KAMALIKA PIERIS

Yahapalana said that when it took power in 2015, Sri Lanka was facing an extremely precarious economic situation. We have inherited a heavy national debt, said Yahapalana. The   figures vary. Here is a selection. The country had a debt of SLR 9000 billion [60 billion USD] when Yahapalana took over, said President Sirisena. We are saddled with USD 1900 million in loans, said Prime Minister Ranil Wickremasinghe. That excludes the loans obtained by state institutions during the Rajapakse administration. Wickremasinghe said the national debt stood at Rs. 8503.2 billion as at December 31, 2015. Of that amount, Rs. 4,959.2 billion was local debt, while Rs. 3,544 billion was foreign debt. The debt had increased to Rs 9,387 billion in 2016  of which 57% was domestic and 43% foreign debt. Paying off foreign loans would hit a record $2.41 billion in 2017, up from $1.82 billion in 2016.

But Yahapalana was very hopeful. Yahapalana government stated that it was going to completely reform the economy of the country.  Prime Minister Ranil Wickremasinghe said the main objective of government was to develop the economy and also ‘complement the economies of its regional neighbors’. A ‘balagathu Sri Lanka’ national economic plan,  will be formulated, and a huge economic reorganization will    take place,  aimed at making Sri Lanka a high income country by 2030. Later, the date was changed to 2045. Once the country is developed, all can have a good house, vehicle, with the children provided with a sound local or foreign education and the people enjoying a good life,   the Prime Minister said.

Here is the Yahapalana economic policy in a mouthful. ’We are repositioning Sri Lanka to maximize our relationships with both our historic and new trading partners to leverage our geo-strategic position  and become a logistic and business hub in the Indian ocean. For this, Sri Lanka must build strong bilateral relations with the Bay of Bengal members of ASEAN and the countries of South Asia. We will integrate with the Asian markets and become a transshipment port for the Bay of Bengal trade.’  There will be a prioritized five year action oriented framework for trade development and competitiveness.

‘Sri Lanka is gradually moving from an inward-oriented and debt-ridden development model to a one with an outward-orientation using trade and investment as engines of growth and employment generation, continued Yahapalana .    A suitable environment has been created today for everybody to lead a better life than they did in the past. The perilous economy we inherited has been brought under control, and today we are on the right course, with financial discipline and ensuring capital investment for tomorrow. We are freeing exchange controls and allowing easier trading. We are aiming to improve our revenue, with higher tax compliance, and a bigger base.”  Our country,” said Ravi Karunanayake is taking a new path.”

Now here is the reality. Sri Lanka recorded an 8% growth from 2009-2011. Growth was y 4.8% in the third quarter of 2015.  Growth was at 4.4% in 2016, the lowest in three years. The Sri Lanka Rupee has fallen steadily  against the USD. Sri Lanka Rupee depreciated by 3.8% against the US dollar in 2016. It depreciated a further 1.2% between January and March 22. 2017. The  Sri Lanka Rupee depreciated from Rs. 132 in 2005 to   Rs. 153 in March 2017 .  It is expected to slide more and settle at Rs 168 per USD towards end of 2017.

Foreign reserves decreased sharply after Yahapalana government took office. USD 324.3 million was withdrawn in 2016 and USD 309 million was withdrawn in January-February 2017. Official reserves were down to USD 5.5 billion at January 2017, compared to $ 6 billion at end of 2016. Foreigners who had invested in state treasury bills steadily withdrew their money after Yahapalana took over. Foreign holding of bonds declined in 2015  and 2016. Franklin Templeton funds amounting to USD 1,475 million were withdrawn over a period of 14 months, including USD 475 million during January and February 2017. Sri Lanka‘s Foreign Direct Investment also declined.  It dropped to USD 300 million in 2016 from USD 658 million in 2015. Bloomberg a respected private data company in New York rated Sri Lanka as red or high risk for investments.  Analysts say the outflow of financial investments was due to a lack of confidence in the Government’s economic policies.

