Features
Can we have good economics and bad politics?
Edited by Amaya Vershuur
On Sunday, July 3, a week prior to President Gotabaya Rajapaksa’s resignation, I wrote an article called ‘’ in which I reflected on the proposed economic reform programme, the role of the International Monetary Fund (IMF) and argued for a broad coalition of activists, political leaders and professionals to come together to provide a more just and decent economic reform plan for all Sri Lankans.
I received a response the very next day from Shanta Devarajan, former Chief Economist of the World Bank, familiar with Sri Lanka and knowledgeable about the workings of the IMF. While much has changed since President Gotabaya Rajapaksa’s resignation, much remains the same – in particular Sri Lanka’s need for an IMF bailout. Below is our frank discussion of the impact of an IMF bailout on Sri Lanka’s economic situation.
Shanta D:Thanks for sharing the article. Since you asked for reactions, I will share mine with you. While your proposed “Next Steps” are perfectly sensible, I think your characterization of the economic reform program and the role of the IMF and other IFIs is incorrect (and perpetuates some myths from the 1970s). Furthermore, a closer look at the current situation in Sri Lanka provides an opportunity for the economic and political agendas to come together.
Is the government strong enough to implement the necessary reforms?
Shanta D: In your article you state that, “Even if this government (the previous government headed by Gotabaya Rajapaksas with Ranil Wickremesinghe as Prime Minister) lasts it would be too weak to carry out the stringent economic reforms that the IMF is likely to impose on Sri Lanka.” However, the government has already undertaken most of the reforms proposed in the programme. So it’s hard to see how the government is too weak to carry out the reforms. Furthermore you mention “Caught between the economic pressure of IFIs and lenders…” The only pressure is coming from the Sri Lankan government, which took the decision to call for a debt standstill and embark on a debt restructuring program and an IMF program. In order to achieve a debt restructuring (i.e. get the creditors to agree to take a haircut on their bonds and debts), the Sri Lankan government has to show that it has a credible fiscal policy that will ensure that it can pay back the (reduced) level of debt. So all of the economic reforms in the IMF program are reforms needed to restore stability to Sri Lanka’s fiscal policy so that it can reduce its debt. The pressure is self-imposed because without a debt restructuring, the economy would simply collapse and be unable to recover for a long time (just look at Lebanon).
Ram M:In terms of government weakness/strength, I do think the government may be strong enough to carry out some of the reforms – such as flexible exchange rates and some tax increases. Getting rid of subsidies though maybe trickier. And I am not convinced they can reduce expenditure on State Owned Enterprises (SOEs) in the face of strong public sector unions. Even a vanity project like Sri Lankan Airlines is still to be privatized, leave alone the Petroleum Corporation and the Ceylon Electricity Board. For this to happen, you need a strong government with the support of the people willing to take on entrenched interests.
Shanta D:Currently, the government is working on schemes to provide alternative employment options for the laid-off workers in the privatized SOEs. One of them is to use the government-owned land to give these workers shares in the land, which they could then farm themselves or lease to other farmers. In any event, there is a lot of experience around the world in managing worker resistance to privatization. Programs such as voluntary retirement schemes and even cash transfers (as in Brazil’s Bolsa Familia) have overcome the much-feared resistance from workers. I don’t think having a strong government is either necessary or sufficient. It takes a creative plan and excellent public communication. The current situation in Sri Lanka helps because of the widespread antipathy to the status quo.
Ram M:I take your general point that worker resistance can be reduced by creative schemes. But I just do not see how a government that lacks support can be effective at coming up with creative ideas or good public communication. At a minimum there should be a plan and the government should communicate it. And preferably, the plan should be viewed as fair and that the money saved as not wasted – for example on SUVs for ministers. I do not see the current conditions reflecting that. Very few people – other than SLPP politicians – will see whatever the government does as legitimate.
My point is that a politically weak government is more likely to agree to external measures and lender/IMF pressure that leads to an agreement that is not as good, as one that could be achieved with a government that is strong. I do not really buy your point that this restructuring is self-imposed by the government. Yes we chose an orderly default instead of a disorderly default, as is the case in Lebanon. But we still have to agree on a debt restructuring programme. And I do not think there is only one type of debt restructuring programme that is given simply by our level of debt and ability to pay it off. In theory, yes. In practice, the programme will depend a lot on how effective the government is at coming up with options, negotiating its position and winning over friends and convincing detractors.
