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Tuesday May 30th, 2023

Sri Lanka’s misguided state priorities and how to reset them

ECONOMYNEXT – In the previous Arthashasthra columns, I showed that the Sri Lankan state’s priorities were all wrong; it was not doing well (or at all) what should be the highest priority tasks; it was doing many things badly that were low in priority.

If a business were to act like this, it would go bust.

But states can get away with it. They have a near-monopoly on the means of violence; the citizens who they allegedly serve are easily distracted and misled.

But these are features common to all states. Not all states are as bad as ours (and ours is not as bad as some others). Some states perform their core functions well. Some that used to be like ours have improved over time. The situation is bleak, but hope is not absent.

Priority setting by politicians?

One may argue that priorities should be set by the people. After all, they are the sovereigns.

How do the sovereign people set priorities? In the same way that they appoint agents to govern the country on their behalf. At periodically held elections.

All political parties and candidates present a manifesto when running for election.

The winning candidate’s or political party’s manifesto then gets converted into a contract that governs their actions for the next five years.

Read Previous columns here

What the Sri Lanka state should prioritize: Arthashashtra

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

Arthashasthra, for new thinking on Sri Lanka statecraft

Political leaders often refer to the “mandate” they received.

But this is a muddy mandate. Each manifesto contains a multiplicity of promises. Was the vote aconsidered approval for each of those promises?

The primary purpose of a manifesto is to convince citizens to vote for the candidate or political party presenting it. The secondary purpose is to gain legitimacy for specific actions.

Manifesto making is political. Experts or those who are perceived as experts may be called in to contribute, but the principal criterion is not expertise, but trust.

Those who have been involved in manifesto making will testify to the opacity of the process, wherein what is accepted one day can disappear the next and new clauses and conditions can mysteriously appear even after “finalization.”

Contributions can be sought, and consultations conducted, but in the end, decisions are made by a few in proverbial “smoke-filled rooms.”

Putting out a manifesto is not a bad thing. It conveys information about the values of the candidate or party and about the overall direction they are likely to take if elected.

Some politicians keep a copy of the manifesto at hand and try to deliver on the promises made therein (though our immediate past President claimed not to know what was in his own manifesto). Some convert their manifestoes into formal policy statements, like the current President.

Politicians, the officials who lack both expertise and spine, and the general public all overstate the significance of manifestos.

A manifesto is, at most, broadly indicative of orientation and priority-setting. Given the partisan and opaque procedure used to develop a manifesto, errors and impossible promises are unavoidable.

The Saubhagyaye Dakma manifesto of the current President included poorly formulated commitments related to exports that were inconsistent with the thrusts and targets of the broadly consulted National Export Strategy (NES) of 2018.

Luckily, the Chairman of the Export Development Board appointed by the newly elected President was himself an exporter and had participated in the formulation of the Strategy. Instead of throwing away the good work done by many, including international experts, he simply announced that the National Export Strategy had priority and would continue to be implemented.

A weaker and less informed person may have done serious harm in the name of respecting “the mandate.”

This example points both to the cause of the problem and to its solution.

Why is it that half-baked ideas of politicians and their advisors cooked up in backrooms to win a particular election against a particular opponent end up setting priorities for the state? It is because in many areas, the responsible officials have not done their job and have not got policies in place.

Assume for a moment that the NES of 2018 did not exist when the new President took office in November 2019 and appointed a new Chairperson for the Export Development Board.

Even if he or she were superbly qualified and motivated, such a Chairperson would have had to fall back on the language in the manifesto because that’s all there was.

Now assume that the NES had been developed through broad consultation and approved by Cabinet but that the new President appointed a political hack as Chairperson.

The political hack would try to impose the manifesto priorities, but her/his subordinates in the EDB would point out the superiority of the NES.

Even more importantly, she/he would face resistance from exporters, many of whom who would have bought into the strategy because of the consultative processes that had been adopted and may have even made investment decisions based on it.

There is no guarantee that the strategy developed in the right way would survive the political hack, but the hack’s disruption would face considerable resistance.

Because the professionals in the EDB and the relevant political authorities in the years preceding 2018 had put in the effort to properly develop a NES, it would have been difficult for the country’s export priorities to be derailed.

So, the key is that the officials should do their job and not leave a vacuum. But vacuums are what exist in most Ministries.

Lack of capacity in Ministries and agencies

I recall a choice that I faced back in 2002, under one of the most reform-oriented governments I have ever worked for.

I was leading a small unit responsible for infrastructure reforms at the Ministry for Economic Reforms and was fast-tracking the completion of telecom sector reforms started in 1996.

Prior to my arrival, the Telecom Regulatory Commission (TRC) had prepared a draft National Telecommunication Policywith the assistance of an international consultant.

But it was seriously flawed because the Constitution and relevant Supreme Court judgments had been willfully ignored in the interests of increasing the powers of the TRC and improving the prospects of its officials.

Cabinet declined to approve the policy.

Given the money that had already been spent, it was not possible to complete the work using another consultant. I told my superiors that the draft NTP could be repaired if I devoted some time to the task.

I was asked what would happen to all the other urgent reforms I was responsible for, such as spectrum refarming and liberalization of the international telecom business at the end of SLT’s five-year ambiguous exclusivity, in addition to work in other infrastructure sectors.

I admitted that some of those would have to be slowed down. The decision was to prioritize implementation of ongoing reforms. Parliament was dissolved prematurely, the government changed, and to this day we have no National Telecommunication Policy.

Looking back at ourcontribution to creating the business process outsourcing industry through the international reforms, the spectrum that was freed up for the mobile operators, the end of the waiting list, and so on, I cannot fault the decision that was made in terms of allocating my time.