Yahapalana‘s own   loan taking has been heavily criticized. Yahapalana has borrowed heavily from domestic and international markets. The loans taken in 2015 were nearly double the borrowing limit mandated by Parliament, said the Auditor General. By September 2016   Yahapalana has borrowed USD 2.3 billion from India, USD 3.65 through sovereign bonds, USD 3.1   through Sri Lanka development bonds and USD 1.5 billion from IMF Bringing the total to an incredible 10.5 billion USD in just 18 months. In addition, the Government has in 2016, made arrangements for a consortium of five banks including HSBC, Citibank and Credit Suisse to take a syndicated loan of up to 3.5 billion USD. Certain clauses in the agreement, such as that the government can be asked to pay back the entire amount if certain events occur, have been criticized by the Auditor General. It was reported (without being contradicted), that the ‘Economic Council’ shot down an offer of $ 1.8 Billion, in an interest-free loan from Iran for oil refinery expansion. However, loans worth $ 650 million were raised via bi-lateral and multi-lateral donors including the World Bank (WB) and Asian Development Bank (ADB).

In January 2017 Cabinet approved a further USD 1500 million bond issue  to meet its loan installments and interest payments for     2017. Due to this reckless borrowing, Moody, Fitch, Standard and Poor the three top international credit ratings,  gave Sri Lanka a negative outlook in 2016. They also warned that if there was no improvement a further down grade may follow. Fitch gave a negative rating for Sri Lanka banks for 2017.

Yahapalana government has also borrowed locally. Cabinet approval was sought in February 2017 to raise Rs. 23 billion from the National Savings Bank and the People’s Bank to fund the second phase of the Central Expressway Project. The project has been awarded to a consortium of 16 local contractors and Rs 11.2 billion from the NSB and Rs. 12 billion from the People’s Bank would be required.

Yahapalana was looking for ways to make money since money was urgently needed to meet the debt crisis. We need US$ 11 billion Yahapalana said. The government had to repay Rs. 960,000 million in foreign loans in 2015. These were loans obtained during 2007, 2008 and 2009.  During the four years thereafter, the total repayable foreign loans amounted to US $ 1,500 million. This was a staggering amount which would make us faint, said Prime Minister Ranil Wickremasinghe. (Daily News 8.5.17 p 1)  The domestic debts will need to be paid in 2017 and 2018, said Yahapalana.  In 2019, the country needs to start repaying the foreign debt.

Superintendent of the Central Bank Public Debt Department said ‘we need more than USD 2 billion in 2019 and a similar amount in 2020 to 2024 to pay up bonds. The Central Bank had, under the Rajapakse government, thought the economy would grow by the time these bonds reached maturity. They thought a hundred billion would not be a problem to manage. This officer also observed that there are techniques like ‘buy back facility’ which can be used to deal with such loans.

There was also the recurrent expenditure. Sri Lanka printed currency worth Rs.217 billion from January to March 2017.This was needed to pay public sector salaries and other state expenditure as government revenue was far below expenditure. Around 50 public institutions had been lined up for privatization   in the 2017 Budget. The proceeds from of the sale of public properties was one of the main sources of revenue expected to be raised to cover the budget deficit in 2016, said Yahapalana. This includes Sri Lankan Airlines and the hotels owned by the government.

Yahapalana has also considered other avenues of getting money. Yahapalana government had informed state backs that it was going to take the valuables in bank lockers which had not been opened for several years. Locker owners were asked to quickly come and open their lockers. Yahapalana was also eyeing the Tea Cess. The tea industry strongly opposed this.. Tea Exporter’s Association said that Tea Fund had now reached Rs 6 to 7 billion. .We strongly believe that further accumulation of funds may prompt the Treasury to force the Tea Board to use the idling funds for recurrent expenditure or for other non-promotional activities”.

We have embraced the IMF said Yahapalana happily. Yahapalana government has entered into an agreement to obtain a loan of $ 1.5 billion with the International Monetary Fund (IMF) in June 2016. IMF has approved a three year Extended Fund Facility (EFF) of SDR 1.1billion (approximately USD1.5 billion). It would come in three tranches over a three year period. IMF has so far given two tranches of this loan to the value of SLR 239 million, approximately   USD 325 million.

