Warning from IMF as Sri Lanka braces for ‘Greek week’

Yesterday, the government held last minute talks with the trade unions with a view to heading off strike action on Monday. The GMOA apparently had not been invited for this meeting.

The only way for this meeting to succeed would be for the PM to cave into all the demands of the unions. That hardly seems likely because if the government caves in, there will be no budget. The coming week will be an acid test for the government. If they manage to survive the standoff with the unions, they’ll be able to implement their budget proposals; if not we would have reached a new highpoint in the unfolding crisis.

No throwing of red herrings across the trail like the Thajudeen case, Avant Garde case or the Medamulana memorial seems to be working. For the first time since 1980 we seem to be facing a situation of a general strike even though the term is not being used. The next week will be the final week before the vote on the third reading of the budget is to be taken on Friday. So Monday to Friday next week will be a week of strikes and demonstrations.

It cannot but be noticed that the most visible leaders in the strike action planned for next week are the same union leaders who played a prominent role in the yahapalana campaign not so long ago. Having thus played a visible role in bringing the present government into power, if the members of their unions lose even the perks and privileges and welfare measures they enjoyed under the previous regime, that will end the careers of these individuals as union leaders. That is part of the reason for the froth and fury that we see today on the union front. Another reason of course is that these cuts were genuinely unexpected by those who voted for yahapalanaya. Election rhetoric led them to believe that once the yahapalana government comes into power, the waste and corruption of the Rajapaksa government will end and state employees and the general public will get even more privileges – not less – with all the money ‘saved’ by not having to maintain the Rajapaksa family.

For a while after January 8, the illusion of more privileges under yahapalanaya became a reality with a Rs. 10,000 salary increase for public servants, lower fuel costs and price reductions in certain essential foodstuffs. This could be maintained till the parliamentary election with great difficulty with increased borrowing and the reckless printing of money. But it cannot be continued any longer – not even till the conclusion of the local government elections three to four months hence. The yahapalana economic bubble has been pricked. As we pointed out last week, the Greek crisis was precipitated by the Greek public being unwilling to accept the inevitable austerity measures. If the Greeks quietly accepted the inevitable, there would have been some hardship but no Greek crisis.

By resisting the cuts in government spending and increases in taxes, the people of Greece have not done themselves any favours – they have only succeeded in prolonging and exacerbating their own agony. And so it will be with regard to Sri Lanka as well. The next week will see a spate of strikes by people unwilling to take what is coming lying down. So it’ll be a Greek week of sorts. But it should be borne in mind that the protests that are taking place next week will be on relatively mild cuts – the fertilizer subsidy may have been converted into a cash grant but there is still something on offer. The duty free vehicle permits for senior government servants will be given only once in ten years instead of once in five years, but it has not been abolished altogether. The same can be said about the school uniforms. It is only next year that the real cuts that will change the economic landscape of this country will come with the plans for sweeping privatization and the introduction of a contributory pension for new recruits to the government service. Given what is in store for us after the December holiday season, the next year may well become Sri Lanka’s Greek year without just stopping at Greek week commencing tomorrow.

IMF’s repeated warnings

The IMF has been issuing warnings to the government since March this year. On Wednesday last week, the IMF issued yet another warning to the government. In the context where the Prime Minister has said that the government will be going in for a bailout programme with the IMF next year, the IMF’s warnings gain special relevance. The IMF has not minced its words. They have said point blank that “The economic outlook remains uncertain, and will depend to a large extent on the course set for economic policies in the coming months.” This sentence is a telling indictment of the government. From March this year the IMF has been talking of the need for ‘policy clarity’ – a sentiment echoed by local financial analysts as well.

The stock market has been in a slow decline since the beginning of this year and every time the CSE marks a new low, local analysts blame ‘the lack of policy clarity’ for the decline. Nothing that the government does seems to be able to get rid of this alleged lack of policy clarity. This writer however thinks that there is policy clarity in this government – only not of the right kind. The first policy was to defeat Mahinda Rajapaksa by saying and promising anything that can win votes. That done, the objective was to win the parliamentary election by bribing the voter. That too having been achieved, now the policy is to hold on somehow, if necessary by taking back with one hand what was given by the other. In the middle of all this the government is trying to implement some of their actual policies which run counter to everything that they said and did in order to get into and consolidate their power. It is this mismatch that is being euphemistically described as a lack of policy clarity.

