FEATURE -Current Sri Lankan crisis through an economic lens

By Sriyani Hulugalle, fomer senior economist at the World Bank

Most economists view the current economic crisis through a political lens. However, this crisis was inevitable and predicted for a long time. Some of the international financial institutions too tend to take a short term view. Probably, the root cause lies with Sri Lanka moving from one crisis to another; not having space for policy makers to take a more longer term view. In my generation, we have witnessed youth insurrections in 1971, 1983, 1988-89 and then in 2022. Most have forgotten the 30 year-old civil war which cost the country an enormous economic setback.  All these youth insurrections have a huge economic cost; immediate as well as longer term adverse impact though certain segments of the general public welcome them jubilantly.

Cost of Universal Free Education and Health

Sri Lanka must be the only country which provides universal free health and education up to tertiary level. Access to education and health creates better human capital no doubt but everyone feels it’s a ‘Right’.

Immediate reaction of the parents would be; “We spend enormous amounts for private tuition”. Why? The teachers don’t properly teach in schools and cover the syllabi. Are there any protests by the parents and the children when teachers do not function efficiently despite the amount of financial cost incurred by the state? No. They blame the incumbent government. Teachers are not ashamed to request their own students to attend extra classes for a payment. These are the products of free education and who are against privatisation of education. The teachers are trained by the government, paid by the government but they are allowed to conduct private classes for a fee. No parent or student go on strike or have protests against them.     

University education is also provided free. The government has to bear the cost of education of doctors, engineers and other professionals and if there is any suggestion of allowing private universities to function in Sri Lanka, they go on strike especially the health sector.  They even do post graduate studies overseas using public funds but do not allow private tertiary education to be introduced in the country. They also work in private institutions and earn a substantial income. Fine. But they are the saviours of free education and limit access to tertiary education by a large segment of a qualified student population. There are private institutions which are functioning under the Companies Act and are not monitored by accredited bodies. There is willingness to pay given the mushrooming of private schools and universities but these cannot be regularised. If the middle and upper income categories make even a partial payment, it will reduce the cost of the state substantially. Why does the educated public fail to understand these realities?  

Cost of a bloated Public Service

The doctors, engineers, most of the arts and commerce graduates seek employment in the public sector. I have come across several schemes introduced by successive governments to support private sector to employ qualified graduates from state universities. However, the youth prefer lower salaried public service to the private sector jobs. The reasons being: The public sector jobs are prestigious and pensionable; access to more holidays; not paid on performance; access to post graduate education overseas; perks such as periodic access to low duty vehicles, better mobility geographically and institutionally; lack of accountability; ability to work privately. These are few of the reasons.  Some of the reforms can be: (i) Portability of pensions and provident funds across public and private sector; (ii) Output based performance evaluations linked to salary increments, (iii) Demand driven recruitment, and; (iv) Increased use of technology for efficient service delivery in the public sector. 

Cost of Social Welfare Programmes and Subsidies

The open economic policies or market forces tend to affect the vulnerable poor. Therefore when open economic policies are introduced in a country, social welfare programmes are also designed to cushion the vulnerable segments of the population; the poor, women, children, disabled and elderly, from adverse impact of such policies. In Sri Lanka too when the open economic policies were introduced in the 1980s, Janasaviya which was renamed later as Samurdhi was introduced as a social welfare programme with consumption and savings components. The main idea was for such families to graduate from the poor to the non-poor category gradually. However, with political agitation these families remain eternally in these groups. Attempts for targeting these programmes for the needy were never accomplished though several studies conducted by the government and the World Bank revealed that over 40 per cent or more recipients are outside the eligible category while certain percentage who needs to have access to Samurdhi are not in the eligible list.

In addition, the rural and estate sector agitate for subsidised chemical fertiliser, higher price ceilings for their produce and the consumers demand lower prices for their consumption goods. The children are given mid-day meals; shoes and school books without any discrimination. Most of the low income families send their elderly unskilled family members as care givers and domestics for a monthly income of Rs. 50,000- Rs. 100,000 a month with food and lodging. They are ‘eternally poor’ and continue to remain in these social welfare programmes. There are no sunset clauses introduced for these social welfare schemes. During the recent pandemic, large numbers of such people were sustained by the state. The rural, estate and urban poor have abandoned the savings culture and depend solely on the state for any emergency. In the recent past these low income categories have imbibed ‘consumerism’ from middle and upper income classes and this trend leads to eternal demands for ‘free goods and services’.  This culture is unsustainable economically for any country.  

