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Saturday July 20th, 2024

Proposed Sri Lanka National Policy for Industrial Development: A commentary

By Ranjit Fernando FERNANDO

Ranjit Fernando is a former Secretary to the Ministry of Industrial Policy, Investment Promotion, and Entrepreneurship development, and former Director/CEO of The National Development Bank of Sri Lanka

A draft National Policy for Industrial Development of Sri Lanka (NaPID) prepared by a Task Force (TF) led by the eminent Economist Prof. SirimalAbeyratne, has been released recently.

The policy prescriptions proposed in the draft paper are based, inter alia, on a comprehensive “Industry Diagnosis Report” (IDR), which was also released simultaneously.

The important role that the industrial sector plays in promoting overall economic growth in a country needs no particular emphasis. The industrial sector in addition to making its own contribution to economic growth, also triggers growth in the other two sectors. Agro processing industries encourage the increased production of raw materials resulting in additional investment in the agricultural sector. A significant percentage of projects in the services sector exists to meet the demands of the industrial sector.

For these and other reasons an Industrial Policy statement by the government deserves serious attention. The policy statement is an official pronouncement by the government of the measures it proposes to take to promote sustainable industrial development and augment industrial production. A great majority of the industrial output in a country are tradeables.

Thus, trade and industrial policies complement each other. Accordingly, policy makers strive to achieve a great degree of congruence between a country’s trade policies and its industrial policies. Together they have the potential of being and are often referred to as the twin engines that drive economic growth in a country. In fact, in countries such as Singapore trade and industry are under one ministry and consequently under the purview of one minister.

It is not my intention, nor is it practical, to engage in a clause by clause analysis of the draft policy document. What I wish to do is to comment on two matters. Firstly, on some critical conceptual issues, central to the designing of an Industrial Policy and how those critical issues have been dealt with by the Task Force (Sections 2 to 5).Secondly, I intend commenting on some specific provisions in the draft NaPID. (Section 6)


1. FOR WHOM IS THE POLICY STATEMENT?

A constructive approach to analyzing the Policy Statement may be to firstly, answer the question “To whom is the Policy statement addressed? An industrial Policy statement is addressed to the stakeholders of the sector. Who are these stakeholders?

The two main stakeholders will obviously be the Government and the Industrialists. The lead role for the Government will in this instance be played by the Ministry of Industries while a key supporting role will be played by the Ministry of Trade. The industrialists will be represented by their accredited Chambers and by leading industrialists with years of experience. Since the performance of the industrial sector will greatly influence the overall performance of the Economy, the informed Public too will be indirect stakeholders.
What will both groups want to see in the report?

While existing and potential industrialists, and officials who will be directly involved in implementing the policies and monitoring progress, will be interested in the detail, stakeholders who are looking at the big picture, will I believe, be more interested to find out the broad direction in which the sector is expected to grow, with the implementation of the new Policies. In other words,what changes to the sector’s present characteristics, it’s composition, role and positioning, would the framers of the new set of Policies, want to bring about via the implementation of the new Policies?


2. THE DIRECTION OF SRI LANKA’S INDUSTRIAL POLICY.

The Task Force, prior to settling down to the actual task of drafting the set of Policies, would have asked themselves, and perhaps some other key stakeholders, the question- What do we want the sector to be, after implementing the new policies? In what direction should the Policies we frame, drive the sector as a whole, given the critical contribution expected of the sector. What is the audacious Goal we have for the sector? Can wepropose a set of Policies that is likely to lead the sector towards thatGoal?

The Task Force appears to answer these questions in Section 2.1 of the Industry Diagnostic Report as follows;

“TheDirection of SriLanka’s Industrial Policy.For Sri Lanka’s industrial policy to succeed in the 21st century, it must adjust to new national, regional and global contexts, including digitalization and growing sustainability challenges. These are among the considerations that have informed the approach taken in the process of drafting this draft report for the National Policy for Industrial Development (NaPID), which is based on the objectives set out in Sri Lanka’s National Policy Framework for 2020-2025: “Vistas of Prosperity and Splendor”, the Fourth Industrial Revolution, and the “Sustainable Development Goals” (SDGs). In addition, a key development that cannot be ignored in Sri Lanka’s NaPID is the impact of COVID-19”.

It appears that the Task Force have themselves identified the need for the industrial sector, not only to grow statistically in terms of the usual performance measuring ratios, but to grow in terms of playing a wider and decisive role dictated by national needs. The report in Section 2.1 of the IDR cites three sources whose priorities ought to set the direction of growth of the sector. These sources are;

(1) The “Vistas of Prosperity and Splendor” document,
(2) The Sustainable Development Goals, and
(3) Changes required to conform to Green industry and fourth industrial Revolution.

