DEW drops on IMF: Meeting of opposite minds on government’s economic mismanagement

Rajan Philips

They were a strange gathering. As reported in last week’s Sunday Island, Sri Lanka’s Communist leader and Senior government Minister, DEW Gunasekara, and the visiting IMF delegation met and compared notes of mutual worries over the Sri Lankan economy. The meeting had been arranged by Treasury Secretary PB Jayasundera. Berating the IMF has been political stock in trade for Communist Parties everywhere, but as economic fundamentals turn depressingly sour rhetoric gives way to realism. And when those in charge of managing the economy are not so much missing in action as they are messing up in action, it is not surprising that otherwise strange bedfellows would find much common ground in a conference room.

How things have changed around in one year, and how the economic chickens are coming home to the Rajapapksa roost! Last year this time, IMF officials in Colombo tried to ‘speak up’ the economic prospects when the balance of payments was deteriorating and businesses and consumers were trying to make sense of the knee-jerk increases in import duties. This year the April cruelty has come in the form of electricity tariffs and DEW Gunasekara reportedly gave the IMF a rundown on "the catastrophic situation in the power sector". Mr. Gunasekara did not try to do a sales job for the government which is the self-assigned job of the Central Bank Governor. Instead, the Minister wanted the IMF economists to explain ‘why the GDP and per capita income increases were not being reflected in state income’.

As far as I know, Mr. Gunasekara is the only Minister to publicly draw attention and express concern over the state of the government revenue, which has fallen from 24% of GDP in 1978 to 13% in 2012. According to the Minister, the current income is "barely enough" to pay salaries of 1.4 million public sector workers and 510,000 pensioners, and pay interest on loans and pay subsidies.

Of equal concern is the annual debt service payment exceeding the annual revenue. Think about having a mortgage payment higher than your monthly salary; how are you going to feed your children? But the government is saying no worries, the economy has been put on a take-off trajectory from the Hambantota airport. And there are plenty of runways to gain speed with all the roads that are being built. How easy!

The comparison to 1978 has some significance. The revenue that year may have peaked as a result of the efficient tax collecting mechanisms introduced by Dr. NM Perera as Minister of Finance in 1970-75. There can be criticisms from the Left or Right of his economic stewardship, but NM’s focus on government revenue was spot on. His period in office was also remarkable for the healthy distance between the government and the Central Bank. Quite frequently, NM would question the periodical assessments of the economy by the Central Bank. NM attributed the Bank’s negative assessments to its orthodox ideology but never tried to coerce or co-opt the Bank to fall in line with the government’s political direction. The Bank was left alone and, right or wrong, it was able to maintain its independence and credibility. How things have changed.

Regime victim of its own


Now a government Minister is unburdening his concerns about the economy before an IMF delegation while the Governor of the Central Bank is going around assuring the gullible that all is well under the regime of the Rajapaksas. And it is this propaganda that seems to be upsetting DEW Gunasekara. The Bank’s media releases on the Annual Report appeared to have been drafted to hide the parlous situation of our revenue and debt. But you cannot hide a pumpkin in a plate of rice! DEW has warned that "the SLFP-led alliance could become a victim of its own propaganda unless tough corrective measures were taken instead of boasting of unprecedented growth in the post-war era. The country is in peril due to economic mismanagement rather than international conspiracy."

One could go further and say that the country is in peril due to wholesale mismanagement and cockeyed priorities. The non-existent international conspiracy is the only excuse the government has to justify its actions and boost its supporters. Independent institutions like the judiciary and the Central Bank have been gutted from within and without. And just as in the case of the LLRC recommendations, the government has been non-committal and lethargic in implementing the recommendations of the Presidential Taxation Commission (PTC), both submitted to the government around the same time towards the end of 2010.

Perhaps therein lie the answer to DEW’s question to the IMF: ‘explain why the increase in the GDP as well as the per capita income didn’t reflect in the state income’. A noted economist has described the state’s income structure as "lopsided and declining." Underlying the fall in revenue as a percentage of the GDP is the fall in tax revenue. From 12.4% in 2012, for example, it dropped to 11.1% in 2011, with both the value added tax and income tax declining. Unlike the Governor of the Central Bank, other concerned economists are worried about the failure to broaden the tax base to match the diversity in income and economic activities. Worse, unlike under NM in 1970-75, tax evasions and exemptions have multiplied in a regime of inefficient and ineffective tax administration.

DEW Gunasekara has called for a leveling of the lopsided tax structure from the current 20% direct and 80% indirect taxation to the more balanced 40:60 ratio. This matter has already been raised by concerned economists but it is not a government concern or priority. 80% indirect taxation is especially harder on low income people and for all its political populism the brotherhood regime has no qualms about punching the more vulnerable on their stomachs.

The expenditure side is no less lopsided with nearly all the government revenue (13% of GDP) being equal to the sum of expenditures on wages and salaries (4.6%), transfers and subsidies (3.1% and interest payments (5.4%). Education outlay sits at 2.3%, paltry relative to other comparator countries, while about 3 % of the GDP goes to cover losses at the CPC, CEB, Sri Lankan and Mihin Air. These four public enterprises account for 95% of the Rs.185 billion losses at state enterprises according to DEW Gunasekara. Enough has been said about the defence expenditure and even here 86% of the defence budget goes to sustain the military personnel and 14% accounts for machinery and equipment. FUTA’s demand to allocate 6% of GDP to education may have been unconventional economically but is morally justifiable considering the inappropriate expenditure in other sectors.

Another aspect of the gap between GDP and per capita income increases, on the one hand, and the falling public revenue, on the other, is the cumulative public debt. According to Central Bank figures, the GDP rose by Rs. 1 trillion in 2012 to $7.6 trillion while the per capita income rose from Rs. 313,000 to Rs. 373,000. We may seem to be getting closer to the vaunted per capita income target of $4,000 by 2015, but bear in mind that the public debt is now Rs. 6 trillion (an increase of Rs. 867 billion in one year) and the per capita debt is squarely at Rs. 300,000.

The public debt was 17% of the GDP at the time of independence and it ballooned to over 100% in 2004. It is less than 100% now only because of element of inflation in the GDP. While the total debt is 79% of the GDP, the foreign debt component accounts for 37% (it was 3% at independence). And the external debt refinancing schedule is getting too loaded for comfort – with nearly $2 billion average per annum projected to mature from 2013-2015. Coincidentally, the country’s exports are falling and reserves are depleting.

The overall picture could not be grimmer. All the current predicaments are not this government’s making. But the government has certainly aggravated all of the structural problems of the economy and it would be difficult for even the most charitable observer to point to instances of proper economic management. Mr. Gunasekera is a man of measured words. He could not have measured them better when said that "the country is in peril due to economic mismanagement rather than international conspiracy."


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