In the statement released last week, the IMF observed that the large increase in wages and salaries and the reduction in the prices of fuel and certain food stuffs had boosted disposable incomes and given rise to a sharp increase in the import of consumer goods giving rise to balance of payments problems and issues relating to government finances. Government finances took a double hit when there was a massive unplanned increase in expenditure on salaries and a simultaneous reduction in tax income from fuel and certain foodstuffs. What landed the government in this mess was their fear of the Rajapaksas. No doubt the cost of living was high during the latter stages of the Rajapaksa regime.

However in order to give the people some relief, all that was needed was a modest increase in government salaries and or a modest reduction in the prices of certain foodstuffs and fuel. But due to their fear of a Rajapaksa comeback, the new government gave the promised massive salary increase and huge cuts in fuel and foodstuffs which precipitated a consumer feeding frenzy with government servants rushing to spend their new salary increases on consumption goods like cars – leading not only to a crisis in government finances but also a serious balance of payments problem. As the IMF pointed out in September, the huge increase in imported consumption goods more than offset the savings in fuel imports because of the halving of the price of crude oil from the beginning of this year.

The IMF has warned the government over the deterioration in the balance of payments and the resulting loss of foreign exchange reserves. They have recommended that the rupee be allowed to depreciate and said that Central Bank intervention in the foreign exchange market to shore up the rupee should be reduced. This too is a measure that will reduce demand for imports. It has also been recommended that interest rates be increased gradually to put a dampener on the growth of private sector spending. What is primary concern to the IMF is the huge difference between government revenue and expenditure and the resultant growth in public debt.

The IMF has observed that Sri Lanka at this moment still has access to international (commercial) debt markets, but that these trends suggest that ‘financial risks for Sri Lanka have increased’. When this is decoded into layman’s language what it means is that we have not yet been shut out of the international commercial debt market like Greece, but are heading in that direction!

The IMF has called for ‘ambitious measures’ in the 2016 budget to put Sri Lanka’s fiscal position on a more sustainable footing. They have recommended an increase in taxes, and ‘reform’ of loss making state owned enterprises which are known to be a major drain on public finances. If the yahapalana government manages to bulldoze their proposal through, it will certainly be an important and worthwhile reform they have effected. Everything will depend on how the government reacts to the ‘Greek week’ commencing tomorrow.

Should the govt. back off?

Having said that, it may be pertinent to take a closer look at some of the budget proposals that have run into controversy. The withdrawal of government pensions for new recruits from 2016 onwards and the introduction of a contributory pension scheme is certainly one of the main causes for disquiet even though it is mentioned less often than the other issues. The reason why it may be mentioned less is because it does not apply to any of the government servants who are now out in the streets protesting but only to those who are yet to be recruited.

The biggest attraction in a government job is the pension which is paid as an expenditure item through the budget. Making this a contributory pension scheme is not altogether a bad idea, so that the pension will thereafter be paid through a pension fund instead of through the budget. University academics used to be on a provident fund scheme which was later turned into a contributory pension fund scheme which seems to be working well.

There is no reason why a similar pension fund will not be a good idea for other government employees as well. The trick perhaps is to ensure that the money in the fund is safe by ensuring that it lends the money at interest only to the government as the university pension fund does. If the money in the fund is guaranteed by the government, there is no reason why such a scheme will not work. When the interest rates are low the fund will earn only a small income and when the interest rates are high they will get a higher income. In the last years of the Rajapaksa regime, the Budget deficit and government expenditure was contracting. When the budget defict contracts, the demand for credit by the government also contracts. If the trend of reducing the deficit year by year had continued, it is difficult to foresee what the demand for credit by the government would have been a decade from now. So there is a theoretical question mark over whether pension funds will be able to function on the assumption that safe investments in government bonds will always be available. Be that as it may, thanks to the financial mess that the present government has created, this will not be a problem for the foreseeable future.