But why was I, a team leader in the Ministry for Economic Reforms, needed for this task?

There was a Ministry responsible for telecom. Policy and legislation are core responsibilities of a Ministry. But most Ministries lack capacity for these core tasks.

There were relatively well-paid and trained people at the TRC. But they had proved their incompetence and partialityby submitting a policy that ignored the country’s basic law.

The problem is the incompetence of the senior officials in Ministries.

In my most recent stint in government service, 20 months heading the ICT Agency under the Ministry of Digital Infrastructure, I saw the problem firsthand.

Compared to the Ministry of Post and Telecommunications that I worked under 20 years earlier, this Ministry hadmore personnel and facilities. But they did little of value. Several pieces of legislation and a National Digital Strategy were formulated, but there was no intellectual or other contribution from any of the Ministry officials. All their time was taken up second-guessing the actions of agencies under the Ministry and slowing things down.

The individuals were not blameless but there were structural problems too.

In the twenty months that I served this Ministry, its name was changed twice (or thrice if the coup period is counted). It had two (or three) Ministers; and four (or six) secretaries.

An official who was a few months away from retirement was appointed as secretary, I suppose to give him a better retirement package.


Political leaders from J.R. Jayewardene to the current President have come up against the incapacity of the Sri Lankan Administrative Service and the other 20 plus services to execute policies. Realizing the difficulties of reforming the SLAS, they have resorted to workarounds.

J.R. Jayewardene, even before becoming President, brought in an outsider, Ananda Tissa de Alwis, to serve as his Secretary.

The 1978 Constitution institutionalized this practice, by giving the power to appoint Secretaries to the President and the power to appoint Heads of Departments to the Cabinet of Ministers. Lateral entry was much easier in Sri Lanka than in India.

Ranil Wickremesinghe entrusted the execution of his Regaining Sri Lanka policies to committees headed by persons outside the administrative structure.

It worked, more or less, twenty years ago. When he appointed some of the same people in 2015, they were older and the results poorer. The current President is appointing serving and retired military officers.

When government departments were seen as incapable of execution, Boards and Authorities were created. As workarounds for the Department of Irrigation, the River Valleys Development Board and then the Mahaveli Authority were created.

The Department of Government Electrical Undertakings was converted to the Ceylon Electricity Board.

When Boards and Authorities were also found to be ineffective, government-owned companies were created.

These were not limited to commercial entities, earlier organized as corporations, but extended to entities such as the ICT Agency, whose task it was to digitally transform Sri Lanka.

These non-commercial units had policy implementation functions and were funded entirely from international development finance grants or loans or by allocations from Treasury.

While the political authorities, at least at the outset, tried to allow the workaround institutions to function, the government officials who belonged to various services such as the Sri Lanka Administrative Service (SLAS), did their utmost to subject them to the salary caps and rules that they were subject to.

They withheld funds, even for salaries in some cases. This passive-aggressive approach resulted in gradually neutralizing the workarounds.

Toward a solution

I recall President Kumaratunge wanting to appoint a dynamic leader as the Director of the Sri Lanka Institute of Development Administration (SLIDA), saying that it was a critical leverage point for improving the quality of the administration.

But she never got around to it. The directorship of this premier training institution has become a way station for senior officials marking time between Ministry appointments. SLIDA has become a high-class tutory.

In 2014, the then Secretary to the President mandated an expert committee with a majority from outside government to make recommendations on how to reform the SLAS.

It could not complete its work because the government changed in January 2015. The abovefacts indicate that senior decisionmakers are sensing that something needs to be done about the capacity and attitudes of the officials in charge of the machinery of the state.

Reform of the most powerful among the various services may not, by itself, lead to an end to the dysfunctions of the Sri Lankan state. But the reform of the SLAS is a necessary condition for improving the performance of the state.

How important is the restoration of some form of self-governing civil service that can ensure that continuity is maintained, and waste is avoided whenever political power changes hands? Can generalists lacking analytical skillsmeet the complex requirements of today’s society?

It may be argued that what is more important is the ability to mobilize and manage expertise rather than be expert. This means the ability specify that tasks expected of consultants, to attract qualified consultants to bid for the work and procure the best ones, and then to get quality work from them.

Writing the terms of reference for a specialized task is in itself a highly skilled activity. In the case of IT projects within government organizations, getting the users to describe the requirements has been one of the biggest challenges faced by the ICT Agency.

It is necessary to get to real human capacity building for government officials including familiarization with how companies actually work, from today’s rote-learning-based training activities.

The mindless expansion of those employed by the state without giving them the necessary resources to perform their duties has made the reform of the administration difficult.

Removing the distortion of the labor market caused by non-contributory lifetime pensions for government officials, contributory provident funds for others in the formal sector, and nothing for those who are self-employed or in the informal sector appears necessary to allow lateral exit and lateral entry.
These are just some elements of the essential reforms.

More will be said on the reforms.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia. In Artharshastra, he looks at how to arrest Sri Lanka’s declining state capacity and re-orient it to current and future needs.

Samarajiva was Policy Advisor to the Ministry of Post and Telecom in Bangladesh (2006-09). He has also been a policy advisor for The Sri Lnaka govermment and was Director General of Telecommunications in Sri Lanka (1998-99), when key reforms were made.

He is a member of the UN Global Pulse Advisory Group on the Governance of Data and Artificial Intelligence. Information lives of the poor: Fighting poverty with technology which he co-authored in 2013 had been published in Burmese, English, French and Spanish.


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Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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