The Chinese government had offered USD1000 million at 2% so government did not need to take IMF loan of USSD 15,000 million at 6% said critics. Critics observed that the IMF money was ‘peanuts’ compared to Yahapalana expenses and dismissed it as ‘dribbles’. After the IMF money started coming in Moody gave Sri Lanka a negative outlook. Experts say this is the only known instance when even acceptance into an IMF programme has failed to bolster market confidence in a country.

IMF is the least transparent, most secretive, of the international financing agencies,  say critics.  IMF economic policies do not help countries. IMF applies a one size fits all formula, which does not take into account the unique needs of each economy  Also, the free market policies adopted by the IMF do not work in the  Third world.

IMF adds to the economic burden on the people. For example, instead of increasing the taxes which target the rich, such as income tax, corporate tax and capital gains tax, IMF goes for taxes affecting ordinary people, like the recent VAT increases. This impoverishes the middle and working class of the country   and ‘kills’ savings. Loss making state owned enterprises   are transformed to work like commercially focused private companies. Electricity, fuel and water are made to reflect market prices, disregarding how it might affect the people.  This too affects the poor consumer.

All IMF loans are subject to conditions. These conditions invariably include higher taxes, reduction of government expenditure on welfare and subsidies,   the sale of state-owned enterprises, preferably to foreign buyers, and foreign direct investment (FDI) where the land also goes to the investor. IMF also insists on several structural changes, such as increasing taxes, restricting public expenditure, reforming state-owned enterprises and liberalizing trade.

IMF’s Structural Adjustments programme of the 1977, In Sri Lanka, killed off Sri Lanka’s small and medium industries by the dozen, and pushed Sri Lanka into repeated and deeper financial crises. Before IMF, Sri Lanka’s foreign debt was only USD 750 million, mainly for project development. IMF advised Sri Lanka to   over spend   and then borrow more.

Yahapalana government has also agreed to the conditions given to it by IMF. Budget 2017 has cuts to spending on essential services  and reforms to taxes, state services, land ownership and labor laws. Why has the IMF not advised the Government to seek debt rescheduling to ease unaffordable interest and loan amortization payments, especially of the USD 8 Billion debt to China, ask critics. One explanation is that the IMF is waiting for a worsening of Sri Lanka’s BOP crisis, by approving only a paltry commitment of funds, so that a second, larger bail-out, with even more troubling conditions, will become inevitable.

Usually, the IMF delegation discusses matters with ministry officials such as Deputy Secretary. It is only the head of the IMF who gets to meet the Minster. This time the IMF delegation was steered directly to the Minister of Finance. This left no space for the ministry officials to interact with the IMF delegation. The IMF       delegation went 45 minutes late to meet the minister .This, said observers, and is most unusual for the IMF.  It is a measure of disrespect to the Minister.

Yahapalana proudly stated that they were negotiating to get the GSP+ concession, which had been withdrawn in 2010 back for Sri Lanka . GSP” is the European Commission’s  ‘Generalized Scheme of Tariff Preferences’. Yahapalana  succeeded in June 2017.  However, Sri Lanka will graduate out of the program when it reaches the status of an upper-middle income country.

GSP+ is the most unsuccessful trade preference programme ever launched by the European Union, said critics. The Sri Lankan garment industry did not fall when the GSP+ concession was removed in 2010.  Instead, the industry continued to grow at around 6% to 7% annually. The Sri Lankan garment industry was doing well before GSP+ was obtained in 2005 and it continued to do well after 2010 when the GSP+ concession was withdrawn. So the question is why do we need this concession.

GSP+ is not an incentive given to the garment producers at the Sri Lankan end. It is a concession given to the importer at the European end so that the importer will not have to pay duty when importing garments from Sri Lanka. Therefore Sri Lankan garment factories may not get anything more than they are now getting per piece of clothing after GSP+ is restored.

It could be argued that it is not just the garment industry that benefits from GSP+ and that tea, coconut products, other items like fish, cut flowers, vegetables, fruits and ceramics can be exported duty free to the EU if GSP+ is restored. But how much can Sri Lanka   export of these items?  Can the garments industry cater to the increased demand, continued critics.