Shanta D:What is this “better agreement” that a strong government would agree to? The economic policies that are being agreed to in the Sri Lanka program are not that different from those agreed to by Korea during the Asian financial crisis of 1997, Argentina during its many crises, and Chad and Republic of Congo in the recent oil price decline of 2014. So extremely weak and extremely strong governments negotiate more or less the same policy package. This tells me that the policy package has to do with the economics of the situation rather than the politics (as it should be).
Ram M:On your comparison between the current Sri Lankan program and those implemented in other contexts, I am sceptical about the argument that short term pain is necessary for medium to long term gain. Most IMF programmes are associated with austerity – at least in the short term. Greece, Spain, not to mention many parts of Latin America. These measures end up punishing the people for the blunders or worse corruption of their leaders. And bilateral and multilateral lenders end up imposing these restrictions, not just because of good economics (balance the budget and reduce wasteful expenditure), but because of politics – a kind of morality play where rich countries (and their public) feel that someone should pay for this. That someone ends up being the poor, or at least the lower middle class and salaried folk – who had nothing to do with the bad decisions of their governments. They gained nothing from it. And indeed suffered from those decisions to begin with.
Shanta D:Let’s separate appearances from reality. Of course, these IMF programs are associated with austerity and when there is austerity, everybody suffers and in some cases, the poor suffer more (incidentally, the recent evidence is that the poor don’t suffer more than the non-poor). And in many cases, the middle class takes a hit. But you have to always compare this outcome to the counterfactual. What would have happened in the absence of the IMF program? In almost all cases, the economy would have collapsed and the poor would have suffered immeasurably. Since (by definition) we don’t observe the counterfactual, most people observe the hardship associated with the IMF program and blame the Fund. But the reality is that the Fund is trying to avoid an even bigger disaster from happening.
Furthermore, for a given austerity program, whether the poor are hurt more than the non-poor depends on the existing policies and institutions in the country. Typically, in these countries, the policies and institutions are captured by the elites. In Egypt, the energy-intensive industries are owned by government cronies who therefore keep energy prices low. Since these are powerful people, they make sure that the burden of an austerity program doesn’t fall on them, which is why they get off Scot free. World Bank programs try to dislodge these entrenched elites (subsidy reform, targeted cash transfers, SOE reforms, etc.) but, as you observed, there are limits given the existing political situation. And a program is needed to avert the bigger collapse. So the Fund and Bank compromise and allow some of the anti-poor distortions in the economy to continue, in order to get the program delivered. But the underlying problem is the policy and institutional framework in the country rather than the IMF program.
Who is to blame?
Ram M:The problem we are in is certainly self-inflicted, in that our corrupt governments borrowed more than we could pay off for non-productive projects. Those who pushed debt on the SL government, or for that matter any other badly run third world government, and lent money for corrupt projects do not pay a price. Sure some of them take a haircut, but many others have already recouped their investments.
Shanta D: Every loan has a risk associated with it. That is why lenders do a cost-benefit analysis of the project before financing. If they made a mistake with their cost-benefit analysis, then they do pay for it in the case of default. Of course, if the borrower doesn’t want to default and continues paying back the loan when it’s gone bad (just like Sri Lanka did paying off the bondholders when the country lost access to capital markets), that’s the borrower’s fault, not the lender’s.
