Alternatives to the neoliberal Ranil-Rajapaksa regime and the IMF

It is essential to ensure that the foreign debt restructuring functions smoothly without adversely impacting the people’s livelihoods and economic stability - Pic by Shehan Gunasekara

The commercial elite and its puppet regime under the unelected President Ranil Wickremesinghe are exploiting the crisis they created. They are eager to slash already dysfunctional legal protections for workers through proposed labour law reforms and sell state assets (SOEs) to further enrich a counterproductive elite. The private sector will further underreport profits following privatisation of profitable SOEs depriving Government of both profits and tax revenue, further exacerbating the fiscal and public debt crisis in the long run

•  An economy that works for the working people: Alternatives to the IMF

Alternative proposals 

1. Resolving the liquidity trap position in the foreign exchange market through state intervention. Repatriation of residual export incomes held outside the country by exporters which was estimated to be $ 6.8 billion in 2021-2022 by the direct intervention of the Foreign Exchange Department of the Central Bank according to the powers vested by the Monetary Law Act.

2. Repatriation of the funds transferred out illicitly by the business elite involved in import-export trade through trade misinvoicing and transfer mispricing (that is estimated to be over $ 40 billion between 2009 and 2018). Strengthening and introducing laws to prevent capital flight through the trade account of the balance of payments. 

3. Immediately cancel all tax holidays given to BOI firms and impose a 10% import tax on all inputs, reversing the current account liberalisation of trade initiated through the IMF program in 1991 to reach IMF Article VIII status in 1994. Approximately $ 1 billion can be collected through tax on inputs. These destructive and regressive measures created the legal groundwork for illicit outflows to take place smoothly, especially through over-invoicing of imports. It also led to a catastrophic collapse in state revenue as a share of the GDP. The ratio started to decline from around 23% in the mid-1990s and settled below 9% in 2021.

4. March 2022 Article IV assessment of the IMF highlights that Sri Lanka’s car fleet is larger than the economy can bear. Sri Lanka’s per capita fuel consumption is almost twice that of South Asia’s average. The Government needs a plan to correct this overconsumption in the economy (notice that IMF has identified a market failure and is suggesting Government intervention to devise an alternative plan to resolve it!). In this light, we propose to re-export 25%-30% of the highest-valued personal vehicles in the country through an online auction system by establishing an independent agency to certify each vehicle’s dollar value and condition, resembling the system adopted by Japan to resell used vehicles to rest of the world. It will allow foreign buyers to assess the value and condition of the vehicle without being physically present. 

Issuing a nonconvertible rupee bond to the local owner of the vehicle equal to its rupee value yielding an attractive interest, will prevent the possibility of increasing the domestic monetary base and stoking inflation. State-sector vehicles will be auctioned initially to encourage the private sector to comply with the plan. The recent increase in world vehicle prices would further benefit this program. The program can gain an inflow of $ 8-9 billion excluding the significant foreign exchange savings on fuel and spare parts imports that will continue to benefit the economy indefinitely. Saving on fuel imports by selling off vehicles overconsuming fuel is rational, especially when the essential sectors of the economy are facing an acute shortage of foreign exchange. 

5. Apply the same methodology to the luxury condominiums market in Sri Lanka and provide a 25% discount to the buyers using foreign exchange to encourage quick liquidation of assets. Impose a 35%-40% sales tax on the domestic sales of the sector to prevent further speculation in the condominiums market and further waste of foreign exchange. The idea is to sell off unproductive private assets as a countermeasure to selling off state assets proposed by the IMF and the current unelected regime. The program can gain an inflow of $ 2.5-3 billion.

6. Employing the inflow of foreign exchange through the above measures to initiate a state housing scheme drawing lessons from countries like Singapore.

The following proposals seek to permeate collectivist values as an alternative to the crisis of contemporary capitalism. In its current Monopoly-Finance phase, global markets are facing a self-defeating battle. It is waged against the inability to reabsorb the surplus it generates, declining real wages, excess capacity, unemployment, and high inflation under increasingly oligopolistic global markets. In response, capitalism is promoting debt-ridden consumerism of both governments and individuals, hand in hand with financial speculation to create profitable spheres to reproduce itself. Capitalism is therefore reorganising human relations, values and aspirations according to the exigencies of a dying order, leading to ecological, political and economic crises that aggravate over time.

The explosion of sovereign debt in underdeveloped economies including that of Sri Lanka should be understood in the global context of Monopoly-Finance capitalism struggling to survive and redeploy its growing surplus profitably. Hence sovereign debt crises of underdeveloped economies are built-in to the international credit system. It has no automated mechanism to assess risk and prevent over-lending to economies on the brink of collapse. The excessive accumulation of money capital in financial markets in core economies and lack of profitable investment spheres in the context of Monopoly-Finance capitalism in turn renders market failure in international credit the normal condition.  

