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A citizen’s understanding of the current economic crisis and the IMF programme

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by Dhammike Amarasinghe

Synopsis

The current economic crisis is not something brought about solely by corruption in high places or some recent policy mistakes of the Gotabaya administration. While those matters certainly did exacerbate the situation, the crisis itself has been long coming.

Two features of our economic situation that needs to be noted are: 1. Government expenditure has been persistently in excess of its revenue, 2. Imports have also been persistently above exports. Both together indicate that persistently we have been living beyond our means. It is time to make corrections.

The immediate problem was the drying up of foreign exchange reserves resulting in our having to default our foreign debts and not being able to import essentials. The IMF programme is only a helping hand to get out of that crisis. We need to put our house in order by implementing the various action points we have agreed with the IMF to execute, while using the IMF money (and other donor assistance it might trigger)to meet part of our external fund needs as well as some part of domestic fund requirements, until we can again stand on our feet.

However, this ‘firefighting exercise’ will have to be followed up with a longer term reform agenda, if we are to set ourselves on the path to prosperity. Two items of the IMF programme that are not often highlighted are 1. the Social Safety Net for the impoverished and the anti-corruption agenda.

It is essential for all citizens to have a correct understanding of the current economic crisis and the programme of action agreed to with the IMF, because in the unprecedented crisis that we are steeped in, the solution of the problem or problems depends very much on citizen support – support, NOT for any individual or party, but for a course of action that is likely to lead to a solution. It is no time for political games. Emotional rhetoric has to be ignored. What is at stake is – without exaggeration – the future of our people including generations to come. And not whether some individual (that one may happen to dislike) will get credit or whether some party wins the next election. That would be an extremely foolish attitude. This is a make or break situation.

Educating the public on such issues is actually the responsibility of the expert. However I have not seen yet a comprehensive all-embracing survey of the current situation – from its beginnings, intended for the layman, written by any expert, What we have seen are expert analyses of particular aspects of the situation, not always fully understandable by the ordinary person. I am no expert. However, I shall try to set down my understanding of these matters, acquired from reading the relevant documents and the analyses of experts. (I intend to do this in Sinhala later) Some knowledge of the basics of economics acquired many years ago at the university did help. Assisting ones compatriots as best as one can, to understand the crisis and what needs doing to overcome it, is I think a civic duty. Experts are welcome to make any corrections necessary.

At the outset itself, I must say that the first point in my understanding of the current situation is that it has been long in coming, only accelerated by some incorrect policy decisions made by the Gotabaya administration. My understanding is also that although corruption in high places has exacerbated matters, it is not the root cause of the present malaise. I shall also try to show that corruption may not be limited to the stealing, misappropriation or misuse of public funds in various ways by the high-ups and others but also includes, according to some people, a certain feature of day to day normal commercial practice. I shall elaborate on this in due course.

The Immediate Problem

To take the immediate problem first, before going on to the root cause: that problem is our inability to repay our public debt (i.e the debt of the government and government entities) to various creditors, owing to the fact that we do not have the foreign exchange to make those payments. Apart from our inability to settle our foreign debt, the inadequacy of foreign exchange also resulted in our inability to import many essentials like medicine, some food items, fuel, and cooking gas – although the situation has now eased somewhat. We have survived so far only because of the helping hand given by our friendly neighbours. Why we came to such a pass is the root cause of the crisis that we need to explore at the end

The foreign debts are owed by us to (a) various muti-lateral agencies like the IMF, World Bank and ADB (b) various foreign governments such as those of India, China, Japan, Iran, Hungary and (c) to holders of bonds ( meaning acknowledgments of our borrowings) issued by the government and referred to as International Sovereign Bonds or ISBs). These are borrowings made in the international bond market. While the vast majority of these bond holders are foreign investors, there are some locals like local banks and funds like the EPF and ETF who also hold them. In addition, these locals have also lent to the government in local currency by way of Treasury Bills and Treasury Bonds. The Central Bank itself is a large holder of these Treasury Bills and Treasury Bonds. This matter of local creditors has complicated matters, as will be clarified later. Our total debts are in excess of US $ 50 billion (different figures are given from time to time based on differing definitions and categorizations but it is safe to say that it is over $ 50 billion, just to indicate its huge proportions).