Ram M:But there is “self dealing” or at least backroom dealing going on that leads to a country like Sri Lanka taking on more debt than it can pay back. Consider the Central Bank under Cabraal paying bond holders even after we lost access to capital markets. There is a private complaint in courts alleging that either through corruption or gross negligence he is responsible for the economic crisis in the country. But it is exactly this leap from Cabraal to Sri Lanka that I am pushing back against. Let us – only for the sake of argument – say that senior officials had a deal with bond holders. And promised to pay them back no matter what the consequences for Sri Lanka’s people. That is exactly the kind of “debt pushing” and back room deals by lenders and key officials in debtor countries that I am concerned about here. Why should the Lankan people pay the price for this? OK we elected President Gotabaya, and he appointed these officials. So it is our fault in the end. But isn’t that a bit of a stretch when it comes to accountability. Since we did not really elect President Gotabaya to undermine the economy in this way. Moreover, this lets bond holders off the hook – when they knowingly invest in shaky bonds on the basis of assurances given by “dodgy” officials. So my concern here is about “odious” debt where debt pushers not only fail to pay a price, but actually make a profit.
Shanta D:I’m still not convinced that the creditors did anything wrong. Anyone who buys an ISB is taking a risk. The bond can be paid back at face value or, if the economy gets worse, it could be worth a lot less on the secondary market. In Sri Lanka’s case, the ISBs were trading at a discount in 2021 because everyone saw that the economy was declining and Sri Lanka would probably not be able to pay back. However, the Sri Lankan government took the decision in January 2022 to pay back $500 million ISBs in full (starving the people of much needed imports). The bondholders who bought these ISBs at a discount in 2021 made a killing but that was because of the Sri Lankan government’s decision. Now, you could say that the people who bought Sri Lankan ISBs in the secondary market in 2021 may have had some inside information that Sri Lanka was going to pay in full, but I would think that even this information was not reliable and they were taking a risk. So I would put the blame for the current crisis squarely on the government.
What will be the impact of the economic reform measures for normal Sri Lankans?
Shanta D:In your article you state that, “Even if this government (then headed by Gotabaya Rajapaksa) lasts, it would be too weak to carry out the stringent economic reforms that the IFIs are likely to impose on Sri Lanka.” How do you know that the economic reforms are “stringent”? The program that is currently being negotiated between the government and the Fund includes tax increases, subsidy cuts, targeted cash transfers, interest rate increases, and exchange rate flexibility. They are not what any of us would call stringent.
Tax increases and subsidy cuts
Ram M:Tax increases and subsidy cuts can work in a “normal” situation. But in the context of an economic contraction they have the potential to move us in a downward economic spiral. In terms of tax increases, my concern is not about income tax, property tax or taxes on business profits. But particularly regressive taxes – such as VAT – that have a significant impact on the poor.
Shanta D:First, the international evidence on whether the VAT is regressive or progressive is ambiguous, leaning towards neutral or mildly progressive. Second, in the Sri Lankan case, note that the Rajapaksa administration reduced VAT rates by seven percentage points in November 2019. Did the poor benefit from this? I think the reduction was to benefit some powerful business interests. So the increase in VAT will also likely hurt those interests. Third, in the current situation in Sri Lanka, an increase in taxes, including VAT (which by the way is one of the most efficient ways of increasing revenues), is likely to reduce inflation, which helps the poor and, by making the fiscal balance more sustainable, will bring in foreign exchange, both through the IMF program and the debt restructuring.
Ram M:I want to just focus on whether or not VAT is regressive – not the repercussions of reducing the fiscal deficit on the poor. That is a bigger and separate debate – where the answer I think is that it depends on what the money is used for. Of course VAT is an effective way to increase revenues. And yes – the rich spend more – so VAT will lead to a larger share of taxes on the rich. But it leaves untaxed – income, wealth, property and savings. So isn’t the answer a combination of VAT and other taxes. And shouldn’t we be shoring up our capacity to tax, not just look at VAT?
Shanta D:Yes, of course we should be looking at other tax instruments as well but in the short run, the VAT is the most effective instrument we have to raise revenues. The other tax that we should be considering is rescinding all the tax incentives given to investors. This to me is the biggest scandal. A number of rich investors, foreign and domestic, pay no taxes because they received tax holidays when they invested in the country. First, the international evidence is these tax incentives don’t result in higher investment. Secondly, at this time of acute revenue shortage, when ordinary Sri Lankans are having to tighten their belts, it is unacceptable that this group of rich people get away Scot free. To be sure, taxing them would mean abrogating the agreement that they pay no taxes. But we have already abrogated a series of debt contracts (ISBs, etc.), so I don’t see why we shouldn’t do the same for these investment contracts.
