Arthashasthra

Core elements of a Sri Lanka state; public goods, national defence, justice: Arthashastra

Rohan Samarajiva

Monday February 8, 2021 7:08 am

By Rohan Samarajiva

Monday February 8, 2021 7:08 am

ECONOMYNEXT – Sri Lanka needs the state to provide public goods, including national defence, law and order and justice; to control market power; to address high levels of information asymmetry and externalities. Sri Lanka needs a state that does a few things well.

That Sri Lanka needs a state that seeks to give stability to the public, not excluding those who create wealth and employment for others, was posited in the inaugural column as what we should strive for.

What are the few things that the Sri Lankan state should do well?

The following discussion may be helpful in structuring a political conversation on statecraft to develop a consensus on the core functions of the state.

Sri Lanka also needs a state to remedy problems caused by negative externalities; and to optimize gains from positive externalities.

Given length constraints, the important discussion on externalities is left for the next column.

What are Public goods?

Public goods are not whatever one feels like labeling as public goods or goods that are currently provided by the state, but those that meet the tests of non-rivalry and non-excludability. They are definitely not what are currently provided by the state.

Recall, the Sri Lankan state at one time manufactured cooking pots in Enderamulla; and ran a biryani restaurant in Maradana.

If my consumption of a good or service does not affect your ability to consume it, it is non-rivalrous. The classic example is national defense, which every stateprovides, more or less. The second condition is that of non-excludability.

It should be possible to exclude a user from consuming the good or service, without a great deal of trouble and expense. Very few goods and services qualify as public goods. The market will not produce public goods. If they are needed, they would have to be produced using taxes.

Most text-book examples such as national defense have little impact on daily lives of citizens. A public good that affects everyone, particularly in cities, is clean air.It is impossible to exclude people from clean air and to charge for access.

Therefore, it is unlikely that any private provider will invest in producing clean air or in acting to prevent air pollution. Those activities have to be supported by taxpayer funding and backed up by state coercion.

National defense

There are different ways by which the public good of national defense (defined as protection from foreign invasion and coercion) can be supplied. National defense does not necessarily require the maintenance of an army, an air force and a navy.

Upon winning a civil war, President Jose Figueres Ferrer abolished the Costa Rican military in 1948.In 1949, the abolition of the military was codified in Article 12 of the Constitution of Costa Rica.The budget allocated to the military is now dedicated to security, education and culture.

Costa Rica maintains Police Guard forces. It has not suffered any invasions or engaged in any wars with its neighbors (it’s not an island). It has also proved immune to the perennial coups that afflicted other Latin American countries.

Many in Sri Lanka would be shocked by the idea that we could do without a massive military. There is no question that the military was needed to defeat the LTTE. But the LTTE was a domestic actor, not a foreign force.

Actions against domestic actors such as the LTTE are best taken by specialized anti-insurgency units such as the STF, which is part of the Police, not the tri-forces.

Some may point to the Indian violations of Sri Lanka’s national sovereignty in 1987 as evidence of a need for military capacity at sea and in the air. But again, dispassionate assessment will show that the Sri Lankan Navy’s actions in turning away the Indian vessels was purely symbolic.

When the Indian aircraft violated our airspace, not even symbolicresistance was shown by the Air Force.

Given the massive asymmetry of power and our location, our national defense is best achieved by giving weight to international diplomacy and use of multilateral instruments rather than maintenance of large military forces.

The model most efficacious in terms of safeguarding our national sovereignty is that of Singapore, not that of Taiwan.

Management of the India-Sri Lanka relationship through regular high-level interactions during Eelam War IV did more for national defense (defined as protection from foreign invasion or coercion) than any expenditures on weapons and men.

This is not to deny the value of effective and properly trained police units of maintaining internal peace or of coast guard units to ensure security of shipping and the exclusive economic zone.

The current confusion of roles and training yields sub-optimal results.

Understandingthe contribution a competent foreign service can make to national defense in a small country like ours will yield significant benefits.

Sadly, our embassies are today seen mostly as providers of protocol services and familiar foodfor the powerful and connected away from home, or as sinecures for friends and family, with little weight being placed on effective execution of foreign policy objectives.

Law and order

Law and order in the abstract exhibitsthe qualities of a public good. Yet, in specific form, it does not satisfy the criteria of non-rivalry and non-excludability.

The massive and growing backlog of court cases, with only certain cases jumping the queue, shows that the use of judicial resources by one deprives others of those resources. Commercial arbitration is evidence that conflict resolution can be provided through market means.

Many farmers complain that the police provide no solutions for theft of agricultural produce, asking them to catch the thieves and bring them to the police. Large farms can self-supply by investing in security equipment and personnel.

