• Looking at the proposal put forward by Dr. Harsha de SIlva

BY Sumudu Chamara While several concrete steps are scheduled to take place within the coming few months as far as the political situation is concerned, there is still a huge uncertainty as to how the economic crisis could be addressed.  In a new development on Tuesday (12), it was reported that the framework of a short-term economic plan put forward by Samagi Jana Balawegaya (SJB) Opposition MP and economist Dr. Harsha de Silva to the Parliamentary economic committee received the approval of the representatives of all parties represented in the committee. This plan, presented for the proposed interim all-party or multi-party Government, is meant for a period of six months or a little longer, according to Dr. de Silva. This framework has been based on the “common minimum programme” (referred to herein as ‘programme’), which is a compilation of several economic proposals compiled by the National Movement for Social Justice (NMSJ). The common minimum programme for economic recovery was developed with the help of proposals submitted by political parties and organisations, which were reviewed by economists and were approved by business leaders. This process was led by economic and technology expert Prof. Rohan Samarajiva.  It provides proposals under eight categories, namely, macroeconomic stability, revenue consolidation, primary expenditure control, public sector and State-owned enterprises’ (SOEs) management, the social safety net, energy and utilities, trade and industry, and specialised legislation critical to recovery. Macroeconomic stability With regard to macroeconomic stability, acknowledging that Sri Lanka has already taken several steps – such as holding discussions with the International Monetary Fund (IMF) to address the economic crisis – the programme said that it looks beyond these ongoing activities. The programme recommended that priority be given to the Monetary Law Act (which exists in draft Bill form), which will ensure the independence of the Central Bank of Sri Lanka (CBSL), which is seen as essential for macroeconomic stabilisation.  Adding that attention is also focused on ensuring that data on public debt are accurate at all times and that a professional approach is adopted for the management of different forms of debt and guarantees, the programme noted that the proposed public debt office should be an elite organisation, staffed by highly qualified and experienced professionals. The programme read that it was felt that providing adequate compensation packages for such professionals would be a challenge unless the public debt office is located within the CBSL. It added however that concerns had been expressed about whether the placement of the public debt office within the CBSL would detract from the central objectives of the CBSL. In addition to the said concerns, the programme presented three short-term (to be implemented within this year) steps under macroeconomic stability. Among them are conducting an audit of all current foreign debt and guarantees, and concluding external debt restructuring by end of the year. The third step recommends establishing an independent CBSL, passing the Monetary Law Act to bring discipline to money printing, building the institutional independence of the CBSL, and creating a legislative framework for inflation targeting. It also put forward three-medium term (to be implemented by the end of next year) steps. The first recommendation was gradually unwinding the CBSL domestic balance sheet in a carefully sequenced manner alongside market interest rate increases and foreign inflow. The second one was creating a central public debt office, which will require highly skilled and paid professionals, regarding which the programme said that while downsides exist to its’ placement within the CBSL, it may also require enabling legislation. Recommending minimising domestic currency debt restructuring as the third medium-term step, the programme said that if domestic restructuring must take place, it should be limited to treatment towards re-profiling with some regulatory forbearance, which may be under the purview of the public debt office, and that converting to bonds and listing on the Colombo Stock Exchange (CSE) must be considered. Revenue consolidation The programme emphasised that in a context where it is almost certain that the entering into an IMF programme will require a commitment to a time-bound achievement of a primary surplus, it will require the raising of revenue above the current levels, which may require restoring the tax regime that existed prior to December, 2019. It noted that while it is necessary to increase non-tax revenues by increasing the fees charged for services and revenues from State assets, attention should also be paid to reducing the costs of collecting the revenue and improving the services provided. Among the short-term steps in this regard, reintroducing and broadening withholding taxes (including capital and service payments), and creating a task force to assess Government assets and to identify opportunities to increase non-tax revenue, regarding which it further recommended to increase revenue on Government-owned assets, fees, and returns from Government organisations, and to ensure that the service quality is improved at the same time, were measures that were recommended. Among the medium-term steps are to formulate a long-term, stable tax policy with no tax incentives for foreign direct investments; creating a progressive corporate tax regime with the rate increase being gradual; broadening the income tax base by reversing the decline in the number of taxpayer files; improving the tax collection mechanisms; becoming a signatory to the base erosion and profit-shifting digital economy frameworks; introducing a 15% minimum alternative tax for multinationals; the halting of giving out strategic development project status for new investments which will be subjected to the payment of a 15% minimum alternative tax; introducing Customs reforms such as enhanced risk-based investigations and the reforming of the Customs’ officers’ rewards schemes and the rationalisation of penalties to address perverse incentives; and establishing a unified revenue administration for the Customs, the Excise, and Inland Revenue Departments. Primary expenditure control Stressing the importance of ensuring that the Fiscal Management (Responsibility) Act, No. 3 of 2002 is implemented properly as part of the proposed reforms, the programme put forward several short-term interventions in that regard. They are: tightening the Act to address the prevailing fiscal numbers and clearly defining the escape clauses (justified deviations from the rules) and the path to recovery along with accountability measures; stopping all projects that lie outside of the national physical plan and those implemented without a rigorous feasibility study, financial analysis, environment analysis, or social analysis; and reprioritising capital expenditure from the general budget on long-term projects such as roads and highways where possible. Public sector and SOEs management The programme included a number of