By W.A Wijewardena –
Dr. W A Wijewardena
Replacing promised commission with a council
President Gotabaya Rajapaksa has appointed an Economic Council some 26 months after being sworn in as the President of the Republic. The Terms of Reference of the Economic Council is not available in the public domain which does not go well with the democratic governance system that he had promised to establish.
In his manifesto, titled, Vistas of Prosperity and Splendour, he had promised to establish an all-powerful economic commission, ‘National Policy, Planning, and Implementation Commission’ under the chairmanship of the President to steer the ailing economy. Pledging to disband the existing National Economic Council established by the former President Maithripala Sirisena and the Strategic Enterprise Management Agency established by his elder brother Mahinda Rajapaksa, the new commission was to undertake a vast array of work relating to the economy.
Its job was to formulate national policies and plans, determine public investment, formulate national development strategies, monitor the procurement process, and undertake project analysis and management. All these works were central to the national development process. The establishment of the commission, it was held, would ensure transparency in economic policy formulation and implementation.
India’s commissions are run by professional economists
The title of this commission implied that it was like the Planning Commission of India which functioned till 2014 when it was dissolved by the Modi Government. It was staffed by top class economists who had been drawn from both inside and outside India and its main function was to formulate, implement, and progress-monitor the five-year plans introduced as rolling plans. Considering the changing global economic environment, it was replaced by a new venture called National Institution for Transforming India or NITI Aayog.
It is to function not as an authority but as a public policy think tank that would advise the Government on the measures it should take to transform India to meet the challenges of the 21st century. Among many initiatives it has made so far include a 15-year Road Map, and 7-year vision strategy, and action plan. It is run by professional economists. A close counterpart in Sri Lanka to NITI could be the Institute of Policy Studies or IPS which has not received the due recognition from all the governments that had been in power ever since it was set up in late 1980s.
A council sans economics inputs: Use IPS as advisor
It is not clear where the newly established Economic Council will stand among these diverse models. Surely, it is not a commission as was promised. Nor is it a think tank of the Government since it is made up of top-level politicians whose competencies are not in economic policymaking but in other areas. The four outside members on the Council are not trained economists but those competent in other professions like public administration or accounting.
Hence, it can be categorised as a Cabinet Sub-committee on Economic Affairs like the Cabinet Committee on Economic Management that functioned under Prime Minister Ranil Wickremesinghe in the previous Yahapalana Government. Hence, to feed it with the necessary economics input, it is advisable that the Council relies on a think tank like IPS which is independent, objective, and staffed with top-class economists. Without this input, the Council is likely to run into the problem of making erroneous decisions as pronounced by the 19th century French Economist, Frederic Bastiat.
He distinguished a good economist from a bad economist by referring to his ability to see things to be foreseen in addition to what can be seen; a bad economist just sees only what can be seen and does not have a view on the long-term consequences of a policy. What this means is that if the Council is to make good decisions it should be aware of all the subsequent consequences of its policy actions, both favourable and adverse. If this is not done, like the conversion of Sri Lanka’s agriculture to organic farming overnight, the economic costs of the policy actions of the Council will be enormous and irrecoverable.
Worst economic catastrophe in post-independence history
At present, Sri Lanka is undergoing the worst economic catastrophe in its post-independence history. The real economy is shrinking with a negative or a near zero economic growth, inflation is rising its ugly head with food inflation running at 25%, foreign reserves are a pittance forcing the country to seek hand-outs from countries like Bangladesh, rupee is under pressure for a mega depreciation, the insane attempt by the Central Bank to fix it artificially without reserves at 230 per dollar has given rise to a lucrative black market, and all essential items like fuel are in short supply making long queues for them a daily occurrence.
The source to all these economic issues can be traced back to three policy errors made by the Gotabaya Rajapaksa administration. One is the offering of an unsolicited attractive tax concession to income taxpayers and value-added taxpayers causing an unrecoverable loss in tax revenues. The second is the attempt at converting the country’s agriculture to organic farming amidst wise counsel by scientists against it. The third is the refusal to seek assistance from the IMF to overcome the mounting external sector crisis and, instead, relying on an illusive ‘home-grown policy’ for the same.
