The trust deficit

Nelum Kuluna: “It’s the folly of such investments that has created the debt problem.”

by Usvatte-aratchi

‘If liberty means anything at all, it means the right to tell people what they do not want to hear.’

George Orwell

When this government was elected to office, there was wild jubilation, almost countrywide. People danced in the streets. But totally unexpectedly that ecstasy lasted a short time. This was no more strongly revealed than when the Cardinal, the leader of the Roman Catholic community in the country, publicly prayed to God that as he and his community could not get justice from secular authority. May God mete out justice to those who destroyed the lives of many members of his community! It was a pitiful cry of desperation (crie de coeur) that touched many people, no matter their religious faith or lack thereof. There were several well-known members of the Bhikkhu Sangha, who spoke most unhappily about the government for betraying the undertakings that had been given to them, when the now government sought election to office. The betrayal was bitter to a large sections of the population when the saubhagyaya (plentifulness), so prominently promised by the winning political party in 2019, turned out to be simply its opposite in 2021. The impending economic austerity, after the yahapalanaya government, glared in the face of all thoughtful people in 2019 but the winning party impressed upon the electorate that the party had worked out strategies and policies that would bring in prosperity which the opponents failed to achieve. The public were not shown the strategies and policies. When something is too good to believe, it is either not genuine or not true. It was sheer stupidity on the part of the electorate to believe that the key to El Dorado was in the hands of one individual or even the few who were on the path of wisdom (viyath maga); perhaps, inevitable given the alternative. It took three serious unexpected disasters to persuade two ministers of the government to explain in Parliament the dire economic situation in the country and their lack of policies to meet those perilous challenges. The first was the invasion of the SARS-CoV-2 infection that came along with tourists. After a promising start, the government floundered helplessly in 2021, failing to use effectively a fine public health structure that had many victories to its credit, including control of malaria, elimination of polio, typhoid and DPT. In mid-2021, the death rate among those infected rose above 1 percent, double that which prevailed in May 2021 and yet better than in most parts of the world. The government could not make use of the work of government servants who had information on the location and the age of people who lived there (Electoral lists in the offices of grama niladhari). The disaster that the Ministry of Shipping cluelessly invited into our seas destroyed not merely the eco system but with it the lives and livelihoods of millions of people, not necessarily only along the coast. The claim by a government minister that deaths on a large scale of sea creatures, both large and small, soon after the shipping disaster, was a regular feature in the stormy season (varakan) was shockingly disingenuous. The government handled both these disasters so incompetently that the electorate lost whatever trust they had about the government’s capacity to govern the country. The ill-timed policy to eliminate the use of synthetic chemicals in agriculture (which itself is not a bad idea in an ideal world) raised the ire of the mass of peasants and farmers and threatened the supply of food in the country and the continued production of tea and rubber. The persistent assertion by the Minister of Agriculture that there was plentiful fertiliser, herbicides and pesticides flew in the face of demonstrations by thousands of cultivators all around the country. Are these protestors true hirelings of fertiliser importers? The threat to import organic fertiliser is fraught with untold dangers, because that fertilizer carries organisms that could be dangerous to human, animal and plant health, here. More directly, that policy openly contradicted the pledges given in the manifesto of the party that fertiliser would be given to peasants free and freely.

In liberal democracies, governance is a matter of trust between the government and the governed. Governments are elected by the people periodically on the basis of manifestoes issued by political parties in which the parties lay out the policies that they would implement, if elected to office. Some unexpected emergencies inevitably arise and the policies they adopt to meet those emergencies must be governed by approaches to policy announced in their manifesto. The governed expect that government has spoken honestly in their manifestoes and would implement them in the people’s interest and not for the pecuniary gains of those that govern. When parties seeking office (not power, as we commonly say) systematically lie to seek election and the voters are either not sharp enough to see through the falsehoods or are swayed by other propaganda, (e.g. finding a small ethnic or religious group in the country whose electoral strength is petty, against whom a political party can whip up a frenzy) governments have a problem retaining the trust of the governed. ‘These leaders might invoke a lost imperial grandeur …. (Rajarata, in our case). They adopt sophisticated propaganda techniques (which may include events of spectacular destruction) in which to demolish adversaries and bolster their own egos… This charisma is leveraged to project an aura of virility that is supposed to protect a helpless citizenry against lawlessness and an endangered nation against the invasive impurities of alien and internal enemies.’ (Ariel Dorfman, 2021.) When lying came to light, the governed lost trust in government.

A fortnight ago, two Ministers who spoke in Parliament to defend the decision of the government to raise the prices of petroleum products (which itself is reasonable) laid out clearly, for the first time, the economic plight of the nation and the impecuniosity of the government. One was the redoubtable Bandula Gunawardana; the other, the lawyer Gammanpila. Later the new Minister of finance, whilst taking office, spoke about the ‘grave situation (bararum thatvaya)’ of the economy and the finances. We wish him well, in a difficult job. Why did it take 21 months for the government to take the people into confidence and explain the dire situation of the economy and the finances when they took over from the yahapalanaya government? There was, then, the added advantage of an escape goat ready for slaughter, a second time.