recommendations to improve the public sector. These efforts include monitoring expenditures, stopping unnecessary recruitments, the privatisation of SOEs where necessary, and budget-related constraints. It provided several short-term steps, which include: freezing public sector recruitment; calculating the personnel-related requirements of the State, of the armed forces, and of the SOEs; re-examining and reassessing defence expenditure, imposing hard budget constraints on SOEs; and ceasing all capital and current transfers to SOEs. Among the medium-term steps are: Engaging in capacity building for retained public sector employees, especially for high-level staff; developing outcome-based key performance indicators (KPIs) for the public sector; privatising high profile SOEs such as the SriLankan Airlines; establishing public-private partnerships where relevant; increasing the efficiency and productivity of SOEs; and liberalising markets in which SOEs operate where relevant. In addition, several longer-term (to be implemented after next year) steps were recommended for the public sector and SOEs. They are: converting corporations, boards and departments to companies to bring fence (guaranteeing that money allocated for a certain purpose is not spent on anything else) liabilities and improve the data quality, and establishing a formal mechanism for director board appointments (such as a fit and proper test). It further recommended bringing professional-level control and regulation, such as conducting management audits to identify those that cannot be revamped, to key entities, and added that those that cannot be revamped should be restructured completely or an alternative should be found. Social safety net Focusing on social security, the programme pointed out that although the Welfare Benefits Act became law in 2002, it is yet to be implemented, and recommended that its’ board be activated, databases be completed, and a social safety net be implemented immediately. In addition, highlighting the present economic situation and the fact that surveys have shown that 77% of households that receive regular benefits from the Government have access to bank accounts, the programme recommended that cash transfers to bank accounts of mobile money accounts be used, with improvements to targeting being made over time. What is more, as medium-term steps, it recommended improving targeting for social safety net payments, and consolidating welfare schemes under a Welfare Benefits Board and building a unified beneficiary database. Energy and public utilities With regard to the petroleum products sector, the programme said that formula-based pricing for imported fuel, which was recommended in multiple documents, has been implemented, though the actual formula and the periodicity remain opaque. In this context, it recommended that these elements be addressed. It was noted in the programme: “Because fuel is a key input for the production of electricity, which in turn is a significant input for the production of piped water, it will be necessary to extend formula-based pricing to these utility services as well. It appears that distributors of cooking gas are adjusting retail prices to reflect the cost of imports and the value of the Sri Lankan rupee. It is recommended that all petroleum products, including cooking gas, be brought under utility regulation through a sector specific law, and that price and quality regulation be entrusted to the Public Utilities Commission of Sri Lanka (PUCSL). “Because over 60% of the fuel imported into the country is spent on transportation, it will not be possible to address the current account deficit and the volatility caused by world markets unless concerted action is taken to shift more passengers to efficient modes of transport. This will require a shift to a public transport first policy and the removal of various forms of subsidies currently in place for private transport. The investments required for this shift may have to be obtained from external sources.” Implementing transparent, automatic, market-based energy and water pricing, and bringing all petroleum products under regulation through legislation were among its short-term recommendations to address the challenges in the energy sector. Under medium-term steps, the programme recommended investing in public transport through foreign assistance, separating the transmission grid to allow the necessary investments and to introduce services such as wheeling (transportation of electric energy from within an electrical grid to an electrical load outside the grid’s boundaries), ground handling services to be reformed in a manner that will make the airports attractive to low-cost carriers, and liberalising the Colombo Airport up to the fifth freedom rights (an airline has the right to carry traffic between two countries outside its own State so long as the flight originates or terminates in its own State) after the privatisation of the SriLankan Airlines. Trade and industry Moreover, the programme said that the committees established under the National Export Strategy of 2018 should be used to identify difficulties experienced by exporters. It added that the crisis and the accompanying failure of basic infrastructure services have brought industrial zones back into discussion, and that unlike in the 1980s, it would be useful to allow privately managed industrial zones, where the operators will be responsible both for the investments and the recruitment of tenants. It provided several short-term steps – i.e. fast tracking trade facilitation reforms by removing distortions, reconsidering import controllers’ functions and rolling back permits (a licence granted to import non-essential items), and promoting understanding on the necessity of imports for exports – and one long-term step – i.e. enabling legislation for private industrial zones. Specialised legislatio With regard to the importance of specialised legislation for recovery, it was noted that it is expected that a large number of enterprises will fail, and hundreds of thousands, if not more, employees will be thrown out of work as a result of the crisis. The programme noted that extant legislation is not capable of effectively responding to these unprecedented events.  “Unless new bankruptcy laws that are applicable to all enterprises are enacted quickly, the recovery will take long. In the same way, unless a more realistic mechanism than the Termination of Employment of Workmen Act for handling employees who lose their jobs as a result of the crisis is set in place, enterprises will not be able to survive,” it added. To address this situation, it recommended fast-tracking unified bankruptcy laws for all enterprises, and replacing the Termination of Employment of Workmen Act with the Unemployment Insurance Fund, both of which are short-term measures. Sri Lanka is likely to appoint an all-party Government soon, and stabilising the economy is one of the main responsibilities that this Government has to prioritise. While experts’ opinions as to what steps need to be taken are essential, how those steps would affect crisis-hit people is also a concern that should be taken into account.