The monied few enjoy the benefits of law and order while others are left out in the cold.

No political or economic theorist would argue that the state should not be engaged in the provision of law and order. Even extreme libertarians would see a role for the state in law and order.

In the same way that wars can be fought with mercenary troops and territory is ceded because the supply of the public good of national defense still requires the use of limited resources, in actual practice the supply of law and order does not pass the tests of a true public good.

The recent announcement by the responsible Minister that more than half the 80,000 personnel employed by the Sri Lanka Police are guarding politicians suggests that a tremendous misallocation of resources is responsible for the undersupply of the order component of law and order.

The hesitancy of the decision makers in successive governments to take on the legal mafia blocking court modernization is evidence of lack of appreciation of the significance of this core function of the state.

This neglect has broad economic ramifications, such as in the perceptions of high risks for investors as shown by the low Ease of Doing Business rankings.

Clear-eyed analysis of the way certain public goods (e.g., national defense in the period prior to 1987 and during Eelam War IV) were supplied, certain others such as law and order and undersupplied, and yet others (e.g., clean air in major cities) are not supplied at all, should provide guidance on priorities for state reform and optimal use of public funds.

Market power

When one firm or a few dominate supply of a good or service, output is restricted, quality is lowered, and prices arekept high. Many countries have competition laws and enforce measures to ensure monopolies are broken up and collusion among a few suppliers is made difficult.

In small economies such as ours, it is also possible to make the exercise of market power difficult by reducing barriers to imports. For example, the prices charged for sanitaryware (bathroom fittings) in Sri Lanka were kept low by permitting imports.

Now that imports have been banned, the local producers have ganged up to almost double the prices for the locally manufactured products.

The Sri Lankan state does not act against those accumulating and profiting from market power. It actively encourages the gouging of consumers using import restrictions and para tariffs.

In many cases the monopolists are state owned. In almost all cases of state-owned or state-supported monopolies/oligopolies, the profits are not taken out in the normal manner as dividends but in the form of politically motivated measures such as keeping supporters on payroll, maintaining excess workforces, disbursing corrupt CSR funding, support of politicians and political campaigns, and so on. In some cases, monopolies even lose money and are supported by taxpayer funded subsidies.

It is possible to have a competitive marketplace in bathroom fittings if the state gives priority to ensuring the welfare of consumers over the protection of inefficient domestic suppliers.

Of course, they make the usual arguments about input costs being high or their foreign competitors engaging in dumping.

The input that may make local manufacturers uncompetitive is energy. Instead of reforming the energy sector that is deformed by inefficient state-owned monopoliesand politically driven pricing decisions, the current government is rolling back even the minuscule reforms that had been undertaken, such as safeguards against corrupt short-term power purchases by the CEB and the fuel price formula.

The Sri Lankan state lacks the capacity to engage in the sophisticated economic analysis needed to enforce anti-dumping. Yet, the previous government made considerable progress on anti-dumping legislation.

So, the remedies for the root causes exist, but kleptocratic incentives favor restrictions and para tariffs that yield political and personal benefits.

Control of market power is an area where reforms must give priority tothe correction of wrong government policies ahead of the establishment of a formal mechanism such as a Competition Commission.

Asymmetric information

Deposit-taking financial institutions take your money and give you promises of future benefits and return of your money in the future. Physicians diagnose the causes of illnesses and prescribe remedies that in many cases they themselves perform.

It is difficult for ordinary consumers to make informed decisions about the ability of financial organizations to keep their promises or of the disinterested nature of the treatments offered by physicians.

Solutions may be provided for information problems without state involvement. For example, information and related trust problems inherent to international trade have been solved without the creation of a world government.

Banks and various certification authorities have provided solutions and made a good business out of it. But sometimes, coercion is needed. That is where the state is useful.

If the state does not actively supervise banks and finance companies, people will start stashing money under their mattresses. Active supervision requires expertise and resources; it also requires coercive powers. If truthful accounts are not kept and reported, the regulator must have the power to punish.

Recurrent failures of finance companies causing losses to depositors indicates that the Sri Lankan state is doing a poor job of reducing asymmetries of information in those markets.

On the other hand, improved labeling of food products is evidence that incremental progress is being made. Greater emphasis on addressing information asymmetries will encourage decentralized supply of goods and services and thereby contribute to a better economy.

Continuation

In Part 2, the critical role that the state can play in addressing problems caused by negative externalities and in optimizing gains from positive externalities will be discussed.

Markets

Sri Lanka stocks close down 0.60-pct, dragged by HNB and LOLC

Friday November 13, 2026 3:28 pm

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed down on Friday, CSE data showed, with the benchmark All Share Price Index moving down 0.60 percent.