The draft report submits that the priorities identified in the first two documents mentioned above, are relevant and must be taken into account in drafting Sri Lanka’s Industrial Policy. The first named document was the election manifesto of the ruling Party published prior to the last Presidential Election. The IDR on page 9lists the priorities extractedfrom the “Vistas” document. They are the following:

1. Priority to National Security
2. Friendly, Non-aligned, Foreign Policy
3. An administration free from corruption
4. New Constitution that fulfils the people’s wishes.
5. Productive Citizenry and a vibrant Human resource
6. People Centric Economic Development
7. Technology Based Society
8. New Approach in National Spatial system
9. Sustainable Environmental Management
10. Disciplined, Law abiding and values

A table on page 10 of the report, attempts to set out the relevance of these priorities, to the Industrial sector. It lists out some specific Objectives and Strategies arising from those priorities, in columns one and two of the Table.Column three states in which way they are relevant to Sri Lanka’s Industrial Policy.

Section 2.1.2 deals with the second source. Seventeen priorities or specific goals have been identified from the second source, viz the Sustainable Development Goals, which many readers may be familiar with. They include; 1.End Poverty, 2.End Hunger & achieve food security, 3.Ensure Healthy lives, 4.Ensure inclusive & equitable quality education, etc.

Table 2 attempts to show the relevance of the SDG goals and its specific objectives, in guiding the formulation of the Industrial Policy.

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With regards to the third source viz the transition to Green Growth and the influence of the fourth industrial revolution, Section 2.2 of the IDR, explains the importance of local industry complying with these new realities. The Industrial Policies proposed must result in an Industrial sector that is compliant of these requirements.

None of the above priorities are objectionable in themselves. But the relevant question is; Can any of them provide direction in the formulation of the Industrial Policy?The priorities identified from the first two documents are laudable objectives and no doubt of relevancein the context of the purposes for which they were initially prepared. However, their influence in directing the shape and content of the Industrial Policy, appears to be remote. The industrial sector needs to comply with many of them. But can they be the directional force behind the Industrial Policy?

The attempt to connect up the priorities identified in these documents to the approach in formulating the industrial Policy and its contents, it is respectfully submitted, looks contrived and unreal. A review of the first two items in Table 1 alone, will make one realize how tenuous the link is between the priorities identified in the “Vistas” document and the particular aspect selected from the Policy statement.For instance, what is the likelihood or relevance of developing a strategic Trade relationship with a country, for the purpose of maintaining a Non-aligned Foreign Policy? How relevant will the removal of Tariff charges to enhance technology imports be, on maintaining People centered Economic development or vise visa?

The priorities identified in the “Vistas” document are mostly Good Governance concerns and not directly related to the Industrial sector. Recognizing them individually or collectively as a directional force that will, shape the future Industrial Policy, needs a stretch of one’s imagination. Page 15 of the IDR states quite correctly that “Industrial Policy must direct socialinclusion, environment protection and economic growth”.Industrialists must of course conform to them.One can even envisageprescribing compliance with same.On the other hand they may be the result of implementing a sound Industrial Policy. But they cannot be the driving force of the Industrial Policy. Further, the “Vistas” document was the Election Manifesto of the ruling party, at the last Presidential election. Adopting priorities arising from that document as one of the directional sources for shaping the industrial Policy, is a near certain way of ensuring that the document will be abrogated, if and when there is a change of the governing party.

Similar comments apply to the choice of the Sustainable Development Goals, as a force, setting the direction of the Industrial Policy. There is no doubt that the growth in the industrial sector will contribute to the eradication of Poverty, or in ensuring inclusive and equitable quality education. However, by what stretch of imagination could one imagine that those laudable goals will be focused upon when the industrial Policy is being formulated? For the above reasons, it is submitted with respect, that the direction presumed to be provided (in fact the absence of it) by the two documents referred to above, are inappropriate.


2.1. How should one pick an alternate direction?

Setting the right Policy direction for the sector, in today’s context, requires one to understand and appreciate the present state of the Sector, viz its strengths and weaknesses, constraints to growth, and where the greatest potential for growth lies, given the trends that are clearly discernible bothlocally and globally. The industrial sector in Sri Lanka is inward looking, and are faced with the limitations of size and purchasing Power of the local market.

The strong lobby for protection that is becoming louder by the day, is a definite sign of the sector being uncompetitive in the global market, both in terms of price and quality. Most local industries are at a low level of technology and the local value added is also at a low level. Wage increases during the last few years has significantly eroded the cost advantage the country enjoyed as a low- cost location. The direction in which the future growth of the sector be driven, and its end destination, should address most of the weaknesses identified above.

