Economic stability with SOE reforms need system change

Is there a more fundamental reason that permitted SOEs to operate without accountability, burden public finance, contribute to economic crisis and misallocation of resources?

The Head of Emerging Market Economies Johanna Chua, when commenting recently on Sri Lanka’s emerging economic stability under IMF direction made a crucial point that “people” should “feel” the stability after paying a heavy price for it. But she failed to identify those people she was referring to. IMF being an institution created by and for the affluent never cared for the poor and downtrodden. It is a class biased institution predominantly interested in maintaining the stability of the capitalist system with its financial structure. 

Therefore, when IMF recommends stabilisation measures for a bankrupt economy it obviously starts with an agenda to stabilise the financial sector of that economy. One branch of that state is public finance as revealed through annual government budgets. The sick economy of Sri Lanka was carrying budget deficits for decades and the obvious remedy is to increase public revenue and cut unnecessary expenses. Revenue has to be increased through tax collection and profits from State Owned Enterprises (SOEs). 

Regarding the first, IMF never aims at taxing the have lots through direct taxes, because that class, according to IMF, is the one laying golden eggs to hatch economic growth. Therefore, tax axe falls heavily on the have nots in an indirect manner, which market economists define more neutrally as broadening the tax base. Sri Lanka’s VAT is an example of that broadening. As a result, on the advice of IMF, Ranil Wickremesinghe’s two budgets raised indirect taxes and avoided raising direct tax rates to collect revenue from high income earners. Thus, it was the poor who paid the most for the so-called stability Chua was referring to. Should one ask this group or the ones benefited from the stability about how they each feel, the answer would certainly not be unanimous.

Another item in IMF’s reparation agenda is the call for structural changes highlighted by the need to make SOEs more profitable. In adding to this need the Chairman of Ceylon Chamber of Commerce remarked recently, “Historically inefficiencies and a lack of accountability in SOEs have led to significant financial burdens on the government, contributing to economic crisis and misallocation of … resources”. The question is what made these white elephants to survive all these years? Reforming them now need not necessarily mean privatisation wholesale as IMF would prefer. But President Ranil Wickremesinghe and his Government are moving along that direction despite opposition from trade unions and RW’s political partners. Is there a more fundamental reason that permitted SOEs to operate without accountability, burden public finance, contribute to economic crisis and misallocation of resources? The cure for Sri Lanka’s SOE travails lies in answering this question.  

But the economy is still not out of the woods, and there is a long way to travel. There is a $ 58 billion debt to be serviced and settled once restructuring negotiations are over. It would take many years if not many decades. But, IMF itself is a money lender. Its $ 2.9 billion EFF loan has to be paid with interest, which, according to one calculation amounts to another $ 2 billion. There was a saying among Malaysians of yore that if one were to see a snake and an Indian one should kill the Indian first, because of the hardship kampong Malays endured at the hands of rapacious Indian money lenders. Elderly Sri Lankans too would not have forgotten similar fear among local villagers about Afghan money lenders. IMF is the institutionalised version of those pre-modern lending behaviour. 

In short, RW has virtually mortgaged the country’s economy in the name of economic recovery to a loan of $ 2.9 billion. How many poor economies that sought help from IMF have prospered as a result? Before reforming the emerging market economies IMF itself needs reforms to become more benevolent towards those economies. That is a subject for separate discussion. 

In the meantime, RW, acclaimed by vested interests as the architect of a transient stability, has produced a list of evidence to prove his success. A replenished treasury with nearly $ 5 billion, low inflation, rupee appreciation, booming tourist trade, inflow of foreign remittances, and ending of long queues for fuel and cooking gas fill that list. He now appeals to the masses to bear whatever hardship they face for a while longer before enjoying the comforts of his economic paradise in 2048.  

But the listed positives were achieved with tight capital and import controls, and when those controls are loosened, when economic transactions become normalised and debt negotiations completed there is no guarantee that the hardships would disappear. Ordinary consumers who visit the market daily do not see RW’s evidence translated into lower prices for their daily necessities. Artificial reduction of prices for consumer goods on the eve of an election is an old trick to buy votes. 

In general, and on international level also the prevailing economic constraints caused by conflicts and climatic disasters make even rich countries like Australia for instance, a country with successive surplus budgets difficult to cope with rising cost of living. The Reserve Bank is fighting a losing battle in balancing inflation, interest rate and unemployment. But at least Australian democracy is not bedeviled with corruption as in Sri Lanka. The underlying socio-political foundation upon which all IMF reforms are experimented at present remain as rotten as they were for many decades. What IMF casually mentioned in its check list as the need for better governance is not possible without a tectonic shift in the ruling ethnocentric and corrupt socio-political order. That demands a system change. Without that change IMF’s 17th visit would not be its last.  Sri Lankan voters, unless deprived by saboteurs, are about to be presented with an opportunity to make that change possible. Frantic attempts are afoot with tit-for-tat tactics to form opportunistic coalitions just to win political power to protect the old order. But, thanks to the Aragalaya a new generation of voters has appeared on the scene demanding a tectonic shift. 

The only coalition that lends support to the voice of this generation is the National Peoples’ Power (NPP). However, NPP is yet to outline the shape and content of the system that it wants to replace with, while not divulging too many details for its opponents to knit pick. This delicate balancing between political expediency and practical difficulty must be understood by NPP’s armchair critics. 

The forthcoming election, whether Presidential or General, is going to be an intergenerational battle between NPP and the rest or between those who want to retain the old order and those wishing to replace it. Sri Lanka’s real economic stability with clean government and secular democracy hinge on the outcome of this election. All other parties and coalitions except NPP have nothing new or original to offer except to reiterate the economic mantra of IMF. NPP wants to go beyond that and is willing to tackle the root causes of the economic crisis. Shouldn’t it be given a chance? As said by Mao, “Even a one thousand miles journey has to start with the first step”.

(The writer is attached to Business School, Murdoch University, W. Australia.)