Sugath Kulatunga

The details of the conditionalities of the IMF Extended Fund Facility (EFF) are now accessible on the IMF website Web: http://www.imf.org. A few comments from a layman’s point of view are as follows. Reference to IMF program covers government ownership as well.

The objective of the IMF intervention aims to restore macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and medium-term growth potential.

It is noted that IMF has not deviated very much from their standard prescriptions except that they have shielded themselves from the accusation that they have no sympathy for the poor by making mitigating the economic impact on them as one of the objectives. Although strengthening the medium growth potential is an objective it is not given much prominence in the implementation.

The acceptable proposals which should have been implemented long time back by any Sri Lankan government are the following.  

1. Progressive tax reforms: At 7.3 percent in 2021, Sri Lanka’s tax revenue to GDP ratio was among the lowest in the world. The program aims to raise the ratio to at least 14 percent by 2026. The proposal to increase revenue from income tax from Rs 302 billion in 2021 to over 1000 billion in 2024 onwards is over ambitions and may meet with resistance.

Proposed reforms in tax administration are welcome specially the proposal to establish a systematic third-party information sharing with the revenue authorities. It is conceded that there are many tax dodgers outside the present tax base and steps should be taken to spread the tax net. One effective measure would be to publish on a Divisional website the names of the taxpayers. This would facilitate information from the public if supported by a reward system to provide information on tax dodgers. Other measures of tax reforms are opportune. The IMF program has recognized that the ongoing economic crisis has adversely affected poor households and the the poverty rate is estimated to have doubled and inequalities have widened over the past two years. Under the IMF program it is proposed to address these challenges by raising the Social Safety Nets spending and improving the coverage and targeting of the SSN.

• IMF program has resulted in the introduction of automatic fuel and electricity pricing mechanisms on a cost recovery basis which were overdue. The mechanism has no transparency as costs have not been defined. Costs resulting from poor management, profligacy and corruption are not acceptable. For example, the Minister in charge stated in Parliament that there are 4000 MW of renewable energy projects where Energy Permits have been given but the CEB has still not granted Power Purchase approval. He also mentioned that the average cost of renewable energy is 16.90 per unit, whereas the cost of energy from thermal plants is over Rs 60. IMF should have ensured the mobilization of this ready to generate 4000 MW before implementing a pricing mechanism based on heavy use of fossil fuel at high cost.

• One of the most providential IMF proposals is the Anti-corruption legislation, harmonized with the United Nations Convention against Corruption (UNCAC), The proposed legislation aims to strengthen the asset declaration system, with coverage of all officials and public access to the declarations. It also creates a new anti- corruption independent commission with strengthened investigative power.
• The present CIABOC prosecutions most times failed on technical grounds which should be avoided in the new legislation. All governments including the Yahapalana regime had an inherent aversion to follow the UNCAC. They were happy with the ineffective CIABOC. No official or employee should be exempt from Asset declaration and the information should be made available to any interested party without restrictions other than those applicable to fundamental rights.

• Printing money was an escape maneuver resorted to by all governments. It is encouraging that IMF has ensured that monetary policy will maintain price stability through tight monetary stance and discontinuing monetary financing.

• One of the problematic proposals of the IMF is that on SOE reforms. SOEs were introduced to meet a felt need and a marker failure. But later on Sri Lanka SOEs became the profitable havens of political henchmen of Ministers. They provided employment for minister’s constituents and in many cases such employment was a source of finance. Ministers intervened in commercial decisions of the SOEs.

What is important in SOEs is not the ownership but the management. Singapore has shown a better way of SOE management with Temasek. But our politicians would not have given up their hold on SOEs to a different mode of management.

The IMF proposal is using financial jargon as comprehensive strategy to restructure the balance sheets” which could include preparing for a sale, buyout, merger, change in overall goals, or transfer of ownership.”

 But neither the IMF nor the govt in its memorandum of understanding which is merely a rehash of the IMF staff proposals have mentioned the sale of profit-making entities like the SLT or the Insurance Corporation. This addition creates doubts of the intention of selling profit making entities. This could end up in unsavory deals which is against the interest of the country. The IMF proposal to restructure the balance sheets is confined to the CPC, CEB, the Road Development Authority, and SriLankan Airlines. Other proposals of prompt publication of audited financial statements for all 52 major SOEs; and prohibition of new FX borrowing by non- financial SOEs and clarifying the mandates of key SOEs through Statements of Corporate Intentons are sound proposals. IMF should have stipulated strict conditions for selecting SOE board members as poor management is the main reason for SOE failure.