By April last year (2022) the authorities belatedly recognized officially that we do not have sufficient foreign exchange to repay the loan installments and interest payments that were falling due. Realization of this dire situation should have dawned on those concerned much earlier, but for some unknown reason the authorities at the time fought shy of recognizing it. Anyway, in April last year, we officially declared to the world that we are unable to repay our external debt as it falls due and that we need to re-structure it. However, our repayments due to the multilateral organizations like the World Bank were exempted since the international practice is that such repayments are normally exempted from default declarations. Our debt repayments to foreign governments and ISB holders stand suspended at present.

IMF loan and IMF programme

We then applied to the IMF for a loan to enable us to get out of this situation, that is, to re-instate ourselves to a position that will enable us to again start repaying our debts ( referred to technically as ‘ regaining debt sustainability’) It is essential to understand this point well. The IMF facility was NOT meant to be a loan to develop the country. It was solely for the purpose of getting out of the hole that we had stupidly dug for ourselves, So people who are now shouting from public platforms ” We can’t develop the country through IMF loans” are simply talking through their non-existent hats! It was never meant to be so.

The strategy to be adapted is to request our creditors to agree to ‘re-structure’ our loans (to be explained) and for the IMF to lend us funds, partly to make essential external payments and partly to support the local budget, to tide over the period that it takes us to put our house in order. In order to lend funds to us, IMF insists on our following a mutually agreed course of action (usually referred to as ‘conditionalities’), to ensure that we will not again go and dig ourselves a pit and fall therein. Isn’t that reasonable?

To explain the ‘re-structuring of loans’: It can take one of three forms or some combination of them. 1. To allow the loan to be repaid over a longer period after an initial postponement 2. To reduce the rate of interest 3. To reduce the amount owed (referred to generally as a ‘hair cut’)

The IMF will give us this loan (roughly equivalent to US $ three billion) over a period of four years, in installments, depending on our implementing the agreed course of action. One of the key elements of this course of action is our undertaking to pursue negotiations with our creditors to re-structure our debt. We have to do that and not the IMF. Assurances have already been given by our creditors that they will co-operate with us in that process (India, China, Japan and some other countries and an ad-hoc organization of some of our International Sovereign Bond holders have been good enough to give those assurance to the IMF and to us. It must also be noted that our involvement with the IMF also gives these creditors an assurance about our conduct and our future capacity to re-pay them. In other words, our agreement with the IMF has given us some degree of respectability in the international financial scene.

IMF Conditionalities

It is necessary now to consider what the other IMF conditionalities are (We should remind ourselves that these conditionalities are what we have agreed to, in a lengthy process of negotiations that our authorities had with an IMF team. There would have been give and take during that process. For instance it transpired recently that at one point the IMF suggested that the tax free level of personal income be fixed at Rs. 43,000 per month, before the present Rs, 100,000 was finally agreed to. Admittedly of course our bargaining position was weak because of the mess we had created for ourselves.

As a background to the consideration of the conditionalities, it is necessary to first take note of a certain feature of our government’s budget. In the 2023 Budget (before the new tax proposals came into effect) the total government revenue was estimated at Rs. 3,456 billion while the total expenditure was to be Rs. 7,879 billion. So, there was a deficit of Rs. 4,422 billion (more than even the revenue itself). Even if we take out the capital expenditure in the budget estimates and take the recurrent expenditure only (salaries, pensions, other office expenditure, social welfare expenditure and debt servicing – i.e. without providing for building new hospitals, schools, roads etc.) it amounted to Rs.4,634 billion, still Rs,1,178 billion in excess of revenue. The payment of salaries, other administrative expenditure, pensions, and servicing of past debt alone accounted for 142% of the revenue. We must wonder how a country can run like that. Is it any wonder that we are in this mess and in debt?

At this point we need also to realize that there is not much scope for reduction of recurrent expenditure because the bulk of it consists of salaries, pensions, social welfare expenditure, repayment of debt to the banking system etc. (The World Bank in its latest ‘Sri Lanka Development Update 2023’ says: “At less than 20% of GDP, Sri Lanka’s expenditures are not high by international standards” thus underlining further the point that the solution to the budgetary problem lies more in the direction of revenue enhancement rather than in expenditure reduction, contrary to popular perceptions. However it is true that in a correct ordering of priorities we must refrain from completely ludicrous expenditures such as those on grandiose Independence celebrations, with tanks and all (!), in a country steeped in debt.

