Photo courtesy of The New York Times
Had the decision been thought out and strategic like that of Mahathir Mohamad in Malaysia during the Asian financial crisis, I would have backed the Sri Lanka government’s lack of interest in going to the IMF for bridging finance. After all, the Fund’s reputation has not always been positive when it comes to helping governments protect the economic and social rights of citizens and achieving environmental justice or addressing climate change. Many would agree that staying away from the IMF’s conditionalities is not in itself a bad thing. We know for instance that early this year Pakistan introduced a controversial set of fiscal reforms so that they could revive the IMF’s Extended Fund Facility that had been approved in 2019. The reforms included a regime of new taxes on solar panels, wind turbines, electric vehicles that are likely to derail the country’s energy transition. We also know that the extreme vulnerability of countries to the COVID 19 pandemic, Ecuador is an example, was the result of weakened public health systems that resulted from IMF strictures to address fiscal deficits by reducing public spending including in the health sector. Reading about Argentina’s debt story for instance one also wonders how much of the decision not to go for restructuring debt earlier this year despite the advice of several economic thinkers is a result of the existence in Sri Lanka of a creditor class that profits from sovereign debt.
But today our country is between a rock and a hard place, the government has declared bankruptcy and has reached out to the IMF as the inevitable lender of last resort. From what I understand, including from listening to Shanta Devarajan on CNBC International a few weeks back, and more recently on Face the Nation programme, we need to propose an acceptable programme of fiscal adjustment to the IMF which will then release some bridge financing from other friendly countries that will enable us to purchase the much needed fuel, food and medicines in the short run and make the restructured debt sustainable in the long term. It is no secret that the IMF supports fiscal adjustment programmes that involve belt-tightening and austerity measures, and that these exacerbate inequalities and make living even a greater challenge for the poor, the daily worker, women and other vulnerable groups. Sri Lankans who fall into these categories have taken a huge beating in the Covid and post Covid period and even more so in the last few months. Professor Devarajan talked about increases in taxation, cuts in expenditures including restructuring state owned enterprises, decreasing the subsidies on fuel and electricity coupled with a cash transfer programme to those who will be adversely affected by the removal of the subsidies.
In this context it is important to flag that Sri Lanka’s policies including our proposals to the IMF must intentionally include measures that can, in the short term, alleviate the hardships that those suffering most from this economic and political crisis face and in the long term, ensure that the stabilisation of the economy will not lead to their being negatively affected.
The implicit social implications of #GotaGoHome and #GotaGoGama underscore the importance of ensuring that whatever policy changes are implemented address people’s concerns. We are seeing the protests cut across all the faultlines in our society that have been exploited by majoritarian politics since independence and which reached their worst manifestation with the Rajapaksas. And even though the slogan itself is about asking the Rajapakses to go away (which they don’t seem to be heeding at all) the underlying call is about changing a system that has progressively eroded the political, economic and social rights of the majority of Sri Lankans. This call for a systems change is getting progressively louder. The people are calling for constitutional change, for the abolishment of the executive presidency, for removal of draconian laws such as the PTA, for an end to corruption, and even if it is not as well articulated, a change to an economic system that has increased inequality and marginalised some while at the same time permitting rent seeking and accumulation of wealth for others. The moment for making a transformative change is with us, it is now or never.
Addressing economic and social rights of the most vulnerable
Many eminent Sri Lankans, including Dr Anila Dias Bandaranaike and Professor Sharya Scharenguivel, have called for renewed attention to the duty of the Sri Lankan state to respect, protect and fulfil the economic and social rights of all Sri Lankans. What this means in essence is ensuring that all citizens enjoy the minimum essential levels of each right and that the rights of marginalised populations are especially protected. This duty has been significantly abrogated by the Rajapaksa government and to different degrees by other governments before them. Given that the human rights framework states categorically that the state has a duty use their maximum available resources for the progressive realisation of these rights, we must ensure that the pay out from the IMF and the benefit of the restructured debt prohibits retrogression and discrimination and leads to the realisation of economic and social rights for all.
