Accountability needed to make debt restructuring more equitable

by Jehan Perera

President Ranil Wickremesinghe notched up another achievement when Parliament ratified the Domestic Debt Restructuring (DDR) programme with a majority of 60 votes, with 122 members voting for and 62 against, with 40 abstentions. Parliamentarians who would need to think about their re-election prospects would have been reluctant to vote for a programme that imposes more burdens on an already burdened population.

But the President stood his ground, and by his vision of the country’s economic future, and the rest of the government acquiesced. The President has been successful in steering the ship of state into calmer waters. He is also setting in place laws, like the proposed Anti Terrorism Act, the Broadcasting Authority Bill and the anticipated NGO Act, which could be used in a sophisticated way to silence critics and to immobilize them.

Now that the ship is nearing safe harbour, and the necessary second tranche of IMF support, the challenge for him will be to ensure that some of the more ambitious members of the crew do not think they can manage without him. It is frightening to think of how the Anti Terrorism Act, the Broadcasting Authority Act and the NGO Act could be used if that arsenal of repressive laws was to be in the hands of those who may choose to act in the manner of pirates.

President Wickremesinghe took charge of the ship of state after it had been driven into the midst of a cyclone by another skipper and his crew. In both 2001-04 and again in 2015-19, the President over-estimated his ability to outwit and outmaneuver the others he was sharing power with. On this occasion, too, there is a danger of a repeat. A foretaste of things to come was displayed by the absence of some of the top leaders of the ruling party when the vote was taken.

The passengers on the ship of state need to be treated better so they will not support a change of skipper in the case of a revolt by the crew. There is no question that the burden of the DDR programme has been laid on the masses of people. It comes after an initial inflation rate of 70 percent last year that virtually halved the savings of the people has been followed by continuous inflation although now at a lower rate, said to be around 12 percent last month. In its DDR plan, the government has taken care to safeguard the remaining half of the people’s savings by treating the banks favourably.

In so safeguarding the banking system, the government has also safeguarded the interests of the corporate sector who generate new wealth. It has also acquiesced in the unjust argument of international creditors that the local population should shoulder the pain of losing part of their wealth. The international creditors knew the risks they were taking when they invested in Sri Lankan bonds, they did so voluntarily because of the huge profits they could make. By way of contrast, the Sri Lankan people who are now called upon to share the burden of debt restructuring with them had no such options while those who were responsible for bringing Sri Lanka to this sorry state are continuing to benefit from the reforms being instituted.

INEQUITABLE TARGETING

It appears that the main casualty of the DDR programme are the pension funds (EPF and ETF) which the government established as one-time payments made at the time of retirement and as an alternative to providing people with a lifelong pension. Although Sri Lanka has long prided itself on being a welfare state that provided everyone with free health, education and foodstuffs (at one time), it never provided universal social security so that those who have no jobs or who are too old to have jobs can survive with a measure of dignity.

The government’s decision to target the EPF and ETF pension funds for a 30 percent tax is unjustifiable, even though the government has tried to justify it. The government has stated that the pension funds have only been taxed at 14 percent whereas the banks have been taxed at 50 percent. The pension funds are being offered a Hobson’s choice.

Thomas Hobson (1544–1631), a horse owner in England, is reputed to have offered customers the choice of either taking the horse in his stall nearest to the door or taking none at all. The pension funds are being offered the option of having their income taxed at 30 percent which is more than double their current rate or agreeing to have their investments in government bonds receive much lower interest payments.

The problem with giving the pension funds the option of paying high tax rates or obtaining low interest rates is that pension funds consist of aggregates of individual entitlements which, if they were taxed individually, would be subject to only a low level of tax. This is as it should be, as these relatively small EPF and ETF entitlements, a few million rupees for the vast majority of EPF and ETF holders, are going to be their only savings for them to live the rest of their lives. Sri Lanka does not provide lifelong social security or pensions (other than to public servants) like most other civic-minded countries do.

In addition, contributions to EPF and ETF have been made after paying taxes prior to making remittances. From this perspective, contributors are being taxed twice.

The unfairness of using the EPF and ETF funds as the way to reduce the government’s debt obligations is made worse by two omissions. The first omission is that the government is not taking measures to recover the massive loans given by banks, particularly the state banks, to errant corporate entities and politically connected individuals. The second omission is not taking measures to recover stolen assets. This was a key demand of the protest movement last year that brought President Wickremesinghe unexpectedly and serendipitously to power.

NO ACCOUNTABILITY

A key opposition leader Prof G L Peiris has summarized the injustice of the government’s DDR programme. He has said of the investors who are being protected that “Their motive was to make use of the perilous state of our economy to make a killing. They sought unconscionable profits in as short a time as possible. While the rates payable to these wealthy investors are left untouched, interest to be earned by the working people who are beneficiaries of the EPF has been reduced by the rate of income tax payable by the EPF being increased from 14 percent to 30 percent if fund declined to participate in the seriously flawed DDO exercise,”

Newspaper editorials have made these points. The Sunday Times has said “These economic reforms will need to extend for many years to come for favourable results to be seen. This may be only phase one of the DDO. The question every citizen asks, however, is; why are the twin ‘untouchables’ – the ten big debtors – the big boys, the local Robber Barons, who have borrowed multiple billions from local banks and not settled their loans but who continue to laugh all the way to the banks are not touched; and is it because of their political connections. And why those responsible for the country’s economic misery are issued with a ‘Get out of Jail’ card as well?”

The Island

newspaper in its editorial has said “The EPF by statute was required to invest a vast majority of their funds in government securities which till Thursday were considered gilt-edge investments. The shenanigans of the EPF in investing in the stock exchange and being used as a victim of pump-and-dump scams are well known. No one has been brought to account for those misdeeds, but millions of taxpayers are once again asked to share the pain of nursing a bankrupt nation to viability.” What is notably missing in the government DDR programme, and in its overall governance, is accountability.

Since the war ended bloodily on the military battlefield, Sri Lanka has been hauled over the coals in international human rights forums, especially the UN Human Rights Council in Geneva. The missing dimension there, too, is accountability for serious human rights violations. The point of going through the transitional justice process of truth, accountability, reparations and institutional reform is to ensure non-recurrence.

The same holds true for economic crimes, such as those that brought down the economy of a country that had reached upper middle income status in 2018 by those who showed no responsibility in terms of protecting national security and the national economy. The ship of state needs a new crew who would be accountable to the passengers so that the vicious cycle of inefficient and dishonest governance, corruption and economic collapse will not recur.