As an alternative to the direction proposed in the NaPID, and given the present state of the sector as described above, in what direction should the proposed Industrial Policies, drive the industrial sector? It should drive the sector to where the greatest potential for growth lies.

In selecting the direction of growth, we should also not be constrained by any particular ideology. The sole criterion should be “What is good for the sector and the country”. Several research studies have focused in identifying the factors that helped Singapore reach the pre-eminent position it occupies today.One among four factors that have been identified by several studies is a principle which has been consistently followed by all governments that ruled the country, since it broke away from the confederation. Viz National Policies were decided on the single criterion of “What was best for the country “. The Government was indifferent as to which ideology or “..ism”the particular Policy subscribed. In the popular words of that great leader Deng Zia Peng, “It matters not whether the cat is black or white, as long as it catches the mice”.

A direction which will meet the aforementioned criteria, but one that is at the same time challenging, is to direct the Sri Lankan industrial sector, to integrate itself with the global industrial sector.Transformingthelocal industrial sector, from an inward looking, state led, import substituting posture to one that is outward looking, export oriented, globally competitive, would be a formidable challenge.But it is a challenge, lesser countries have taken on and achieved much progress.

The transformation of the local industrial sector from what it is today, to a robust, globally competitive, and export focused one, will no doubt be a daunting and challenging task. A strong commitment by the government and a change of the direction of the NaPID to something similar to what is proposed above viz. “to design our industrial policies with a view to integrating our industrial sector with global industry”, will enable the Government to play the Lead Role in securing the commitment of the organized local industrial community to accept this challenge.

If the above is accepted as the direction in which the industrial sector should grow, then the Industrial Policy document should contain Policies that encourages and incentivizes all stakeholders to move in that direction. For instance, the Policies proposed must offer assistance to the sector players to overcome their present weaknesses, and to acquire new skills. They must become Globally competitive. Our industrialists must be encouraged to follow the trends in the global industrial sector.They must be encouraged and assisted in visiting regular global fairs and exhibitions which focus on new technologies.

The Policies must promote ways and means of our industrialists establishing joint ventures and alliances with Global players. We should install Policies that will not leave room for developments in the Global industrial sector, such as the phenomenal growth achieved by the Global Value chain (GVC) business, ever bypass Sri Lanka. The Global Value Chain business today is said to account for 70-80% of global Trade.The current account surplus of US$ 12.5B achieved by Vietnam in 2019, is largely attributed to its success in attracting GVC business.

Sri Lanka has limited manufacturing capability unlike countries that can boast of advanced manufacturing capability. It has been found that in countries with limited manufacturing capability, technology transfer and the linking up with Global value chains takes place mostly via Foreign Direct Investment (FDIs). Thus, our Policies must encourage FDIs and incentivize our industrialist to identify suitable Joint venture partners and approach them directly. Our embassies overseas should help them schedule one to onemeetings with the decision makers of the Target Companies.

It has been reported that disruptions and delays caused by COVID recently, has highlighted the susceptibilities of GVC arrangements and how a delay in the supply of one component can force companies to breach supply contracts for delivery of the finished product. This may be the opportunity for Sri Lanka to enter the fray. It has also been pointed out that instead of marketing the country as a low wage and therefore a low-cost country we should strategize on marketing cleaner production, environment friendly processes etc for industries such as dyeing in the textile industry.(charith.gamage@monash.edu).

While there may be good reason to classify “small” and “medium” industries together as one category named “Small and Medium Scale Industries”, there are also circumstances when the two categories ought to be treated differently. There are many medium scale industries which are owner operated, set up by professionals who have returned to the country after studying and working overseas for a number of years. They are generally well organized, profitable ventures producing quality goods serving local demand. There is much potential in encouraging these establishments to focus on the export markets. If 50 of these establishments can be identified for a start, and assisted to explore overseas markets there is good prospect of success in the short to medium term. The Policy statement must initiate promotional activities of this type in collaboration with Banks and other promotional agencies.

A concerted effort must be made to equip all Bankers with the tools that enable them to evaluate a request for finance from an industrial outfit, based on the RISK inherent in the proposal, rather than on the Security offered.Every investment project has its own Risk. The purpose in evaluating a project is to assess that Risk and to take steps, together with the project proponent, to lower that Risk. Project evaluation is not an adversarial process. Engaging the potential borrower in a joint effort to reformulate the project to reduce the Risk and make it more viable can be a rewarding experience. Security is not a substitute for viability.