In contrast competitive industrial phase of capitalism did not face demand stagnation, except during periodic crises. It was characterised by shortages of capital and savings that constrained further expansion. Reabsorption of the surplus was never an obstacle during the period. As opposed to promoting debt-ridden consumerism, the key message of the industrial capitalist to the rest of the world was to save even at the expense of starvation, so he could turn it into more machinery, raw material and workers, only for the sake of producing surplus value ad infinitum. Consumerist ideology is, therefore, only a historical construct of the Monopoly-Finance phase of capitalism designed to resuscitate a stagnating system. 

The corporate elite of underdeveloped economies like Sri Lanka is the antithesis of the industrial capitalist1. They are destroying the surplus in conspicuous luxuries and illicit transfer of surplus which was reported extensively. They drive governments deeper into debt through tax evasion and illicit outflows and simultaneously convert ownership of public debt into a mode of surplus appropriation. Without mandatory repatriation requirements and a robust system of capital controls, the corporates could rob the Government treasury by evading taxation. 

The Committee on Public Enterprises (COPE) recently revealed that the corporates have evaded as much as Rs. 904 billion in tax payments up to December 2022 which is 37.7% of the fiscal deficit projected this year. They emerged as the emissaries of the ongoing collapse and the humanitarian crisis that left 56% of the population having to reduce their food intake as of May 2023 according to the Food and Agricultural Organisation of the UN, close to half the population had to borrow to buy food, thrown half of the children below five years of age into malnourishment, and sacrificed the sovereignty of the nation with the blessings of the political and the bureaucratic establishment. 

Having done so, the commercial elite and its puppet regime under the unelected President Ranil Wickremesinghe are exploiting the crisis they created. They are eager to slash already dysfunctional legal protections for workers through proposed labour law reforms and sell state assets (SOEs) to further enrich a counterproductive elite. The private sector will further underreport profits following privatisation of profitable SOEs depriving Government of both profits and tax revenue, further exacerbating the fiscal and public debt crisis in the long run. The following proposals in this backdrop attempt to show that not only collectivist alternative is possible to the IMF and the autocratic rule of the current Government. But also, it is individually more rewarding and liberating than an economy organised according to the dictates of impersonal market forces, prioritising the needs of the core capitalist economies in stagnation, at the expense of the underdeveloped periphery. 

The below statement was issued by Ceylon Bank Employees’ Union Senior Vice President Anupa Nandula on behalf of: Center for Community Empowerment, Ceylon Bank Employees’ Union, Ceylon Electricity Board New Employees Union, Ceylon Federation of Labour, Ceylon Teachers’ Union, Climate Action Now Sri Lanka, Commercial & Industrial Workers’ Union, Dabindu Union, Engineers’ Services Professional Association, Federation of Media Workers’ Trade Union, Free Trade Union Centre, Institute for People Engagement and Networking, International Peasant Movement (La Via Campasina), Movement for Land and Agricultural Reform, Movement for the Defence of Democratic Rights, Movement for Plantation Peoples’ Land Rights, National Collaboration Development Foundation, National Fisheries Solidarity Movement, National Trade Protection Council, National Union of Metal and Migrant Workers of Sri Lanka, National Union of Seafarers Sri Lanka, North South Solidarity Group, Prathivada, Protect Union, Rural Development Foundation, Satahan Media, Social Institute for Development of Plantation Sector, Sri Lanka All Telecommunication Employees’ Union, Sri Lanka Insurance General Employees’ Union, Stand Up Workers’ Union, Suriya Shakthi Foundation Nuwara Eliya, Textiles Garments and Clothing Workers’ Union, United Fishermen’s and Fish Workers’ Congress, Upcountry Civil Society Collective, Uva Shakthi Foundation, Young Lawyers’ Association; Sugath Kulathunga – Former Senior Advisor at International Trade Centre (WTO/UNCTAD), Former Director General of Sri Lanka Export Development Board and Former Additional Secretary to Ministry of Trade; Prof. (Dr.) M.P.S. Magamage – former Chairman of National Livestock Development Board; Dr. Kalpa Rajapaksha – Senior Lecturer in Economics; Dr. Amali Wedagedara – Political Economist:

7. The inflow of foreign exchange through the above measures will be managed by a separate investment fund under the Central Bank of Sri Lanka, which will also make it possible to restore the value of the currency closer to its true value, which ranges around Rs. 250 per US$ as per IMF in March 2022. It will restore real wages, and significantly reduce the internal price level and interest rates while output expands. 

The basic theory behind this idea is the complete rejection of the demand to privatise Government institutions to increase foreign exchange inflow. It assumes that only state sector institutions are unproductive and that the private sector is employing resources productively. However, a significant portion of assets of the private sector, which they keep within the economy, is held unproductively in the form of personal vehicles and apartments and has not led to an expansion of the modern industrial sector. An economy needs to increase its savings in a tradable form to expand its productive sector. So we must convert these unproductive private assets, which simultaneously cut across savings, investments, and consumption, to strictly tradable savings in the form of foreign currency. 

This process is essential to finance the Import Substituting Industrialisation plan proposed here to resolve the foreign exchange crisis, resist the privatisation of state institutions and transform the economy to create better quality employment simultaneously. The idea is to promote the sale of private assets instead of SOEs to acquire the capital necessary to launch a recovery plan and a plan for economic transformation.