This GSP concession comes with conditions attached. These conditions have nothing to do with trade. The ‘Article 13’  of the EU Regulation No 978/2012 gives the European Commission the power to supervise the implementation  of  27 issues  inside the  beneficiary nations.. These relate to  human rights, environmental protection and labor standards. The ‘Report on assessment of the application for GSP+ by Sri Lanka’ put out by the European Commission on 11 January 2017 clearly indicates the conditionality of  GSP+.  Yahapalana’s human rights action plan for getting GSP  includes prosecuting perpetrators of   religious violence,   review and consider the need to declare English as an official  language under the constitution.

In contrast to other countries benefiting from GSP+, monitoring of Colombo’s implementation will be three track. This monitoring framework forms a vital part of the new GSP  scheme. I want to underline one element which is slightly different in Sri Lanka’s case, than in other beneficiaries,” the EU representative said. The GSP+ monitoring will be reinforced by two  additional controls. Firstly, a bilateral HR dialogue with Sri Lanka. This has already commenced. Secondly, the ‘UN track’ particularly  what happens  in UN HR Council. The EC has used the reports of the UN High Commissioner for HR,  as reference, when evaluating Sri Lanka’s eligibility for the GSP+.

For Sri Lanka, the monitoring mechanism will operate at three levels. One, written questions,  two, regular dialogues with the authorities,   three, a well functioning Working Group on Democracy, Good governance  and Human Rights will have a dialogue with Sri Lanka . We are now granting them GSP+ status but, it doesn’t mean we are fully satisfied with the situation.   EU  will continue to monitor the country’s future progress towards reforms and reconciliation. It is planning to commence its first monitoring mission in September, in order to include SL in the 2018 GSP+ implementation reports.

Former President Mahinda Rajapakse stated emphatically that the  restoration of the GSP+ facility to Sri Lanka by the EU could cause permanent damage to the country. That was why his government allowed it to be withdrawn in 2010 without agreeing to their demands. Sri Lanka is just USD 200 away from  the threshold of USD 4,035. After Sri Lanka reaches the USD 4,035 mark in a particular year, we will be under observation for a further two years and then given a grace period of about one year before being taken out of all EU-GSP schemes.. It would have been better if we had simply remained within the ‘general GSP’ scheme paying a concessionary duty until we cross the USD 4,035 mark. Then the transition to full import duty would have been easier.

Now, once we cross the USD 4,035 mark, we will have to make a sudden transition from enjoying zero duty status to paying the full import duty. Since we are very close to the USD 4,035 per capita threshold, we should prepare for a future without any GSP concessions from the EU, by building on the strengths we already have.   The government should inform the people and the export industries that we are on the verge of losing not only the recently restored GSP+ but the ‘general GSP’ concession that we had since 2010 as well.

Rajapaksa also pointed out that even after losing the GSP concession, ‘our apparel exports to the USA continued to grow.’ Our export industries have certain marketable strengths such as the absence of child labor, adherence to high environmental standards and comparatively good working conditions for employees. Buyers can thus rely on getting an untainted product from Sri Lanka. Since we are very close to the USD 4,035 per capita threshold, we should prepare for a future without any GSP concessions from the EU, by building on the strengths we already have, concluded Rajapaksa.

Central Bank Governor Indrajit Coomaraswamy said the country is now in the midst of the most favorable set of economic circumstances it has encountered in 50-60 years.  He said that Sri Lanka must now increase exports and foreign-direct investment and  engage in broad macroeconomic adjustments. But the government, in his view, does not have the fiscal capacity to drive development processes at this time. The private sector will now have to take the reins of the economy.

Some who had campaigned for toppling the Rajapaksa administration were trying to defend economic policies of the new government. But others were critical. The government lacks imagination in economic strategy and the lack of a robust economic plan is evident, said economists.  Harry Jayawardene said there are no long term economic policies polices now change frequently. There is considerable uncertainly in the economic policies of the government this year.  They keep changing said Sanderatne.   Razeen Sally said we have so far not seen any serious economic reforms.  We need to implement unilateral liberalization in terms of tariffs; custom procures, shipping and so on.  We do not see enough investment coming in it has become painfully obvious that the government is not able to manage the economy properly. They have mismanaged it. Dinesh Gunawardena said in March 2017 that the Yahapalana government had caused an unprecedented economic crisis and the situation was rapidly deteriorating. ( continued)