3.THE PATH TO ECONOMIC DEVELOPMENT

Reference was made in the introductory section of this paper to the close relationship that exists between Industrial and Trade Policy. A liberalized industrial Policy as proposed cannot co-exist within a restricted and protective trade regime. Trade as a percentage of GDP has come down drastically ie from almost 90% in the year 2000, to approx. 40% in 2020. The Government has a clear choice to make.

The ongoing debate on the preferred path for achieving rapid Industrial growth in a small country, that is unable to influence neither the globally traded quantity nor the price of a particular tradeable, revolves around two schools of thought. One, that espouses the merits of an Industrialization strategy that is based on a liberalized economy that is fully integrated with the global economy, and the other, which places a premium on self-reliance and focusses on a strategy of import substitution, under the guiding hand of the state. Industrial Policy In Sri Lanka, has alternated between these two models depending on which Political Party was in Power. While frequent changes in Policy, of the kind we have experienced in Sri Lanka, brings about a sense of uncertainty and is likely to have discouraged investment in the Industrial sector at times in the past, it has unwittingly provided useful information, on the performance of the industrial sector as well as the economy, under each policy regime.

The diagnostic study accompanying the NaPID, includes a detailed analysis of the periodic Political regime changes that has occurred during the 72 year post independent history of Sri Lanka, the consequent changes in economic Policy, as well as how the economy has reacted to such Policy changes. Unfortunately, the above information is in different sections of the report, thereby rendering the cause and effect relationship between one change and the other, less transparent. In contrast, the results of a similar analysis, carried out by Professor Prema-chandraAthukorale,( Arndt-Corden Department of Economics Crawford School of Public Policy, Australian National University ) published first as a working paper in Trade and development for the Australian National University, and later as an article in the Daily FT, is presented with greater clarity highlighting the causal relationship between one change and the other.

The research paper of Mr Prema- Chandra Athukorale referred to above, has dealt extensively with these regime changesand more importantly, the manner in which the economy and the industrial sector had responded to the differentPolicy regimes that prevailed at different times. I cannot do better than summarizing his submissions on the changing fortunes of the economy during the different Policy regimes.

1. Growth of manufacturing in the Sri Lankan economy was lackluster during the state led import substitution era. The averageannual growth in the early stages of import substitution era (1990s) was approx. 8.5%, dropping to a mere 3% by 1970-7.

2. The manufacturing sector entered a distinct growth phase following the liberalization reforms. Contrary to gloomy predictions by the critics of reform, the lifting of import controls did not result in a sudden massive contraction. Following initial adjustments to the new the competitive market setting, manufacturing growth surpassed that of all other sectors during most years in the next two decades.

3. From the 1970s to about the late 90s, manufacturing grew at an annual average growth rate of about 6.5%, compared to an overall GDP growth rate of 5.3%. The manufacturing share of GDP recorded an almost two-fold increase from 10% in the 1970s to nearly 20% by the early 2000s.

4. There has been a dramatic shift in the ownership structure of the manufacturing sector, during this period. The share of SOEs in manufacturing output dropped from about 70% in the mid 70s to less than 3% by the turn of the century. The shrinking of the role of the SOEs in manufacturing had a salutary effect on productivity improvements in the manufacturing sector.

5. At the time the reforms started, manufacturing accounted for about 10% of total employment in the country. This increased continuously to over 18% by mid 2010s.

6. The total employment in enterprises approved by the BOI increased from about 11,000 in 1980 increased to nearly half a million by 2015.

7. The share of foreign invested enterprises in total manufacturing exports increased from 24% in 1977 to 80% in mid 1995. The share of BOI approved enterprises in total manufacturing exports ranged from 80% to 92% during the period 2002 to 2019.

8. The share of developing countries in world manufacturing exports increased significantly in 1970s and thereafter. From 10% in the 1970s it increased to over 50% by the late 2010s. Sri Lanka’s share of manufacturing exports from that of all developing countries increased from 0.02 % in 1976 to over0.28% by early 2000s.

Source; “Rethinking Sri Lanka’s Industrialization strategy”Prema-chandraAthukorale.