That said, we should keep in mind two things. First, the VAT has proven to be a really effective instrument around the world, and especially in developing countries, as a minimally distorting form of taxation. Second, we should be trying to achieve our equity objectives through the fiscal system as a whole rather than separate the revenue and expenditure sides. Most developing countries try to achieve a neutral tax system and achieve their redistribution objectives through the expenditure system (it’s the reverse in developed countries). So I think you should focus on the impact of the fiscal system on the poor rather than looking at each tax instrument. The latter is in fact dangerous. I’ve seen many countries that introduce a highly progressive income tax system but one that doesn’t generate much revenue (Sri Lanka is a bit like that). They then don’t cut expenditures so they run huge fiscal deficits that lead to inflation, debt crises and the like which end up hurting the poor very badly.
Interest Rates
Ram M:On the increase in interest rates, while you need to fight (hyper) inflation, what about a situation where the poor are indebted and spend significant parts of their income servicing debt. How is this affected by inflation – positively or negatively. If I am poor and heavily indebted, would inflation be a good thing?
Shanta D:In general, inflation helps debtors and hurts creditors (because the real value of what they have to pay back is eroding). If there are genuinely poor people who have high debts, there are ways of forgiving their debts. But you need to be careful here. Many of the people who claim to be poor and indebted are not poor (that’s why they were able to take on the loans in the first place). For instance, many tuk-tuk drivers borrowed to buy their tuk-tuks. But these are mainly urban dwellers in Colombo who come from the 80th percentile of the income distribution. In general, we should avoid giving relief to specific types of workers or sectors. The cash transfers should be given to poor people regardless of which sector they work in.
Now to the opportunities from the current crisis
.Shanta D:The two main differences with the current crisis are: (i) the people are already suffering from a government-imposed austerity program (because of the shortage of foreign exchange) before the IMF program has been concluded. To the extent that the IMF program will bring in $4-5 billion in foreign exchange, it will relieve the shortages rather than exacerbate them. So the effect of the IMF program is to put Sri Lankan fiscal policy on a path that can, over time, enable the country to bring in foreign exchange (and pay less to creditors). So I don’t see the IMF program as necessarily “aggravating the crisis”. On the contrary, it is likely to relieve it. (ii) the people in the Aragalaya movement clearly see the link between the government’s failed economic policies and their dire economic situation today. They don’t blame Covid or the Ukraine war–they know it was the misguided policies of the administration (including the delays in going to the Fund and undertaking a debt restructuring) that got us into this mess.
Some of them seem to understand that subsidies are not helpful when you run out of money to pay for them. This is a huge improvement in thinking from, frankly, what I hear from Sri Lankan politicians from the left and the right. The logical extension of this argument is that, if the government’s policies led to the current situation, then to get out of the situation, we must reverse those policies. That is exactly what the economic reform program is doing–reversing the tax cuts of November 2019, reducing regressive subsidies, expanding targeted cash transfers, cutting government borrowing from the central bank, raising interest rates, making the exchange rate flexible, and approaching the IMF and embarking on a debt restructuring. So the demands of the Aragalaya movement are consistent with the IMF program. We should seize this unique opportunity to galvanize the support of the Aragalaya movement in order to counter the usual objections from senior politicians to the economic reforms on grounds that they will not be politically acceptable. Most of these objections stem from an effort to protect the rents accruing to their particular political base. This is a chance to call their bluff.
Ram M:I agree that just because the IMF helps bailout Sri Lanka, need not mean then President Gotabaya (and now President Wickremesinghe) will continue in power. Whether or not a President or government continues, depends on the opposition and the protesters and their ability to out manoeuvre those in power, politically. And making people suffer in order to get a government out is not only unconscionable, but also not likely to succeed (again look at Lebanon). In this regard, I do think that we should separate these two issues, even as we use, to the extent possible, the economic pressure to press for political reforms.
(Ram Manikkalingam is the Director of the Dialogue Advisory Group and a Visiting Professor at the University of Amsterdam.
Shanta Devarajan is a former Chief Economist of the World Bank and a Professor at Georgetown University.)
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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