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Envisioning an Asia-Pacific Economic Union in the Next Decade and its Benefits for Sri Lanka

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By Srimal Fernando and Justin Chua

As 2020 comes to a close, it is worth discussing the great potential in the next decade for intra-regional trade within the Asia-Pacific region. In particular, the Regional Comprehensive Economic Partnership (RCEP), Association of Southeast Asian Nations (ASEAN) and the South Asian Association for Regional Cooperation (SAARC) have provided the foundation for greater economic integration and interconnectivity between Asian economies. Integration into the world economy has proven a powerful means for countries to develop and prosper. Thus, the development of an Asia-Pacific Economic Union can be envisioned for the next decade.

 

Key Driver of Economic Integration

For the short to medium term future, international trade will be largely driven by a few regional economic giants. These nations will provide greater economic activity for other countries, located in Asia, which are part of the global supply chain. Specifically, greater linkage of major players in the region will see a beneficial increase in trade of smaller nations. Sri Lanka, as a relatively smaller economy in this region, will gain immensely through a greater economic union within Asia and can develop into a regional centre for trade and investment. Its strategic location within the Asia-Pacific region provides great access to over 40 percent of global trade and over 2.5 billion consumers.

 

Sri Lanka’s gains from Regional Integration

With US elections symbolising a greater social and political amalgamation of national powers, greater trade through global and regional policy reforms are becoming more prevalent. The recent signing of RCEP gives greater access to the largest economies in Asia. Along with India’s strong presence with ASEAN, greater integration of Asian nations will benefit small nations like Sri Lanka, which is well-placed on global shipping lines linking the world. In addition, India’s Act East Asian foreign policy along with its Neighbourhood First policy will strengthen Sri Lanka’s trade policy with ASEAN and RCEP member nations. Similarly, members of ASEAN will see Sri Lanka as a launching pad into South Asia and make use of increasing SAARC cooperation.

 

RCEP, ASEAN and SAARC: the makings of an Asia-Pacific Economic Union

The greater connectivity through trade and investment, as a result of these multilateral agreements, may pave the way for a grouping of Asian countries similar to that of the European Union. In this respect, greater interdependence between the larger and smaller nations within and outside these regional blocs will provide the impetus for policy reforms. However, mutual gains are required for there to be a sustainable and enduring merger. It is important to ensure that increasing trade among all member nations does not come at the expense of national sovereignty.

 

An Asia-Pacific Visa-Free Zone

One of the drivers for increased trade and interconnectivity in the Asia-Pacific economic zone will be the increased numbers of people moving among the regional blocs. Although there are currently visa-free agreements within ASEAN and SAARC, future challenges will come about from providing more unrestricted movement within the broader Asia-Pacific zone. Moreover, future effective regional migration policy needs to avoid the amplification of stark differences in purchasing power as well as real wages between countries at various development stages. In a nutshell, movement of labour ought to be based on medium to high skill labour rather than low skilled labour to mitigate a large number of issues.

Furthermore, economic integration that incorporates visa-free work and travel rights requires greater homogenisation of national policies to create synergies between member nations of a future Asia-Pacific Economic Union. Further, this may well allow for relatively open border-protection policies whilst safeguarding national sovereignty. Thus, a visa-free policy in Asia without adequate planning and policy reforms will fail to address growing concerns. Therefore, policymakers are required to consider developing equitable outcomes both at home and abroad.

 

Union of Free Trade and Protectionism

The propagation of Free Trade Agreements in the 21st century has necessitated a fundamental reconciliation between economic liberalisation and protectionism, in order to develop a sustainable framework for an Asia-Pacific regional order.

In the trade realm, the combined effort by the three regional blocs ASEAN, SAARC and RCEP has imposed the removal in full or in part of tariffs and other trade barriers. Whilst this has provided countries with opportunities to become logistic hubs, individual nations within an envisaged Asia-Pacific Economic Union have to work out suitable policies to protect valuable import and export interests. But the challenge is bringing the different sub-regions under one regional umbrella agreement with vastly different interests. In this respect, safeguarding national interests in certain industries requires policy makers to undertake problem-solving with a strong focus on collaboration. Developing nations, such as Sri Lanka, have a lot to gain from increased trade and connectivity throughout the region. Greater speed of development and access to capital will elevate the livelihood and economic opportunities available to its populace.

In the monetary realm, the veneration of free trade and privatisation of trade and investment will be unjustifiable if it fails to benefit participating countries. In this respect, monetary and fiscal policy with a focus on Asia-Pacific intra-regional support is more likely to provide genuine long-term gains and greater diversity in terms for borrowing nations. For Sri Lanka, greater monetary support from regional partners will not displace post-WWII foundational monetary frameworks, but significantly reinforce the global rules-based order.

