• If SL does not strengthen its finances, it may default on IMF loan
• Govt. needs to control inflation as gateway to economic recovery
• After Premadasa’s time, SL has never had a proper economic policy
• Population of 20 million in this country, but only 500,000 pay tax

Sri Lanka is currently in what he would term an ‘interval in hell,’ says Economist, Attorney-at-Law, and University of Colombo Department of Economics Senior Lecturer Dr. Shanuka Senarath. “This is just the tip of the iceberg; all the problems are still under the carpet,” he asserted, in an interview with The Sunday Morning.

Commenting on the anticipated International Monetary Fund (IMF) bailout, he asserted that the $ 2.9 billion assistance package was hardly any financial gain, but noted that working with the IMF would put Sri Lanka on a better global footing. However, he warned that if Sri Lanka did not strengthen its finances, there was a possibility of it defaulting on the IMF loan too.

In the course of the interview, Dr. Senarath also spoke on areas the Government should prioritise in moving towards recovery, the tax regime, the latest power tariff hike, the Samurdhi poverty alleviation programme, the lack of a focused national economic policy, and the complete disinterest in tackling corruption.

Following are excerpts:

How do you view Sri Lanka’s current economic status and what’s your outlook for the country in the months ahead, especially in the backdrop of positivity surrounding the IMF bailout package for Sri Lanka?

If you look at the current economic status of the country, Sri Lanka obviously is a bankrupt country. It has been declared bankrupt so we are not paying our debt obligations and we are also not importing things as we used to do.

On average we were paying around $ 600 million as interest and repayments of debt, which we are not paying now, so we are saving around $ 600 million a month. Also, due to import restrictions, we are saving around $ 1,000 million a month.

Given that we are bankrupt and we are not importing or paying our debt, we are in what I would call an interval in hell – a situation which may look quite calm but is not. This is just the tip of the iceberg; all the problems are still under the carpet. That is how I would explain the nature of our economy in brief.

If I come up with a shorter example, if we have a hire purchase vehicle and stop making our repayments, no one will suddenly come and take our vehicle. There is a time gap between default and legal enforcement. We are in that time gap at the moment.

We have defaulted, we have to restructure our debt, and we have to pay back our debt; we are in an interval and we have to face real economic hardship in future. 

Will this be the case even if the IMF bailout comes through?

The IMF bailout is $ 2.9 billion, which will be given to us over four years’ time. That is hardly any financial gain or loan because it is a minimal amount. 

The good part about the IMF is, when Sri Lanka’s debts are restructured in light of the IMF funding, it gives a signal to the rest of the world that we are with the IMF. As a result, we will be able to do things like issue sovereign bonds or go for bilateral debt agreements. Other than that, the IMF won’t give any monetary strength to the country. However, it’s a good thing that the IMF has given a greenlight. 

With the IMF, we can expect a slight recovery in the economy, but that doesn’t guarantee anything. Greece defaulted on its IMF loan; that is also a possibility. If we do not really strengthen our finances, there is a possibility that we may default on the IMF loan as well.

What should the Government’s priorities be in order to speed up recovery?

If we have a disease, we have to control our growing temperature. Our economy is facing huge inflation. Over the last 12 months, inflation has been over 100% and prices have doubled.

First, the Government needs to control inflation, for many reasons. One is, when we have this sort of inflation, it affects people’s purchasing power. People are becoming poorer. It also affects our domestic economy and our industries, which is why the economy is shrinking. Inflation also results in exports becoming harder to market in foreign markets. Local inflation is higher and so is the cost of production.

The Government should control inflation as the first step, as a gateway to economic recovery.

While revenue generation is important, negative impacts on people’s purchasing power is in turn negatively impacting the overall economy. How can these factors be balanced and managed favourably?

People’s purchasing power has gone down by more than 50%. In a rough estimate, the real value of Rs. 100 would be around Rs. 33 by now; purchasing power has declined by around 66%. That is something severe, with no increase in income. This is simply due to inflation, which the Government should control.

I will give you one good suggestion of what the Government should do. Oil or fuel is the lifeblood of the economy given that electricity and diesel are the main components of power generation in the economy.