There was therefore a need for increasing government revenue. That is the rationale for increasing taxes. In addition to the income tax already imposed there will be a property tax and a gift and inheritance tax to be introduced by 2025, a tax that will fall on the top bracket of the really wealthy and not likely on wage earners and the majority of professionals. True enough, the new taxes are quite burdensome in the context of the general increase in the cost of living. It is hoped that the authorities will consider adjustments. However any such adjustments will be feasible only within the framework of various financial targets that the IMF programme has set, in order to achieve financial solvency within a reasonable time period.

For instance, it is required that the government Budget upgrades itself from its eternal deficit position (i.e expenditure exceeding revenue year after year resulting in the government getting more and more into debt) and attains a surplus of 0.8 % of GDP in 2024. increasing it to 2.3% in 2025 and beyond (this is what is called a primary surplus which does not take debt repayments into account) Any deviation from these carefully set down targets will only prolong the agony and condemn us to continue suffering in the long term.

Although as pointed out earlier there is not much scope for reducing government expenditure, the government is obliged under the IMF programme, at least to keep to the present level of expenditure. Thus it has some space only to make less than full compensation for inflation in respect of salaries and pensions. Anyway, in respect of other aspects of government administration most citizen are well aware that there is much scope for reducing inefficiencies, wastage and acts of corruption, leading not only to reductions in expenditure but to increased efficiency in delivery of services. In this connection one hopes that the government will embark on a full scale modernization and rationalization of its institutions and systems and procedures. In this endeavour it needs to allow for the introduction of digitization in a big way.

(To be continued)

(After a long public service career the writer retired in 1998 as Additional Secretary to President Chandrika Kumaratunga. He has served post-retirement as Chairman of the Sri Lanka Insurance Corporation and was an Advisor to President Mahinda Rajapaksa from 2005 to 2015)



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Govt. needs to explain its slow pace

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President Dissanayake

by Jehan Perera

It was three years ago that the Aragalaya people’s movement in Sri Lanka hit the international headlines. The world watched a celebration of democracy on the streets of Colombo as tens of thousands of people of all ages and communities gathered to demand a change of government. The Aragalaya showed that people have the power, and agency, to make governments at the time of elections and also break governments on the streets through non-violent mass protest. This is a very powerful message that other countries in the region, particularly Bangladesh and Pakistan in the South Asian region, have taken to heart from the example of Sri Lanka’s Aragalaya. It calls for adopting ‘systems thinking’ in which there is understanding of the interconnectedness of complex issues and working across different sectors and levels that address root causes rather than just the symptoms.

Democracy means that power is with the people and they do not surrender it to the government to become inert and let the government do as it wants, especially if it is harming the national interest. This also calls for collaboration across sectors, including political parties, businesses, NGOs and community groups, to create a collective effort towards change as it did during the Aragalaya. The government that the Aragalaya protest movement overthrew through street power was one that had been elected by a massive 2/3 majority that was unprecedented in the country under the proportional electoral system. It also had more than three years of its term remaining. But when it became clear that it was jeopardizing the national interest rather than furthering it, and inflicted calamitous economic collapse, the people’s power became unstoppable.

A similar situation arose in Bangladesh, a year ago, when the government of Sheikh Hasina decided to have a quota that favoured her ruling party’s supporters in the provision of scarce government jobs to the people. In the midst of economic hardship, this became a provocation to the people of Bangladesh. They saw the corruption and sense of entitlement in those who were ruling the country, just as the Sri Lankan people had seen in their own country two years earlier. This policy sparked massive student-led protests, with young people taking to the streets to demand equitable opportunities and an end to nepotistic practices. They followed the Sri Lankan example that they had seen on the television and social media to overthrow a government that had won the last election but was not delivering the results it had promised.

