Two years on from when the Sri Lanka Freedom Party and Left coalition (United Peoples Front Alliance) candidate, Mahinda Rajapakse, narrowly won the Sri Lankan presidential election presents an opportunity to identify some trends in the present government’s economic policy.
The two issues that won the right-wing United National Party/Front encomiums from abroad were those that lost the election domestically: the Cease-Fire Agreement with the Tamil separatist Liberation Tigers of Tamil Eelam and neo-liberal economic strategies as articulated in its 2003 poverty reduction strategy paper (PRSP), ‘Regaining Sri Lanka’, prepared under the close supervision of the World Bank and for the consumption of the international donor community.
Following the November 2005 presidential contest, the Cease-Fire Agreement progressively became a legal fiction, routinely violated by both sides. The breakdown of an already troubled ‘peace process’ has brought enormous suffering to civilians in conflict and border zones from aerial bombardment, forced displacement, economic blockades and senseless killings of innocents by both sides mainly through extra-judicial killings, abductions leading to ‘disappearances’, and suicide and bus bombings.
These rough notes, work-in-progress, attempts to identify some features of the current government’s macro-economic policy which is the argument of its Left allies (Lanka Sama Samaja Party, Communist Party, Democratic Left Front) for their continued support and participation in it despite evident discomfort with its Sinhala nationalist fervour, chauvinist allies (Janatha Vimukthi Peramuna and Jathika Hela Urumaya), and intransigence on power sharing with the Tamil nation.
Whereas the previous regime’s economic policy orientation was neo-liberal, the United Peoples Freedom Alliance (UPFA) government has abandoned the 2003 PRSP and its diet of privatisation, deregulation of the labour market and borrowing from the International Monetary Fund and to a lesser extent the World Bank. Still, it is far from sceptical of capitalism and has hailed the “positive attributes of market economic policies”.
In January 2007 the IMF closed its country office being in no doubt of official disinterest in its loans and policy perspectives. No new borrowing has been sought from the International Bank for Reconstruction and Development (IBRD) for the same reasons as its disengagement from the IMF: to avoid the imposition of conditionalities that impose fiscal austerity measures limiting government spending.
The state divestment agency, the Public Enterprises Reform Commission was wound up in July 2007. Public utilities such as electricity and water as well as state banks are safe, for now, from privatisation.
Employer friendly labour law reforms have been suspended and private sector workers in formal employment continue to be protected by a labour relations regime crafted prior to economic liberalisation in 1977. The iconic Termination of Employment of Workmen Act that fetters employers in medium and large-scale enterprises from involuntary redundancies remains on the statute books. However, 70% of the labour force is in the informal sector and therefore unprotected by labour laws, and over 21% of the labour force are underemployed.
Exploitative conditions in free trade zones that continue to be the government’s strategy to attract foreign direct investment have resulted in 10 000 vacancies, in a context of open unemployment of 500 000.
Ironically, the labour supply shortage is encouraging some employers to be more humane to their workers for fear of losing workers and increasing financial incentives such as bonuses while continuing to flout labour laws on overtime, holidays and sick leave to meet production targets and buyers orders. Additionally, the government and larger employers are sensitive to labour and human rights conditionalities in preferential trading arrangements with key markets such as the European Union’s Generalised System of Preferences Plus (GSP +).
Industrial disputes measured in strike action is at historically low ebb, with most days lost accounted for by a single strike in plantations at the end of 2006 and the threat of strike action in that sector in 2007 averted through presidential directive to increase their daily wage to the fury of the private sector plantation companies and the Employers Federation.
Urban private sector companies and garment exporters are clearly concerned that the government will likewise compel them to increase salaries and cost-of-living allowances especially as trade union and political pressure mount.
The public sector remains a convenient means of soaking up unemployment particularly of graduates seeking job security and the prestige of white collar government jobs. Salaries at the lower levels are now more attractive than in the private sector and tax-free to boot.