I am flagging here three policy approaches that I believe are worth considering if the government sincerely wishes to protect the economic and social rights of all Sri Lankans and especially address the needs of disadvantaged and marginalised groups. They may require some overturning of the conventional wisdom that has governed our approach to the economy. The first is to make available nationally defined basic social security guarantees[1]. Sri Lanka currently does not have a minimally acceptable cash transfer programme to protect its poorest citizens[2]. Globally the discourse on social protection of the most vulnerable has resurfaced with even greater clarity post Covid and has indicated that there is a difference between the palliative, safety net type of social protection that is often advocated by the World Bank and the IMF and the more comprehensive social protection policies that aim to be redistributive and lead to reductions in inequality.
There were several innovative programmes for social protection in the Global South in the 1990s[3] that led to greater acceptance for government-funded social protection floors and ultimately to the ILO Recommendation 202 that provides states with the guidance required to establish a social protection floor that include at least four essential guarantees: (a) access to at least essential health care, including maternity care; (b) basic income security for children, providing access to nutrition, education, care and any other necessary goods and services; (c) basic income security for persons of working age who are unable to earn sufficient income, in particular in cases of sickness, unemployment, maternity and disability; (d) Basic income security for older persons. If expanded to include the concept of universal basic income (UBI) social protection guarantees can better address the disadvantages that women face as a result of their disproportionate involvement in unpaid care work[4]. Unlike the safety net approaches that tend to consist of insulated programmes often fragmented and insufficiently coordinated with gaps in coverage and exclusion errors, social protection floors aim to approach social policy comprehensively through the establishment of integrated strategies for essential social services and income security for all. At this moment of developing a plan not only for immediate relief but for the long term wellbeing of citizens, decision makers would do well to review existing social protection mechanisms and develop a strategy in alignment with ILO Recommendation 202 that can include a mix of measures, contributory and non-contributory, targeted and universal, public and private.
Taxing those with wealth and assets
Often when issues of social protection floors or universal basic incomes are brought up as a means to protect the economic and social rights of the most vulnerable, the question is asked about how governments can finance such social justice measures. Increasing taxation is one way that this can be done. The traditional approach to and the dominant narrative on tax, recognises only its value for economic growth and sees it merely as a means to raise revenue. Feminist economists have challenged this traditional approach. Given that the issue of tax is likely to feature significantly in the proposals to the IMF, this could be the moment where Sri Lanka also transforms the narrative and looks at using tax as a means not just for generating much needed government revenue, but also as a way of responding to the civil society demands to redistribute wealth and achieve a greater measure of equality and social justice.
We have done this before. In the immediate three decades after independence governments collected a high proportion of Gross Domestic Product (GDP) in taxes. They spent most of that money on mass provision of health and education services and subsidised food. Sri Lanka was considered a model welfare state, with unusually high human development indicators. However from the 1990s the proportion of GDP collected in tax revenue steadily declined and was just 11.6% in 2019. The decline is a result of a continuous series of policy decisions that exempted wealthier people, businesses, incomes and assets from taxes. The emergence of foreign aid and loans as an alternative to domestic revenue mobilisation, the pressure to exempt the private sector from taxes, the power of the executive president and the high dependence on imports for tax revenue have bolstered this decline and exacerbated the current bankruptcy of the government.
Tax reform can be a strong element of that transformative change that people are calling for. Reform needs to address the very wide range of deficiencies in both tax policy and tax administration in contemporary Sri Lanka. But equally, if not more important, is for decision makers to make the political commitment to shift from a regressive system of consumption taxes to one that taxes not just the incomes but also the accumulated wealth of the rich. Historically Sri Lanka has shown a growing preference for safeguarding private companies and for attracting foreign direct investment through tax exemptions for investors in particular sectors. As a result the wealthy currently pay relatively little in tax but do rather well out of public spending. Sri Lanka’s current regressive tax system generates tax revenue largely from indirect consumption taxes and we all know that this places a huge burden on those at the bottom of the wage pyramid, on informal sector workers and others in precarious jobs and on women. This regressive tax revenue accounts for about 82 percent of total tax revenue used for financing public expenditures. The poorest 20 percent pays as much as 13 percent and the poorest 10 percent 23 percent of their income in the form of indirect taxes while the richest 10 percent pays less than 1 percent of their income as indirect taxes.
