Business Times

Lankan economic model needs drastic change

Sri Lanka’s current economic model is in dire need of restructuring, requiring a radical change in mindset, eliminating government waste and removing subsidies and special incentives, according to a panel of professionals.

At a Business Times panel discussion in the Sunday Times auditorium in Colombo this week, the Chairman of the Ceylon Chamber of Commerce (CCC) Anura Ekanayake, Director General of the Securities & Exchange Commission (SEC) Channa De Silva, President of the International Chamber of Commerce, Sri Lanka branch and Deputy Chairman of the Federation of Chambers of Commerce and Industries of Sri Lanka (FCCISL) Tissa Jayaweera and the Executive Director of the Consortium of Humanitarian Agencies (CHA) Jeevan Thiagarajah all agreed that Sri Lanka’s development path has been sidetracked by inefficiencies and that time for change has come.

Here is a compilation of their views:
Subsidies must stop –
Anura Ekanayake

Dr. Anura Ekanayake said the country has to bear in mind that ‘we’ are living in a globalised world and economic variables can be manipulated less. Sri Lanka is also trade dependent so there is less room available to carve out its own type of economy. “It is limited and that’s a reality but we have open trade relations and there is a lot Sri Lanka can do with that.” Dr. Ekanayake explained that there has been high inflation and high rates of poverty over the past few years with poor living standards in general.

The social and economic infrastructure is at very low l evels comparable to other countries of the same size and resources. With the end of the war, Dr. Ekanayake said Sri Lanka can get to a path of low budget deficit primarily from low recurrent expenditure. “One thing is that for decades and since the time of independence, Sri Lankans have been made to depend on subsidies and special incentives and the support of government and politicians. These have been given by imposing restrictions on business, trade and economic relations.”

He said Sri Lanka should come to a point where by and large, they don’t need subsidies and special incentives and all the impediments in the economy should be taken away so people can earn a better living.

“This doesn’t mean that there aren’t marginalized people or entire communities that need support or subsidies for a short period of time but they don’t need it for eternity,” he said. “Institutional structures in the country should be geared towards that. We must get into a culture that is not subsidy and special incentive oriented. Politicians love to promise people subsidies and special incentives but all of them are given by taking money from us via indirect taxes.”

Dr. Ekanayake explained that direct taxes constitute only 20% of the total income. The remaining 80% is taken directly from the public. He added that in some cases, public servants are paid more than equivalent level workers in the private sector. “The government must stop exploiting the masses for this nonsense of subsidies and incentives.”

In terms of business, Dr. Ekanayake said cost of production is so high primarily due to the inefficiency of the public sector. “Due to massive deficit financing to prop up a bureaucracy of a hundred ministers, secretaries and their cars, it is jacking up inflation. When inflation is jacked up, you cannot trade with a country that doesn’t have inflation at our level without some support. Inflation is driven by the budget deficit which has to be brought to a manageable level. We must stop wasting resources of this country for the consumption of some individuals.”

Dr. Ekanayake also pointed out that interest rates are critical and have to be above the rate of inflation. Lending rates can only go down when inflation and deposit rates also go down. Referring to the President’s order that state banks reduce interest rates on lending, Dr. Ekanayake said presidents cannot rule the interest rates of the country.

Need for competitive business plan --Channa De Silva
Channa De Silva said Sri Lanka needs a competitive business plan for each industry and a rationalization of the tax structure. “Taxes (personal and corporate) should be brought down to 15% or we are going to lose everything,” he said. “The tax net has to be broadened four folds over.” He also said that Sri Lanka’s entrepreneurs have been neglected by and large. “Universities don’t have programmes to train entrepreneurs. We need to have proper venture capital and banking systems that support entrepreneurs.”

He feels a better option is for Board of Investment (BOI) to give opportunities to local investors first before looking to foreign investors for ordinary industries like construction. He urged more prudence when selecting foreign investors that can uplift technology. “Most times, foreign investors have ordinary technology and value addition services.” Mr. De Silva also said imports have to be rationalized. “Sri Lanka will soon forget to manufacture.”

Mr. De Silva said a competitive business plan can be drawn up quickly but with the engagement of the private sector. “Leaders from industries should be involved.” He also said the President’s directive to state banks to reduce interest rates on lending is the single most critical decision made in terms of the economy.

No level playing field -- Tissa Jayaweera
Tissa Jayaweera said there is no level playing field for investment and people in Sri Lanka. “Human wrongs are being performed against people of this country. One sector pays taxes and the other does not. We try to encourage investment and growth where there is no level playing field for local investors.” He said there is discrimination for local investment and favoritism for foreign investment. In countries such as India and Japan, small industries supply the medium industries which in turn supply the big industries.

Mr. Jayaweera also said there is no proper infrastructure. “We are encouraging industries and industrialists to go to the North and East but how long does it take for you to go there and come back? It takes about 7 or 8 hours for those products to come. Obviously, the western province is the most economical province and has the better infrastructure. We need faster roads and faster trains. Trains are completely ignored for goods transfer.”

Mr. Jayaweera also pointed out that there is a lack of accountability in Sri Lanka. “Where is the productivity in the state sector? One of the most inefficient organizations in the country is driving it backwards.”

State must equalise opportunities -- Jeevan Thiagarajah
Jeevan Thiagarajah said development minus freedom and freedom minus development will not work. “It is a given that in society, it is difficult to have equal opportunities for everybody but the duty of the state is to try to equalize opportunities as much as possible.” He pointed out that there is not enough attention paid to the importance of the environment and energy. “We don’t pay enough attention to the fact that we have an extraordinary amount of water and waterways. A country with weak energy options will be weak.”

Mr. Thiagarajah said no economy can be efficient if it is not an integrated framework. For example, producers and suppliers must be efficiently linked together. Regional imbalances have to be corrected and rectified. “Sectoral elements of an economy, particularly the education sector is vital and part and parcel of our economy.”
He said a major issue is the external inflow of funds. The government is the biggest borrower from banks. “We are fairly good at raising funds outside and borrowing more to pay them off. We have to able to repay without defaulting.”

He also spoke on the inefficiencies of the state sector. The leading consumer of petroleum products is the state sector, he said. “In effect, the largest consumer is also subsidized.”

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