Treasurer to Parakramabahu I: ‘Your Majesty, your Treasury is empty’
It may be useful for the Council to look at the tax issue closely and identify how the Government’s top policymakers have misled the President. A good example can be found from Sri Lanka’s history. According to Chulavamsa, when Parakramabahu, the First, became the overlord of the Dhakshina Desha, the enterprising young king wanted to bring the whole island under one rule. He had asked the Treasurer of the Dhakshina Desha, the counterpart of the head of modern treasury in Sri Lanka, whether he had enough resources to wage war against other overlords.
That Treasurer had been an honest man when it came to economic advice unlike those who advise the President today. The Treasurer had opened the Treasury and showed the young king and said that it was empty. Chulavamsa says the king acquired the necessary resources not by taxing people but by boosting international trade by setting up, perhaps the first ever in Lanka, a special export processing zone called the Antharanga Dhura.
This wise counsel was not given to President Gotabaya Rajapaksa by his economic advisors. They would have told him that his Treasury was empty with a Consolidated Fund running at a massive deficit of Rs. 438 billion at end-2019, up from Rs. 304 billion a year ago. Because of the shortfall in revenue due to tax concessions, the shortfall in the Consolidated Fund shot up to Rs. 636 billion in 2020. The Contingency Fund for meeting emergency expenditure programs was just another pittance at Rs. 500 million. The Government had been financing itself on a day-to-day basis by raising a massive overdraft from the two state banks amounting to Rs. 194 billion. In 2020, this also increased to Rs. 463 billion.
These overdrafts were outside the Government’s normal borrowing program. Hence, what was necessary was not to offer tax cuts but to increase taxes. The misled Gotabaya Rajapaksa introduced this tax cut to his own peril. The dip in the tax revenue was more than Rs. 500 billion a year. As a result, the tax revenue fell from 12% of GDP to 9% in 2020 and it is continuing at that level since then.
Contd....
Dr. W A Wijewardena
Replacing promised commission with a council
President Gotabaya Rajapaksa has appointed an Economic Council some 26 months after being sworn in as the President of the Republic. The Terms of Reference of the Economic Council is not available in the public domain which does not go well with the democratic governance system that he had promised to establish.
In his manifesto, titled, Vistas of Prosperity and Splendour, he had promised to establish an all-powerful economic commission, ‘National Policy, Planning, and Implementation Commission’ under the chairmanship of the President to steer the ailing economy. Pledging to disband the existing National Economic Council established by the former President Maithripala Sirisena and the Strategic Enterprise Management Agency established by his elder brother Mahinda Rajapaksa, the new commission was to undertake a vast array of work relating to the economy.
Its job was to formulate national policies and plans, determine public investment, formulate national development strategies, monitor the procurement process, and undertake project analysis and management. All these works were central to the national development process. The establishment of the commission, it was held, would ensure transparency in economic policy formulation and implementation.
India’s commissions are run by professional economists
The title of this commission implied that it was like the Planning Commission of India which functioned till 2014 when it was dissolved by the Modi Government. It was staffed by top class economists who had been drawn from both inside and outside India and its main function was to formulate, implement, and progress-monitor the five-year plans introduced as rolling plans. Considering the changing global economic environment, it was replaced by a new venture called National Institution for Transforming India or NITI Aayog.
It is to function not as an authority but as a public policy think tank that would advise the Government on the measures it should take to transform India to meet the challenges of the 21st century. Among many initiatives it has made so far include a 15-year Road Map, and 7-year vision strategy, and action plan. It is run by professional economists. A close counterpart in Sri Lanka to NITI could be the Institute of Policy Studies or IPS which has not received the due recognition from all the governments that had been in power ever since it was set up in late 1980s.
A council sans economics inputs: Use IPS as advisor
It is not clear where the newly established Economic Council will stand among these diverse models. Surely, it is not a commission as was promised. Nor is it a think tank of the Government since it is made up of top-level politicians whose competencies are not in economic policymaking but in other areas. The four outside members on the Council are not trained economists but those competent in other professions like public administration or accounting.
