• Plaster solutions not the way out 
• Micro and macro economics in a mess 

By Sarah Hannan With just months away from having to pay a debt instalment of $ 1 billion, and the economy of Sri Lanka still taking the first steps towards recovering from the downturn experienced in 2020 due to the pandemic, The Sunday Morning this week invited Dr. Harsha de Silva to the Hot Seat to seek his views on the present economic climate of the country. [caption id="attachment_111932" align="alignleft" width="300"] Dr. Harsha de Silva[/caption] Dr. de Silva was seen at a ministerial-level meeting recently where he was invited by the Ministry of Trade for a discussion on restarting the climate-controlled storage unit in Dambulla which would allow farmers to store their excess produce in an attempt to reduce wastage. This will ensure food security and help in controlling the skyrocketing vegetable prices and the demand could be met through a controlled and regulated supply of vegetables.   Following are excerpts of the interview; Given that Sri Lanka needs to repay debts amounting to over $ 6 billion, would the present measures taken by the Treasury be sufficient to repay this year's instalments?  It’s not a liquidity problem that we are discussing; we are talking about a solvency problem. So to say that we will somehow make this year’s payment is just a plaster solution to the problem. We must understand the gravity of the crisis we are in. We can get a swap from China or India and make the payment instalment that is due in July, which is $ 1 billion from International Sovereign Bonds (ISBs). In May there is a due of another $ 500-600 million in Sri Lanka Development Bonds (SLDBs). We can use some of the reserves to pay it. But it is not about just paying these instalments; it is also about what happens next year and the year after that. Because every year we will have $ 6 billion-plus debt instalments to be paid, so we have to think beyond our immediate future. You recently said that the State Minister of Money and Capital Markets was downplaying the debts Sri Lanka is to repay. What implications would it have on the country's economic stability?  You see, you have to be factual. Now the other day I heard the Governor of the Central Bank of Sri Lanka (CBSL) say: “Look, these numbers that are being bandied around are incorrect.” The State Minister had said the debt amount is around $ 3.1 billion. But it was the state institution (CBSL) which publishes a document every week that indicated the amount of foreign external debts that need to be paid in 12 months, which was around $ 6 billion. That is just capital interest on loans. Then there is about $ 1.3 billion in short-term swaps, etc. and another $ 1 billion which is a repo (repurchase agreement) with the Federal Reserve of the US. So if you add all those, then the amount is around $ 8.7 billion. This $ 3 billion that the State Minister is referring to is the quantum of ISBs and SLDBs. There are other loans that need to be paid back that were offered through bilateral lenders such as the World Bank, Asian Development Bank, China, Japan, and India. Then there are loans that we need to repay to the International Monetary Fund (IMF) and domestic banks that have lent sometimes in swaps and sometimes in short-term facilities to the Government. So you have to look at all of these loans that are to be repaid. Then you have to look at how much the private sector has to repay. That also has to come from the pot of reserves that this country has at a given point of time. So it is absolutely and totally misleading to say “we have only obligations of $ 3 billion”, when we really have obligations for over twice that amount. To further clarify the debt issue, Sri Lanka has an external debt of about $ 52 billion. What is shown is only $ 35 billion and of that what the ministers are speaking about is only $ 14 billion, which is merely the ISBs. Of that, you actually revalue it based on the market prices today. So given that they are selling at sweet discounts, that $ 14 billion also has now come down to about $ 11 billion. So really, there is a lot more beyond that little grouping of debt that needs to be paid. Then you have the SLDBs, the project finances that need to be repaid, and the CBSL obligations that include IMF and swaps and others which comes up to about $ 35 billion. There is about another $ 17 billion on private and state-owned enterprise loans. Then you have banks that have borrowed, which are in both the state and private sectors, and foreign direct investments (FDIs) in terms of loans that are directly owed to investors overseas. So if we add all that up, the amount that we owe as a nation is over $ 50 billion. So when you say these loans need to be paid, all those people have to make loan repayments and meet obligations, not just one group. If you look at Sri Lanka, it is not only the Government or the CBSL or the CPC (Ceylon Petroleum Corporation); Sri Lanka needs to be considered as a whole. So we need to consider this as a challenge faced by Sri Lanka. The country's debts were not accumulated by just the present administration. Couldn't the previous governments find a method to reduce the debt portfolio of Sri Lanka during their tenures?  What we are looking at is the primary balance in the Budget, which means the revenue minus the expenditure minus the interest cost. Because actually it is legacy – what Mr. Cabraal has to pay today is some of what the previous Government borrowed and some of what the Government during his time as the Governor of CBSL borrowed. For instance, the $ 1 billion that we paid last year was borrowed by Mr. Mahinda Rajapaksa in 2010. The $ 1 billion that we have to pay by July this year was also borrowed by Mr. Mahinda Rajapaksa in 2011. So it is completely unfair and misleading to say “these people had increased the borrowings and now I have to pay”. No! That is totally wrong. So you are right when you say it is a build-up of debt for the last so many years. You cannot do anything about it, because it is coming from the past. So what is the objective of the Government? They should manage their finances – what they are in control of – i.e. besides interest. Since 1952, it was Mangala Samaraweera who was able to run a surplus in the primary account in 2017. It was also Mangala Samaraweera who ran a surplus in the primary account in 2018. So, yes, it is the responsibility