Looking at Economic Affairs in Sri Lanka

W.A Wijewardena is an independent economic analyst. From 2000-2009, Mr. Wijewardena served as Deputy Governor of the Central Bank of Sri Lanka.

This interview has been edited lightly.

What are Sri Lanka's principal economic challenges?

The current economic challenge has been to elevate the growth rate to a high and sustained level to uplift the country from the present lower-middle-income country to a higher-middle-income country in the first instance, and then to a high-income country within the next 3 to 4 decades.

This could be achieved by Sri Lanka if it can maintain an annual growth rate of 7% or above continuously in the next 3 decades. However, its past performance since independence in 1948 has been highly volatile, recording an average annual growth of about 4.7%. It has peaked the growth rate above 7% only on six occasions and even then in periods way apart from each other. The growth for the next 4-year period has also been projected at around 5%. Thus, the country has to make a jumpstart through a host of supportive policies. They encompass linking Sri Lanka to the rest of the world through trade, converting Sri Lanka's simple technology-based economy to a complex technology-based one, attracting [Foreign Direct Investments] FDIs with high technology, creating a competitive atmosphere within the economy, improving ease of doing business by eliminating hurdles, reforming the public sector and the budget and, above all, selling thrift as a guiding principle to the electorate. These are difficult but not impossible through a proper strategy. In terms of Colombo's economic reform agenda, how much has been accomplished thus far?

The economic policy to be pursued by the government was announced by Prime Minister Ranil Wickremesinghe in parliament in November 2015. It was a comprehensive document outlining key reforms the government was planning to introduce during 2016-2020. This was to be followed by a supportive budget to be presented by Finance Minister Ravi Karunanayake two weeks later.

However, the main budget proposals had been counter to what the premier had announced in the economic policy statement. Hence, the work done to implement the reform agenda in the statement is far from desired. On top of this, the premier made a second policy announcement in parliament in October 2016, but it appeared that it was a fresh statement with no relation whatsoever to the one he made in November last year. There was no assessment of the progress on the previous announcement. Independent analysts therefore feel that the government has not implemented the reform agenda adequately.

Regarding tax reform, what specifically would you like to see happen?

In the policy statement of November 2015, the premier quite correctly announced that the government should change the tax structure from the current indirect taxes bringing 80% and direct taxes bringing the balance 20% to a structure where indirect taxes would be reduced to 60% and direct taxes increased to 40% -- by 2020. The foundation should have been laid for this right from 2016 but in the budget [for] 2016, indirect taxes were raised to 87%, quite contrary to what the premier had expected. The current reliance on a [Value-Added Tax] VAT has reinforced this. Hence, the tax reform should expand the tax net, get more people to pay income taxes and to encourage them to pay more. Marginal tax rates should be reduced from the current 26% to about 15%.

Would you talk a little bit about the alleged "bond scandal" (from early 2015) and the role of Perpetual Treasuries Limited? What allegedly occurred and will anyone be held accountable?

There was suspicion in the market that Perpetual Treasuries had benefitted from some inside information throughout to superperform in the market, making longstanding and large primary dealers just dwarfs. This was confirmed by the financial results which they had published in terms of the Central Bank requirements. Accordingly, from February 2014 to March 2016, they had made a net after tax profit of about Rs [Sri Lankan Rupees] 6.1 billion (USD $ 41 million) -- when many others had made losses or those who made profits, insignificant amounts of profits. Now the parliamentary watchdog, the Committee on Public Enterprises (COPE) has released its investigation results, agreed by 25 members out of 26, implicating Perpetual Treasuries of improprieties. The COPE report has declared the former Governor Arjuna Mahendran and the Central Bank officers who had supported him as accountable. It has recommended that legal action be taken against Mr. Mahendran, Perpetual Treasuries and the Central Bank officers involved in the scam. What is Mr. Mahendran's current position? What kind of message does his continued role in government send to the public?

Prime Minister Ranil Wickremesinghe made a statement in parliament that Mr. Mahendran has left the country to attend a wedding ceremony. He did not say that he would return, but the indication was that he would return. Meanwhile, the opposition has vowed to take him to court if he returns to the country. In fact, one senior minister of the government who represents the president's side on the government has said that they would get Interpol's assistance to bring him down to Sri Lanka. Hence, his continued association with the prime minister would be an eternal rock in the latter's boot. Nearly two years since the new government came to power, we still haven't seen anyone held accountable for high-level corruption. Does this concern you? And, more broadly, will the current government will ever get around to dealing with high-level corruption in a meaningful way?

Civil society activists and organisations are concerned about the slow pace of bringing the culprits to justice. They continue to exert pressure on the government to expedite the investigations and judicial processes. The government will be presenting its annual budget soon. What are some things to look out for?

It is a very trying era for Sri Lanka requiring some hard choices on its part. But the electorate has not been sufficiently groomed to accept such hard choices. It is better if the finance minister makes a frank announcement and comes out with a program of 'thrift' implemented across the board.

In recent years, why has the country's defense spending has continued to rise. And is this a prudent course of action?

Defense expenditure in any country is like joining the mafia and once joined, no one can leave it. Hence, defense expenditure had ballooned during the time of war and the government is unable to reduce it even when there is peace. Accordingly, the government will have to live with it forever like a cancer patient who has to live with his cancer without treatment. Chinese influence in Sri Lanka was a hot topic when Maithripala Sirisena campaigned for the presidency. Has Sri Lanka's economic relationship with China truly changed since January 2015?

Sri Lanka was a neutral country throughout and, despite what the politicians may have pronounced in election platforms, China has been a friend and will continue to be a friend. Sri Lanka's foreign policy has to make a proper balance between China vs. India and China vs. the West and get the maximum for the country without angering anyone. The Economic and Technology Cooperation Agreement (ETCA), a trade deal with India, is expected to be signed soon. What's your view on the agreement? How would ordinary people benefit from the ETCA?

ETCA is a must given the current economic situation in the country; in fact, Sri Lanka should sign many more trade agreements with other nations as well. Bilateral free trade is not something which Sri Lanka could ignore at this point in time.