The UPFA is pledged to increasing recruitment to the public sector but graduate unemployment remains at high levels and vocational and skills training do not guarantee permanent employment. Over-employment in government offices reduces the quality of work and skill enhancement even as the level of public service to citizens deteriorates for those without money or influence. Salaries and pensions account for 32% of overall government expenditure.
Although, in practice the UPFA’s economic policies are inconsistent with core tenets of the ‘Washington Consensus’, neo-liberal economic ideology commands influence in key ministries, many of which are headed by former or current members of the United National Party (UNP) who have defected over the years to the present regime namely Minister of Enterprise Development and Investment Promotion (Sarath Amunugama); Ministry of Trade, Marketing Development, Co-operatives and Consumer Services (Bandula Gunawardena); Minister of Export Development and International Trade (GL Pieris). The Central Bank Governor Ajith Nivard Cabraal, a political appointee, is also a former UNPer.
The present government is as committed to the ‘open economy’ as its predecessors since 1977. Its economic strategy is based upon accelerating export-led growth, increasing volumes of inward foreign investment and boosting remittances from migrant labour abroad.
The structure of the economy was radically transformed post-liberalisation in 1977 such that agriculture is now the lowest contributor to gross domestic product (16.8%); industry out-performs it (27%) but both sectors are dwarfed by the services sector (wholesale and retail trade, tourism and food, financial and business services, public administration and so on) that accounts for 56.2%.
Although 70% of Sri Lanka’s population live in rural areas and are directly or indirectly dependent on agriculture, the secular decline in agriculture’s contribution to the economy and its share of the labour force (32.2% in contrast to 26.6% in industry and 41.2% in services) is unlikely to be arrested by policies of this or any alternative government. This trend has significant negative consequences for incomes of rural and farming households (which constitute the overwhelming majority of the poor) as well as their employment opportunities.
Rural employment generation is reduced to the 300 garment factory programme that is predicated on women’s labour as in free trade zones (where women comprise 87% of the labour force). These factories are known to operate outside supervision of the Labour Department and therefore to violate minimum wage laws, restrictions on overtime, holiday and sick leave and pay and so on.
The government also seeks to promote commercially-oriented agriculture reminiscent of the agricultural promotion zones that were mooted by the UNP after 1977.
Recent plans to alienate 65 000 acres of land to a British company for sugar cane cultivation (for ethanol production) in Moneragala district have met with stiff resistance from farmers who face eviction from their lands and proletarianisation into landless labourers reliant on daily wages and the labour supply vagaries of seasonal requirements and world market prices.
A new element, but still familiar from the 1977-1980 era is the emphasis on infrastructure development. This has been eagerly supported by the Asian Development Bank. Mega-development projects in coal power generation (Puttalam, Hambantota and Trincomalee); dams for hydro-power generation (Upper Kotmale); ports and airports (Hambantota, Galle, Oluvil and Colombo South and Weerawila International Airport in Hambantota); roads and highways (for example, Southern, Kandy and Katunayake expressways) and irrigation schemes (Weheragala and Moragahakanda) have been estimated to cost Rs2 226 billion and are extremely popular in central government because of their scale (physical and financial) and therefore undoubtedly opportunities for kick-backs.
The displacement of people, degradation of the environment, unfair compensation for loss of property and livelihoods, sub-standard alternative dwellings and poor facilities in terms of access roads, health clinics, schools and income generation opportunities for affected communities are foreseeable consequences.
Chinese state capital has also assumed an increasing prominence in the government’s infrastructure projects such as the Norochcholai coal power plant and Hambantota port; while tenders for oil prospecting off the Gulf of Mannar have been awarded to the Chinese and Indian governments in what appears to be a politically calibrated calculation.
The decision to create an export processing zone exclusively for Indian companies in Trincomalee appears to be to assuage Indian anxieties over strategic access to China Bay naval harbour and combined with the Indian investment in the Sampur coal power plant is intended to draw the Indian government into the securitisation of the Eastern province conceivably through land and sea presence.
The UPFA government too measures development through achievement of high levels of economic growth. Its targets are at least 8% per annum from 2006-2012 and 9-10% thereafter. This is a quite a leap from 5% average growth rates over the last 20 years in the context of a conflict-torn country.