The NaPID does a similar analysis of the ups and downs experienced by the sector during the different Policy regimes and concludes as follows;

“LEARNING FROM THE PAST: IMPORT SUBSTITUTION VS EXPORT- ORIENTED LIBERALIZATION. Over the last 7 decades, since Sri Lanka claimed independence in 1948 Sri Lanka has experimented with a wide variety of trade policy regimes – from open, ‘non-interventionist’, free market policies (1948-to 1959/60) through dirigisme import substitution industrialization (ISI) (1960-1977) to export oriented liberalization (post-1977). There is a large body of literature attempting to make an in-depth and systematic assessment on past trade policies and industrial strategies adopted over the last seven decades. A closer examination of this literature has revealed there are mixed views on which strategic trade policies have delivered desired results. Trade policy regimes adopted by Sri Lanka can be divided into the following two components:

1. Import Substitution or inward oriented trade policies.
2. Export oriented or outward oriented trade policies.

In theory, these two policy options when put into practice are distinctively different from each other.

1. Import Substitution and performance from 1960-1977

Import substitution, a term both descriptive and prescriptive- is one of the development economics frameworks largely pioneered in the 1950s by economists RaúlPrebisch, Gunnar Myrdal, W. Arthur Lewis, Albert Hirschman, and Ragnar Nurkse. The key policy aspects focus on imports and exchange controls, using tariffs for protection of domestic industries on the basis of infant industry arguments. The key thrust to the strategy was an assumption that replacing imports would reduce dependence on imports and set the stage for self-sustained growth. Thinking that these policies would be beneficial, Sri Lanka pursued a state-led import- substitution development strategy beginning from the 1960s and this foreign trade strategy prevailed in most of the 1970s, making the Sri Lankan economy one of the most restrictive economies until 1977. “By the mid-1970s the Sri Lankan economy was one of the most inward-oriented and regulated economies outside the communist bloc, characterized by stringent trade and exchange controls and pervasive state interventions in all areas of economic activity.

In terms of the performance achieved during this closed economic regime it has been pointed out that Sri Lanka encountered a range of economic setbacks. Inflation, unemployment and poverty were rising; Sri Lanka was facing severe pressure due to a widening trade deficit which emerged in the mid-1970s. The situation in the external sector further worsened.

Immediately after the first oil shock in 1973, to which government responded by introducing more stringent measures, increasing controls on imports. The unsustainability resulting from these inward-looking protectionist trade and industrialization policies led to a regime change in 1977, with a landslide victory for, a pro-western, market-oriented right-wing government.

2. Export- Oriented trade liberalization policies from 1977 to 2003

As a response to the poor economic performance of inward-looking import substitution policies, in 1977, Sri Lanka embarked on a comprehensive economic liberalization process, introducing a landmark economic reform package. It became the first country in the South Asian region to introduce a set of policy changes introducing a far-reaching trade liberalization reform agenda. Accordingly, the first wave of trade reforms implemented during 1977-79 included the replacement of quantitative import restrictions with tariffs and the revision of the tariff system to achieve greater uniformity; the reduction of foreign investment restrictions with new incentives for export-oriented foreign investment under the attractive Free Trade Zone (FTZ) scheme.; financial reform and the adjustment of interest rates supported for exports to grow more positively. In order to further strengthen the outward orientation of the country, Sri Lanka implemented a second trade liberalization package in 1990. The key elements of this reform package included Government privatization programs, simplification of the tariff structure with further tariff cuts and removal of restrictions on current account transaction, and several important changes to foreign investment policy. An export-oriented open trade regime dictated the industrial development agenda, which remained in place until the late 1990s.

An assessment carried out by World Bank in 2004 on Sri Lanka’s economic performance during the reform era stated that ‘It would be hard to find a more convincing case of trade and industrial transformation of a small island economy through market-friendly policy reforms’. By the late 1900s, the Sri Lankan economy was considered as one of the most open economies in the developing world”. (Sources: Industry Diagnosis Report. Pages 90 and 91).

Recent decisions by the Government in response to the spread of COVID, and the severe dearth of Foreign currency even for financing the import of essential raw materials required for industry, appear to lead the country slowly but surely to the recreation of the closed economy model that prevailed in the pre 1977 era. The recently released “State of the Economy 2021” publication by the Institute of Policy Studies of Sri Lanka, refers to these developments as follows;

“Recently Sri Lanka started to use Restrictive Trade Policy Tools to mitigate the COVID 19 induced Foreign Exchange crisis. Various forms of quantitative restrictions and Tariff increases were used to discourage imports. For instance, in April 2020 imports of 750 productsat eight digitHS code, worth US 1,353 million at 2019 import prices were suspended temporarily. Additionally, imports of 634 products at eight digit HS code worth US$ 3232 million at 2019 import prices were subjected to the requirement of a credit facility of three months.” (Chapter 4 page 67)

The detailed analysis in Chapter 4, clearlydemonstrates that import restrictions are not thesolution to the problems it is supposed to solve. The analysis which is too lengthy to reproduce here concludes “Hence inward-looking Policies will not solve the Forex crisis but aggravate it, resulting in additional costs like domestic monopolies, rent seeking quotas, corruption in granting licenses, encouraging black market and smuggling activities and opening the door to retaliation from trade partners.” (page 68).

