ECONOMYNEXT – Sri Lanka’s United National Party has well and truly lost its reputation for economic management during three and a half years of coalition politics with President Maithripala Sirisena, who stopped reforms, but most of its troubles were of its own making.
Pushed by outside activists, the administration had lofty ideals of good governance but both Prime Minister Ranil Wickremesinghe and President Maithripala Sirisena were legacy politicians from the 1980s and 1990s and went about their arrogant and partisan ways.
Sirisena got bogged down in party politics after taking over chairmanship of the Sri Lanka Freedom Party and Wickremesinghe arrogantly protected his friends in the bondscam and went about cynically counting on a collective amnesia of a voting public.
Constitution of Liberty
Sri Lanka’s main problem is not the lack of democracy, but the lack of appreciation of liberty by the people, and the lack of knowledge on the mechanics of how to ensure freedom.
Freedoms are preserved by institutions of liberty.
The main idea behind constitutions which were developed in Western Europe was to restrain the state and provide absolute guarantees of equality to the people.
In Sri Lanka the 1979 constitution was written to build a strong presidency and a strong state, which went against the basic principles of liberty. It was not a constitution of liberty.
That was the problem with both the constitution and the presidency.
The people who wrote the US constitution, also managed to get through a sentence that everyone is born equal, despite the existence of slavery in which eventually helped everyone get freedom, even non-citizens inside the US.
The 19th amendment to Sri Lanka’s constitution, despite there being diluted by the likes of Dinesh Gunewardene, an expert filibusterer, had served its purpose in terms of restoring the independence of the judiciary.
An independent judiciary is a key institution preserving the freedom of the people. Liberty comes from rule of law and an independent judiciary will ensure it.
Freedoms are robbed mainly by two sections of society. It is the armed state, and armed robbers who will trample the freedoms of ordinary citizens.
The constitution will restrain the armed state and rulers, ensuring the liberty of the people. Democracy (popular vote) does not ensure freedom, neither does self-determination from Kings or Emperors.
Citizens of a nationalist state, which will get freedom from a King or Emperor will inevitably suffer far more horrors as Eastern Europe and also Sri Lanka has shown.
The elected ruling class is inherently more prone to sow injustice than a king or emperor, since nationalism is the easiest path to power.
Institutions of Liberty
An independent public service is another institution of liberty.
Sri Lanka got an independent public service from British liberals, who transferred the institution from their home country.
The British Civil Service was a product of the learning from their possessions in Asia. The British East India Company learned it from China.
The civil service came on to its own with the Northcote-Trevelyen report of 1854. In Sri Lanka the President and Prime Minister are appointing ministry secretaries as if they are contract workers. Interstingly both Northcote and Trevelyen had served in India and saw some of the problems in the existing system to which they suggested remedies.
It can be safely said that a Grama Sevaka has more security of tenure in Sri Lanka than a ministry secretary who is no longer permanent.
It is significant that when the Northcote-Trevelyen report was presented, Queen Victoria was against it, just like Presidents and Prime Ministers of independent Sri Lanka.
Without security of tenure, no secretary can stand up to what is right. Those who did, ended up in the pool. Like some of the Rajapaksa-era judges, those who remained had to be willing to do the wrong thing.
A bigger danger of the system of impermanent secretaries was that relatives could be brought in.
Gotabhaya Rajapaksa, was effectively the head of the military when his brother was President.
In Sri Lanka the third cog in the freedom robbing triangle is the central bank.
The administration had high hopes of a ‘social market economy’ but lacked the basic tool make it work; which is sound money.
The central bank started busting the currency as soon as the new administration came in. The first Governor under Arjuna Mahendran claimed that the rupee was overvalued as soon as he started to print money and lost control.
But later he got some wisdom, that money printing has to stop for the rupee to stop falling. From where the wisdom came it is not known.
This is what the President Commission report on a ‘bondscam’ said later.
“In this connection, Mr. Rodrigo (Head of Domestic Operatins of the Central Bank) said that the “Governor telephoned me in the morning, and said to immediately stop conducting of reverse REPO Auctions.”