However, international human rights obligations mandate the government to protect people’s economic and social rights using the maximum of available resources. This obligation should influence the way the government generates revenue (i.e. collects taxes) and allocates and spends it. To protect the rights of the most vulnerable it is imperative that the government moves away from indirect taxation to a more progressive and direct system of taxing. This is probably the most opportune time to do this when there seems to be a coming together of citizens across class lines. We have already seen several blue chip companies and industry leaders come out in support of the peoples’ protests and the IMF bail out. If they are committed to putting their money where their mouth this, they should stand with the government to support a progressive tax scheme that would stabilise the economy and reduce inequality in the long run.
Cutting public expenditures in the right places
It is more than likely that the IMF advice will also include a call to reduce government expenditure, and in particular, the government wage bill. Parliamentarians have habitually created government jobs as a means of gathering votes, and it is no secret that the country has an inflated public sector wage bill. However, we have seen many countries follow the IMF strictures based on contractionary neo-liberal economics and reduce expenditure on public services, resulting in significantly negative consequences for citizens. The inability to cope with the Covid pandemic because of an underfunded health system has been one such consequence. We have also seen that when governments cut or fail to adequately finance public services, it is women who are left to take on a larger proportion of time consuming and unremunerated responsibilities such as caring for their families, young children, the sick and the elderly. Sri Lanka needs to recognise these potential pitfalls and ringfence the resources spent on public services, particularly health and education. The kind of reduction in state expenditure that is compatible with the demands for a more equitable and just society is to safeguard public services (and some would argue, increase them) and to reduce the military budget and the subsidies to non-performing state enterprises, Sri Lankan Airlines included.
After Gota goes home, the need for political courage
As the #GotaGoHome protests have indicated the freedom from authoritarian and unaccountable governance ultimately depends on the people’s ability to liberate themselves. Sri Lankans, especially young Sri Lankans, have embarked on a strong non-violent struggle towards this end. However while strengthening this resistance is critical, if we are reading the slogan as a call for a transformative change, then it is insufficient to boot the Rajapaksas out of office. Whoever it is that will take their place will need to ensure that there is new thinking that will help develop a more equitable economic system as well as implementing constitutional reforms that will have the checks and balances that guard against dictatorship.
Yesterday I had some colleagues discuss how the belt tightening measures that would be the inevitable outcome of engagement with the IMF would lead to unpopular measures for citizens that could in turn result in continued political instability and dissatisfaction with the next government. The three approaches I have highlighted provides alternatives for transformative change that would put the majority of people and the most vulnerable at the centre of the reforms. They would benefit from a people centred care economy. In such a system, resentment and disgruntledness would lie with the privileged. Hopefully, whoever takes over when the Rajapaksas go away will have the courage to implement such a transformation.
[1] UNHCR Social Protection Floors and Economic and social Rights report A/HRC/28/35, submitted in accordance with resolution 25/11 of the Human Rights Council
[2] Mick Moore (2017) The Political Economy of Long-Term Revenue Decline in Sri Lanka ICTD Working Paper 65 First published by the Institute of Development Studies in February 2017
[3] E.g. Bolsa Familia and Brasil Sem Miséria in Brazil; Oportunidades in Mexico; Asignación Universal por Hijo para Protección Social in Argentina; a social transfer scheme in Zambia; the National Rural Employment Guarantee Scheme in India; the Productive Safety Nets programme in Ethiopia; a universal pension scheme in Namibia; and the provision of universal health services in Thailand.
[4]Patricia Schulz (2017) Universal basic income in a feminist perspective and gender analysis CEDEF/CEDAW, Switzerland, Global Social Policy 2017, Vol. 17(1) 89 –92
