Can We Survive without a Homegrown Solution?
Posted on January 17th, 2024

By  Shivanthi Ranasinghe Courtesy Ceylon Today

A senior Japanese diplomat attached to the Japanese Embassy in Colombo, speaking to Ceylon Today in terms of anonymity, claimed that a homegrown solution will not help Sri Lanka overcome the present economic crisis. He pointed out that the Gotabaya Rajapaksa Administration’s attempt to resolve the then-developing catastrophe with a homegrown approach failed. Therefore, in his thinking, the sole solution for Sri Lanka lies with the IMF’s Extended Fund Facility (EFF) as the only way forward. 

This Japanese diplomat, who was not authorised to make such observations, obviously has not heard of the age-old adage that if you fail once, try again. Had we accepted a failed attempt or for that matter multiple failed attempts as the reason not to keep trying, then we would still be under the LTTE’s terror reign. 

Therefore, before we blindly accept this anonymous statement as a qualifying recommendation, we need to comprehend two factors:

1.) The reasons for Gotabaya Rajapaksa’s homegrown solution to fail;

2.) Whether the factors that contributed to Gotabaya Rajapaksa’s homegrown solution are still true. 

At the same time, we need to understand the impact the EFF is having on our economy. The EFF is almost fondly known as the IMF’s bailout” package. While this facility did much to restore the external creditor confidence, it is hardly a bailout package. It is more of an austerity programme imposed on a society that is both indisciplined and illiterate financially. 

Why did Gotabaya’s Homegrown Solution fail?

The tax holidays granted by President Gotabaya to the business community is widely blamed as the root cause of the economic crisis. Economic experts as Dr. Nalaka Godahewa, who played a pivotal role in bringing President Gotabaya to power, criticise this move. Many who were in the core team responsible for President Gotabaya’s position suspect that the tax cuts were a brainchild of the neoliberal team President Gotabaya attached to after entering Office. 

It is unclear who actually advised President Gotabaya to grant these tax concessions to the business community. However, whether it was an ill-advised strategy is highly debatable. Those who condemn these tax breaks forget the economy President Gotabaya inherited. 

The Much-Condemned Tax Breaks

Next to the war-torn Afghanistan, our economy in 2019 was the worst performing in the region. The rest of the region was thriving. Unemployment has risen by half a million and the business community was hanging by their fingernails. It was taking this bleak scenario that President Gotabaya declared the tax concessions as well as moratoriums on bank loans. 

The logic was to give the business communities the much-needed breathing space to pick up their pace. Without the burden of having to pay heavy taxes, the businesses could then invest that money into their businesses. 

Money invested in modern technology, the latest machinery, new markets etcetera can only translate into one thing – growth. With growth, employment opportunities increase, the cost of production decreases and productivity expands. As sales of companies and personal incomes of individuals grow, so does the revenue collected by the Government as taxes. 

Today, parapet and other public walls are defaced with spray-painted slogans demanding to tax the rich. Those who demand the rich to be taxed and wealth to be distributed to the poor demonstrate their ignorance on the concept of tax. The rich, or rather the investors as entrepreneurs should either pay taxes or put their money into the economy and increase the wealth in the country. 

Governments must be clever enough to incentivise the business community (the so-called rich”) to contribute to the economy in ways governments cannot. Increasing employment opportunities is one thing that is best left in the hands of the private rather than the public sector. 

When employment can be easily gained in the private sector, the public sector would be free to hire the most competent and remarkable heads. Governments must concentrate on hiring the best, compensate them well above market price and insist on outstanding performance. If that could be achieved, then most of the woes we suffer from the public sector as inefficiency and a bulging but unproductive workforce would be resolved or at the very least minimised. However, to come to that point, the private sector must be booming with enough employment opportunities across the society’s strata. 

The Pandemic 

Most unfortunately, the Covid-19 virus that emerged even before President Gotabaya could warm up his seat and which quickly flared into a pandemic within three months put a spanner into the economic recovery plans. The whole world went into lockdown. 

Sri Lanka, a country that depends almost entirely on exports but with limited forex revenue avenues lost most of its income routes almost overnight. Conversely, our expenses soared as the entire responsibility of managing the pandemic as well as the social securities of the population fell on the Government. Still, the Gotabaya Administration overcame all obstacles and challenges. 

Yet, the developing economic crisis could not be contained. This is not because of the weaknesses of the homegrown solution. In fact, the homegrown solution fell victim to factors that were entirely political than financial. 

The Protests

The first factor that contributed to the economic crisis was the protests. Since the day President Gotabaya assumed Office, numerous protests took place. In the early days, these protests amounted to a simple nuisance. President Gotabaya appointed a task force comprising the senior most officers with proven track records to personally look into the protestors’ grievances. These protestors simply melted away as the pandemic struck the island nation.

However, as the pandemic’s second cycle ended, protests from various quarters emerged. When the health sector decided to take trade union action, which could have derailed the anti-Covid-19 vaccine programme, the military took over and did a better job. 

When the farmers took to the streets demanding agrochemical fertilisers, the Government was still able to ignore the protests. This indifference caused deep wounds among the agrarian communities. Considering that it is these communities that hold President Gotabaya’s vote base, the Government should have taken their contention more seriously. 

It was however the teachers’ protests over salary anomalies – an issue that has been festering for a quarter of a century – that really took a toll on the already fragile economy. Instead of being the strict disciplinarian expected by President Gotabaya’s voters, his Government played being the nice guy. This did not resolve the problem but dragged it on for weeks. Consequently, the third lockdown got elongated as the number of Covid-19 patients and deaths increased. To the economy, it was akin to beating one who has a headache with a stick. 

As the third cycle elongated and economic recovery slowed down, our economy began to collapse. This gave rise to anti-government protests as we ran out of forex to pay for our energy sources. 

Politics at its Worst

By this time, President Gotabaya’s support base had fractured and he was losing support from the very ones who brought him to power. For reasons not entirely clear, the then Finance Ministry’s top guns ignored the Central Bank’s (CBSL) recommended roadmaps. These officials also refused to adjust to the prevailing situation and refused to increase fuel prices or ration it altogether. 

As CBSL struggled to protect the LKR, unofficial and illegal USD exchanging channels emerged. Again, top management from the CBSL, Finance Ministry and the Government failed to stop these channels. As a result, forex that was slowly trickling into the country bypassed official channels and was directly transacted via systems as undial. Soon the banks’ forex dwindled. Consequently, banks could not even open a Letter of Credit for manufacturers to import their raw materials. 

In the end, it was not the merits of the homegrown solution that failed the nation. It was the nation with its myopia, politicians with self-serving agendas and a government that mismanaged its political platform that failed the homegrown solution. 

Presently, the pandemic is a fading memory. Recent reports of a new variant hardly causes a stir. The incumbent President Ranil Wickremesinghe is on a borrowed mandate and his Parliamentary support is sketchy. However, he is one politician who knows how to contain a protest. His political opponents bark at him but dare not bite him. However, unlike President Gotabaya, his successor does not have much faith in our solutions. 

The IMF, which recently granted the second tranche, has expressed their satisfaction with our performance. However, the brain drain that has accelerated since the bailout” indicates that Sri Lankans are not happy with the changes shaping our economy under the IMF’s guidance. This gives rise to the most pertinent question of all – can we recover from the prevailing economic crisis with just the IMF’s helping hand? 

ranasingheshivanthi@gmail.com 

(The views and opinions expressed in this column are writer’s own and do not necessarily reflect the official policy or position of Ceylon Today)

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