Hence, it can be categorised as a Cabinet Sub-committee on Economic Affairs like the Cabinet Committee on Economic Management that functioned under Prime Minister Ranil Wickremesinghe in the previous Yahapalana Government. Hence, to feed it with the necessary economics input, it is advisable that the Council relies on a think tank like IPS which is independent, objective, and staffed with top-class economists. Without this input, the Council is likely to run into the problem of making erroneous decisions as pronounced by the 19th century French Economist, Frederic Bastiat.
He distinguished a good economist from a bad economist by referring to his ability to see things to be foreseen in addition to what can be seen; a bad economist just sees only what can be seen and does not have a view on the long-term consequences of a policy. What this means is that if the Council is to make good decisions it should be aware of all the subsequent consequences of its policy actions, both favourable and adverse. If this is not done, like the conversion of Sri Lanka’s agriculture to organic farming overnight, the economic costs of the policy actions of the Council will be enormous and irrecoverable.
Worst economic catastrophe in post-independence history
At present, Sri Lanka is undergoing the worst economic catastrophe in its post-independence history. The real economy is shrinking with a negative or a near zero economic growth, inflation is rising its ugly head with food inflation running at 25%, foreign reserves are a pittance forcing the country to seek hand-outs from countries like Bangladesh, rupee is under pressure for a mega depreciation, the insane attempt by the Central Bank to fix it artificially without reserves at 230 per dollar has given rise to a lucrative black market, and all essential items like fuel are in short supply making long queues for them a daily occurrence.
The source to all these economic issues can be traced back to three policy errors made by the Gotabaya Rajapaksa administration. One is the offering of an unsolicited attractive tax concession to income taxpayers and value-added taxpayers causing an unrecoverable loss in tax revenues. The second is the attempt at converting the country’s agriculture to organic farming amidst wise counsel by scientists against it. The third is the refusal to seek assistance from the IMF to overcome the mounting external sector crisis and, instead, relying on an illusive ‘home-grown policy’ for the same.
Treasurer to Parakramabahu I: ‘Your Majesty, your Treasury is empty’
It may be useful for the Council to look at the tax issue closely and identify how the Government’s top policymakers have misled the President. A good example can be found from Sri Lanka’s history. According to Chulavamsa, when Parakramabahu, the First, became the overlord of the Dhakshina Desha, the enterprising young king wanted to bring the whole island under one rule. He had asked the Treasurer of the Dhakshina Desha, the counterpart of the head of modern treasury in Sri Lanka, whether he had enough resources to wage war against other overlords.
That Treasurer had been an honest man when it came to economic advice unlike those who advise the President today. The Treasurer had opened the Treasury and showed the young king and said that it was empty. Chulavamsa says the king acquired the necessary resources not by taxing people but by boosting international trade by setting up, perhaps the first ever in Lanka, a special export processing zone called the Antharanga Dhura.
This wise counsel was not given to President Gotabaya Rajapaksa by his economic advisors. They would have told him that his Treasury was empty with a Consolidated Fund running at a massive deficit of Rs. 438 billion at end-2019, up from Rs. 304 billion a year ago. Because of the shortfall in revenue due to tax concessions, the shortfall in the Consolidated Fund shot up to Rs. 636 billion in 2020. The Contingency Fund for meeting emergency expenditure programs was just another pittance at Rs. 500 million. The Government had been financing itself on a day-to-day basis by raising a massive overdraft from the two state banks amounting to Rs. 194 billion. In 2020, this also increased to Rs. 463 billion.
These overdrafts were outside the Government’s normal borrowing program. Hence, what was necessary was not to offer tax cuts but to increase taxes. The misled Gotabaya Rajapaksa introduced this tax cut to his own peril. The dip in the tax revenue was more than Rs. 500 billion a year. As a result, the tax revenue fell from 12% of GDP to 9% in 2020 and it is continuing at that level since then.
Contd....
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