CONSTITUTIONAL PROCESS

Despite similarities, there are also major differences between Bangladesh and Sri Lankan uprisings. In Sri Lanka, the protest movement achieved its task with only a minimal loss of life. In Bangladesh, the people mobilized against the government which had become like a dictatorship and which used a high level of violence in trying to suppress the protests. In Sri Lanka, the transition process was the constitutionally mandated one and also took place non-violently. When President Gotabaya Rajapaksa resigned, Prime Minister Ranil Wickremesinghe succeeded him as the acting President, pending a vote in Parliament which he won. President Wickremesinghe selected his Cabinet of Ministers and governed until his presidential term ended. A new President Anura Kumara Dissanayake was elected at the presidential elections which were the most peaceful elections in the country’s history.

In Bangladesh, the fleeing abroad of Prime Minister Hasina was not followed by Parliament electing a new Prime Minister. Instead, the President of Bangladesh Mohammed Shahabuddin appointed an interim government, headed by NGO leader Muhammad Yunus. The question in Bangladesh is how long will this interim government continue to govern the country without elections. The mainstream political parties, including that of the deposed Prime Minister, are calling for early elections. However, the leaders of the protest movement that overthrew the government on the streets and who experienced a high level of violence do not wish elections to be held at this time. They call for a transitional justice process in which the truth of what happened is ascertained and those who used violence against the people are held accountable.

By way of contrast, in Sri Lanka, which went through a legal and constitutional process to achieve its change of government there is little or no demand for transitional justice processes against those who held office at the time of the Aragalaya protests. Even those against whom there are allegations of human rights violations and corruptions are permitted to freely contest the elections. But they were thoroughly defeated and the people elected a new NPP government with a 2/3 majority in Parliament, many of whom are new to politics and have no association with those who governed the country in the past. This is both a strength and a weakness. It is a strength in that the members of the new government are idealistic and sincere in their efforts to improve the life of the people. But their present non-consultative and self-reliant approach can lead to erroneous decisions, such as to centrally appoint a majority of council members, who are of Sinhalese ethnicity, to the Eastern University which has a majority of Tamil faculty and students.

UNRESOLVED PROBLEMS

The problem for the new government is that they inherited a country with massive unresolved problems, including the unresolved ethnic conflict which requires both sensitivity and consultations to resolve. The most pressing problem, by any measure, is the economic problem in which 25 percent of the population have fallen below the poverty line, which is double the percentage that existed three years ago. Despite the appearance of high-end consumer spending, the gap between the rich and poor has increased significantly. The day-to-day life of most people is how to survive economically. The former government put the main burden of repaying the foreign debts and balancing the budget on the poorer sections of the population while sparing those at the upper end, who are expected to be engines of the economy. The new government has to change this inequity but it has little leeway to do so, because the government’s treasury has been emptied by the misdeeds of the past.

Despite having a 2/3 majority in Parliament, the government is hamstrung by its lack of economic resources and the recalcitrance of the prevailing system that continues to be steeped in the ways of the past. President Dissanayake has been forthright about this when he addressed Parliament during the budget debate. He said, “the country has been transformed into a shadow criminal state. While we see a functioning police force, military, political authority and judiciary on the surface, beneath this structure exists an armed underworld with ties to law enforcement, security forces and legal professionals. This shadow state must be dismantled. There are two approaches to dealing with this issue: either aligning with the criminal underworld or decisively eliminating it. Unlike previous administrations, which coexisted with organized crime, the NPP-led government is determined to eradicate it entirely.”

Sri Lanka’s new government has committed to holding local government elections within two months unlike Bangladesh’s protest leaders, who demand that transitional justice and accountability for past crimes take precedence over elections. This decision aligns with constitutional mandates and upholds a Supreme Court ruling that the previous government had ignored. However, holding elections so soon after a major political shift poses risks. The new government has yet to deliver on key promises—bringing economic relief to struggling families and prosecuting those responsible for corruption. It needs to also address burning ethnic and religious grievances, such as the building of Buddhist religious sites where there are no members of that community living there. If voters lose patience, political instability could return. The people need to be farsighted when they make their decision to vote. As citizens they need to recognise that systemic change takes time.

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The Gypsies…one year at a time

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After the demise of Sunil Perera, referred to by many as Sri Lanka’s number one entertainer/singer, music lovers believed that The Gypsies would find the going tough in the music scene.

Sunil was the star of The Gypsies and what he created on stage was loved by all, and there was never a dull moment when this great entertainer was in the spotlight.