“When the Commission of Inquiry asked the witness why Mr. Mahendran had issued such instructions, he said, that Mr. Mahendran had mentioned that the CBSL had earlier increased the Statutory Reserve Requirement in an effort to reduce Liquidity and that the intention of the CBSL was to “drain liquidity.”
“Mr. Mahendran had said that, in this background, Liquidity should not be injected into the market by CBSL and that the CBSL wanted Interest Rates to move up.”
This is exactly the opposite of what happened in November 2018, when the central bank lost 500 million dollars in reserves.
The current Governor Indrajit Coomaraswamy went about his task with the deliberate intention of busting the currency. According to public statements he wanted to target it along a path to keep the Real Effective Exchange Index at 100.
However he did not have a currency board (floating interest rate) to target the exchange rate at any percentage.
President Sirisena claimed in public statements that Wickremesinghe had extreme neo-liberal strategies. But in a fact check does not find much evidence to support this.
This deliberate destruction of the rupee was perhaps the most vicious illiberal policy of the current administration.
Then the central bank went about robbing economic freedoms done in the form of trade controls just like it had done in the past.
After printing massive amounts of money to keep interest rates artificially low, Sri Lanka is now in the midst of a balance payments crisis, with one credit downgrade already in.
Sri Lanka was recovering in the first quarter of 2018. All the central bank had to do was to mop up the inflows that were still coming in February with a little higher interest rates.
But that was not done. Instead rates were cut and money was printed. Is this neo-liberal?
Instead of the economy recovering, steadily in 2018, the credit system was pushed into a crisis. The currency collapsed.
Is soft-pegging a free market or liberal economic system? A free floating regime is free market. A hard peg is free market.
But a soft-peg is a contradictory mish-mash of interventions where free trade, which is the foundation of liberalism is not possible.
The central bank is the third institution that has to be built and restrained either through a floating rate and a low inflation target, or a hard peg.
The lack of freedom of the people, and the criticism of ‘neo-liberalism’ whatever that is, is symptomatic of the statolatry or Stockholm syndrome that is prevalent among the urban intelligentsia of the country.
That certain people who get benefits from state worship, lucrative posts, contract commissions and they like it is understandable. But why do other people believe all this?
Unsound money in the form of permanent currency depreciation, robbing real of savings of the poor, was the foundation of economiic illiberalism under this administration.
The 1980s reforms failed for the same reason and people went to the streets to get a living wage.
But there was a litany of others.
Economic Illiberalism and the 2015 budget
Ravi Karunanayake’s 2015 budget was a textbook document of vicious illiberalism. The demand from the people was not for subsidies but good governance.
State sector salaries were hiked forcing taxation and austerity on the rest of the population.
Fuel prices were cut willy-nilly, losing a chance for market pricing. Kerosene prices were cut below cost helping large industry and triggering massive mis-use, which had to be fixed a huge political cost, with fishermen protesting.
The worst were the retrospective taxes and revenge taxes on casinos and the Rajapaska TV station. It was true that the TV station was an emblematic institution of shameless patronage. But it has to be dealt with by law, not taxes.
Are retrospective taxes neo-liberal or classical liberal? If there are ill-gotten gains taxes cannot be slapped willy-nilly on everyone. It has to be dealt with by law.
The Rajapaksa’s also slammed revenge taxes on the media targeting Sirasa dubbed programs. This administration increased it.
No foreign investor will come when retrospective and revenge taxes are slammed.
The 2015 budget raised state worker salaries and taxes ordinary people. Is this neo-liberal? It is blatant statism.
The minimum wages were raised. It that neo-liberal?
Then sugar taxes were raised. Is this neo-liberal? This is vicarious desires of European style social engineering, practiced by rich countries.
In a bid to stop rich kids who get chauffeured about in cars from consuming sugar, taxes are slammed on the poor, and those that get exercise because they walk home after getting off the bus.
Like any food tax or import duty, any sales reductions come from the poor, not the rich.
In fact Rajapaksa cut the tax during the so-called coup period.
Under a new foreign exchange law, barriers against foreign investors starting trading companies have been raised. It is a shame on the administration.
What Neo-liberal where?
