• Sri Lanka should show bipartisan support for IMF programme
• Fix longstanding policy and structural mistakes 
• Everyone should pay taxes
• Domestic debt restructuring is tricky but possible

Sri Lanka should support the International Monetary Fund (IMF) agreement and reach the targets set by it for our own benefit, asserted University of Colombo Department of Economics Head Prof. Sirimal Abeyratne.

According to Prof. Abeyratne, the programme should be seen as an opportunity for Sri Lanka to correct its policy and structural weaknesses, which make the island nation vulnerable and crisis prone. He also stressed on the need for Sri Lanka to put in place measures to reduce the impact from corruption vulnerabilities and widen the tax base, noting: “We can’t have Scandinavian-type welfare on an African-type tax system.”

In an interview with The Sunday Morning, Prof. Abeyratne spoke in favour of domestic debt restructuring in parallel to external debt restructuring, pointing out that State institutions and private financial companies alike could negotiate a process which would not affect their cash flow status. 

Following are excerpts from the interview:

Now that Sri Lanka has entered into an agreement with the IMF for the $ 2.9 billion Extended Fund Facility (EFF) programme, how important is it to show bipartisan support for it? 

This time the IMF support is different from what it has offered before. We have sought support from the IMF multiple times before. This time there are other countries – China, Japan, and India – involved, especially with our debt restructuring process. 

Secondly, there are multilateral donors who are concerned about the debt restructuring. Thirdly, there are private lenders who are also interested in what is happening in Sri Lanka. So, this time, there is no way we can ignore the programme we have agreed to with the IMF. We have the international community watching over us, watching to see whether we follow the programme or if we are taking it lightly, so Sri Lanka cannot ignore the agreement, even for political reasons. We must carry out what we agreed to do. 

Earlier, Sri Lanka would borrow from the IMF through an agreement, be it an EFF or other mode of delivery, and we would go along until we reached an area of political sensitivity and then we would go our own way. This is because many governments prioritise their political goals over following the IMF agreements. This time we are bound to do it, whether we like it or not. 

It is important that we follow this agreement (EFF) and show results. Not because we want to satisfy the IMF, but because we want to get out of this crisis and we need to end all our policy mistakes once and for all. 

The IMF has set some macroeconomic targets for Sri Lanka to meet by the end of the year. Do you think Sri Lanka can achieve them? 

I think Sri Lanka is on track to do so. However, besides the IMF programme, there are certain changes which are as important that I think Sri Lanka needs to implement in order to reach the targets and sustain the momentum beyond 2023.

I think we are on track in terms of stability – that is one of the primary objectives of the IMF programmes – but we have problems in some areas of implementation. In the targeting of the poor for relief and targeting taxpayers, we have a problem. Also, targeting corruption vulnerabilities is a challenge for us.

These issues are quite serious; we have to improve the situation related to them by ourselves. The IMF will not tell us to tax all the people who are eligible to be taxed. We have to decide that ourselves. At present there are about 500,000 citizens registered with the Inland Revenue Department, whereas there are millions of people who should be paying taxes but instead are moving along as ‘freeriders’.

It’s mostly those who are in the private sector and the public sector who receive fixed salaries who are paying taxes. I think everybody should pay taxes, even Rs. 20. Even a beggar on the side of the street should pay taxes, because they use public assets and utilities. We Sri Lankans are not used to paying taxes, but it is important that we do. 

We argue for committing 6% of GDP for education and such, but so few of us pay tax. We can’t have Scandinavian-type welfare on an African-type tax system. These two don’t go together. We should expect better welfare, better public service, and better pay, and we should also pay for them, which we haven’t done in the past. We have to do these ourselves; we need to be innovative. 

Similarly, we don’t know who should receive Samurdhi benefits or scholarships and who should receive Government support. The Government doesn’t have a proper system in place to survey and identify these individuals. The same goes for corruption vulnerabilities. How many major corruption cases have been reported over the years that have been ignored? Even the institutions which are supposed to act on these issues have been paralysed. Unless the President gives an order to act, they don’t initiate action. It shows how weak the institutions are. 