His brother Piyal Perera, who is now in charge of The Gypsies, admitted that after Sunil’s death he was in two minds about continuing with The Gypsies, and, he says, he mentioned it to the rest of the members.

“However, the scene started improving for us and then stepped in Shenal Nishahanka, in December 2022, and that was the turning point.”

Shenal is, in fact, a rocker, who plays the guitar, and is extremely creative on stage with his baila.

He has already turned out to be a great crowd puller, and with Shenal in their lineup, Piyal then decided to continue with The Gypsies, but, he added, “I believe I should check out our progress in the scene…one year at a time.”

He was happy with the setup in 2023 and then decided that they continue in 2024, as well.

“The year 2024 was equally good, and 2025 has opened up with plenty of action for us, and so we will continue, and then checkout 2026.”

Their first foreign assignment, for this year, was for a Valentine’s Day dance in Dubai.

What’s more, The Gypsies schedule for 2025 includes gigs in Italy, France, Germany, and a one month tour of the USA in October.

They have also released a song ‘Aniyata Naga Balapan,’ created in a video format – filmed at a location in Negombo – with Piyal and Shenal in the vocal spotlight.

Piyal says this particular song was done when Sunil Perera was around and he used to sing it, occasionally, at stage shows, but they never got down to recording it.

With Monique Wille’s departure from the band, after more than a decade as their female vocalist, The Gypsies now operate without a female vocalist.

“If a female vocalist is required for certain events, we get a solo female singer involved, not as a band member. She does her own thing and we back her.”

Piyal and Shenal also move into action as ‘Api Denna’ and, Piyal says, they will continue this duo scene, even after The Gypsies ‘call it a day.’

And…according to Piyal, the end of The Gypsies could eventually happen in the year 2027.

The band has been in existence for 56 years!

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Colombians and the JVP: Puppetry a la the CIA

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Rohana Wijeweera addressing a political rally

by Gamini Seneviratne

Our electors must be baffled by what those who call themselves “JVP” have been doing in the past few months in which they have enjoyed the right to exercise state power. One has to look not just at events here but to developments centered on shall we say NATO and its investments in politicians in the global South.

To begin to understand all that we need to go back to what is regarded as the beginning here – the insurrection of 1971. It has been portrayed as an armed uprising by ‘socialists’ / ‘communists’ who were either Russia-oriented ‘Stalinists’ or who, on waking up each morning, engaged in a ritual reading of Chairman Mao’s little Red Book.

And what indeed provoked that effort to acquire arms for the supposed revolution by raiding Police Stations (which were known to have some 202 or 303 rifles that were in firing order. In that exercise the government responded by sending in army volunteers who proved to be somewhat better equipped than the Police and even less disciplined in combat situations than they. Their overall commander, Rohana Wijeweera, alas, was captured before the action began: he had lain in wait where routine Police patrols were known to take place and had taken to his heels when they appeared. He was taken into custody (which provided him with safe harbour behind prison walls). In later years, Somawansa Amarasinghe, another ‘leader’ sought refuge overseas well in time.

Even more interesting than such detail was the fact that it was a revolt against a coalition of left / left of center political parties (SLFP, LSSP, Communist parties) that had scored a handsome electoral victory against the then and forever mish-mash of politikkas that are usually classified as a rightwing group, the UNP. That coalition had set in motion programmes to bring under State control or otherwise ‘socialising’ “the commanding heights of the economy”.

They had also outlawed South Vietnam, Israel and Taiwan that served not so much as outposts of the imperial ambitions of the US policy makers but served the market, notionally monitored by the Pentagon, for the weaponry of the arms manufacturers.

A Lankan government that does such outrageous things had to be toppled – in what has entered the literature as ‘regime change’. Relatively recent successes of such US ‘policy’ interventions are Ukraine (where ‘NATO’ removed the president elected by the people and thrust in their puppet cum mouthpiece), and the criminal assault on governance honoured in Pakistan by the vast majority of electors led by Imran Khan, the most honourable and competent figure by far in all of South Asia

And, all the while that fountain of Democracy, Human Rights and other such laudables as International Law, yes, the USA, was continuing to fund research organisations including Universities to produce ever more lethal weaponry for use against the people, all non-human of course, of Asia, Africa, Latin America and the ‘Middle East’.