Cost of National Security

Many have forgotten that over the years thanks to the insurrections and protests and the ensuing war we had to maintain a large national security force. Since Sri Lankans have short memories and the majority of Colombo elite ‘claim’ to have lived abroad during those years they do not remember the road blockades, frequent bombing, massacre of innocent people including women and children, the checking by armed forces, continued emergency laws, illegal closure of institutions and private companies. If not for the war, the country would have been in the upper income group by now and the COVID-19 pandemic impact would have been marginal on the lives of the people.

Cost of Trade Union Action and Cartelization

Sri Lanka must be the most unionised country in the world. The doctors, nurses, engineers, teachers, private bus owners, the professional and non-professional employees of the CPC, CEB, universities, and banks are all unionised.  So are the paddy millers, poultry farmers, paddy farmers, the confectionery industries, biscuit manufacturers, bakery owners, exporters, etc.  These unions take trade union action (i.e. work to rule, no work, agitation and vandalism) on matters relating to their own industry or profession. In addition, they intervene on general issues such as foreign investment decisions, other regional geopolitical matters, trade agreements, pricing policies, political and religious matters on which their own knowledge is next to nothing. The Buddhist, Christian and Muslim clergy discuss and intervene in matters which are related to non-religious issues. Few individuals with political affiliations dominate such unions and the masses follow blindly. These unions are responsible for high inflation and inefficiency much more than the policy makers and politicians. Professionals should be dignified and not mislead less knowledgeable public.

Therefore, when the general public blame the policy makers, they don’t realise that policy makers have been obstructed over the years for several decades by these ‘so called’ professional unions and groups. For example when the Indians wanted to invest in the Eastern Container Terminal of the Colombo Port all were up in arms against it. When the oil tanks were to be developed jointly by the government and the Indian companies the priests and politicians become national saviours. There is an adage that, “You can’t have the cake and eat it.” Since “beggars can’t be choosers” we have to get foreign investments flowing in for development as national savings are not adequate.  Given Sri Lanka is located in a strategic geographical location, and if handled well we could have capitalised it to our own advantage.      

Cost of Avoidance of Taxes

This is a country with citizens who have no clue from where the government revenue is collected. Always the industrialists, the exporters, the farmers, the SMEs etc. etc. lobby for tax relief measures. The public sector doesn’t pay taxes.  The upper income earners do not want to pay taxes on their income. Reason being the financial literacy of the majority of the educated class is marginal. What if you have to pay a 5 per cent tax on your interest income?  If you have Rs. 1,000,000 in the fixed deposit and if your interest income is Rs. 100,000, you have to pay 5 per cent of Rs. 100,000 which is Rs. 5000 as taxes. Is it unreasonable? No. But since they lack the knowledge, they claim that the politicians misuse the funds therefore they should not pay any direct taxes. However, they are the ones who travel on highways, use the airports and ports much more than the poor. How many professionals; doctors, engineers, teachers or lawyers pay taxes and declare their real income. They think they are a privileged class and the public needs to bear the cost of maintaining them. They are not providing a service. Their behaviour has brought their social status down and wonder why? Look yourself in the mirror. Respect should be earned.  

Cost of Ignorance

If you speak to any of the educated they have very little knowledge of fundamental economics. If you avoid paying taxes where would the government get resources to provide for education, health, social welfare, public sector salaries, national security, and provision of infrastructure? This blame game of political leaders has taken the country to the current unsustainable levels. Take a step back and ask yourself whether you have actually done your duty by the country and your profession. Have you fulfilled your obligations? What sacrifices have you made for the country? Have you ever volunteered to provide a service without expecting anything in return? Citizens from our neighbouring country (India) with so much poverty, corruption, nepotism etc. never complain about their own country. Wherever they go, they eat Indian food, dress like Indians, support their compatriots and are proud of being Indians. That is why they are ahead of others not only because they have over a billion people.        

There is an economic cost to every action taken by you. It's time for us to put aside all differences and unite to make this country a better place to live or keep bickering over policies and perish together. Take your choice.