Is progressive taxation of individuals neo-liberal? Rajapaksas had a 16 percent proportionate person tax. This is a liberal tax regime that many in the West are calling for.
Is charging value added tax on health care neo-liberal? No liberal western country charges VAT on health care.
Are price controls neo-liberal? Ravi Karunaynayake slammed price controls even on tea.
An entire price control agency was set up by Rajitha Senaratne, for drugs while a central bank that is depreciating the currency as a declared policy was committed to making drugs more expensive. Is this neo-liberal?
Is giving purchase guarantees for pharma companies with the peoples’ healthcare budget instead of calling for open tenders neo-liberal?
Karunanayake slammed import permits on cars. Is this neo-liberal?
After calling for private investment into the East Terminal, which was certainly a liberal move (container terminal investments are risk capital, where the investor is bound to pay minimum royalties to the port unlike deals like LNG terminals where the state agency bears the risk).
But that was stopped, apparently it now seems on the wishes of the President. Is this neo-liberal?
After bids were called for international private players to run a bunkering operation in Hambantota it was suddenly stopped. Is this neo-liberal?
The entire Hambantota Port was then sold to a Chinese state corporation not a private investor. Is this government-to-government deal neo-liberal?
There were also bids called for Mattala. That was also stopped. Is this neo-liberal?
When Bank of Ceylon tried sell some shares to a Japanese investor, Wickremesinghe, Karunanayake and Kabir Hashim screamed from the rooftops and stopped it. Is this neo-liberal?
Air Asia asked for license to start a budget airline. It was not given. Is this neo-liberal? Vietnam has since given it a license.
Not a single privatization was done. Is this neo-liberal?
An LNG power plant and terminal is being pushed where there is no pure-risk capital but purchase guarantees are sought from the state agency. Is this neo-liberal? And were only Wickremesinghe cronies behind this as claimed by some?
What about ship purchases when the US is giving ships gratis?
A whole bunch of small taxes were slammed, after promising to reduce the total number of taxes. Is this neo-liberal?
Price controls were put on fertilizer, after giving cash handouts generating shortage. Is this neo-liberal or simple stupidity in policy contradictions?
Is taxing gold imports neo-liberal?
Is hiking letter of credit margins on car imports neo-liberal?
Is placing credit restriction on the import of three wheelers neo-liberal?
It may have been liberal to eliminate tax holidays and try to tax all companies equally. It was also liberal to cut import duties on foods and essential goods like footware, which helps the poor.
But currency depreciation took away the benefits of import duty cuts. Is this neo liberal?
Is appointing incompetent or corrupt cronies to cabinet and other offices neo-liberal?
Is delaying elections – partly at the behest of the president according to some – neo-liberal?
Malik Samaraweera’s ministry has re-gazetted pages and pages of import permits. Is this neo-liberal?
The tourism authority imposed mandatory star ratings. Is this neo-liberal?
Other than cutting import duties and reducing the budget deficit, whose benefits were also negated by currency depreciation, there seems to be very few liberal moves by the administration on the economic front.
There was however major advancements in civil freedoms. People are no longer disappearing.
There is a more open society, where people can speak freely, social media is free. The only net censorship has come from President Sirisena where an agency under him appeared to have blocked Lankaenews.com.
If there was liberal policy, where the exchange rate was strong, either via a true floating rate or a East Asia style consistent peg, this country would now be on a recovery path in 2018. If state firms were privatized, investors would have been excited and come into other sectors as well.
Not even Sri Lankan airlines was privatized. Instead a cronies were stuffed into it. Is this neo-liberal?
If shipping was liberalized, if warehousing was liberalized, this country would now be logistics hub for the region, may be even Amazon.com.
If Air Asia was given a license, Sri Lanka would be making the first steps to being a budget airline hub. If the East Terminal was given to Maesk or MSC or CMA CGM, the stranglehold on Sri Lanka’s shipping sector would not exist and other private FDI would also have come in.
This administration’s economic program went belly up, not because of freedom, liberalism neo or classical, but due to the lack of it.
This column is based on ‘The Price Signal by Bellwether‘ published in the January 2018 issue of the Echelon Magazine.To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.
To contact the author BellwetherECN@gmail.com