{"id":67653,"date":"2017-07-07T14:58:40","date_gmt":"2017-07-07T21:58:40","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=67653"},"modified":"2017-07-07T14:58:40","modified_gmt":"2017-07-07T21:58:40","slug":"yahapalana-and-the-economy-part-1","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2017\/07\/07\/yahapalana-and-the-economy-part-1\/","title":{"rendered":"YAHAPALANA AND THE ECONOMY Part 1"},"content":{"rendered":"

KAMALIKA PIERIS<\/em><\/span><\/h2>\n

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\u00a0\u00a0 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 \u00a0of 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.<\/p>\n

But Yahapalana was very hopeful. Yahapalana government stated that it was going to completely reform the economy of the country.\u00a0 Prime Minister Ranil Wickremasinghe said the main objective of government was to develop the economy and also \u2018complement the economies of its regional neighbors\u2019. A \u2018balagathu Sri Lanka\u2019 national economic plan,\u00a0 will be formulated, and a huge economic reorganization will\u00a0\u00a0\u00a0 take place,\u00a0 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,\u00a0\u00a0 the Prime Minister said.<\/p>\n

Here is the Yahapalana economic policy in a mouthful. \u2019We are repositioning Sri Lanka to maximize our relationships with both our historic and new trading partners to leverage our geo-strategic position\u00a0 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.\u2019\u00a0 There will be a prioritized five year action oriented framework for trade development and competitiveness.<\/p>\n

\u2018Sri 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 .\u00a0\u00a0\u00a0 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.\u201d\u00a0 Our country,\u201d said Ravi Karunanayake is taking a new path.\u201d<\/p>\n

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.\u00a0 Growth was at 4.4% in 2016, the lowest in three years<\/a>. The Sri Lanka Rupee has fallen steadily \u00a0against 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\u00a0 Sri Lanka Rupee depreciated from Rs. 132 in 2005 to\u00a0\u00a0 Rs. 153 in March 2017 .\u00a0 It is expected to slide more and settle at Rs 168 per USD towards end of 2017.<\/p>\n

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\u00a0 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\u2018s Foreign Direct Investment also declined.\u00a0 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.\u00a0 Analysts say the outflow of financial investments was due to a lack of confidence in the Government\u2019s economic policies.<\/p>\n

Yahapalana\u2018s own\u00a0\u00a0 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\u00a0\u00a0 Yahapalana has borrowed USD 2.3 billion from India, USD 3.65 through sovereign bonds, USD 3.1\u00a0\u00a0 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 \u2018Economic Council\u2019 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).<\/p>\n

In January 2017 Cabinet approved a further USD 1500 million bond issue\u00a0 to meet its loan installments and interest payments for\u00a0\u00a0\u00a0\u00a0 2017. Due to this reckless borrowing, Moody, Fitch, Standard and Poor the three top international credit ratings,\u00a0 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.<\/p>\n

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\u2019s 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\u2019s Bank would be required.<\/p>\n

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.\u00a0 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)\u00a0 The domestic debts will need to be paid in 2017 and 2018, said Yahapalana.\u00a0 In 2019, the country needs to start repaying the foreign debt.<\/p>\n

Superintendent of the Central Bank Public Debt Department said \u2018we 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 \u2018buy back facility\u2019 which can be used to deal with such loans.<\/p>\n

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\u00a0\u00a0 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.<\/p>\n

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\u2019s 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\u201d.<\/p>\n

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\u00a0\u00a0 USD 325 million.<\/p>\n

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 \u2018peanuts\u2019 compared to Yahapalana expenses and dismissed it as \u2018dribbles\u2019. 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.<\/p>\n

IMF is the least transparent, most secretive, of the international financing agencies, \u00a0say critics. \u00a0IMF 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\u00a0 Also, the free market policies adopted by the IMF do not work in the \u00a0Third world.<\/p>\n

IMF adds to the economic burden on the people.\u00a0For 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 \u00a0\u00a0and \u2018kills\u2019 savings. Loss making state owned enterprises\u00a0\u00a0 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.\u00a0 This too affects the poor consumer.<\/p>\n

All IMF loans are subject to conditions. These conditions invariably include higher taxes, reduction of government expenditure on welfare and subsidies,\u00a0\u00a0 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.<\/p>\n

IMF\u2019s Structural Adjustments programme of the 1977, In Sri Lanka, killed off Sri Lanka\u2019s 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\u00a0\u00a0 over spend\u00a0\u00a0 and then borrow more.<\/p>\n

