of the N&E province. The Tiger tax regime has been in
operation at least since 1990 and is not an outcome of the MoU signed
in February 2002. However, until the signing of the MoU these taxes
were levied clandestinely in the government held areas of the N&E,
but now it is much more open and systematic. This illegitimate imposition
of income tax has resulted in the exodus of teachers, medical officers,
and other public servants from the province that has depleted and
deteriorated the public service in the province. There is a severe shortage of school/university teachers and medical officers in the N&E province, because very few Tamil speaking teachers and medical officers (let alone the Sinhalese) are willing to take up posts in the province. During the time of war the fear of probability of being killed was the primary reason for the lack of interest in working in the province. However, even after the ceasefire there is not much interest among public servants to work in the N&E primarily because of the fear of the LTTE taxation. It is important to note here that the Sinhala public servants working in the N&E are not taxed, and only the Tamils and Muslims are taxed. Thus, during the past one year LTTE taxes have been the major cause of the failure to improve the quality of public education and health services in the province. The farmers
in the LTTE held territory are also taxed either in cash or in kind.
The farmers and fisherpersons are expected to contribute part of
their output to the LTTE coffer irrespective of their income level
or the size of the household. The taxation of the agriculture sector
by the LTTE in the N&E province is again a unique phenomenon
because the farmers in other parts of the country are exempt from
income taxation. Likewise, small scale manufacturing concerns and
service providers are also taxed a percentage of their monthly income.
In some parts of the Jaffna peninsula the LTTE has the audacity
to demand taxes from businesses backdating from 1996 when the LTTE
was forced to withdraw from the peninsula. The direct taxes paid
by the farmers, small-scale manufacturers, and service providers
are passed on to the customers in the form of higher prices. Hence,
the higher prices of goods in the N&E province, even after the
lifting of the economic embargo, are mainly due to taxes imposed
by the LTTE. In addition
to direct taxes the LTTE imposes an array of indirect taxes. The
goods being transported to LTTE territory or passing through the
LTTE territory to the Jaffna peninsula are taxed at rates ranging
from 5% to 25% (ad valorem tax). All vehicles in the LTTE territory
are required to pay vehicle registration tax. All passengers travelling
to the Jaffna peninsula in privately run vans via the A9 highway
are subjected to a unit tax of LKR 350 per passenger. Furthermore,
the sale of property in the Jaffna peninsula is subjected to taxation
by the LTTE. A percentage of the proceeds of sale have to be paid
to the LTTE. The people
and businesses in the government held areas of the N&E province
are the most affected because both the GOSL and the LTTE subject
them to direct and indirect taxation. Thus, in practise, the consumers
of the province (who are the majority) are the ones who bear the
cost of such dual taxation as these taxes are built into the retail
prices. In addition to the foregoing taxes the LTTE demands contributions
to their coffer from Tamil and Muslim individuals and businesses
from time to time in the N&E and Colombo. Furthermore, Tamil
businesses and individuals in various countries are routinely asked
to contribute to the Tiger coffer. These are carried on even during
the time of peace. The arbitrary
nature of these Tiger taxes is that no accounts of these resources
are shown to the general public. The taxpayers are unaware of how,
and for what, these tax revenues are expended. During the times
of war these taxes may have been justifiable because of the funds
required for the war effort. But, what justification is there for
this comprehensive and systematic tax regime during the time of
peace? These Tiger taxes are stifling entrepreneurship in particular
and economic revival in general. Needless to say, the Tiger taxes
are one of the major impediments to economic revival in the N&E
province. According to
the author's judgement at least LKR 5 million (50 lakhs) revenue
may be earned by th e LTTE daily on the A9 highway by way of taxation
of passengers and goods. In addition, another LKR 2.5 million (25
lakhs) taxes may be levied per day throughout the N&E province
(including at Uyilankulam checkpoint) from people and businesses
(both Tamil and Muslim). Therefore, the daily total tax revenue
of the LTTE in the N&E could be about LKR 7.5 million (75 lakhs).
This translates into annual revenue of LKR 2,340 million (2.34 billion)
[312 days X 7.5 million]. The LTTE is involved in farming, fishing
and several other economic activities as well in the territory under
their control. For example, the LTTE is reported to be dominating
the fish trade from the Mullaitivu district to Colombo. These productive
and entrepreneurial activities yield profits to the LTTE. If we
add these profits to their tax revenues the annual domestic income
of the LTTE could be at least LKR 3 billion (roughly USD 30 million),
which I presume is a very conservative estimate. In addition to
this domestic income the LTTE derives income from LTTE run enterprises
and tax collected from expatriate individuals and businesses around
the world. The revenue
mobilised abroad may be used to purchase arms & ammunition in
the international armament markets. Therefore, we shall focus on
the domestic revenue. According to the LTTE, the domestic mobilisation
of resources during peacetime, through direct and indirect taxes
and entrepreneurial activities, are necessary for the upkeep of
their cadres. This justification is not convincing, because during
the time of war the LTTE managed to maintain their cadres with far
less revenue. The opening of the A9 highway and officially undertaking
political activities in government controlled areas of the N&E
have provided them a goldmine in terms of tax revenue. Moreover,
the different tax rates of the LTTE are very high compared to the
tax rates prevalent in Sri Lanka and that Che Guevara proposes in
Guerrilla Warfare. It seems a mystery where the Tiger tax revenue
is going, because the LTTE does not seem to be involved in providing
public services to the people of the N&E whether in the LTTE
held or government held areas. In both these areas it is the Sri
Lankan government that is providing public services in education,
health, agriculture, irrigation, social services etc, to the people. In accordance with the MoU unarmed LTTE cadres are permitted to undertake political work in the government controlled areas of the N&E. To the best of the author's knowledge the LTTE is mostly involved in only four activities in government controlled areas of the N&E. They are: (a) recruitment of cadres. (b) collection of taxes. (c) commemorating the martyrs and (d) harassing political opponents. While the first, and third may be legitimate activities the other two are unjustified. Disappointingly, the LTTE is not involved in any community or public service in the government controlled areas despite a huge revenue mobilisation effort. The people of Jaffna could be won over only by improving their livelihoods and not by the above activities. The ordinary masses have suffered enormously during the past two decades of war and wish to get along with their lives in tranquillity and dignity. A state or a de facto-state entity mobilises resources through taxation not only to maintain its cadres, but more so to provide public services to the population living in the territory under their jurisdiction. The LTTE has failed to provide community or public services to the people whom they claim to solely represent both in the areas under their direct control and in the government held areas (which are under the indirect control of the LTTE). |
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