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COPING with COPE : a message of hope

Eran Wickramaratne in an exclusive interview with the Sunday Island, a Colombo based weekly.

| by Maheen Senanayake

( July 28, 2013, Colombo, Sri Lanka Guardian) Quintessential banker (former) and silent activist, I have observed from afar Eran Wickramaratne for his silent pursuit of a brand of politics that is appealing to the intellectual and petit bourgeois and inspirational to the working class. The few debates we have been privy to on mass media are succinct, to the point and devoid of clouding of issues. He appears to have a vision and a touch of professionalism rarely seen on the Diyawanna. His cordial manner and sharp grasp of matters of a diverse nature is refreshing; yet for those accustomed to the vociferous ferocity of the traditional politician, perhaps too soft. But make no mistake, his approach has much merit and as we discussed many issues way into the night, his overarching grasp of issues and his ability to dig deep makes him a man to watch, a politician to listen to and most importantly a glimmer of hope as we will find out below.

Q: What is your view of the economy?

Two years ago in 2011 we experienced GDP growth of 8%. This I believe was direct dividend of peace and utilization of hitherto underutilized capacity. But otherwise the fundamentals have not changed and are experiencing what I call the strange phenomenon of jobless growth. So, has the economy transformed? Technically GDP growth should create jobs and unemployment should come come down. Well the government boasts of the latter because we are increasingly sending people to the Middle East, an environment which is harsh in the first instance and at very low wages while the government has been absorbing people into the public service. We also experienced a new metric. Figures show that employment in the private sector in the 2011 time frame has been virtually stagnant with losses of approximately 65,000 jobs in the private sector. On the other hand the government claims those seeking employment came down by approximately 195,00 during the period 2011-2012. First there is the strange phenomenon of jobless growth which is a clear indication of an economy that has not transformed and a dependence on Middle Eastern employment traffic.

Our economy is largely dependent of exports and we can clearly see these coming down by as much as 16% year-on-year. Now given that we have borrowed heavily for infrastructure development at alarmingly commercial rates, we have to be conscious of the fact that these loans have to be repaid in foreign exchange. So exports become doubly critical. We had an opportunity to grasp GSP. We could have applied for the new program of GSP starting in 2014. We have time till October to apply and the program starts in January. Then there is GSP plus for which we qualify. GSP plus gives us zero taxation which on the one hand provides not just foreign exchange but an opportunity to be very competitive. And all that we have to do is honour our international treaties.

What is inexplicable is we chose to send more and more of our citizens to the Middle East where they face the harshest conditions in an virtually unprotected environment but find it so difficult to honour the international covenants and treaties that we are signatories to. We live in a global community. We have closed down almost 450 factories during the last three years because of the loss of GSP. This argument that we are a middle income country and that we don’t need it is tosh. The fact of the matter is that when someone offers you an opportunity you take the advantage not because others want us to but for economic reasons. The real issue is that we are scared that we may not be compliant with our international obligations which we should honour because we are part of the international community. But look at the hypocrisy of this government. We don’t grab the GSP opportunity but keep sending people to the harsh environment of the Middle East. This is one of the issues that I feel very strongly about.

Q: What are your thoughts on business and the ease of doing business?

We must ask ourselves why exports are coming down. We have a drop in foreign investment. There is a host of issues over the ease of doing business. Whilst there are marginal improvements on some points, bigger issues such as taxation remain largely unresolved. Really speaking this is about what investors look for. And it is to do with the issue of confidence. One of the principle contributors to confidence is enforceability of contracts. In particular the government expropriation bill suddenly projected vulnerability of private property and one has to realize that these matters have long term implications. On the one hand there is foreign investment risk. There is the myth of a strong government as promoted by the government with a two thirds majority but investors tend to look at these issues differently. Investors don’t see this as a strong government with a two thirds majority as the state media would have you believe. Investors are interpreting it otherwise. For them it’s a weak government.

The parliamentary majorities are artificially created. They look at political stability and particularly look at the Rule of Law and it is only then that they look at the economic fundamentals.

Then there is the fact that we are competing for investment. Investment hasn’t really flown in. The growth is coming mainly from the the public investment program which is approximately 6% of GDP over a long period of time.

The State is advocating a state driven, state dominated model comparing ourselves to China and India. But essentially for this there has to be savings and savings in India is 35%, China 50% and for Sri Lanka it’s 15%. We do not really have savings to propel investment. Furthermore with losses in the public sector we have dis-savings of about 3%. With a capital output ratio of 3.4 % you will need around 4 billion dollars per annum plus. Ours is about 1 billion dollars. What do we do to meet that gap? We borrow heavily. The country is moving towards debt dependence. And the actual investments are in infrastructure. This can only cause cash flow problems. As long as you can borrow you can pay back. In this backdrop we are desperate for growth and easing of policy rates may not be eliciting the required reaction due to the fact that cost of capital is just one of the many factors.