Yahapalana government has also agreed to the conditions given to it by IMF. Budget 2017 has cuts to spending on essential services \u00a0and 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\u2019s 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.<\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 delegation went 45 minutes late to meet the minister .This, said observers, and is most unusual for the IMF.\u00a0 It is a measure of disrespect to the Minister.<\/p>\n

Yahapalana proudly stated that they were negotiating to get the GSP+ concession, which had been withdrawn in 2010 back for Sri Lanka . GSP\u201d is the European Commission\u2019s\u00a0 \u2018Generalized Scheme of Tariff Preferences\u2019. Yahapalana\u00a0 succeeded in June 2017.\u00a0 However, Sri Lanka will graduate out of the program when it reaches the status of an upper-middle income country.<\/p>\n

GSP+\u00a0is 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\u00a02010.\u00a0 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.<\/p>\n

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.<\/p>\n

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,\u00a0cut flowers, vegetables, fruits and ceramics can be exported duty free to the EU if GSP+ is restored. But how much can Sri Lanka\u00a0\u00a0 export of these items? \u00a0Can the garments industry cater to the increased demand, continued critics.<\/p>\n

This GSP concession comes with conditions attached. These conditions have nothing to do with trade. The \u2018Article 13\u2019\u00a0 of the EU Regulation No 978\/2012 gives the European Commission the power to supervise the implementation\u00a0 of\u00a0 27 issues\u00a0 inside the\u00a0 beneficiary nations.. These relate to \u00a0human rights, environmental protection and labor standards. The \u2018Report on assessment of the application for GSP+ by Sri Lanka\u2019 put out by the European Commission on 11 January 2017 clearly indicates the conditionality of\u00a0 GSP+.\u00a0 Yahapalana\u2019s human rights action plan for getting GSP\u00a0 includes prosecuting perpetrators of\u00a0\u00a0 religious violence,\u00a0\u00a0 review and consider the need to declare English as an official\u00a0 language under the constitution.<\/p>\n

In contrast to other countries benefiting from GSP+, monitoring of Colombo\u2019s implementation will be three track. This monitoring framework forms a vital part of the new GSP\u00a0 scheme. I want to underline one element which is slightly different in Sri Lanka\u2019s case, than in other beneficiaries,\u201d the EU representative said. The GSP+ monitoring will be reinforced by two\u00a0 additional controls. Firstly, a bilateral HR dialogue with Sri Lanka. This has already commenced. Secondly, the \u2018UN track\u2019 particularly\u00a0 what happens\u00a0 in UN HR Council. The EC has used the reports of the UN High Commissioner for HR,\u00a0 as reference, when evaluating Sri Lanka\u2019s eligibility for the GSP+.<\/p>\n

For Sri Lanka, the monitoring mechanism will operate at three levels. One, written questions,\u00a0 two, regular dialogues with the authorities,\u00a0\u00a0 three, a well functioning Working Group on Democracy, Good governance\u00a0 and Human Rights will have a dialogue with Sri Lanka . We are now granting them GSP+ status but, it doesn\u2019t mean we are fully satisfied with the situation. \u00a0\u00a0EU\u00a0 will continue to monitor the country\u2019s 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.<\/p>\n

Former President Mahinda Rajapakse stated emphatically that the\u00a0 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\u00a0\u00a0the 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 \u2018general GSP\u2019 scheme paying a concessionary duty until we cross the USD 4,035 mark. Then the transition to full import duty would have been easier.<\/p>\n

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.\u00a0\u00a0 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 \u2018general GSP\u2019 concession that we had since 2010 as well.<\/p>\n

Rajapaksa also pointed out that even after losing the GSP concession, \u2018our apparel exports to the USA continued to grow.\u2019\u00a0Our 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.<\/p>\n

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.\u00a0 He said that Sri Lanka must now increase exports and foreign-direct investment and \u00a0engage 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.<\/p>\n

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. \u00a0Harry 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.\u00a0 They keep changing said Sanderatne.\u00a0\u00a0 Razeen Sally said we have so far not seen any serious economic reforms.\u00a0 We need to implement unilateral liberalization in terms of tariffs; custom procures, shipping and so on.\u00a0 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\u00a0Yahapalana\u00a0government had caused an unprecedented economic crisis and the situation was rapidly deteriorating. ( continued)<\/p>\n","protected":false},"excerpt":{"rendered":"

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\u00a0\u00a0 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. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[104],"tags":[],"class_list":["post-67653","post","type-post","status-publish","format-standard","hentry","category-kamalika-pieris"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/67653","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=67653"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/67653\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=67653"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=67653"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=67653"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}