Economic Transformation Bill: Putting the Cart Before the Donkey
Posted on June 15th, 2024

Dilrook Kannangara

The Economic Transformation Bill (ETB) was presented to the Sri Lankan parliament on May 22 by President and is one of the most backward and irrational bills ever presented to Sri Lanka parliament. Instead of creating economic conditions that achieves stated objectives, this bill puts the cart before the donkey. This will lead to politicians cooking the books of the Central Bank economic indicators report to suit them than achieve anything tangible.

Not surprisingly, this bill was drafted without consulting the public, business, parliamentary, chambers of commerce or other groups of people. It is only aimed at appeasing the IMF to get the $3 billion IMF loan in full for now, to hell with the future of Sri Lanka.

The Bill interferes with the Constitution which gives the parliament the power to manage the nation’s finances, not the President and certainly not an Economic Commission” (Section 11 of the bill) that aims to hijack those powers. The Economic Commission will also mess with labour rights, environmental protection laws, provincial council powers and national security. The bill also interferers with Sri Lanka existing and potential free trade agreements.

Reference to Net Zero by 2050 as stated in the bill must be taken for comedy matter as its implementation will only bring environmentally disastrous investments into the country, dumped by other nations. The cost of achieving Net Zero, state investments required and diversifications needed to get there are not factored in the bill.

Section 13 of this ominous bill lists draconian powers of the Economic Commission including its ability to declare investment zones anywhere in the island and removes restrictions on foreign interference in essential services critical to public and national security. What’s worse, the Bill has provisions to allow the Cabinet (not the parliament) to approve any investment accepted by the Economic Commission.

The bill has some fancy numbers, plucked from the sky. These must have been clobbered together by Mahadenamutta’s disciples and persons with no economic knowledge as the measures and goals are inconsistent and even contradictory!

For instance, it aims to achieve a government revenue target of 15% of the GDP from 2027. Such a massive tax charge on the economy will crash the economy. Unlike in other countries, in Sri Lanka, people in a few provinces foot most of the tax burden. Taxing them even more than now will crash their economy and empower the people in provinces that don’t pay their fair share. This in turn will reduce government revenue. What is even more ridiculous is the bill puts many state-owned enterprises for auction and fire sale. Instead of turning them around and getting their profits to the government to reduce the tax burden on the people, the Bill aims to sell them off which results in no income to the government in future other than tax on productive sections of the economy!

Public debt to GDP ratio is to be below 95% of the GDP. This is another foolish indicator that disregards the interest rate of loans. Japan’s debt to GDP ratio is over 260% but it poses no problem as the interest rate of those loans are less than 0.5%. Not the case with Sri Lanka. Economic disaster this bill creates will force Sri Lanka to get foreign loans at very high interest rates. Repaying these will increase state expenditure and annul other economic indicators contained in the bill.

The bill aims to bring down the Central Government Annual Gross Financing Needs to Gross Domestic Production (GDP) ratio to below 13% by the year 2032. For this to happen, the budget deficit should be contained to 13% of the GDP or much less while Sri Lanka repays accumulated debt and interest payment. Simply impossible. If attempted, it means a total crash in government investments and spending, and, resultant social unrest and long-term economic crash. It leaves no allocation to face climate change related disasters which will happen with increasing frequency and far more damaging than now.

When looked at with other government initiatives including its planned reduction of military expenditure well beyond the critical 2.5% of the GDP, and the size of the army, the bill will usher in a new era of war and violence and climate change events that will be difficult to manage. Mixed with rising social unrest higher taxes and lower social services offered by the government, conditions will be perfect for political instability and rapid regime collapse.

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