In practical terms, greater regional integration in the form of an Asia-Pacific Economic Union will not be beneficial if it weakens capabilities of member nations to control their monetary supply. Nevertheless, greater regional cooperation may well serve to protect the value of national currencies from extra-regional forces. Therefore, this conflict between regional and global monetary powers may well lead to the Asia-Pacific becoming another European Union, albeit in a more loosely defined form.

 

Conclusion

A more collective and integrated world order is coming into being. This will benefit small nations like Sri Lanka in the next decade. Greater economic integration and interconnectivity has seen greater free trade within the whole region, albeit without a formalization of a Free Trade Agreement for the whole of Asia. Still, recent moves by the regional blocs has made an Asia-Pacific Economic Union an achievable goal.

Dr. Srimal Fernando is a recipient of the prestigious O.P Jindal Doctoral Fellowship and the SAU Scholarship under the SAARC umbrella. He is also an Advisor/Global Editor of Diplomatic Society for South Africa in partnership with Diplomatic World Institute (Brussels). He has also received accolades such as 2018/2019 ‘Best Journalist of the Year’ in South Africa, (GCA) Media Award for 2016 and the Indian Council of World Affairs (ICWA) accolade. He is the author of upcoming book Politics, Economics and Connectivity: In Search of South Asian Union.

Mr. Justin Chua is an Australian Lawyer with a particular focus on commercial and immigration law. He has studied commerce and law at universities such as RMIT University, University of Melbourne and University of Hong Kong, and has lived and worked in a number of countries in Asia. As a foreign policy analyst who is based in Melbourne, Australia, he has a keen interest in international relations in the Asia-Pacific region.



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Who does Sri Lanka’s fuel subsidy really benefit? 

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by Prof. Amal Kumarage

In a recent article, parliamentary MP and former VP of CitiBank, Eran Wickremaratne said Sri Lanka’s policies are skewed towards the rich and not the poor of the country.  He was referring to fuel subsidies where the government pays the difference between the high global fuel price and the price it is sold at the pump to cushion the people.  But the MP says it is not the man on the street who benefits from this subsidy but the wealthy private vehicle owners with big vehicles that require more fuel.

“As a country, when we choose this subsidy, we are actively choosing to give more money to wealthier families to drive their large vehicles. We are saying that our government would rather support the businessman with a fancy gas-guzzling car in Colombo over the school children in Monaragala who are struggling from a lack of food.”

Pump prices of petrol and diesel in Sri Lanka, even after the increase, are still lower than in most neighbouring countries. It is ranked 50th lowest from 170 countries listed, with almost all those having lower fuel prices than Sri Lanka being oil producing countries. Sri Lanka then becomes a country having the lowest pump prices for a non-oil producing country. It is also lower than the inflation-adjusted price in 2008 when global crude oil prices exceeded $100 per barrel, and the US dollar was only LKR 110. Oil crossed $100 per barrel even in 1981-82 during the Iran-Iraq war when the US dollar was just LKR 20. Sri Lanka has weathered such price hikes before. But what is needed is not just a temporary tiding over in terms of the fuel over-consumption, but a permanent policy that will make fuel use sustainable.

It is becoming more and more clear that the widespread practice of cushioning people from fuel price shocks in the long term, no longer works and it has also come to a point where the country can no more afford it. There is just too much oil consumption and eventually, it is the affluent heavy consumers who benefit from the subsidies.  Incidentally, the cost of kerosene in Sri Lanka is the lowest in the region, sold at a concession of around 60%.  Yet, it is manageable since the consumption is only 206 million litres per year, which is around half the domestic use of LP gas and around 5% of the fuel used for transport.

Therefore, efficiency targets should be given to fuel companies (CPC/LIOC) to reduce operating costs by 20%, equal to Rs 1 per litre of fuel, enabling the savings of Rs 3-4 billion per year.  This should be connected to programs supporting the reduction of fuel consumption in the long term.

Unlike other goods, fuel imports should not be restricted or just rationed as it is necessary for almost every category of economic production. But at the same time, our selling prices should be pegged to market prices with a reasonable tax component introduced.  This will discourage heavy consumption and encourage alternate use.

Most countries build in a tax for fuel that goes to assist in developing public and alternative modes of transport. This should be an important aspect of our long-term fuel policy as improved public transport means more people using it, and this would bring us another step closer to reducing our massive fuel costs. Countries that have implemented this successfully have been able to reduce their fuel consumption without reducing productivity or convenience.  In the current Sri Lankan context, adopting a similar policy will allow more funds to be allocated for goods that are vital for daily living.