All that has of course been a continuation of the ‘Manhattan Project’ that had made it possible for “America” to destroy Hiroshima & Nagasaki when Japan was on the cusp of surrendering to the Russian forces that were already across the waters in Manchuria and the northern islands of Japan.

There’s a clear difference though in terms of ‘American’ priorities: the scale of investment on war has been blown up from millions of dollars to billions and on to trillions. How does it fund such a “growth” in “investment”? Besides making health care and education virtually unaffordable, it has worked on expanding a landscape of homelessness while its investment in prisons, in arming Police to enable them to Keep the Peace and weaving garlands to honour the National Rifle Association (NRA).

But regardless of all such efforts we should never lose sight of the investment that underpins them all: the manufacture and dissemination of lies: you could call them fabrications or spin or, as is today the preferred characterization, ‘media bias’ (which is also sought to be sanitised as ‘double-standards’ and ‘hypocrisy’). The investments on all that might, for all we know, be in $$ billion in their uppermost range.

And it has become impossible to overlook the investment in politicians from the sub-State level to Congress and the White House. To all of which we must add what common superstition used to say was Unthinkable: the Judiciary.

It should be noted too that such as Soththi Upali should not be regarded as architects of a new political culture.  The association/camaraderie between politicians and members of the underworld has a long history in most parts of a world that is said to thirst for democracy.

It should baffle nobody that the trial of the ‘socialists’ bent on regime change in 1971 was attended every day by Mr. R Premadasa. Or, that Wijeweera’s last request to his captors was that he be taken before the then power-wielder, Premadasa.

Now, we see in the Janatha Vimukthi Peramuna or “NPP’ (or, in an attempt at a more sophisticated try at misleading them, “Malimava” or ‘the Compass’) what these supposed ‘socialists’ really are or wish to see for the country or for themselves in their lifetime.

The raggers at places of higher education target the brighter entrants to them in a scenario that led them, ab initio, to murder such beneficiaries of the people as, say, Dr. Rex de Costa, (way back in 1971 up in Deniyaya).

It should come as no surprise then that the objectives that have been fed to the JVP” has required them to support raggers and to focus on damaging its own leaders such as Weerawansa, who show signs of helping the country and combating the forces led by the CIA.

When, themselves, in a position of power, those blessed by them have demonstrated just whom they represent. By way of example one would have to examine what, as Minister of Agriculture, etc., AKD actually did twenty years ago. The restoration of 10,000 small tanks  was touted by the JVP as the foundation for the redevelopment of an agrarian culture: AKD never pursued that but quite recently it was proclaimed that he had the distinction of ‘cleaning up’ the Kandy Lake (the good-to-see and walk around bit of water that tourists love). There could be no clearer example than that of the cynicism that envelops their ‘thinking’.

The hand of ‘the CIA’ has been long visible on many fronts. And in that the support of the IMF has always been crucial to the project of destabilisation. One might think that it all began with JRJ’s enabling of corruption, but then one comes with examples from much earlier. J’s drive post 1977 was preceded by, say, the battle for the Freedom of the Press (so vital for the survival of a fascist regime) in 1964 that was greased by a hand-out of 20,000 rupees each to the MPs who crossed the floor and of much more to C.P .de Silva, who led that walk. That operation was orchestrated by Esmond Wickremasinghe.

That such funding has always tended to be the needful back-stop of politics is not disputed but ‘regime change’ requires much stronger instruments of shall we say ‘investment’ in which the IMF plays a commanding role. Much has been the praise bestowed on Dr. Manmohan Singh recently to mark his passing; what I recall is Dr. Gamani Corea (Chairman of the South Commission when Dr. Singh was its Secretary) telling me that he had asked Dr. Singh what he was up to as the Finance Minister of India and that Dr. S had dodged giving him an answer: well, part of the IMF package that Manmohan shoved on India was a targeted explosion of corruption within the government. Your readers would not require you to quote examples for them of what’s been going on here.

And, nowadays the CIA in the form of the US Ambassador, has shown its hand yet again: Ms. Chung, whose role in inducting an unabashed Colombian, into Parliament via the JVP has been quite obvious, has chosen to go public with their support for the unabashed co-leader of the corrupt strand of the Rajapaksas.

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