Q: Lets talk about COPE of which you are a member. The report is out, what happens next?

Well for one thing the lack of a finance minister in the House is a great disadvantage. According to article 148, Parliament has full control over financial matters. We have a deputy minister in the House who remains largely unaware of most things. To further aggravate the situation we have no ‘Right to Information’ law. So I wonder how ordinary citizens have rights when a parliamentarian does not?

Q: What are your views on the SEC and the CSE?

Well it’s very disturbing (that in the SEC) we had two regulators being virtually forced out who have made it very clear that they had had no freedom to act. And we had these in the backdrop of issues such as the EPF and the NSB (investments in quoted companies). So to say the least they have been very disturbing.

And now we have a regulator who is directly involved in trading. We must draw the point here that members of the cabinet, judiciary and other regulatory bodies should not be in positions of conflicts of interest.

Q: What about constitutional appointees?

Furthermore, we draw attention to the distinction and responsibility of those holding office in Constitutional positions because constitutional appointees are responsible to parliament and not the executive. And I believe strongly that constitutional positions should be remunerated well. A few months ago I recommended at least Rs. 100,000 be paid to a magistrate, Rs. 200,000 for a district judge, Rs. 300,000 for a High Court judge, Rs. 400,000 for a Appellate Court judge and Rs. 500,000 for a Supreme Court judge. It is important to ensure the independence of those holding such office. This is just one example. Recently we recommended that the Auditor General be remunerated in keeping with the office he holds. Much more has to be done in this area.

Q: What is your view on the military being involved in commerce?

The military should not be in profit making enterprise. I am of the opinion that that would cause adverse effects on the market. If we are overstaffed (in the military), then we must invest in retraining this cadre for re-integration to society.

Q: What is your overall view of the COPE report?

Well for one thing, this is the second COPE report while CPA (Committee of Public Accounts) has not yet tabled a single (the first report was since presented). This COPE report is the outcome of one and half years of investigation into 299 state institutions and essentially speaking we are trying to force a response from the finance minister. Whilst we are never really entirely satisfied with the output, we must recognize the successes. For instance if you look at the recommendations for improvement, there are some critical points that will make the COPE exercise more relevant and effective. One of the main recommendations is for the committee to publish every three months. So the committee puts out a stream of reports as they finish investigations without waiting to finish the investigations of all the enterprises. This makes the information and findings more relevant and gives more time for action on those findings. So now we have asked to debate this in parliament and are awaiting dates for the debate. The COPE report says:

engaged in a highly competitive dynamic business environment. The severe losses of the Ceylon Electricity Board, Mihin Lanka Ltd. Etc. had been due to the under-selling of their services for not being able to pass the burden on to the General Public. IF this situation is not addressed promptly, the institutions like CEB, CPC, Mihin Lanka Ltd. Are on the verge of a collapse as entities which would in turn affect the banking sector in the country.

- Extract from the COPE report

Q: Can you cite a critical issue with the structure of public enterprises?

There is an increasing tendency to float (government) companies as private enterprises under the Companies Act. Normally all public enterprises are formed under acts of parliament. Whilst you could still form subsidiaries under the Companies Act, we are suggesting that you bring their accounts under the auditor general’s department and make them answerable to the auditor general where matters of finance are concerned.

Q: Can you identify any specific improvements in COPE?

I could point out the section on self assessment as a unique feature of this report particularly with a view to increasing the effectiveness of the committee.

We have recommended that we publish one month ahead the names of those establishments we intend to scrutinize so that the public can participate.

COPE intends to exercise authority and where cheating, corruption and fraud are involved the committee can where appropriate refer these matters directly to the Anti Bribery commission.

And COPE is primarily about finance and the committee is of the opinion that we must force a response from the finance minister to the report. This is where certain certain immunities given to the president must be removed.

I must highlight here that "We are not living in a democracy."

Q: One key finding that is relevant to all enterprises?

Professionalism is very important. We recommend that minimum qualifications be specified for positions in public enterprises. This will ensure that even if a friend or relative of someone in power is appointed the individual appointed to that office has the qualifications to do the job.

Q: There has been euphoria over Sri Lanka deciding to open up capital markets. What is your perspective?

I would be very cautious in opening up our capital markets particularly because we have questionable reserves.

Q: Present on the nominations committee the previous day, playing a participative role on decisions of who should be in and who should be out, Dayasiri Jayasekera was very much of the UNP the night before. So what happened or could have happened in those dark hours to elicit what we now know to be his crossover?