While annual car imports keep adding to our fuel bill, another issue is the concessionary permit system provided by the government to certain state officials to import cars with tax benefits. According to statistics, the concessionary permit system is a huge loss annually to the Treasury averaging Rs. 94 billion per annum.  This figure is almost equal to the LKR 97 billion per annum the Treasury gathers from the country’s overall car imports. Furthermore, because of the tax concession, permit holders tend to go for more expensive vehicles in consideration of the resale value and more often than not, these expensive choices are heavy on fuel consumption.

Therefore, policy readjustments such as scrapping the concessionary vehicle permit system, and allowing concessions only for electric vehicles, should be brought in.

(Prof. Amal Kumarage is a transport sector professional with over 35 years of experience in academia, government and consulting. He is a Senior Professor in the Department of Transport & Logistics Management, University of Moratuwa, a Chartered Engineer and a Fellow of the Chartered Institute of Logistics and Transport and Founder President of the Sri Lanka Society for Transport & Logistics. He is a graduate in Civil Engineering from the University of Moratuwa, Sri Lanka. He completed his PhD at the University of Calgary, Canada.)

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PM hints at full term, opposition in boycott mode, no relief for queuing public

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by Rajan Philips

Prime Minister Wickremesinghe made yet another statement in parliament last Wednesday (June 22). Apparently, these are biweekly statements he has committed himself to make “since taking over the reins of this government,” as he put it. With cynical self-deprecation he acknowledged the mockeries directed at him for making too many statements with too little action or results.

Sajith Premadasa and Anura Kumara Dissanayake have taken the criticism to another level by boycotting parliament until the PM and the government present a plan of action to address the economic crisis. This is the first instance the two leaders have reached common ground in the current parliament. Ironically, their agreement is not over some positive intervention but inexplicable abdication in the face of national suffering.

One appreciates the enormity of the challenge that the Prime Minister and the government are facing and the extremely limited and constantly diminishing assets available to them. People know that supplies are chronically short and they are going to get severely worse. What nobody gets is why cannot the government arrange orderly distributions of limited supplies, and spare the already suffering people the additional trauma of standing in long queues for something they are not going to get in any case.

A case in point is the supply of petrol, diesel and cooking gas. They have been in short supply since February, and nothing has been done to regulate their distribution. Those who have little or nothing, stand and suffer to get nothing much, while those who can afford – send proxies to collect more for the purpose of hoarding and potentially reselling.

The young and confused Minister of Power and Energy, Kanchana Wijesekera, has promised to have a quota system in place by July. That is already too late and would be far too little as well. The bigger question is why the PM and the government are not thinking about implementing a system of priorities for procurement and distribution – food, medical supplies, cooking gas, and allocate fuel only to public transport (including three wheelers) and lorries involved in internal food transport. With all the shortages and closures, it makes no sense continuing with fuel supply for private vehicles and transport.

Given that Prime Minister Wickremesinghe is leading a cabinet of old worn-outs, the onus is on the Opposition to constantly raise these matters in parliament and force the Prime Minister and government into taking concrete action. Instead, the SJB and the JVP are running away from parliament apparently intending to force the government to come up with a plan. JVP leader Dissanayake who made big splashes in parliament last year and announced that the JVP is ready for national leadership, is now missing in action and missing out on opportunities to demonstrate his and the JVP’s readiness for leadership. Sajith Premadasa has become the occasional Leader of the Opposition. After weeks of silence, he appeared in parliament only to announce his boycott of parliament.

Political opinion is divided, as the Prime Minister himself acknowledges, between those who ridicule his ‘statements,’ and others who welcome his apparent openness and transparency. The problem is that Mr. Wickremesinghe has not been able to dispel the perception that he is still playing his old political games while appearing to provide a new form of leadership. The Prime Minister and the President are not at all working together. This is the same as what it was during the yahapalana administration, according to former President Maithripala Sirisena. There is a huge difference, of course. Sirisena and Wickremesinghe were elected to work together, but between them they botched a joint venture that began with much promise. On the other hand, Wickremesinghe and Gotabaya Rajapaksa have come together by mutual consent and out of desperation. It makes no sense for them to work at cross purposes now. It only weakens the administration and adds to public cynicism.

There is no politics without gossip, and the going gossip is that the Prime Minister has been trying to get one of his sidekicks to step in as the new Central Bank Governor when the Governor’s current term expires. That would mean the replacement of Governor Nandalal Weerasinghe, who came out of premature retirement from Australia to head the bank in a state of crisis, by a rank outsider and a new Arjuna Mahendran. Why? Why would Mr. Wickremesinghe repeat the same colossal blunder that ended his legitimate political career? Fortunately for the country, and for himself, he may not be having his way around this time. But it only shows that there is no end to playing political games even when the country’s economy is in flames.