of the Government to reduce borrowings. The right path to follow is to increase revenues, to reduce as much as possible on your expenditure, run a surplus in the primary account, and try to sustainably reduce the debt. Debt has several forms, those days the debts we used to take at 0.01% were paid over 40-50 years. But when you take the ISBs, which Mr. Cabraal started in 2007-2008 with the first $ 500 million facility, and thereafter almost annually going to the market and borrowing $ 1 billion, $ 500 million, another $1 billion, and $ 1.5 billion, those were due on a particular date in a bullet payment; that was the problem. So paying $ 1 billion over 30 years is not an issue, but paying $ 1 billion in one day is a problem. So this market borrowing also happened during the same period when these same gentlemen were running the Government on the previous two occasions. I am not saying that it is wrong, but what I am saying is that is the reality. We have to make sure that our debt is sustained. So the primary focus should be, like I said, to manage the Government’s income and expenditure. When you reduce taxes in an unprecedented manner, the tax rates for instance, the tax collections will reduce. If we look at the 2020 tax collections, it may be Rs. 500-600 billion less than the previous year, which is about Rs. 1 trillion less than what was expected, and in total the revenue may be Rs. 1.3 trillion. So you are talking about massive deductions in revenue. Do you think that the decision to switch to a production-based economy amid the pandemic is weighing down the economic growth of Sri Lanka?  One must understand what our comparative advantages are. We are an island; if you look at the economic history before Christ even, people have been describing this island as an emporium. We saw traders coming and going. Even if you refer to the Mahavamsa, there are so many stories where this country was a trading country. Parakramabahu in the 12th Century fought a war with King Alaungsithu of Myanmar, because he tried to put tradeblocks in the trades of ivory, gems, and jewellery. Lot of our economic activity has been centred around ports on the coast. Even after the economic restriction in 1977, (former President) J.R. Jayawardene liberalised trade, reduced tariffs, liberalised investments, set up investment promotion zones, reduced the restrictions on finance, and created enterprises – particularly in the Western Province. Then (former President) Ranasinghe Premadasa took that to the rural areas by setting up industries. But they were all linked to international trade. So my point is that we must talk about the production of what you call “tradable”; that is what we are going to benefit from. Tradable does not mean just what you export, it can be what we consume inside the country, but it must be comparative with the goods and services that are traded outside this country. So creating a “production-based economy” is a political clickbait sort of word. But there is a much deeper meaning when it comes to policy-making. Take for instance the Australian Open. (Novak) Djokovic and (Daniil) Medvedev both wore high-tech gear made by MAS. Now that is production, but that production is different to what some of these people are talking about, where you increase the duties by huge margins and build tariff walls around this country and then you give inefficient producers a massive advantage. So for what can be purchased at Rs. 500, the consumer will have to pay Rs. 1,000 because of the inefficiency and since it is not comparative from a tradable perspective. Therefore, what we really need to do is produce for the region and the world at comparative levels. What we need to improve on is building bridges from this country. If you think about it – you produce, put them in trucks, and you cross the ocean. In reality, you would put them in ships or planes but that is the concept; not to put a wall, but to bring down the walls and put bridges. That is how this country is going to develop. Being a specialist in economics, has the present administration reached out to you for counsel in matters relating to economics?  No, this Government has not sought any advice from me. In fact, it is funny because in this democracy, the Opposition’s views also matter in the legislature. That is why the Standing Orders clearly state that the Chairman of the Public Finance Committee must be a member from the Opposition. That is to bring some checks and balances, to bring some counter argument in the legislature. That is to be able to discuss matters with the officials. But what did this Government do? They used their silly two-thirds power and brought a motion in the House and overruled the Standing Orders. I was to be the Chairman of the Public Finance Committee but was kicked out. That shows absolute arrogance on the one hand and on the other hand, I don’t think that was wise. Because what I would have said as the Chairman of the said Committee could have been listened to. Whether they want to accept or not is another matter. But there would have been some dynamic and vibrant discussion on matters of public finance, and that door they closed. This is an almost authoritative management of the economy. It does not work like that. Discussion is important; where there is no discussion and where there are no counter arguments presented, you would not succeed in any board, any society even. Even if you take school society, discussions take place. It is important that the media at least is able to highlight some of these counter views that are expressed because as a legislator I am responsible too, whether I am in Government or I am in Opposition. How could the present administration approach the issue differently and rescue the economy from downward spiralling? In my view, they are messing up both the micro and macro economies. We talked about the macro in terms of deficits, loans, primary accounts, and all that. So let’s look at it at the firm level; look at the household and the price of rice for example. When I was presented with this problem in late 2018 by then Prime Minister Ranil Wickremesinghe, to talk to the rice mill owners, they said “please help us, we are sinking”. They were the small and medium rice mill owners. Their loans were overdue and they were going to auction off their mills. I spoke to a wide variety of stakeholders, including the big mill owners; the