At these projected growth rates the government envisages Sri Lanka achieving middle-income status by 2016 boasting a per capita GNP of US$3 960 from the current level of US$1 355. (It neglects to advertise that at that level, Sri Lanka would become ineligible for soft loans from the International Development Association and trade preferences in export markets, both of which are critical to its growth strategy.)
Further, comparative and historical experience, including that of Sri Lanka, confirms that there is no simple correlation between growth and human development, such that increases in the former automatically lead to improvements in the latter.
Economic development is lop-sided and will continue to be so. Colombo and the Western province as a whole account for 51% of Sri Lanka’s gross domestic product underlining the skewed nature of economic growth and distribution of its benefits. This pulls rural people to urban centres such that by 2016, more than 50% of the population will be in urban settlements.
Indeed even four figure per capita income has not made a dent in the number of poor in Sri Lanka. 41.6% of the population survive on less than US$2 a day. Even if the official poverty line estimates that only 23% of the population as poor; the government’s own Samurdhi poverty alleviation programme covers 46% of the island’s population which is recognition in itself of the seriousness of the problem.
Embarrassed by this statistical discrepancy, the Government has announced that it intends to halve the number of Samurdhi beneficiaries but this will not reduce the number of poor correspondingly but rather abandon those without political patronage to ever greater insecurity and misery.
Between 1990/91 (base year) and 2002 income inequalities (measured in gini coefficient) have worsened by 30% in rural areas, 19% in urban areas and 24% all-island outside of the North and East.
Similar to previous governments, including the UNP/UNF, UPFA economic policies are predicated upon sustaining and increasing foreign exchange receipts from the 3 T’s: Textiles/Ready-Made Garments (US$ 3 080 million), Tea (US$881.2 million) and Tourism (US$410.3 million).
However, as 60% of the inputs in the RMG sector are imported, its net contribution to foreign exchange earnings is less significant than that of remittances from migrant labour overseas (especially West Asia) and therefore this government has been quite aggressive in seeking to expand employment opportunities abroad, and in non-traditional markets such as South Korea. It has recently (and quite belatedly) made noises about a minimum wage for housemaids of US$200 per month.
1.5 million Sri Lankans are temporarily employed abroad and 90% of this number in the Middle East. Historically, the majority have been women but this proportion has begun to decline from 75% in 1996 to 56% in 2006 as semi-skilled opportunities for men have increased especially in Qatar.
Still, as much as 70% of migrant labour is in unskilled work (mainly domestic service). Therefore, the Government proposes identifying opportunities for skilled labour particularly in nursing, shipping and information technology that are better remunerated and might exponentially boost remittances from abroad. However, formidable obstacles remain in the form of lack of international recognition to Sri Lankan qualifications as well as poor English-language proficiency. It is therefore likely into the foreseeable future that there will be a predominance of domestic labour, construction workers, masons and technicians in the occupational categories of migrant workers.
The upward revision of public sector salaries (Rs267 billion allocated in 2007 as compared to Rs186 billion in 2005) has not been able to arrest the deterioration in living standards through double-digit inflation and the burden of cost-of-living increases.
In January 2007, inflation peaked at 20.1% and has averaged in excess of 17% thereafter climbing back up to 19.6% in October 2007. The increase in oil prices in the world market and the inability of the Ceylon Petroleum Corporation to absorb further debt has led to petrol and diesel pump price increases for consumers with its knock-on effects on cost of public transportation and consumer goods.
The urban poor and middle-class in particular have been badly affected by regular price hikes to essential goods such as kerosene, gas, bread, milk powder, flour and so on. The weakness of the Consumer Affairs Authority and absence of a consumer rights movement is palpable as citizens depend on government to intervene with importers, producers and wholesalers to limit price increases.
The bloated but always famished defence budget officially accounted for 18.85% of all state expenditure in 2006 which is equivalent to combined spending on education (11.17%) and health (8.05%). From 2007 onwards, the military budget will far exceed that in education and health. Supplementary sums are also voted during the year taking actual spending to at least 50% more than budgeted. Parliamentary scrutiny of this expenditure is non-existent.