Full Term as PM

The Prime Minister statement last week included a surprising hint that ‘his’ interim government would go on until firm economic recovery is achieved and only then elections will be called. In a pertinent paragraph towards the end of the statement, the Prime Minister shifted his target audience from parliament to the people, and said:

“Once we have established a firm economic foundation you can hand over power to any political party as per your wish at an election and elect 225 suitable representatives to parliament. The responsibility and power to do so lie with you, the citizens of this country. You will be then given the opportunity to reject those you believe were responsible for the predicament Sri Lanka is facing today.  In turn, the new government will be given the mandate to bring those responsible before justice. But all this can only be achieved following the revival of the country.”

“A firm economic foundation” is not going to be established within the next two to three years, which would mean there will likely be no opportunity for an election sooner than when it will be normally due in 2025. That is full term for the current parliament and near-full term for Wickremesinghe as Prime Minister. The President has already indicated that he will serve out his only term in full. If the Prime Minister wants parliament also to continue for its full term, he must state his intention clearly and categorically to parliament and to the people. It must not be conveyed through hints in a single paragraph in a long statement. Without transparency, there will be no trust.

For instance, the PM cannot be extending his hand for co-operation from the SJB and the JVP for an interim administration of less than a year at most, while seriously thinking of going on for the next three years. Among the people at large the expectation is that the Prime Minister Wickremesinghe will steady the ship of state out of the Rajapaksa chaos, reach agreement with the IMF, implement constitutional reforms as widely understood, and then – in the span of about a year, set the stage for a general election. Beyond Mr. Wickremesinghe’s role, there have also been expectations for President Gotabaya Rajapaksa to resign from office and abolish the system of elected-executive presidency. All of these expectations now seem to be water under the Aragalaya bridge.

President Rajapaksa has announced that he will not resign before his term is over, but he will not contest for a second term. With all the talk about a parliamentary election, the Election Commission has started the process of updating the voter registry and lists. That work is expected to be finalized only in October. So, practically no election till October. In any event, for an election to be called this year, parliament has to pass a resolution for it to be dissolved. This is unlikely given the current dynamic in parliament under the Ranil-Rajapaksa government.

After March 2023, the President will have the power to dissolve parliament and call an election. There has been considerable expectation for an election some time in 2023. That may not happen if what Prime Minister Wickremesinghe suggested in parliament last Wednesday is also shared by the President and their cabinet of Ministers. The Prime Minister may have very good reasons for suggesting that a fundamental economic recovery is necessary before there can be a parliamentary election. But his reasons are not an open book unless he shares them with others. And there is more.

It is the Prime Minister who has been consistently saying that there is not only an economic crisis, but also a political crisis, and that the former cannot be addressed in isolation from the latter. If a full term of parliament is needed to address the economic crisis, what is the implication for the political crisis?

Can the present parliament continue as it is for three more years? Wijeyadasa Rajapakshe’s 21st Amendment might be acceptable as a stop-gap measure for a limited period, but can it meet all the constitutional reform expectations over a longer period? How will the government handle the next presidential election that will come up before the parliamentary election, if the mode of electing the Head of State is not changed beforehand?

Specific to the executive presidency, how will Prime Minister Wickremesinghe and President Rajapaksa deal with the question of abolishing the elected-executive presidential system over an extended three year period? The Supreme Court has again stipulated, in its ruling on the SJB’s (ill-advisedly rushed) 21st Amendment Bill, that a referendum will be required to abolish the presidential system or to change the mode of presidential election. This is unfortunate in that the court may not have been sufficiently presented with the benefit of sound legal arguments questioning the appropriateness of extending the referendum requirement to matters that are not specifically included in the referendum provision in the constitution. Prof. Savitri Goonesekere and Dr. Nihal Jayawickrama have both expressed this opinion many times in the public domain, and no less a person than Dr. Colvin R de Silva proffered the same opinion 35 years ago during the forensic debates over the 13th Amendment.

Regardless of the legal position, it would be politically conclusive to decide the future of the executive presidency in a referendum of the people. That is what Prof. Savitri Goonesekere suggested in this newspaper a few weeks ago – to bite the bullet and put the question to the people. But government leaders and the current Minister of Justice do not have the courage for it, and are hiding behind the referendum bogey to keep the presidential system going. The question will become a hot potato for the Prime Minister. It will be over a full term that he seems to be fancying now, and not just in the interim as others understand it.