Well there are two schools of thought. I will touch upon one and leave the other to your imagination. I am convinced that no one crosses over for the benefit of the greater good. In this respect it is also important to make legislators financially independent because without financial independence it is impossible to make independent decisions while on the other hand in situations of dictatorships as we are experiencing now there is the likelihood of opening oneself to being cornered.

Q: Are you happy now that you are in politics?

Financially it’s a disaster but from a enjoyment perspective, well it’s very satisfying and it is definitely difficult to measure. Furthermore, I feel I am trying to do something and not just be a disconnected critique.


* The idea of tariff preferences for developing countries originated with the General Agreement on Tariffs and Trade (GATT) and UNCTAD beginning in the 1960’s. There were 4,800 products from 129 countries that received preferential duty free entry into the U.S.A. In 1990’s textile and agriculture was included even though it was sensitive to GATT’s primary promoters the U.S. and Europe.

* The EU has emerged the number one market for Sri Lanka’s export since 2007. Total value of trade was US $ 5.4 Billion in 2011, down to US $ 4.9 Billion in 2012. Exports from Sri Lanka to the EU was US $ 3.5 Billion in 2011, down to US $ 3.1 Billion in 2012. Sri Lanka’s trade to EU has steadily increased since 2004, with the exception of 2008 and 2012 where the European Financial Crisis was evident.

* SL’s major exports to the EU are apparel with 59% of the total exports, rubber products 8%, diamonds & gems 8%, tea 4% gloves 2%, solid rubber tyres 2% and tobacco products 1.9% consisting the balance.

* The standard GSP offers General Tariff reductions to developing countries.

* "GSP +" enhanced preferences meaning full removal of tariffs. These are granted to countries which ratify and implement international conventions on human & labour rights, environment and good governance.

* The European Union has adopted a reformed GSP law in October 2013. A new preference scheme will apply from 1st January 2014.

In February 2013, the EU released procedural rules on how to treat the applications for the GSP + arrangement.

The product categories will be revised over a two year period.

The new scheme will last for 10 years.

There are 29 developed economies (of which 15 are in the European Union) that welcome products from developing countries.

* The benefits of the scheme are :

1. The duty exemption means a more competitive price to the consumer in the importing country.
2. It enables the Sri Lankan exporter to increase its share of the market.
3. It provides new exporters with an edge to break into a market.

* If we do not have the advantage of "GSP +" our competitors in other countries for apparels, tea and rubber products will enhance their market share. 10 years from now our dominant industries will become marginal exporters to the EU and USA. It will be near impossible to recover from such loss of market share and competitiveness.

* While Sri Lanka will qualify to apply for "GSP+", there are conditions to be met. The rules of origin, and compliance with global treaties. An early decision to apply must be made as the industry needs to gear itself to take advantage of the tariff concession.

* Sri Lanka declined the GSP benefit in 2009 due to the ongoing military conflict and the country’s inability to comply with the conditions. The inevitable decision that the country took at that time has caused a loss of more than US $ 1 billion, closure of hundreds of factories and loss of multiple thousands of jobs. More than four years after the ending of the conflict we must re-engage our dominant trading partners in Europe and North America. The absence of GSP beginning 2014 will translate into a potential loss of about US $ 350 million per annum. The loss over 10 years can exceed US $ 5 billion. Given the state of the global economy and the declining exports from Sri Lanka the advantage of GSP has become more pronounced.

* GSP is the casualty of a failed foreign policy. There were understandable reasons to terminate the GSP preference in 2009. The Government’s inability to forge stronger links with our major export markets more than four years later may weigh-in on the decision to apply or not apply for the GSP. A foreign policy that does not improve our global standing in the community of nations, neither providing strength to our export markets is indefensible.

* When exports of goods reduce, the government is dependent more and more on the export of cheap human resources to work in harsh conditions in the Middle East. There are a staggering number of deaths of Sri Lankan workers in the Middle East annually and that’s not to talk of the abuses of Sri Lankan maids working overseas. Sri Lanka does not have the diplomatic muscle to safeguard the interest of our workers in the Middle East. Our dependence on Saudi Arabia and Kuwait is absolute. The indirect result of losing export market share in Europe and the USA reduces opportunities for workers within the country and poor prospects overseas.

11. Adverse Role of Trade Unions on Decision Making

The Committee is of the opinion that the role played by certain trade unions operating in some state institutions is such that they should be held responsible to a significant extent for the unsatisfactory performance of those institutions. Their influence in relation to recruitments is sometimes detrimental to the institution. The Water Supplies & Drainage Board has been unable to recruit more professionally qualified accountants due to the pressure of non professional accountants who demand a 50% quota of recruitments relating to accountants for the internal staff. Further, in most of the regional centres, there are no professional accountants other than the promoted staff. Therefore, the institution is faced with a serious difficulty in getting adjusted to the new accounting standards to be made effective from 2012 accounts.

- COPE Report p.21

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