The ASPI was down 133.22 points at 22,024.18, while the more liquid S&P SL20 was down 1.06 percent, or 67.55 points, at 6,298.02.

The ASPI ended the week up 784.53 points from last Friday.

Positive contributors to the ASPI were Dialog Axiata (up 0.40 percent at 50.20 rupees), Distilleries Company of Sri Lanka (up 0.52 percent at 58.30 rupees), Aitken Spence (up 3.60 percent at 151.00 rupees), Ceylon Tobacco Company (up 1.05 percent at 1,828.50 rupees), and LOLC Finance (up 1.96 percent at 5.20 rupees).

Hatton National Bank (down 1.88 percent at 403.75 rupees), Richard Pieris and Company (down 6.21 percent at 27.20 rupees), LOLC Holdings (down 2.17 percent at 405.00 rupees), Sampath Bank (down 1.91 percent at 154.00 rupees), and Singer (Sri Lanka) (down 2.40 percent at 77.30 rupees) were top negative contributors.

Market turnover was 3.23 billion rupees. Capital goods led turnover with 869.21 million rupees. (Colombo/Nov13/2026)

Economy

Sri Lanka MP slams budget speech for omitting Tamil national question

Friday November 13, 2026 2:56 pm

ECONOMYNEXT – A Sri Lanka legislator has voiced strong disappointment that the President’s budget speech failed to make a single mention of the Tamil national question.

“It is very unfortunate that in His Excellency the President’s speech, there has not been a single word mentioned about the Tamil national question. Not a single word,” Shanakiyan Rasamanickam said.

“A budget speech generally, is a policy direction of the government for the next year. The budget speech is not only a statement of the country’s fiscal position or the economy’s position. It is the country’s, the government’s, plan, or what the government plans to do the following year. That’s a policy statement.”

Former presidents would at least mention the Tamil question even if it was not resolved, he said.

Former President Ranil Wickremesinghe in his speech, in his policy statement, he would mention: “The Tamil national question must be resolved,” Rasamanickam said.

Former Presidents Maithripala Sirisena and Gotabaya Rajapaksa also mentioned that the national ethnic question must be resolved, he added.

“Every President, every country’s Head of State, in their policy statements, have acknowledged the fact that there is an unresolved national issue, the Tamil national question, that it needs to be resolved. Various governments have proposed various mechanisms; none of them have succeeded, but at least it was mentioned.”

This year’s budget made allocations for the Office of Missing Persons, and the Office of Reparations.

“But the domestic mechanism is a mechanism that the victim community has rejected. So you all are allocating money to a mechanism where the victim community is not going to be part of.”

Last year’s budget 1 billion was allocated to be spent on the Trincomalee and Jaffna airports.

“Where was that 1 billion for the Trincomalee and Jaffna airports spent last year?”

“The trajectory of this government, Honourable Deputy Speaker, is worrying to me. It’s really worrying to me. Because if the objective is to say that there is no Tamil national question, if the objective is to say that you all have resolved any ethnic issue that this country faced, then Honourable Deputy Speaker, then I think the Tamil people will teach this government a very, very, very harsh lesson in the future.” (Colombo/Nov13/2026)

Bonds & Forex

Sri Lanka sells extra Rs6.5bn Treasury bills after auction

Friday November 13, 2026 12:32 pm

ECONOMYNEXT – Sri Lanka has sold 6,500 million rupees of treasury bills offered on tap at an average rate of 9.95 percent, the public debt management office said, bringing the total of bills sold in the week to 85.562 billion rupees.

The issue offered 90 billion.

Total market subscription was 6.5 billion rupees.

The debt office sold a 12-month bill at 9.95 percent.

On Wednesday (11) the debt office raised 79 billion rupees of 3, 6 and 12 month bills after offering 90 billion.

The settlement date is November 13. (Colombo/Nov13/2026)

Construction and Real Estate

Access Engineering Sept quarter group net profit surges 200-pct to Rs4.75bn

Friday November 13, 2026 12:15 pm

ECONOMYNEXT — Sri Lanka’s Access Engineering PLC recorded a group net profit attributable to equity holders of Rs. 4.75 billion for the quarter ended September 30, surging 200 percent from Rs. 1.58 billion a year earlier, interim accounts showed.

Basic earnings per share rose to Rs. 4.08 for the September quarter, up from Rs. 1.58 previously.

Quarterly group revenue expanded 36 percent to Rs. 20.39 billion from Rs. 14.94 billion, underpinned by condominium property handovers — reflected in inventories dropping Rs. 7.69 billion since March to Rs. 35.71 billion — alongside strong automobile sales and steady civil engineering execution.

Cost of sales rose at a slower 27 percent to Rs. 14.34 billion, lifting gross profit by 64 percent to Rs. 6.05 billion and expanding gross margins to 29.7 percent from 24.7 percent.