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A Strategy for the Restoration and Rebuilding the Agri-Food Sector of Sri Lanka

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Submitted to the Government by the members of the Faculties of Agriculture of the State Universities of Sri Lanka

Sri Lanka’s economic crisis has caused immediate uncertainties regarding whether (a) required food supplies are and will be available, (b) the agri-food sector is and will be able to sustain the livelihoods of those engaged in crop, livestock and poultry farming, fishing, food manufacturing, food distribution and allied activities, and (c) the agri-food sector is and will be able to provide food security for those most affected communities by the crisis. As these concerns are particularly pertinent to the agriculture sector, the Faculties of Agriculture of the State Universities of Sri Lanka joined in proposing a plan of action that has been communicated to the President and the Prime Minister through a letter dated June 15, 2022, and signed by the Deans of all Faculties of Agriculture.

The proposal addresses the present crises by identifying immediate actions to address the most pressing needs of the current moment and also identifies actions requiring immediate attention that if unaddressed can exacerbate the crisis in the long-term. The action plan is designed to address the two objectives of ensuring food and nutrition security and of protecting and sustaining livelihoods and employment in the agri-food sector. It focuses on the entire food system considering all economic actors and priority sub-sectors in the agriculture value/supply chains.

The prevailing situation has brought to the forefront serious concerns, especially relating to increases in food prices and shortages in food. Food inflation in Sri Lanka during May 2022 (year-on-year basis) has stood at an all-time high of 57.4%. The recent appeal from the United Nations (UN) to the global community for USD 47 million in humanitarian aid to Sri Lanka to provide lifesaving assistance to 1.7 million people indicates, to some extent, the depth of the crisis. It is estimated that 4.9, 3.5 and 2.4 million people are in need of food security, agriculture and livelihood, and nutrition, respectively (United Nations, 2022). Although national-level data on the depth and breadth of the crisis is unavailable and the situation is still not well understood by many, we note with concern that if the country continues its current trajectory, especially with respect to the food consumption patterns, it will move beyond crisis into a state of emergency and potentially famine (United Nations, 2022).

Within this context, we recognize and acknowledge the short-term measures adopted to-date by the Government of Sri Lanka to support agriculture; for example, import of agrochemicals and seed stock with the support from World Bank and Asian Development Bank, , urea fertilizer with support from the EXIM Bank of India and Food and Agriculture Organization (FAO) of the United Nations, and prioritizing seed paddy supply for the Maha season 2022/2023. This, however, neither reflects the broader set of urgent concerns that the sector confronts nor provides solutions to the overarching problems that we face as a country.

The proposal providing A Strategy for the Restoration and Rebuilding the Agri-Food Sector of Sri Lanka, submitted by the members of the Faculties of Agriculture of the State Universities of Sri Lanka includes two sections of activities. The first section is an emergency preparedness plan that specifies a list of actions addressing four broad areas: (1) immediate food security issues of Infants (under five years of age), adolescent girls, pregnant and lactating mothers, and elderly groups. It recommends a screening process for malnourishment, strengthening pre-school and school lunch programmes, the distribution of dry rations and supplements for particularly vulnerable groups, (2) The estate sector and war-affected areas are identified as a second vulnerable population and recommendations include providing essential nutrients, support with growing food sources for carbohydrate requirements, (3) To support low-income groups, food rationing to ensure equitable distribution, improvements in marketing and distribution channels, encouragement and support of community kitchens, and facilitation of access to emergency funds and foods through the support of private actors, NGOS, foreign sources are recommended, and (4) A series of actions to protect industries that are critically important to the nation’s food supplies and foreign exchange, specifically the rice farmers, export agriculture, and poultry industry are identified. These activities must be complemented by awareness, extension, and educational programmes.

The second section of the proposal includes short-, medium- and long-term actions organized by sector (crop and animal production and processing, and cross-cutting) and identifies the relevant government agencies whose attention is sought in implementing each action. The attached figure is a graphical representation of a summary of the proposals. We note that the problems confronted by society today are a result of a lack of a consistent long-term policy and action programs for agriculture, which could have prevented a crisis of this nature from occurring. Such a policy must be developed and must include mechanisms to address future crisis situations by effectively using knowledge, other resources, and institutional structures (state and others). It must use consultative processes in a holistic manner that ensures that a system to address pressing issues, over the long term, in a sustained manner, is developed in which relevant institutions and bodies are represented with nominees identified through proper channels of communication.

We wish to note that the Faculties of Agriculture are committed to address the problems faced by the people of this country and will gladly extend support to any follow up actions of the State in implementing this plan.

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