Central Bank Governor Dr. Indrajit Coomaraswamy hit the nail on the head last week when he stated that the government must get its policy framework right, in terms of revenue, interest and exchange rates. He stressed the need to overhaul the regressive tax system and replace it with a model with better composition and sustainability. With interest rates also at unsustainable low levels, he noted the need to improve the quality of public expenditure.
Sustainability is the key word here and despite the government stating its continuous commitment to this aspect of governance, this is exactly what is lacking from the policy it has envisaged thus far. As espoused by the governor, the government needs to pay better attention towards improving its revenue and strengthening its existing base to offset the misdeeds of wasteful expenditure – the latest batch of proposed vehicle imports for parliamentarians being a case in point.
Sustainable economic policy is about protecting your revenues and supporting long-term growth whilst safeguarding the interests of the public, the environment and enterprise. In typical banana republic developing economies where political rhetoric and appeasing the minds of voters takes precedence to prudence, sustainable policies are often relegated to pipedreams. This has long been the Sri Lankan experience, where policymakers and pundits wax eloquent for votes and applause as opposed to implementing real policy.
Prudent policy must be all-encompassing and this is what is lacking. The government’s present predicament with the tobacco industry serves as a fine example. Since increasing the prices arbitrarily by 45 percent in October last year, the state has lost close to Rs.3 billion in revenue during the first quarter of 2017 from the legal industry. This is 37 percent below what the government projected to earn from this price revision, in addition to the Rs.11 billion loss in revenues during the fourth quarter of last year.
With incomes rising marginally versus inflation, Sri Lanka’s stick prices are the second highest in the Asia-Pacific region and the consumers are hard pressed to lay down a Rs.100 for just two fags. Some officials try to lay claim that people are smoking less and that these actions have contributed to a healthier population and less expenditure on the health sector which is far from reality. Smoking is an informed adult choice and Sri Lanka’s smokers continue to do so – except that there is far more incidence of illicit than legal products.
The shift from legal to illicit is happening at all levels and not just at the bottom of the pyramid as Colombo’s elite boastfully brandish their foreign packs often stating how they save Rs.10,000 per carton. At least they may have access to quality products via duty free, whereas the common man must smoke cheap but low-quality hazardous illicit cigarettes and beedis which cause significant harm. Where is the saving then?
Over 320 million illicit sticks have reportedly made it to the market during the first quarter of the year, amounting to a loss of Rs.13 billion in revenue to government. This amounts to a total reported loss of Rs.27 billion in six months from the tobacco trade alone, with no benefits in terms of real smoking incidence, health – plus, the loss of livelihoods to farmers and traders due to the Ceylon Tobacco Company scaling down operations following the price hike, whilst criminal illicit elements thrive. What sustainability.
There are several problems with the above situation. To begin with, the assumption that under a high price regime, demand would be inelastic. Consumers opted for cheaper illicit alternatives. Smoking has not reduced, thus, there is no saving on health expenditure – if there ever was any saving to be done. There is no record of how much the government spends solely on treating smokers, whereas total government expenditure on the health sector in 2016 was Rs.176 billion, whilst as per Ceylon Tobacco Company, the government would have earned Rs.125 billion this year at pre-October 2016 prices.
Did the government consult the company? Did they project a realistic consumption or revenue plan before they embarked on what was surely an ambitious cost revision? Did the government consider the impact of its effort on grassroots economies or the ensuing boom in illicit? With a loss of Rs.27 billion in six months and 37 percent off projection… it doesn’t appear to have done any of the above or any good.
Our island nation poses a number of similar examples, where better thinking, policy and planning needs to come in. For instance, we espouse a digital economy but data rates are on the rise. Sri Lanka has probably the most absurd vehicle imports and tax policies in the world, which is fuelled by the consumption mindset of our public.
What can we do better to control such wasteful spending and foreign exchange loss and how can we educate our public to transform them into active partners of a planned development process? Perhaps the pressures of a fractious coalition and how to stay in power for yet another term, warrants more effort than the future of a nation and its people.
On Tuesday, the Central Bank opted to hold the interest rates unchanged, as private sector credit growth slowed marginally. Sri Lanka must adopt a more long-term and prudent view with respect to its national policies. They are still far too short-sighted and focused on individual whims as opposed to serving the greater national good. As we close in on a decade since the end of the conflict in Sri Lanka, one must wonder what real progress we have made since then.
(Ajith Perera is a retired Superintendent and Director of Plantation Services, who has served with leading agriculture and plantation companies in Sri Lanka with over 35 years of experience)