If you look at the process of supplying fuel to the Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC), the Government imposes a tax of almost 100% on fuel. The price of a litre of petrol when it arrives in Sri Lanka is well below Rs. 200. A litre of diesel costs around Rs. 250. Then the Treasury imposes a tax, which makes a litre of petrol Rs. 400 and a litre of diesel more than that. 

Fuel is given to the CEB at these prices, due to which the price of electricity has gone up. Transportation uses fuel at this price, so the cost of transportation has gone up. The entire economy is facing inflation because transportation and power are the main sources of production. As a result, all prices are going up, from bread to whatever else.

If the Government can provide fuel to the CEB at CIF [Cost, Insurance, and Freight] price, that will control inflation. This is just one example I can suggest to policymakers. There are many ways of controlling inflation; this is how we can enhance people’s purchasing power and at least try to control the situation.

What are your thoughts on the current tax regime, especially in the backdrop of protests by trade unions?

Taxes are quite usual in any economy. The biggest argument from the Government side is that in other countries, taxes are quite high. I agree. Say for example in Australia, after a certain point taxes are around 33% of income.

However, the issue here is, given our purchasing power, we have been facing so much inflation over the last two years and our prices have doubled or more, while there has been no increase in income over the last 12 months.

On the other hand, there are so many indirect taxes in the Sri Lankan economy – for example, the tax on fuel and various other things like Value-Added Tax (VAT), which are indirect taxes that have also caused prices to go up. There are also other means of revenue generation from the Government side, fees and so on, which have gone up as well.

As a result, people are experiencing or gaining very little real income. The amount you can spend is very little as all these indirect taxes, fees, and everything else has gone up. On top of that, once we have these tax rates, it will be devastating. That is why the trade unions are working on this.

Some people have found out that they are gaining negative salaries; once they have paid their loans and the tax is imposed, they have to pay something to the institute for which they work. This is the nature of the situation.

There is an issue in Sri Lankan tax rates. The tax curve should be something that increases gradually. For lower-income brackets, the tax should be very low. For example, Rs. 200,000 is a very low amount of income in Sri Lanka at the moment. Even for Rs. 100,000, there is a tax. I do agree that even for a Rs. 50,000 income there should be a tax, but that should be at an absolute minimum – it should be nominal, say 0.5% or something. When it goes up, the tax rate should go up accordingly. 

One of the biggest issues with the current tax rate is that taxes are higher at middle-income levels and comparatively lower at higher-income levels. I believe the tax threshold should go up at least to Rs. 200,000 and from there onwards tax should increase gradually. 

There is another problem as well. We have a population of 20 million in this country, but only 500,000 people pay tax. Our tax base is quite weak because a lot of people are not paying taxes and the tax system is not developed. That is something the Government should focus on rather than forcing the entire burden on these 500,000 taxpayers.

How do you view the latest power tariff hike and its impact on people and industries?

If you look at the formulas and the rates of tariff on power, the increase is mainly for those who consume less power. For a person consuming less than 90 units per month, the hike is more than 250%, which is quite high.

The other issue is that our economy is already shrinking. Estimates are that it has gone down by 20%. The World Bank estimates that our economy will shrink another 4% by the end of this year, but that is for the formal economy. In a country like Sri Lanka, with such a wide informal economy, the actual drop will be more than 4% because most economic activities are not recorded. As a result, my estimate as an economist would be another 10% or 20% for this year as well. 

Our industries are closing down – mainly local industries do not have the capacity to export; they don’t have any other market. Local demand is confined to essentials. People are mostly buying only food items and essentials like medicines; they have cut out most of the items we consider as luxury items in our current state. On top of that, we have this huge increase in electricity bills, which definitely impacts people’s purchasing power. It’s another indirect tax. 

Industries also cannot cope with these prices and when they add their prices to the products, no one will buy them. Even export prices will go up tremendously in line with the electricity prices, which will result in a problem for Sri Lankan exporters in foreign markets.

Now we have a sudden appreciation of the rupee, which we have incorporated with all the good hopes, but look at what happens to the exporters – the amount of rupees they are getting for exports has suddenly dropped. The increases in cost of production, electricity, and all other factors along with the sudden appreciation of the rupee all work as obstacles for economic recovery. 

The IMF has called for an increase in welfare programmes, even as some of the revenue generation steps are pushing people into economic hardship. How can the wellbeing of the lesser-privileged sections of society be ensured?