The door to retaliation referred to in the final part of the above quote was opened recentlyas predicted, when the EEC issued a statement that it cannot accept for long, the recent restrictions imposed on imports, from the EU countries too, when the latter keeps assisting exports from Sri Lanka to the EU countries via the GSP + scheme.

Much of the same empirical and research data referred to above, supporting the view that an export led industrial Policy together with a liberalized Trade Policy has and will best serve the growth of the industrial sector, is included in the Industry Diagnostic Report accompanying the IaPID. TheIaPIDhowever, does not make a categorical statement that an Export led, Liberalized Trade Policy will be maintained throughout the currency of the proposed Policy. What is proposed is a “Mixed Economy” with selective import substitution, picking of winners and export orientation. While specific intervention in support of import substitution projects,

exceptionally selected, can be justified for reasons such as those set out on page 9, the extension ofstate support for winners (euphemistically referred to as “thrust” industries) picked by committees of whatever composition, is not only a misallocation of state resources, but also a cause of confusion in the market.

4.ROLE OF GOVERNMENT

The sections quoted above from the “Industry Diagnosis report” makes it clear that the Task Force has, as a lesson learnt from the past experience of Sri Lanka, concluded that the Export oriented trade liberalization Policies in the post 1977 period had a significant beneficial effect, inter alia, on the growth of the industrial sector, while under the import substitution Policies “Sri Lanka encountered a range of economic setbacks, inflation, unemployment and Poverty were rising”. The report also states that an assessment carried out by World Bank in 2004 on Sri Lanka’s economic performance during the reform era stated that ‘It would be hard to find a more convincing case of trade and industrial transformation of a small island economy through market-friendly policy reforms”. By the late 1900s, the Sri Lankan economy was considered as one of the most open economies in the developing world”.

It concludes stating that “several empirical studies have shown that outward-looking export promotion strategy has produced better results in accelerating the manufactured growth in contrast to import substitution strategy”. (page 96)

The NaPID , based on the findings of the Diagnostic study, has in Section 4 of the Policy document set out nine “Policy Principles” which captures the essential purpose of the Industrial Policy. The second of these nine principles is the following. “Competitive integration with international markets”, which objective was submitted by the writer as the preferred direction of the NaPID. It will be noted that the implementation of this principle viz. “Competitive integration with international markets “can be effectively implemented only against a framework of an export oriented, open economic developmental policy regime being already in place within the country. In terms of this model, the state is expected to play a non-interventionist role, focusing mainly on the task of creating and maintaining a conducive environment for industry to function. The state, under the export oriented economic model, was not expected to pick winners by which is meant, the selection of industries for investment, by the state ( ie.byBureaucrats).

In this context it is interesting to read what the Task Force has to say about potential interventions by the Government in general, and the picking of winners, in particular.

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Jayampathy Wickramaratne PC, responds to President on constitutional article 83

ECONOMYNEXT – Jayampathy Wickramaratne, President’s Counsel had responded to a statement made by President Ranil Wickremesinghe that Article 83 (b) of the constitution which has reference to a six year term was left alone not due to any ‘lapse’ on his part.

A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The changes to the Constitution, were made by a team of legal officers of which he was member, overseen by a Cabinet sub-committee headed by then Prime Minister Ranil Wickremesinghe.

“Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether,” Wickramaratne explained.

“However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.”

The Attorney General also made sure that there were no changes that required a referendum, he said. As a result Article 83 (b) was left as it was.

The full statement is reproduced below:

On President Wickremesinghe’s statement that not amending Article 83 was a lapse on my part

The President stated in Galle on 19 July 2024 that not reducing the upper limit of the term of the President and Parliament from six to five years while preparing the Nineteenth Amendment to the Constitution was a lapse on my part due to my inexperience.

I wish to set the record straight.

Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether.

However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.

Soon after being sworn in, President Sirisena appointed Mr Ranil Wickremesinghe as Prime Minister. Constitutional affairs was Gazetted as a subject under Prime Minister Wickremesinghe. A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The five-member team that prepared the initial draft comprised three retired officials who had served in very senior positions in the Legal Draftsman’s Department, myself and another lawyer.

The entire drafting process was carried out on the basis that the Bill should not be placed for approval at a referendum, in keeping with President Sirisena’s electoral pledge. While the terms of the President and Parliament were proposed to be reduced from six to five years, the upper limit of six years was not touched as that would require a Referendum.