The government was so keen on standing by their propaganda that the president, soon after taking office, abolished the PAYE scheme, drastically reduced both direct and indirect taxes and renewed his promise to give new employment to hundreds of thousands of university graduates, which promise he fulfilled later under pressure. (The public were told, very late, that tax revenue had fallen sharply in 2020.) Independent observers were taken aback by these decisions which may have been so enthusiastically adopted only by a government, with an economy with strong sinews and a Treasury with bottomless reserves. The public awaited a miracle. They should not have, because the horn of plenty is only a fairy tale for toddlers not economics for adults. In government, one should have ‘soft hearts and hard heads’ and not the other way around, which seems to be partly the problem with the new government.

Now that some members of the government have given expression to the true nature of the economic situation and the financial imbroglio of the government, what about the way out of these predicaments? There was widespread antipathy to the idea of seeking assistance from IMF on account of the eventual necessity to agree to conditions they would lay down to come to the assistance of the economy. The IMF lays down those conditions because it wants to ensure that the objectives it sets out to achieve, require countries to follow those policies. The IMF conditions that the government disapproved of included austerity measures to ensure that the economy has a surplus with which to service debt. (It is the obverse of more resources than we produced when we borrowed from abroad.) There is no escape from seeking such drop in the domestic use of domestical output to pay back debts incurred. In addition, there was an equally widespread objection to seeking assistance from abroad and much enthusiasm for working out our own solutions. These strategies and policies now on display feature the following. There is widespread austerity in the country, fulfilling the first condition that could have been demanded by the IMF. The supply of goods of all kinds has fallen. That scarcity has resulted from many measures that government implemented. The direct reduction of imports is the most visible. Any shopper in a supermarket can observe empty shelves. Fertiliser and agrochemicals are scarce. The Covid epidemic, the shipping disaster and the scarcity of fertiliser and agrochemicals will reduce incomes cutting down total demand and demand for imports. The other means of enforcing austerity is to raise prices to make goods and services beyond the budget of most people. Fortuitously, the fall in employment has reduced levels of income and cut down living conditions. Printing money large scale brought about the rise in prices. Whether the government wished it or not, austerity which IMF would have recommended is here with us. No matter which party formed the government, this austerity was inevitable, not because we borrowed but because we invested foolishly. The public are in austerity. What is absent is a programme to reschedule debt repayment.

Individuals, corporations and governments all borrow and prosper out of debt. The secret is in the uses made of the loan proceedings. Large scale borrowing was resorted to in the years 2010-2015. We had been impoverished by a long drawn out civil war. Borrowing was welcomed by society because there were large scale projects, employment in construction ran high and the rate of economic growth was elevated. By 2015, the rate of growth had come down and the government was voted out of office. Among other reasons, the poor performance of the economy was of major importance. With large investments in the early years which helped raise the growth of the economy, the failure of the investments to raise output (summarily, high incremental capital/output ratios – ICOR) dampened the rate of growth. The failure of investments to earn a return on it was all too clear to see: Hambantota Port still does not make an adequate return; the International Conference Hall lies idle; Mattala airport receives an occasional flight; Nelum Pokuna has a more attractive garden than audiences shouting acclaim for plays on its fine stage; and the Nelum Kuluna stands solitary guard over the Colombo Port City. It is the folly of these investments that created the debt problem, not borrowing itself. Yahapalanaya government failed to realise that unless they explained to the public the dire situation in the country and imposed austerity to pay back the loans, that they would hand over to the successor government a debt burden impossible to bear. That is exactly what has happened. Saubhagya government that succeeded the Yahapalanaya government completely failed to read the economy correctly or imagined that they could hoodwink the public to believe that they had strategies and policies to meet these exigencies. The public evidently took in the latter, hook, line and sinker. That the same strategist who promoted the infrastructure programmes in 2010-2015 was appointed today to manage the economy and that his first project was an infrastructure project is cause for deep concern.

We need to put in place a programme to restructure debt service payments so that the government can manage to avoid a catastrophic further fall in living standards of the people. To agree to reschedule debt repayment, creditors need an organization, in which they have faith, that it will enforce an agreed upon reschedule. Most of the time that organization has been the IMF. Interest rates in international capital markets have begun to rise with widespread fears of incipient inflation in developed countries. The prices of materials like aluminum, copper and rare minerals have been rising for several months. The tendency for interest rates to rise is further strengthened by the initiative of central banks to disgorge their bursting portfolios of financial assets. The cheap credit regime may have come to an end. A reschedule itself may be now more expensive than earlier.

If the government does not wish to use the IMF, they will have to find a substitute. There are no other solutions.