That is a very crucial point when it comes to a crisis. In an economic crisis, poverty increases. Our poverty over the last 10 years was around 5% of the population and it has risen to 10% now. It’s a challenging task for any government to address poverty in a crisis. One good thing the Government can do is minimise inflation and also strengthen its poverty alleviation programmes like Samurdhi.

If you look at Samurdhi, one of the biggest issues is that about 7% of recipients are from among the highest income earners in this country. Another 5% of actual poor people who should get the allowance are not getting it.

The Government was talking about a project where it would give the Samurdhi based on electricity consumption; this was discussed some time ago. People consuming less than 90 units a month are considered to be poor. There are issues with the measurement of considering people who use less power as poor, but all these impacts of power hikes are again on those who should receive Samurdhi. 

The Samurdhi allowance, for example, is given to political henchmen rather than those who really need it. The Government should look into these factors and strengthen its poverty alleviation programme.

Addressing poverty amid a crisis is a hard thing, but it is something that should be done. If this situation continues, the impacts of malnutrition and the collapse in education will be seen in another 10 years’ time.

Does Sri Lanka actually have a focused economic policy or is it just flailing about in the dark in a reactionary manner?

To be honest, the sad truth is that we don’t have one. If we look at the economic history of this country, after President R. Premadasa’s time, we have never had a proper economic policy.

When we were kids, we had some sort of an industrial policy for this country, where they started garment factories and were starting to move towards semi-industrialisation of the country, which was quite good for the time. If you look at some of Sri Lanka’s export giants, those organisations came during the time of those industrialisation policies, especially in the garment industry. 

After that, we never had a proper policy or a framework to address the needs of this country. What the Government has always done is depend on the revenue of those who are working in the Middle East. India has now banned sending housemaids to the Middle East given the higher social costs of such employment, but it is sad to see that Sri Lanka is solely depending on the monies of those working in the Middle East.

If you look at India, it is generating more dollars by selling IT services to the world compared to the revenue generated by Saudi Arabia by exporting oil. Imagine how much India is earning by strengthening its IT sector? What have we done? We were talking about monorails and technology villages, but we have never implemented anything. We have made some concrete investments in harbours, airports, and towers, which have no impact on the economy.

To be honest, as an economist, I have not seen any strong policy or any considerable policy on our economy over the last two decades.

While people undergo tremendous hardship, no politicians and State officials have been held accountable for the economic crisis. How can faith in the system be restored and people’s buy-in ensured in getting Sri Lanka back on track?

That is one of the key points I would like to emphasise on. If you look at the history of this, if I go back two years when Fitch Ratings was downgrading Sri Lanka, some of our key people who are responsible for economic management were talking about this downgrade as a conspiracy against the country because we had finished the war – the usual gallery political discussion.

At the time, we as economists said, ‘do not utter these words; they may burn the trust we have among the international community’. We have lost reputation and recognition in international communities over the last five years due to many factors.

Corruption, bribery – there was a time we were talking about a 10% commission on all investments coming into Sri Lanka – mismanagement and nationalist ideology have ruined the reputation of this country internationally. Locally, if you talk to an average Sri Lankan, no one believes in politicians because of corruption.

One good thing – and I don’t think this will ever happen – that can be done is carrying out proper investigations into what happened, into the corruption that has taken place. The report on illicit finance states that $ 20 billion has been looted from Sri Lanka over the last 10 years. That $ 20 billion amounts to almost half of our debt obligations.

For example, Israel is considering building a canal from the Red Sea to the Mediterranean, which would cost $ 15 billion; $ 20 billion is more than that. $ 20 billion is enough for Sri Lanka to survive for five years without doing anything. That is the amount we have lost thanks to corruption.

The IMF is talking about corruption control but nobody here is talking about it. The IMF is talking about tax increases and the Government is very happy about it. The IMF is talking about revenue generation through taxes, that is fine and politicians are happy, but nobody is talking about corruption control.

One good thing whoever comes into power in the future can do is have a proper investigation like in Malaysia and Singapore. We talk about becoming Singapore, but we are not talking about controlling corruption. That is something that should be done, it is an urgent need, but we cannot expect it from the current regime or current politicians.