Tuesday, 6 January 2015 02:05
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By a special correspondent
Policy makers are jubilant on extra-ordinarily great numbers on the economy. Their political masters chant a mantra of unrelenting development. A citizen earns an annual income of $ 3,280 or Rs. 426,000 a year, a four-fold increase from 2005. Cost of living is among lowest in Asia. People spend increased disposable income on newly built high-end recreation facilities such as Independence Arcade. Their surplus is used for importation of sports cars and luxury motor vehicles. Rulers build roads, ports and airports as and when the people demand such facilities. Sri Lanka is inching towards becoming the Wonder of Asia!
Underneath, there exists a cruel reality; a reality that widens the gap between the haves and the have-nots, a reality that distances benefits of so called development from the very people who sweat for such development, a reality that creates a super rich class that benefits at the expense of a vast majority. This reality is that post-war Sri Lanka has become a mine of wealth for a few who control the government.
All this takes place in the name of development. ‘Mega projects’ has become the name of the game. Taxes paid by poor households on milk powder, fuel and other essential food items are lavishly spent on projects that these poor households will never afford to use. Future generations are mortgaged to foreign lenders. A highly indebted nation is in the making. Creation of short term bubbles has become the formula for growth and development undermining the economy’s long run sustainability.
The national income is growing without benefitting the contributors?
Historically, Sri Lanka’s growth benefitted all Sri Lankans. A fair growth of household income was a priority even for the most right-wing regimes. Household income broadly grew in line with the Gross Domestic Product (GDP) growth. In fact, between 2002 and 2005, average household income growth exceeded the average GDP growth. During this period, when household income grew by 7.4%, GDP also grew by 6.2%.
What has happened since 2006? Only GDP is growing fast; the household mean income is stagnating. This is evident from government data as well. Between 2006/07 and 2009/10, average GDP growth had been 5.8%; in contrast, the average household income growth had slowed down to a mere 0.6%. Alarmingly, the situation has further worsened since the end of war. Between 2009/10 and 2012/13, when GDP grew by 7.2% on average, the household income growth had plummeted to 0.3% (Illustration 1). Growth has not benefited the ordinary household.
How much has gone missing from the national wealth? Is missing money connected to mega projects?
Although, addressing the country’s infrastructure deficit became an undisputed economic priority after the end of war, the rulers soon developed an ‘extra ordinary love’ towards mega scale construction projects. From the government side, all possible steps were taken to create a mega project economy. Of course, no one would say that the projects are bad if they are beneficial to the country and the people. But what has happened? These mega projects seem to be designed to steal people’s wealth. And this is not by coincidence, but by carefully manoeuvring governance structures.
Selection of mega projects happens according to whims and fancies of a few people. Feasibility and environmental studies are no more considered.
Mega projects are fast-tracked through unsolicited proposals preventing transparent procurements.
Every single mega project is routed through three ministries with the support of Ministry of Finance and Planning i.e. Ministry of Ports and Highways, Ministry of Defence and Urban Development and Ministry of Economic Development. (Simultaneously, these ministries control the state budget as well; in 2013, aggregate expenditure of the President and the said ministries was equivalent to 99% of the total tax revenue of the government.)
These are sure ways of securing mega deals through the mega projects. Senior Professor Amal Kumarage who immensely contributed to Sri Lanka’s transport sector has estimated the potential waste of just four road construction projects at Rs. 200 billion (‘The Real Cost of Highway Development – Who has got the numbers right?’, Sunday Times 21 December 2014). And there are many more projects that have been used to plunder people’s money. In simple words, the country has become a mega deal economy for a few at the top.
These mega deals do hurt people and the economy. Since 2009, the share of national income that goes to people has been declining at an alarming rate. This people’s share, in the past – even during the 30 year war, had been hovering around 44% of the national income. However, this share has declined to 43% in 2009/10 from 47% in 2006/07. The decline became further steeper in the post-war era. By 2012/13 people of this country received only 36% of the national income as their share.
What does this mean? The economy is growing; people’s share of national income is declining. A few people at the top seem to be enjoying the increased wealth of a nation. The loss of people’s share of income could be estimated at Rs. 700 billion for 2012/13; mind you, this is the loss by the people only for one year (Illustration 2). It appears that those who enjoy the disappeared wealth have used this money to purchase mansions in the USA; buy over opposition parliamentarians; and invest the remainder on lavish election campaigns. Just to remind ourselves of the gravity; this money could have been used to pay 35 years of fertiliser subsidy, 26 years of free medicines, 25 years of Samurdhi cash subsidy, or approximately two years of salaries of government employees at the present cost level.
Future generations mortgaged? A highly-indebted nation created?
It is clear that the mega project economy is run on debt. As a result of extravagant borrowings from China and other commercial financial markets to fund mega projects, non-concessional and commercial components within the public external debt increased from 4% in 2005 to 50% in 2013. As of now, China portfolio is equivalent to 10% of the entire economy. On the other hand, the Government compels the state banks to borrow overseas at excessive costs pushing future generations into a debt trap.