Immediate measures to revive the domestic economy 

1. Revive local production of food – rice, vegetables and fish. Introduce control prices. Create purchase and marketing mechanisms through cooperatives and Sathosa. 

2. Debt moratorium for all production-oriented loans, including microfinance. 

3. Subsidised LPG, fuel and electricity for small and medium industries, farmers and fishers. 

4. Low-interest regime with non-interest incentives for savings; credit facilities to the rural coop to purchase agricultural machinery; fisher folk coop owned fishing harbours, ice plants and selling centres.

Medium to long-term measures: Transform the economy based on Import Substitution Industrialisation (ISI) integrated with the agricultural sector:

1. Redirecting the foreign exchange inflows to selected import-substituting industries by restricting imports of nonessentials. Gradually restricting the imports of selected industrial goods to address the indivisibility problem and generate productive employment by subjugating the unproductive private sector. The internal demand deficiency can be managed by creating input and output linkages between industries as opposed to isolated and ad hoc setting up of a few unrelated industries in the 1970-77 period. Worker control and management in large SOEs and setting up of new worker training courses in the universities and technical colleges.

2. This would also involve redirecting the flow of bank credit towards this program and restricting private credit into conspicuous consumption and unproductive, speculative investments like property and real estate.

3. Expansion of the public transport sector industries through the inflow of tradable savings mentioned above at the expense of private transportation. This will also significantly control environmental pollution driven by consumerism and address climate concerns simultaneously.

4. The planned state investments would involve the absorption of rural surplus labour within the limits of the rural economy itself through the expansion of industrial SMEs (instead of the retail-driven SME structure we currently inherit) following the example of South Korea, Taiwan and Japan. It aims to transform the backward, unproductive SME sector in Sri Lanka, dominated by trade and petty production, into a dynamic sector linked with the broader industrial structure of the economy, which needs to be established from the beginning. For this to be practical, a complete reorganisation of the pattern of labour deployment in the paddy economy in the South – addressing issues of gender inequality deeply ingrained in agriculture – is necessary for the long run. Moreover, the market mechanism cannot ensure the optimality conditions of resource utilisation of the paddy sector.

5. Evaluate the corruption involved in the tea auctions where estates, brokers and franchise exporters are all under the ownership of a handful of conglomerates violating the legal and ethical requirements of the sector. This corrupt structure which was exposed previously in a series of articles enables the suppression of wages in the estate sector by recording lower incomes in the estates where workers are mostly employed while a greater share of the profits is recorded within the franchise export firms. We propose an industrial transformation of the estate sector, dismantling the corrupt trading structure of the conglomerates shamelessly exploiting workers and an increase in both employment and wages in the sector and ensure land rights of the working families of the sector. 

6. The Ministry of Agriculture recently pointed out that approximately 40% of the agricultural output is wasted due to output being deliberately destroyed to keep market prices artificially high (traders under free market conditions exploiting the price inelasticity of demand for food to increase profits by destroying the output), lack of cold storage facilities, and due to improper handling during transport. The Ministry estimated that the output waste in 2021 was sufficient to feed 10 million people. Therefore, we propose a Government program to minimise waste and to channel the recovered output to economically deprived families through cooperatives. In addition, it can address malnutrition and the chronic food shortage that has affected over half of the population, especially children and women, according to the UN FAO. 

7. As opposed to privatisation, we are proposing the exact opposite: the expansion of the state sector in a way that addresses both the economy’s foreign exchange liquidity trap position and underdevelopment. 

8. Rationalisation of the import trade to ensure essential supplies such as medicine, fertiliser, fuel and raw materials are adequately available until domestic production gradually replaces the imports of selected goods. So eliminating the possibility of shortages in the short to medium run.

9. Iron and steel and machine-building industries are necessary to ensure that the industrial sector has an adequate supply of capital goods and industrial inputs. Therefore, building a necessary industrial infrastructure as opposed to an unproductive consumerist infrastructure contributed heavily to the debt crisis.

10. Drawing insights from Vietnam and the approach of South Korea following the Asian Financial Crisis, who were capable of producing their economic revival plan instead of implementing the standard IMF policy package, we must engage in a dialogue with the IMF to ensure its support to the proposed program, which will not be a smooth process as the experience of Vietnam and South Korea in the 1990s to 2000s also show. It is essential to ensure that the foreign debt restructuring functions smoothly without adversely impacting the people’s livelihoods and economic stability. 

In this connection, we should demand 70%-90% foreign debt reduction, including a significant moratorium (five years or more) on debt, citing the incidence of illicit capital flows aggravating the debt issue learning from the demands of the African Union. We must resist the insignificant foreign debt reduction proposed in the ongoing IMF program, the higher interest charged on the IMF advances exceeding 6% and the heavy emphasis on reducing domestic debt by approximately 30% as opposed to foreign debt (see IMF Sri Lanka Country Report, March 2023, p. 16). 

11. The African Union sought the assistance of the UN to become an independent arbiter in negotiating with creditors on legal terms. We also have the option of taking the road less travelled if negotiations with the IMF do not succeed.