Article 83 of the Constitution mandates that a Bill that seeks to amend or is inconsistent with particular Articles listed or the said upper limits would be required to be passed by a two-thirds majority in Parliament and approved by the People at a Referendum.

It is essential to note that Article 83 itself is included in the list of provisions requiring a Referendum. The several drafts prepared were all shared and discussed with the Cabinet sub-committee.

The draft finally approved by the Cabinet sub-committee was then sent to the Legal Draftsman, who took over as required by law and made some changes. It was then sent to the Attorney-General, who took the view that certain clauses, especially some that reduced the powers of the President, would require a Referendum. Prime Minister Wickremesinghe had several meetings with the Attorney General to discuss the matter. I participated in one such meeting. Several changes had to be made to the Bill because of the Attorney-General’s position.

Prime Minister Wickremesinghe presented the Bill to Parliament. When it was challenged in the Supreme Court, the Attorney-General argued on behalf of the Government that no provision required a Referendum. The clauses that the Supreme Court held to require a Referendum were either amended or withdrawn in Parliament.

In light of the above, I regret that President Wickremesinghe has thought it fit to place the entire blame on me for not reducing the upper limits of the President’s and Parliament’s terms.

I reiterate that the entire amendment process was based on avoiding a Referendum following President Sirisena’s pledge at the Presidential election.

(Dr) Jayampathy Wickramaratne, Presidents Counsel
20 July 2024.

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Sri Lanka banking system foreign assets turn positive in May: analysis

ECONOMYNEXT – Net foreign assets of Sri Lanka’s banking system turned positive in May 2024, official data showed, amid a steady reduction in the negative reserve position of the central bank helped by the current interest rate structure and domestic credit.

In May the combined net foreign assets position of commercial banks and the central bank was about 311 million US dollars by May, up from a negative 178 million US dollars a month earlier, central bank data show.

It was made up of positive 1.9 billion US dollar foreign assets position in overseas banking units and a negative 811-million-dollar position which gave a positive NFA position of about 1.13 billion US dollars for banks.
,
The central bank still had a negative position of about 821 million dollars by May, down from about 4.5 billion US dollars in last currency crises triggered by deploying liquidity tools (printing money) to cut rates.

The central bank has been collecting reserves for several months, except in June after a confidence shock from the flexible exchange rate and some injections made to keep rates down.

Analysts have warned that under flexible inflation targeting, where there are anchor conflicts, external imbalances will re-emerge when private credit recovers and money is printed to cut rates.

Printing after giving Reserves for Imports

Sri Lanka’s central bank ran up a negative foreign assets position, by spending dollars borrowed from the International Monetary Fund and from other central banks including in Bangladesh and India as well as domestic banks and spending them to suppress market interest rates and finance imports.

An ‘age-of-inflation’ (or age-of-BOP-deficit) central bank that spends reserve for imports, simultaneously prints money into banks, injecting excess rupee reserves to maintain an artificial policy rate, preventing the outflow of real resources to other countries being reflected in bank balance sheets.

The printing of money after spending reserves, or the sterilizing of an outflow, allow banks to give loans without deposits and trigger forex shortages.

To collect foreign assets, a central bank has to do the opposite, and sell its domestic asset portfolio down against dollars purchased from banks, at an appropriate interest rate, which will moderate domestic credit.

Modern IMF-prone reserve collecting central banks are able to mis-target rates beyond their reserves mostly with the aid of Central bank swaps.

Sri Lanka’s central bank also borrowed reserves from domestic banks through swaps, in a somewhat similar operation to the way Lebanon’s central bank borrowed dollars to show reserves instead of buying outright against domestic assets.

Borrowed Reserves

Central bank swaps were invented by the Federal Reserve to mis-target rates and avoid giving gold reserves as macro-economists printed money to target growth in the 1960s and the printed dollars boomeranged on itself from other Bretton Woods central banks that focused on stability.

RELATED Central bank swaps symptomatic of Sri Lanka’s IMF return tickets and default: Bellwether

By March 2022, before rates were hiked, negative reserve position of Sri Lanka’s central bank was around 4.0 billion US dollars.

The negative position worsened to around 4.5 billion US dollars by the third quarter of 2022, helped by credits from Reserve Bank of India, which allowed Sri Lanka to run arrears on Asian Clearing Union balances.

In addition to the swaps, Sri Lanka also had borrowings from the International Monetary Fund which contributed to the negative foreign assets position.

