IMF, McKinsey not the panacea for our ills; decisiveness, empowerment and selfless politicians are e

By a Special Correspondent

The past 18 months have been, possibly, one of the darkest, and bleakest, periods, in recent times, for Sri Lankan businesses and entrepreneurs.

While there has been an improvement during this subject period, relative to the five-year period pre-January 2015, in areas such as freedom of expression, law and order and facilitation of the rights of citizens, the enablement of enterprise, entrepreneurship, risk taking, capital formation, investment and business confidence has hit an all-time low.

This can be attributed to three main causes; these being indecisiveness in the area of taxation, dis-empowerment of public servants and the politicisation of economic decisions.

Indecisiveness in taxation

The tax promulgations, and implementations, of the past 18 months have been nothing but a circus and I need not dwell on it in greater detail.

Lankan businesses recognise that there is a dire, and urgent, need, for the State to increase her tax revenues in order to implement the future centric infrastructure, and social, developments. However, one would have hoped that a tax strategy to achieve both the short and long term objectives, would have involved the greater involvement of all the stakeholders. 

To advertise the so-called “talk sessions” to merely create the optics of a listening government is of no use, if, at the end of it, the Government decides to proceed, unilaterally, with its preconceived motives, with poorly-designed tax policies which are not aligned to the National Strategy. As Aitken Spence Chairman Harry Jayawardena stated recently, the Government must listen more to the captains of Sri Lanka business if Sri Lanka is to progress economically. 

Mind you, these are the same captains who helped to achieve regular 5% GDP growth, pre-2009, despite the ravages of, and the uncertainties created by, the 30-year ethnic conflict.  Sri Lankan businesses, self-centred as they may be at times, are very rational, and objective, if the strategic intent of decisions of Government is clearly stated and consistently operationalised in a transparent manner. Yes; at various moments of time, there will always be winners and losers. Despite such, I am confident that businesses are mature enough to accept that.

We now hear that the legislation of an IMF-drafted Taxation Policy is planned to come into effect from 1 April 2017. Other than discussions, in the past few weeks, at a Chamber level, Sri Lankan businesses, and the public have very little knowledge of the imminent legislation. So much for the Right to Information and Yahapalanaya! It appears that the IMF Tax Draft aims to bring laws which will have serious effects on investment and capital formation. 

Rumour has it that the new laws aim to withdraw the rights conferred by the BOI, and other regulatory bodies, on projects which have already commenced on the basis of such legally-granted rights. Rumour also has it that there are moves to heavily tax dividends earned by corporates even where such dividend emanates from profits which have been already subject to tax. 

Sri Lankan businesses have, for a long time, accepted the concept of a one-off tax on dividends. However, it will be very detrimental if a corporate has to pay to pay tax at Corporate Income Tax rates on already taxed dividends. A slow-down of corporate business expansion will surely be the outcome.

As stated earlier, the country needs tax revenue. The Government must ensure that the tax strategy is aligned to its economic goals. The irony is that the tax strategy proposed by the IMF is very similar to that it has proposed for Ghana. Whilst there is no harm in adopting generic templates, one has to adapt such to the specifics of the subject domain, at a moment of time, and must be in keeping with its strategic objectives. 

To what extent have the Sri Lankan think tanks, including the relevant public servants, contributed to the final draft? To what extent have Sri Lankan businesses and entrepreneurs been allowed to contribute? I trust that the Economic Committee of the Cabinet and the Parliament will ask these questions before they hurriedly approve the passage of this new Tax Act and face legal challenges. 

If the IMF proposal is steamrollered, without adequate discussion and dialogue, there will be, without a doubt, challenges via the judicial system, particularly if the legally conferred, and already entrenched, rights of citizens, corporate and non-corporate, are affected.  

Disempowerment of public services

There has been a gradual dis-empowerment of the Public Servants commencing in the 1980s and more apparent, and visible, during the previous regime.

Our public services (i.e. the Civil Service) are fortunate to have some of the best brains in the country. Unfortunately these “brains” are not allowed to contribute. For example, since the VAT scam in 2004 and its resultant fall-outs, the IRD officials have been reduced to mere robots. They are frightened to exercise their decision rights through an application of their knowledge, this being a knowledge gained out of studies, exposure and experience. 

Most of the officials in public service, just like their compatriots in the IRD, are competent, knowledgeable and honest. The problem is that there are not given the requisite freedom to operate with autonomy. Very often, their right decisions are overruled by politicians acting on a basis which is not meritocratic. The obvious outcome is one of “dis-interest” and the consequent inaction, lethargy and the inevitable corruption engendered through such a system.

The Government is attempting to accelerate its economic programs by appointing McKinsey as an implementing body. Whilst I have the highest respect for McKinsey, the problems of, and delays with, project implementation lie in the lack of decision making authority given to public servants.

Cabinet Ministers, the Prime Minister and the President are not experts on specific subject matters. They must get guided by the public servants. Unfortunately, even the correct decisions made by the public servants, which more often than not is the case, are overruled by the Government “biggies” who think they are experts in everything!

Politicisation of economic decisions

It is recognised, and accepted, that there has to be a balance between “economic” and “social” aspects in any policy and/or policy decision.

Unfortunately, in recent times, almost every decision is perceived to have been made with an eye to winning the next election rather than in the best interest of the country. There are other times when decisions are perceived to have been made in the interest of another country rather than in the best interest of Sri Lanka. There are also decisions perceived to have been made in placating “friends” and in pursuing “personal enrichment” as opposed to in the best interest of the country. One might say “these are just perceptions”: but, perception more often than not is reality. There is no smoke without fire!

Sri Lanka, unfortunately, lacks transformational leaders who have the courage to take long term decisions in the best interest of the country rather than taking knee-jerk, ad-hoc decisions, in the interest of winning the next election. With their actions, these leaders are only further fertilising the “subsidy-based” mindsets that we Sri Lankans are currently enslaved to. These are mindsets which are linked to constant hand-outs rather than mind sets which yearn for performance based rewards.

It is true that there are inequities in the social system which does not give everyone equal opportunity. The politicians must focus in removing such inequities and creating an environment which provides an enabling environment of equal opportunity for everyone irrespective of race, class, creed, gender or existing riches rather than meddling in areas which are best left, in the main, to the more knowledgeable public servant. Notwithstanding the current state of play, one has to start to progress further. Rome was not built in a day!  

Conclusion

It is more than 75 years since Sri Lanka gained her independence. We have capable, and emancipated, citizens.

We may need the IMF money... but we don’t have to blindly accept a proposal which appears to be similar to the one they proposed for Ghana. Sri Lanka is not Ghana. Discuss extensively, and with sincerity, with the key stakeholders before you adopt it for Sri Lanka.

We don’t necessarily need a McKinsey to implement programs when we have public servants who are perfectly capable if they are allowed to operate within broad, and bounded, decision rights. Empower them.

Lastly, we don’t need politicians who make decisions in their own interest than in the interest of the nation. Time we identified the good from the bad and filtered them. The “tone from the top” is important.