Sri Lanka’s top lenders in 2006, in descending order, were the Japanese Government (through Japan Bank of International Cooperation); Asian Development Bank; International Development Association; Citicorp Investment Bank; Government of Germany and HSBC Ltd.
The distribution of borrowing in 2006 was as follows: soft loans (US$932 million); grants (US$287 million); commercial loans (US$150 million) and programme loans (US$52 million).
The government’s strategy is to reduce its dependence on western donors and to look to Japan, China, India and Iran instead. These are countries that do not ask awkward questions on democracy and human rights.
Sri Lanka’s external debt in 2006 was US$12 235 million; debt service repayments were US$1 079 million and per capita debt was US$6 110. While the foreign debt/GDP ratio was 40.4%, the debt service/exports ratio was 7.1%.
The UPFA’s inability to interest the international donor community in its economic plans in the wake of its break with the PRSP as well as its militaristic approach to the national question has compelled it to borrow from the international money markets.
The October 2007 sovereign bond issue raised US$500 million that is claimed to be earmarked for infrastructure development. The interest rate of 8.25% is double the commercial lending rate and treble that of multilateral financial institutions. The loan has a five year maturity (in contrast to 10-20 and up to 40 year maturity on concessionary multilateral lending for e.g. WB International Development Association loans) while annual interest payments (US$41.25 million) will have to be made taking the total amount paid in 2012 to US$706.25 million.
Further such forays are now likely and Sri Lanka will slip ever deeper into the debt trap saddling future generations with debt service payments that erode even further social welfare budgets that are already stagnant. Chronic under-funding of public induces greater reliance on the market and private sector providers by citizens. The poor are therefore most vulnerable to shortfalls in access and quality of public sector provision of these services.
On an island that has prided itself on its social welfare indicators, one health survey in 2006 concluded that malnourishment among children was rife in Anuradhapura (23.2%), Hambantota (22.9%), Matale (19.3%), Mannar (17.3%) and Ratnapura (17.1%) districts. The prevalence of anaemia among pregnant women was 42.5% in Uva, 37.4% in Sabaragamuwa, 30.4% in Central, 29.5% in North Central, 28.7% in the North Western and 23.5% in Southern provinces. Even in the prosperous Western Province anaemia among pregnant women is as high as 29.3%. Sector wise, anaemia among pregnant women is high in the estate sector which is 49.1% in comparison to the urban sector where it is lower at 24.6%.
Some 17% of children still do not complete compulsory education (5-14 years) and science education at senior grades is limited to 25% of all schools. 18% of the population lack access to safe drinking water, including 49% of estate sector (Up-Country Tamil tea and rubber workers and their families); 19% of the rural population and 4% of the urban population. Access to water is of course not the same as continuous supply of safe, piped water. 33% of the population do not have access to sanitation facilities, rising to 67% in estate sector; 33% in the rural sector; and 22% of the urban population. 27% of the population are still not on the national grid and 25% among them are without access to electricity from any source.
The UPFA denounces strikes and social protest as “unpatriotic” when the war against terrorism is being waged. Its victories in the military theatre and hubris in eliminating the LTTE have infected its southern Sinhala constituency. Even unprecedented increases in the cost of living and electricity tariffs are greeted with resignation and self-sacrifice in the name of winning the war against Tamil separatism.
Ending the war is a precondition for livelihood and social justice issues assuming centre-stage but the poor, the marginalised and the exploited do not have the luxury of suspending struggles for survival to an indeterminate point in future; nor relief from any likely governmental alternative to the present regime.
REFERENCES
Bastian, Sunil (2007), The Politics of Foreign Aid in Sri Lanka: Promoting markets and supporting peace, Colombo: International Centre for Ethnic Studies.
Central Bank of Sri Lanka (2007), Annual Report 2006.
Ministry of Finance and Planning (2006), Mahinda Chintana: Vision for a New Sri Lanka – A Ten Year Horizon Development Framework 2006 – 2016.