Other income jumped 144 percent to Rs. 259.9 million, while administrative expenses rose 75 percent to Rs. 1.14 billion, leaving operating profit up 64 percent at Rs. 5.16 billion.

However, finance costs more than doubled, rising 107 percent to Rs. 1.18 billion on elevated group borrowings of Rs. 43.74 billion, partly offset by finance income climbing 302 percent to Rs. 42.2 million.

Share of results from equity-accounted investees rose 122 percent to Rs. 26.7 million, pushing pre-tax profit up 56 percent to Rs. 4.05 billion.

Income tax swung to a net reversal of Rs. 186.6 million from an expense of Rs. 804.1 million, boosted by deferred tax assets on unrelieved losses from a 100 percent enhanced capital allowance claimed by 60 percent-owned radiopharmaceutical subsidiary Access Medical Tracers (Private) Limited.

Total period profit rose 136 percent to Rs. 4.24 billion, with non-controlling interest declining 24 percent to Rs. 164.9 million following last year’s buyout of minority shareholders in Harbour Village (Private) Limited.

No separate exchange gain or loss was itemized in quarterly earnings, though foreign currency translation via associates recorded a Rs. 17.4 million loss in other comprehensive income, alongside USD 16.6 million in corporate guarantees.

Notes also flagged an expected Rs. 1.45 billion recovery from the terminated South Asia Commercial and Logistics Hub project, a Rs. 225 million post-quarter legal settlement already provided for, and a Supreme Court appeal over a 2011/12 PAYE tax ruling.

Group assets stood at Rs. 132.4 billion as of September 30, with net asset value per share at Rs. 46.70, as the Employees’ Provident Fund raised its stake to 5.69 percent.

Access Engineering shares closed at 80.00 rupees at the end of September and are currently trading around 85.80 rupees. (Colombo/Nov13/2026)

Economy

Sri Lanka private sector says timely implementation of Budget 2027 key

Friday November 13, 2026 11:43 am

ECONOMYNEXT – Private sector body, The Ceylon Chamber of Commerce, said it was encouraged by the broad direction of Budget 2027, noting that it reinforces Sri Lanka’s commitment to economic transformation while maintaining policy continuity, macroeconomic stability, and fiscal discipline.

“This continuity is particularly important as the country seeks to transition from economic stabilisation to a more durable, investment-led growth trajectory.”

The chamber also noted several areas where the Budget could have placed greater emphasis to strengthen the country’s growth prospects.

“In particular, there is a need for a stronger focus on attracting Foreign Direct Investment (FDI), accelerating factor market reforms, particularly in land and labour, and fast-tracking public procurement reforms to improve the efficiency and speed of project implementation.

“More targeted and actionable proposals could have been introduced to unlock the potential of sectors with significant growth opportunities, including tourism, agriculture, IT/BPO and logistics.”

The chamber said the budget contains positive measures aimed at enhancing competitiveness, and external sector resilience, while presenting opportunities for focus on sectors that can accelerate growth.

“A number of the key structural reforms identified in last year’s Budget have been carried forward and strengthened, providing greater certainty and predictability to businesses and investors.

“These include the continued implementation of the Trade National Single Window (TNSW), the phased removal of para-tariffs, the rollout of the Digital ID framework, efforts to expand market access through new Free Trade Agreements (FTAs), the strengthening of one-stop-shop investment facilitation mechanisms, progress on Customs reforms, the expansion of Bandaranaike International Airport (BIA), enhanced financing support for SMEs, and reforms relating to the management of State-Owned Enterprises.”

The CCC said that more than 20 proposals submitted by it have been reflected in Budget 2027.

These include measures to strengthen investor facilitation through the establishment of a professionally managed investment promotion agency; continued efforts to improve trade facilitation and export competitiveness; the Government’s consideration of a successor programme with the International Monetary Fund (IMF); accelerated progress on key legislative reforms; the expansion of digital government services; and the promotion of cashless payments and broader digital adoption. The Budget has also captured several priorities relating to energy security, including the accelerated deployment of Battery Energy Storage Systems (BESS) and investments in fuel storage infrastructure, initiatives to optimize underutilized agricultural land, measures to support the expansion of the digital economy and the IT/BPO sector, and tax reforms to support exporters, including the acceptance of newly VAT-registered exporters as eligible exporters.

“The inclusion of these priorities reflects the value of sustained public-private dialogue and demonstrates increasing alignment between national policy objectives and the needs of a competitive, export-oriented economy.

“The priority now must be effective and timely implementation to translate policy commitments into investment, competitiveness, exports and sustainable growth.” (Colombo/Nov13/2026)