What could be done is to create a new management cadre for SOE governing Boards and senior managers. Such a cadre with professional staff parallel to the special class of the SLAS would give strength and independence to SOE  management. SOEs should be removed from the grasp of Ministers and brought under one or        several holding companies on the model of Temasek of Singapore.

• The IMF proposal to strengthen Sri Lanka’s governance and anti-corruption framework is most welcome. But IMF has avoided even reference to non-repatriation of export proceeds by exporters estimated to be around 50 billion US dollars and loss of revenue by Trade Misinvoicing. The extent of this swindle is estimated at US$ 36.833 from 2009 to 2017 and around 50 billion dollars by 2020. Instead of taking action to recover the arrears of repatriation of export proceeds IMF has regularized the retention of export proceeds and given an assurance that during the program period, government will not:

(i) introduce or intensify exchange restrictions or MCPs; (ii) impose or intensify import restrictions for balance of payments purposes; or (iii) conclude any bilateral payment agreements inconsistent with Article VIII (continuous performance criteria). Are writing off 50 billion US dollars to get 2.9 billion dollars?

(Main CFM measures introduced or tightened in 2020-2022 and currently in force        include: (i) a repatriation requirement for exports of goods and services; (ii) a surrender requirement for exporters on proceeds from exports of goods; (iii) a surrender requirement for banks on purchases of export proceeds; (iv) a surrender requirement for banks on purchases of inward worker remittances; (v) suspension of outward remittances on capital transactions; (vi) restrictions on purchases of Sri Lankan ISBs by local banks; (vii) restrictions on outward transfers of funds for emigrants. )

One wonders on the reaction of the Minster of Justice who was threatening to change the Exchange Control Act to ensure full repatriation of export proceeds.

IMF governance diagnostic mission has started to assess Sri Lanka’s governance and anti-corruption framework. But it is mentioned that this will not cover corruption at institutional or individual level. This is looking at the forest but not the trees.

• When it comes to trade and investment, IFM has revealed its true colors in their intention of implementing later in the program an agenda of structural reforms designed to allow Sri Lanka to reach its full potential which involves trade liberalization, which IMF claims is critical for attracting investment and boosting productivity growth. In this regard, IMF proposes to revisit the 5-year plan for rationalizing remaining para-tariffs developed under the 2016-20 EFF arrangement, aimed at removing an important impediment for foreign investment. IMF is for the implementation of a single window for trade and will pursue further trade reforms with technical assistance from development partners.

The single window proposal has been repeated ad infinitum, but subject ministries insist on holding on to their powers which are source of power and illicit income. In the 1980s there was the Foreign Investment Approval Committee which dealt with all foreign investments outside the GCEC. (Now BOI). This Committee which functioned under the Ministry of Finance acted as a one stop shop. Delays jn approval by subject ministries were dealt with persuasion and threats of exposing the delay at the Exporters’ Forum or reporting to the cabinet. It was a non-bureaucratic collegiate decision-making process which did not tolerate delays or lame excuses. Another proposal which could expedite approvals is to assign a local consultant who is familiar with the approval process to every prospective investor to help him to go through the maze.  

• IMF also proposes to introduce by 2025 Property, Wealth, and Wealth Transfer Taxes. These taxes were there in the past and were removed for good reasons. It would be useful to examine these reasons before implementing them. Recently India has abolished them on the ground that they impose a compliance burden on the taxpayers as well as administrative burden on the department. Perhaps more revenue can be collected from arrears of tax pyments.

1. Without giving any examples the IMF makes an unsupported statement that Sri Lanka’s highly protective trade regime has hindered import competition, export diversification, as well as the entry and establishment of foreign firms. This broad statement picks on para tariffs on which IMF requires the authorities to develop a concrete medium-term plan to rationalize them. To claim that some innocuous para tariff has hindered import competition, export diversification, as well as the entry and establishment of foreign firms is specious and unprofessional.