I believe these are the issues that Sri Lanka needs to show that we are making progress on and meeting targets. 

Sri Lanka was to provide the IMF with a programme on restructuring its debt by the end of April. Do you think Sri Lanka will need to seek an extension from the IMF to submit a programme? 

I am not sure; I think we may need to seek an extension. We know how the public sector works here. The actions are quite delayed, even though we do a lot of talking. The higher level of administration is always busy, but their output has been very low compared to their busy schedules. That has also been a tradition in Sri Lanka, so I am not surprised to hear that we are not ready yet. 

The IMF will probably give us a new deadline; now that we have an agreement, it may offer us an extension to put forward a plan. We must do so; we need to come up with a credible programme in line with the IMF recommendations.

Should Sri Lanka consider domestic debt restructuring this year (2023)? How will it impact the banking sector? 

I think if we don’t address it, it would be unfair. That is, if we only ask the foreign creditors to bear the burden and not the domestic lenders. I am sure the foreign lenders will also insist on this area. 

However, domestic debt restructuring is a tricky matter. It can have a negative impact on the stabilisation programme and it might create political unrest as well. If you look at the structure of domestic debt, there are areas which can be restructured without having a negative impact. 

If you look at those who have invested in Government securities or what the public usually understands as money printing; what money printing means is purchasing Government securities in the primary market and giving money to the Treasury.

The Central Bank of Sri Lanka (CBSL), State-owned financial institutions including People’s Bank, Bank of Ceylon, and the National Savings Bank, and also the Employees’ Provident Fund (EPF) have purchased Government securities. Also, private banks and individuals have kept part of their assets in Government securities. 

When you look at this structure, the most controversial sectors are the financial institutions, the banking sector, but I think that they can look at their cash flow and then negotiate with the Government on how to restructure their debt. If they are comfortable with their cash flow, they can allow the Government to go ahead with some debt restructuring without affecting the cash flow.

For example, part of the Treasury bills held by commercial banks, they can extend the Treasury bills or convert them into Treasury bonds for the next year if the banks are comfortable with their cash flow for that year.

The CBSL can also support restructuring by converting its Treasury bills to Treasury bonds, which means a longer period. The EPF can also do so. To my understanding, every year Rs. 150 billion gets accumulated to the fund, so I think if the restructuring doesn’t affect paying the benefits to the members, they can also look at some form of restructuring. 

The Government can innovatively decide, minimise the impact, and come up with a restructuring programme with guarantees. I think domestic debt restructuring should be part of the debt restructuring effort. 

Much has been said about reforming the State sector, particularly in relation to State-Owned Enterprises (SOEs), but there has been little tangible process. Do you think there is adequate political will to carry out the necessary reforms ?

This is another area where Sri Lanka has shown slow movement in showing results. Political will is divided, political parties are divided on this matter, and the country is divided on this matter. One good thing about this crisis is that the people, the voter, the taxpayer can learn some bitter lessons from it. They have been deceived throughout history by politicians saying they are not going to privatise ‘public assets’.

Another aspect that the people should understand is that politicians and trade unions look at this issue through their ideological spectacles, so they don’t want to see outside those ideological frames. 

This realisation, which the public is facing now, is the most important outcome of this crisis. In fact, it also gives the Government the opportunity to restructure these public enterprises. While the process has been initiated, progress is slow. This is not only due to the regulatory barriers, but also political opposition. However, restructuring SOEs is a must.

The way SOEs have been framed and administered over the years have given an opportunity for politicians and trade unions to benefit from them. This has been happening over the decades. The existing system has allowed SOEs to grow their own community, which they want to sustain. In economics, we call this a ‘principal-agent problem’. Thus, politicians and employees – and sometimes part of the public – exploit them.

The terms ‘public enterprise’ and ‘State-owned’ are political branding; what matters is who benefits from these enterprises. Clearly not the public.