likes of Dudley Sirisena and the clan, and we came up with a plan. My plan was that the only way to fight the oligopoly that is made up of Dudley, Nipuna, and New Rathna was to build up an army of SME (small and medium enterprise) millers, who have got the milling capacity, storage capacity, technical knowhow, and entrepreneurial spirit in them to compete with these guys. We later created rice manufacturers’ co-operatives covering eight districts, including Polonnaruwa, Hambantota, Ampara, Kurunegala, and Trincomalee which gathered hundreds of SME millers. Then we created national rice manufacturers’ co-operatives, which we named as Shakthi and used that brand. I even went a little further and designed a QR code to bring in some technology, sold it in the local supermarket chains and Sathosa outlets, and it was getting noticed. We were able to maintain the price of samba at Rs. 90 and nadu at Rs. 85 throughout. Now what did these guys do? “We do not want to do Harsha de Silva’s plan; we will do our thing. We have the knowledge, we have the Viyathmaga behind us, and we have the Brigadier who told us where the grain stores are located and how much they have stored in them.” They thought they could manage and go ahead with their plan. Today, the price per kilogramme of rice at the supermarket is Rs. 130. This is going to go even higher, because the Government is in an absolute chaotic situation in terms of paddy and rice since they said “we are going to compete with the big boys”. That means the price of wet paddy is going to increase further. They have pushed aside the small and medium-sized millers, and in fact, the Government should have supported the SMEs. Look at the Prabashwara initiative which I started, which was the one and only climate-controlled agricultural warehouse. What did we as a Government do? We just put a photograph in the newspaper or a TV story and that is it. The Government needs to find solutions for problems. So a 5,000 metric tonnes storage warehouse on government land was allocated, for which we did not have to spend a cent on. We started building this country’s first temperature and humid-controlled warehouse for agro produce and people were looking forward to it, and what happened? This Government stopped the project and the money – Rs. 300 million – allocation was a grant that was given to us by the Indian High Commission and as the Minister of the previous administration, my Ministry had to put only Rs. 225 million. Then I had to make such a fuss in Parliament. Although I am an MP in the Opposition, I drove to Dambulla to talk to the press, which was widely publicised by senior journalists. Finally, Minister Dr. Bandula Gunawardana realised that there is perhaps something that should be discussed after which he called me for a meeting, which I appreciate, as such a meeting has not happened in many years. We went to the Ministry and sat for a meeting with all the officials including the Food Commissioner, secretaries, the co-operative society people – to whom I explained what we were trying to do and why they should finish the project that I started. I suggested that they implement a network of climate-controlled warehouses, and use technology to control it as well. Now they have undertaken to complete it, but I got to know that they are trying to totally mess up the plan for its implementation. There needs to be a vision. There is no point having a building if that building cannot serve the purpose of what that building was designed for. So Prabashwara is an interesting concept for which we created something called a “social share” that is not necessarily in the Registrar of Companies standard procedures, but we had sorted it out so that the farmer can be represented on the board of this enterprise through social shares. Then the economic shares by the Government, find public-private partnerships to make this work efficiently. They seem to have completely missed that idea, and they have assumed that this is going to be a warehouse for Sathosa. You need to understand the problem before you try to solve it. I am taking this opportunity to tell the Government that it is not just a building to store produce. It has a much broader connected ecosystem around it, which the Government needs to understand. But the only initiative that they cannot shut down which I started is the 1990 Suwasariya Ambulance Service, which is led by Duminda Rathnayaka on a completely voluntary basis. The programme is run on Sri Lankan software, providing employment for a 100% Sri Lankan youth workforce. I appreciate the $ 23.2 million gift that was given by Indian Prime Minister Narendra Modi to get it started, which is by now a completed Sri Lankan service provider, of which services are accessed on a daily basis by the public. This is the level we need to reach when it comes to mature politics. Doesn’t matter who started the initiative or doesn’t matter whose idea it was, we need to get things done as a country. Will projects following the Build, Operate, and Transfer (BOT) system positively impact the stability of the country’s economy? These are good methods to follow; BOT projects or BOOT projects i.e. is to build, own, operate, and transfer. I think it was during Madam Chandrika’s time that the Board of Investment had a special unit to handle this type of project, in which public-private partnerships were seen as essentials in today’s context. During former Minister Mangala Samaraweera’s time at the Finance Ministry, people like Thilan Wijesinghe and Aritha Wickramasinghe had a public-private partnership unit to structure these types of investment projects. Now the East Container Terminal was supposed to be a BOT project, although they abandoned it, but now apparently they are going to do the same thing at the West Container Terminal. Hambantota is following a similar investment model. Recently, I saw the opening of the waste-to-energy project which was started during our Government; that is also Aitken Spence and the Government. The world over, multiple BOT and BOOT-type projects are taking place. If the Government is serious about the participation of the private sector in developing this country, then they cannot be pushed to change their position 180 degrees because a particular group is pressuring them. That is not a sign of strong leadership. We have to have a plan and we must include both the private and public sectors.