The IMF borrowings came from serial currency crises triggered in the course of money printing to enforce rate cuts and target growth (potential output) and generate twice to three times the level of inflation found in monetarily stable countries through ‘flexible’ inflation targeting.

The external sector started to balance only after ACU credits were stopped. It has since been turned into a swap and the central bank is paying it down steadily in the current interest rate structure.

Related Sri Lanka repays US$225mn to Reserve Bank of India in first quarter

Sri Lanka was unable to use a People’s Bank of China swap to mis-target rates and boost imports its use was barred after gross reserves fell below three months of imports.

Private and State Banks

Sri Lanka’s private and state banks also had negative foreign assets for many years, due to lending to the government through US dollar Sri Lanka Development Bonds and other credits. The dollar loans to the government were financed in part by foreign credit lines.

As downgrades hit the country, and forex shortages worsened from flexible inflation targeting/potential output targeting, banks could not renew their credit lines.

Some banks avoided rolling over Sri Lanka Development Bonds. After the default and debt restructure, they were repaid in rupees leading to banks covering their open positions. The dollars are banked abroad, leading a net foreign assets position.

An improvement of net foreign assets, reflects an outflow of dollars from the domestic economy to foreign accounts, similar to repaying debt for building foreign reserves.

The foreign assets position of banks excluding the central bank turned positive in February 2023 and reached around a billion US dollars by the year end and has remained broadly stable around those levels in 2024r.

RELATED Sri Lanka bank net foreign assets turn positive: analysis

The stabilization of the NFA position in banks may allow the central bank to collect more foreign reserves than earlier, analysts say, at the current interest rate structure as long as money is not injected overnight or term injections to mis-target interest rates claiming inflation was low.

Any confidence shocks from the ‘flexible’ exchange rate or liquidity spikes, would also reduce the ability of the central bank to collect dollars and lead to mini ‘capital flight’ style episodes from importers and exporters. (Colombo/July20/2024)

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New constitutional amendment a ‘necessary revision’: Sri Lanka President

ECONOMYNEXT – Sri Lanka’s President has said a proposed amendment to the country’s constitution was a ‘necessary revision’, which would not result in a postponement of elections.

“In 2015, we proposed a new constitutional amendment,” President Wickremesinghe was quoted as saying during a ceremony to open a court complex in Beligaha, Galle on Friday.

“Typically, I would have assigned this task to K N Choksy, a lawyer.

“However, since he had passed away, the responsibility fell to lawyer Jayampathi Wickramaratne. He was unable to make the necessary revisions. This oversight is regrettable, and I apologize to the nation for it.”

President’s Counsel Wickramaratne has explained that the leaving out Section 83 (b) of the constitution was a not an “oversight” but it was a result of instructions received from the then administration to avoid making changes that required a referendum.

President Maithripala Sirisena in his election manifesto has pledged not to make changes that required a referendum, and the drafting team was told not to make changes that would require a referendum.

Related Sri Lanka’s 6-year Presidential term: problem in drafting 19th amendment explained

Meanwhile President Wickremesinghe said the move to change the constitution should not lead to a delay in elections.

“Our country has upheld democracy since 1931,” he said. “Protecting democracy is crucial. The upcoming election is on schedule, with the Chief Justice and the Supreme Court confirming that it should be held within the specified timeframe, and we support this directive.

“Some critics argue that democracy is at risk during certain crises. However, our constitution, judiciary, and political system have worked to advance and protect it. The most significant threat to our democracy occurred in 2022, yet we have continued to progress through consensus.”

Sri Lanka became the first country in Asia and Africa to grant universal suffrage in 1931, Wickremesinghe said.

“Unlike in the United States, where some states did not extend voting rights to Black people, Sri Lanka is unique for maintaining democracy continuously since then.

“Despite facing wars and rebellions, Sri Lanka has preserved its democratic system, and democracy has remained intact despite numerous challenges.”

Sri Lanka got universal suffrage under British rule.

In Sri Lanka, power transitions smoothly and without conflict after elections, the president said, “a testament to the strength of our democratic process. Despite various debates and issues, democracy has never been compromised.”

Opposition parties and lawyers have charged that the legal process involving changing the constitution could potentially delay the upcoming Presidential elections.

“Article 83 of the Constitution of the Democratic Socialist Republic of Sri Lanka is hereby amended in paragraph (b) thereof, by the substitution for the words “to over six years,”, of the words “to over five years,” the gazette notice issued on the orders of Wickremesinghe says.

Download bill 523-2024-bill-constitution-EN

There is a discrepancy in the Article 83 with reference to a six year term, while the rest of the constitution, refers to a five year term. (Colombo/July19/2024)

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