Harim Peiris

Political and Reconciliation perspectives from Sri Lanka

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Vistas of prosperity – Not quite! 

Posted by harimpeiris on January 6, 2022

By Harim Peiris

(Published in the Island on 5th January 2022)

The New Year 2022 is upon us and with it also, late last year, the completion of two years of the first SLPP administration. As a nation, as we look to the year ahead, the prospects for the vistas of prosperity, we were promised, are not bright and a look back may allow the current administration to charter a new course or an eventual successor to carve out an alternate path. For a country promised vistas of prosperity and splendour, the contrary could hardly be starker; people standing in line for daily essentials, shortages of everything from cooking gas to foreign exchange, with rising inflation and declining real incomes and living standards. The hardest hit is the rural farmer and plantation worker as agricultural and plantation output and yields drop precipitously due to the fiasco that is our fertiliser policy. National life and governance are no better. We seem unable to manage anything from an oil spill to sub-standard fertiliser, and despite various election pledges of both national security and justice we are no closer to knowing who the masterminds of the 2019 Easter bombings were and bringing the conspirators to justice. Our international standing is at an all time low, facing opprobrium in Geneva and very unwisely having moved Sri Lanka away from our traditional ‘friends with all policy’ to an unnecessary alignment with one power at the cost of our relations with others.

Finance Minister Basil Rajapaksa has sought to defray rising criticism and significant erosion of public support to the government by announcing overnight and not through his November Budget, a relief package costing the government over two hundred billion rupees, the highlight of which is a 5000 rupee monthly allowance for all public servants and disabled ex-servicemen. This will indeed be a welcome relief to public servants, but those really hurting even more right now are the rural farmers, the informal sector and daily wage earners, who are seeing living standards and real incomes plummet.

The government’s answer to all this of course, is that the only culprit is COVID-19 and if not for the pandemic, the vistas of prosperity and splendour would be upon us. But even a cursory examination of this thesis proves otherwise. It was unwise and bad policy, pure and simple, which caused the mire in which we find ourselves in today. Many economies in the world, including those in our region, such as even Bangladesh, to whom we now go hat in hand for foreign exchange swaps, saw their economies take a hit during the initial COVID-19 waves in 2020, but rebound in 2021 and are well poised for growth in 2022. That is not the case for Sri Lanka. Our wounds are self-inflicted and exacerbated by the defining weaknesses of this administration, their unwillingness to consult experts, their inability to listen to the community and their complete, if misguided, faith in the righteousness of their cause.

Organic fertiliser fiasco

The first self-inflicted wound, the pain of which is yet to be felt, because the Maha crop season is yet not fully harvested, was the amazingly short-sighted decision, since rescinded, to administer shock therapy to the agricultural sector by banning non-organic fertiliser. Around the world, organic farming is an upmarket niche and not a mass market practice. The SLPP manifesto did promise to work the transition to organic farming but in a phased-out manner, over a decade. The implementation was different. It was sudden, overnight and instantaneous. The task of green agriculture has now been, even more bizarrely, handed over to the Army. It was not only agriculture that was affected, but also the plantations, especially tea, that also relies on fertiliser. Both these sectors combined employ the majority of Sri Lanka’s labour force. The drop in yields and output would push many rural families and plantation worker communities deeper into despair, debt and relative poverty. Food shortages are causing cost-push inflation or prices of daily essentials to soar. The reversal of the non-organic fertiliser policy has come too late and with the significant collateral damage of having to remove any subsidies on fertiliser and not paying the fertiliser importers their dues, running into billions of rupees, for prior period subsidies, thereby effectively restricting their ability to supply fresh stocks. This was not COVID-19 induced.

Fiscal slippage

The previous Sirisena-Wickremesinghe administration had expended political capital and taken the political hits to adjusted direct taxation upwards through the 2018 Budget and the resultant Inland Revenue Amendment Act. Sri Lanka is a country which has the twin anomalies of a very low tax revenue to GDP ratio compounded by a very high indirect to direct tax ratio, which disproportionately falls on the lower income sections of the population; this in a social context of extremely skewed income distribution, where the top ten percent of the population earns just below forty percentile of the national income. In that context, there was absolutely no need for a massive tax cut, in the first flush of election victory, for that top percent of the population. It was both unwise and unnecessary and resulted in a massive fiscal slippage which consequently led to an even more foolish loose money policy by the Central Bank. Today, consequently, the government is without adequate revenue. This was also not COVID-19 induced.

Loose monetary policy and foreign exchange crisis

The Central Bank, in 2020 and 2021, led by economic theories that predated the fall of the Berlin wall and was inspired most closely perhaps by the Sirimavo Bandaranaike government of 1970-1977 and its protectionist, even isolationist ethos, followed a loose money policy during the years of the pandemic. Saner counsel, including those of the opposition SJB was ignored. Former State Finance Minister Eran Wickramaratne was to point out in 2020, that the problem in economic activity and production was supply side constraints consequent to the lockdowns and loose money would not help or address the situation. It would merely cause massive inflation down the road. The rather obvious forecast has now been fulfilled. The foreign exchange crisis is because the Central Bank by executive fiat, that far exceeds the moral persuasion of markets, insists on maintaining the exchange rate artificially high, essentially seeking to have the export sector subsidise the government’s money printing binge. A solution that cannot really be made to work. While interest rates should only be allowed to rise moderately, the exchange rate would need to be at a more market driven equilibrium, which would result in both greater foreign exchange inflows through formal banking channels, while facilitating foreign direct investment (FDI) as well, which is also at an all time low. None of this is COVID-19 induced.

The cracks in the Government ranks are showing. The minor left party allies are openly voicing their dissent. The SLFP, whose leading lights have been deprived of meaningful ministerial office, has been distancing itself from the Administration and there is fresh speculation in the mainstream press about yet another Cabinet reshuffle including a replacement of the Prime Minister, a rumour squashed by the PM’s media office earlier yesterday. But the disunity can hardly help either policy cohesion or a course correction, both of which are needed for Sri Lanka to recover from the hole we have dug for ourselves.

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