A good case study would be the National Savings Bank (NSB) bond issuance. In 2013, NSB borrowed $ 750 million at 9.0% and lent it to the Government at yields around 7%; effectively this means the money borrowed is making losses from the inception even without considering exchange rate risks.
Let us quote two tragicomedy projects that could potentially damage the country’s debt sustainability although the benefits to the society are not clearly established.
Hambantota seaport: Phase 1 full cost was $ 508 million (Rs. 66 billion). Since the inception, the total revenue generated up to 2014 November was Rs. 2,460 million, and the average revenue per year during the four year period was Rs. 615 million. The number of years to cover the loan for phase 1 with this revenue (without covering operating expenses and cost of funding) would be 107 years. However, the loans obtained for the first phase will need to be paid in less than 20 years.
Mattala airport: The cost was Rs. 27,000 million. Present revenue as stated in the Parliament is Rs. 16,185 a month. In order to recover the cost using this revenue (without covering operating expenses and cost of funding), it should take more than 139,000 years. However, the loans obtained for the project will need to be paid in less than 20 years. This money could have been used to pay the present tea crop subsidy for 99 years or increase the paddy price stabilisation allocation by another Rs. 1.0 billion and maintain it for 10 more years or increase the existing free medicine provision by 100%.
Of course, these projects have long gestations; and the revenues could increase in the medium term, making the pay back shorter. However, for the moment, they do not make sense from an economics perspective. The absence of a feasibility report and relevant project appraisals makes the entire process nonsensical.
As a result of extravagant borrowings at commercial interest rates, Sri Lanka is fast becoming ‘a highly-indebted nation’ according to United Nations – Economic and Social Commission for the Asia and Pacific’s debt framework. Both external debt stock and debt servicing volume has been moving towards the highly-indebted red threshold based on the country’s external sector receipts (Illustration 3.1 and 3.2).
How is the fiscal health? Do the numbers presented reflect a true state of affairs?
Official version is that the fiscal operations have improved under the present regime and that the deficit was brought down from 9.9 to 5.9% of GDP during the period 2009 to 2013. The government boasts that this has been done whilst maintaining the public investment high. Is this true? If so, how has this happened?
In fact, Sri Lanka’s fiscal revenue collection is a bad shape. As of end 2013, Sri Lanka became the lowest tax collecting regime in the Asian region (Illustration 3). While every meal of the ordinary citizenry is taxed, the government offers unbelievable tax bonanza’s to mega projects such as casinos and debt accumulating Colombo port city; another indication of the lucrative nature of these mega deals to top echelons of the government. Due to generous tax concessions, these mega project owners will start properly paying income and corporate taxes only after 25-30 more years. If the trend continues, one could expect that the government will be compelled to increase the taxes on essential items to manage the fiscal operations.
To minimise the impact of reduction of tax revenue, the government resorted to cutting expenditure. Understandably, the easiest targets were education, health and welfare offered to ordinary citizenry. This is due to less lucrative nature of these human capital investments compared to mega project expenditures; and the ordinary citizenry’s inaction in raising voice. Accordingly, over the last few years, the government continued to cut education and health expenditure. By 2013, Sri Lanka became the lowest spender on education and health as a percentage of national income; in the regional context.
It appears that the Ministry of Finance and Planning has introduced some new schemes to show a reduced fiscal deficit. One such major mechanism is the use of treasury guarantees. In recent years, state treasury stepped up providing guarantees to various state and non-state actors to borrow from the banking sector. In 2013, the outstanding volume of treasury guarantees exceeded 5% of GDP; an amount close to the entire budget deficit stated by the government for year 2013. This should have been adjusted in fiscal deficit and public debt. Public debt should at least be stated at 84% of GDP instead of 78%.
What does the Ministry of Finance do here? It simply transfers the fiscal expenditure that should have gone through state expenditure (expanding the budget deficit) to a privately owned/state controlled bank by way of a guarantee. The bank is funding based on the guarantee. Neither the borrower nor the treasury pays it back. So the reported fiscal deficit and the public debt get reduced at the expense of the innocent depositors’ money. It seems that, the Ministry of Defence and Urban Development Authority are freely accessing the Treasury to get whatever guarantees they want. It is surprising to see that the guarantee volume granted to the Kotalawala Defence University is larger than the guarantee volume granted to Paddy Marketing Board, Sri Lankan Airlines and the Ceylon Electricity Board; an indication that pet projects of rulers get priority over projects that deliver benefits to general public.
It is clear that a few people holding power are using the war victory as a license to do whatever they want for the benefit of themselves. They are hijacking the post-war economic prospects due to masses of the country through a mega deal economy. They are slowly paving the way towards destruction of Sri Lanka’s long standing value systems with immoralities such as casinos and drugs. They are damaging harmonious living among communities. They are fast creating a debt trap for the future generations to suffer. In the context, there is no better time than today for the citizenry of the country to come forward and save the nation and its generations from this devastation.
“The world suffers a lot… Not because of the violence of bad people…But because of the silence of good people” – Napoleon Bonaparte.