Abolishing the government pension and introducing a pension fund scheme for new recruits to the government service will make the government service less attractive and will reduce pressure on politicians to create government jobs. A contributory pension fund will level the playing field between the state and private sectors as far as employment goes, and this is not altogether a bad idea. Certainly it will improve productivity in the country. We have all heard of young people recruited into the government service simply to eliminate graduate unemployment idling away in various government offices with nothing to do. That certainly will be a thing of the past once the contributory pension fund for government servants is introduced. So this is an important reform which will be of benefit to this country in the medium to long term.

Another envisaged reform in the budget for 2016 is a sweeping programme of privatization more ambitious than any that we have seen before. Institutions that no previous government dared to touch have been earmarked for privatization including the areas of electricity generation, port and airport operations and so on. We know that some of these government institutions are Mafia-ridden outfits that have no compunctions about holding the country to ransom if it suits their purposes. The ideology of the left and left of centre SLFP somehow invests the government servant with more virtues than the private sector worker. Karl Marx invested the working class with greater virtues than the other classes but whether this proletariat was employed by the state sector or the private sector did not seem important to Karl Marx or the founders of socialist ideology.

The reason why local left parties and the SLFP have invested government employees and state enterprise with greater virtues is probably because the state enterprises are under the direct control of the political authorities and it is easier to organize the workers and employees of the government than those of the private sector. The only thing in this country that stands against privatization of state owned enterprises is the self interest of the employees of those institutions and the ideological partiality of the left movement and the SLFP towards government employees.

The self interest factor will always remain with us. But the left movement will have to rethink their attitude towards government employees in the light of what happened on January 8 this year. It was not the unlettered peasants who proved easiest to influence with promises of increased salaries and lower food costs but the government servants that the left movement and the SLFP had so assiduously protected and expanded. It was the oft heard boast of the Rajapaksa government that they doubled the number of state employees during their tenure. Well it is that very state service that turned against the Rajapaksa government for a mess of pottage. So perhaps a rethink of left and SLFP attitudes towards the state service is in order.

In the past, the affinity of the left/SLFP to the government service may have been due to the fact that the private sector always favoured the UNP which was seen to be good at economic management and private sector friendly. Today however everything has changed and it is under the left/SLFP of the Rajapaksas that the private sector thrived much more than under the UNP government of 2001-2004 and again in 2015 January to date. This is an era in which the behaviour and performance of political parties and the general public have changed so attitudes too should change and old shibboleths should perhaps be discarded.

Another factor that has to be taken into account is the mafia ridden nature of the state service. One hardly needs to say anything about the CEB. In the health sector we saw the unedifying sight of strikes and work to rule campaigns over trifling disputes between midwives and nurses. Such things never happen in the private sector. So there are many reasons why privatizing state owned services may not be a bad idea.

The abolition the fertilizer subsidy and its replacement with a cash grant may have to be reconsidered. This is not a consumption subsidy but a production subsidy. There is no nation on earth which does not subsidize agricultural production in one way or another. The same applies to the school uniforms. Instead of replacing the free uniform material scheme with vouchers for everybody, it may be more feasible to identify needy children in schools and provide free uniform material only to the parents of children who request same.

The duty free permits for government servants has also proved to be a contentious issue. There is no doubt about the fact that the duty free permit has contributed enormously to improving the living standards of senior government servants. When we were in university, it was not unusual to see our lecturers traveling by bus. This writer cannot remember a single lecturer who had a posh car those days. Today however, the new generation of university lecturers travel in brand new cars and SUVs which would have been used only by the very rich two decades ago. Furthermore, senior government servants were getting these vehicle permits once in every five years. The Rajapaksa government continued to provide these duty free permits even at the height of the war.

Today however due to the financial straits that the government finds itself in, it is unable to provide these duty free or concessionary permits once every five years but has pledged to provide them once every 10 years with a maximum if two per lifetime. There are two pressures acting on the government. One is the inability to forego the tax income from the import of vehicles. The other even more important consideration is the need to reduce or discourage imports to get the balance of payments situation into order. So perhaps the government has few options in this regard.

(Source: The Island)