Whilst it is impossible to eliminate corruption and governance lapses overnight, it is essential to have a robust institutional and legal framework with appropriate checks and balances to make this goal a reality.
by Mahinda Siriwardana
Editorial Note: This series is based on the keynote speech by the author, titled “Shaping the Future: Policies for Dynamic Growth towards Improving Social Protection and Well-being of the People,” delivered at the launch of Sri Lanka’s National Social Protection Policy on 16th August 2024.
Delaying Required Reforms for a Prolonged Period – A Policy Disaster
Many of the above long neglected reforms have been discussed for around two decades and in some cases, for up to 50 years, as can be seen in the agreements signed by the Sri Lankan authorities with the IMF in 19777 and 1983. During this period, our neighbors, particularly in South East Asia, have adopted sound macroeconomic policies, integrated with the global economy and built competitiveness, invested in education, and attracted global capital and know-how, allowing rapid economic take-off and improvement of the quality of life of their populations. The following are a few examples.
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| Sri Lankan youth during the in-famous 'Aragalaya' [Photo: Special Arrangement] |
Thailand: The 1997 East Asian crisis had devastating impacts on the Thai economy. The country undertook comprehensive macroeconomic and financial sector reforms supported by the IMF. Fiscal reforms focused on freeing up fiscal space for social protection measures and resources for recapitalization of the financial sector. Extensive financial sector reforms comprised restructuring of corporate debt, recapitalization, and reform of bankruptcy legislation. Economic growth returned to positive territory by 1999 and external debt began to decline.
India: In the wake of deep balance of payments crises in the 1980s, India went into a recession in 1991. India undertook a comprehensive set of macroeconomic reforms in 1990/1991, which set the foundation for transformation of the economy to the powerhouse that it is today. Fiscal reforms played a major role in addressing macroeconomic imbalances, along with monetary policy and foreign exchange management reforms, supported by the IMF from 1990. This was followed by comprehensive trade and industrial policy reforms, which gradually liberalized the Indian economy, unleashing competitive forces and driving productivity gains across the economy.
Jamaica: Jamaica is seen as a success story in terms of macroeconomic reforms undertaken in the last decade. This included significant fiscal reforms to address a longstanding underlying debt burden. Some remarks by Nigel Clarke, Jamaica’s Ambassador of Economic Affairs at the time, are revealing. “The primary surplus that we have decided to pursue is not arbitrary; it is designed to achieve a larger objective, which is the reduction in Jamaica’s debt to levels that are sustainable.
Let me remind you that the 7 percent primary surplus target is merely an intermediate goal. It is a means to an end. The substantive goal is the achievement of real economic independence, where Jamaica has the policy space to address its opportunities and challenges, without reliance on the multilateral community, in a manner that sustains and even enhances that independence”.
However, it is very unfortunate that Sri Lanka is still trying to implement some of the policies that were planned to be implemented 50 years ago, leaving the country well behind its peers in terms of economic development.
A Qualitative Improvement in the Economy
Whilst the reforms undertaken over the last two years have been largely successful in stabilizing the economy, there is also a public expectation in terms of a fundamental change in the quality of economic, political, and social structures in Sri Lanka.
The size of Sri Lanka’s economy should be enhanced substantially in the next decade by integrating into the global platform for knowledge based, sustainable and innovation focused businesses while emphasizing enhanced research and development in emerging sectors. A more transparent and accountable government should be fostered to restore the public trust in the government, which was seriously eroded in the run up to the crisis and during the crisis.
Deep-rooted governance issues and corruption vulnerabilities could contribute to economic challenges and social issues in a country. Corruption has also been identified as a macro critical component in the macroeconomic management and growth process. According to the IMF, “Corruption undermines growth and economic development, its economic and social costs are high, and transparency, effective institutions, and leadership are key factors of success. By vigorously reducing corruption, countries can improve economic stability and boost growth and development”
In this regard, the government of Sri Lanka requested the IMF to conduct a Governance Diagnostic Review, the first in Asia, to identify potential gaps in governance and corruption vulnerabilities, with a view to implementing an evidence based process to address such gaps. Following the publication of this report in 2023, the government has published an Action Plan in February 2024 and is implementing key steps in the Plan. Steps to address corruption must be taken and they are being taken. The Anti-corruption Act was enacted in August 2023, which strengthens the asset and income declaration framework and investigative power of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC). Following the Act’s approval, rules for the appointment of CIABOC Commissioners were gazetted in December 2023. Publication of asset declarations by senior officials in government commenced in July 2024. Key sections of the Anti-Corruption Act, such as sections 109 and 114 (5), give effect to asset forfeiture in relation to corruption related offences.
Whilst it is impossible to eliminate corruption and governance lapses overnight, it is essential to have a robust institutional and legal framework with appropriate checks and balances to make this goal a reality. Over the last two years, the first very significant steps towards addressing broader governance issues in the country have been taken.
Specific measures, led by the Ministry of Finance, have been taken to address issues of fiscal governance. A “system improvement” is being implemented at the revenue collecting agencies. This is not only an effort to improve the systems but an effort to address deeply entrenched legacy issues in these institutions as well – addressing the longstanding weaknesses in RAMIS being just one example. The measures to improve governance and address corruption vulnerabilities in these institutions include the introduction of codes of conduct, establishment of Internal Affairs Units which have already yielded positive outcomes, a High Wealth Individuals Unit (HWIU) at the IRD, strengthening of audit function to focus on risk based audits, and most importantly digitization are part of these efforts. A Criminal Investigation Unit (CIU) has already been established as a sub-unit within the Large Taxpayer Unit (LTU) at the IRD to identify and investigate cases related to crime proceeds. This will operate as a separate unit starting from January 2025.
It is important to understand that even if one hundred percent of these governance gaps are eliminated, the gap in the budget deficit could not be filled. The government expenditure largely comprises very rigid non-discretionary items, such as public sector wages and pensions, interest cost, essential welfare payments. Just the interest cost, pensions and the salary bill alone easily surpasses government revenue. Therefore, even with zero corruption and perfect governance, tax revenue must still be enhanced and expenditure should be managed responsibly with strict discipline in order to reduce the budget deficit and borrowing requirements.
Some groups claim that “the tax burden on the people can be relieved once stolen assets are recovered”. I do not have the evidence to comment on such assets in Sri Lanka, but if we consider the experience of other countries, asset recovery takes an exceedingly long time. Take the case of the Philippines, it took over 18 years for recovery of a small component of estimated ill-gotten gains since Ferdinand Marcos was ousted in 1986.
Unfortunately, in Sri Lanka’s case, time is not a luxury that we have. When the Treasury has to pay salaries at the end of this month, we do not have the option of telling our teachers, doctors, lecturers and civil servants to please wait for a couple of decades and they will be paid eventually. Nonetheless, even though asset recovery has limited near term fiscal benefit, it is crucial to have a framework to enable asset recovery from the perspective of justice.
One of the most important elements required for recovery of assets related to corruption is the legal framework. That is why the recent Anti-Corruption Act incorporates the key elements of the United Nations Convention Against Corruption (UNCAC). At the same time, the proposed Proceeds of Crime Bill, which is in very advanced stages of drafting, will help address the issue of ill-gotten asset recovery in Sri Lanka.
To be Continued
K. M. Mahinda Siriwardana, Secretary to the Treasury and Ministry of Finance, Sri Lanka
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