Sri Lanka: Correct The Price Distortion for A Sustainable Development – Part 3

The government must allow SOEs to sell their products at a cost-reflective price with a reasonable profit margin, enabling them to sustain and invest further. The poor, who cannot afford market prices, should be supported sufficiently to satisfy their basic needs.

by Sirisena Amarasekara

This is the third and final part of this series by the author, Click here and here to read previous parts -Editors

Excess Staff in the Public Service 

Compared to developed and developing countries, Sri Lanka has extensive public service, with about 1.5 million employees for a 22million population, which means one public servant for every 14 people and 19% of the country’s workforce. According to the Central Bank Statistical bulletin, 84.6% of the government tax revenue (Rs.1.1 trillion) of the year 20221 has been spent on public servants’ salaries and pensions, leaving little room for other recurrent expenditures and capital investments. This figure doesn’t reflect the salary bill of the semi-government institutions. Currently, there are 675,000 pensioners, and this number keeps increasing every year, and at a point, this will exceed the number of serving public servants. Most public sector workers have no sufficient work but enjoy the total salary and all other fringe benefits. If we estimate 40% is redundant, 40% of the Rs. 1.1 trillion (Rs.0.44 trillion) is a wasteful expenditure annually, which amounts to another massive subsidy for a privileged group who otherwise could have been unemployed.  If the government employs someone at the age of 18 years, serves for 42 years and lives for 81 years, the government will have to maintain him for 63 years. After his death, if the dependant lives for another 21 years, altogether government is committing to 84 years to obtain his services for 42 years. The above simple example is sufficient to understand the gravity of the problem created by the oversized public service.

Night view of Colombo City [Photo © Thilina Kaluthotage]

In 1990, recruitment to the public sector was frozen, and a voluntary retirement scheme (VRS) was introduced to reduce the size of the public service. Most of the excess cadre was unskilled, who couldn’t be employed anywhere else for that remuneration. Therefore, many did not agree to early retirement, which could have resulted in a low pension for the lifetime and dependents after their deaths. However, the opportunity availed under VRS was capitalised by essential categories such as nurses, engineers, accountants, science and mathematics teachers, and technicians of various fields, creating a vacuum of those skills in the public sector. The government was compelled to fill those vacancies again with qualified but inexperienced people while paying the pension for pre-mature retirees. In 1995, 2005, and 2015, the size of the government service jumped upward due to political reasons.

In 2022, in place of VRS, the government adopted a new approach. According to the circular issued by the Ministry of Finance, public sector employees can avail of no-pay leave to work abroad for a maximum of five years without affecting their seniority and annual increments. This has created great enthusiasm among the employees. However, unwanted cadres (unskilled) may face difficulties securing foreign jobs. Professionals in various fields have a good demand, and heads of departments may find it challenging to prevent them from obtaining five years’ leave. Like in 1990, a vacuum may create again in the essential cadres of public service, compelling the government to do new recruitments. As employees are not retiring under this scheme, vacant positions can’t be filled without creating additional cadres. If that happens, while the new cadre is in the service, employees on leave also shall accommodate after five years, doubling the burden. 

Instead of attempting to reduce the size of the government service in general, a scheme targeted towards unwanted cadres may produce better results. For instance, heads of institutions shall identify such people by name, and provisions of the circular shall apply only to them. Until they find foreign or private sector jobs during the five-year leave period, allow them to stay home with half the salary.  Half of the salary, overtime payments, electricity, telephone bills, and office space will be saved in that case. As a by-product, traffic congestion will be reduced, and the efficiency of the remaining workers will be improved.  Another solution is establishing a combined service for all SOEs, like in the public service. Then employees may be transferred to needy institutions from excess institutions without new recruitments. That would prevent unwarranted competition among institutions for salary and promotion schemes. Also, Politicians will not be able to overload the staff with unwanted cadres. Moreover, excess staff from SOEs may be transferred to public service vacancies instead of new recruitments. Further, in establishing new institutions and expanding the operation of existing institutions, excess staff may be transferred to those places without new recruitments.

Fraudulent Practices

According to various media reports, from time to time, governments write off unpaid taxes and duties from companies. In addition to the above-discussed futile expenditure, many public funds are being drained from public coffers due to the above tax alienation.  However, I don’t have data to highlight the seriousness of the issue.  But the importance of the problem can’t be underestimated. Even with the tax reduction in December 2019, the revenue loss was about Rs500 billion per annum, which continued until the tax revision in 2022. Unpaid accumulated indirect taxes, such as customs duties, excise duties, VAT, etc., are also being written off from time to time. Consumers pay indirect taxes, and companies are only tax collectors. Therefore, companies have no right to keep those; they should pay those to the government or return them to the consumers who paid. But governments have allowed companies to keep these silently, which amounts to fraud. Authorities are allowing tax evasion and accumulating unpaid taxes, compelling the government to costly borrowings to fill temporary gaps. Tax alienation, as well as allowing tax evasion, amounts to a significant subsidy in disguise to a few privileged/corrupt individuals and companies.

Poverty alleviation

The Samurdhi program was launched in 1995 and implemented over the last 28 years as the national poverty alleviation strategy. Conceptually, it has several components for sustainable poverty alleviation. (Income transfer, credit for self-employment, infrastructure rehabilitation, social welfare, awareness building, etc.). As of 2020, 35% of the households (1.8 million) were receiving Samurdi benefits, and another 800,000 were on the waiting list. Including them, it will come to 51% of the households in the country.  While the number of families below the official poverty line has come down to 4%, Sumurdhi relief recipients remained at a very high level of 35% of the total families. It has created a permanent dependency, and no one wants to get out of the program. There are many criticisms about the targeting of the benefits. While non-eligible families are receiving benefits, many eligible families have denied them. Also, there is no regular exit and entry mechanism for the benefits. The government spent 52.47 billion on samadhi relief payments in 2020, which accounts for 0.35 % of the GDP.

Under the Samurdhi banking system, assistance is extended for self-employment/micro-enterprises. But rarely someone comes out of poverty. While a large majority who can work receive the relief grant, the vulnerable without breadwinners in the family are receiving insufficient amounts to meet their basic needs. Self-employment is a mythical solution for most unskilled people. It will help only a few people with entrepreneurial skills and attitudes. Others must be employed for monthly or weekly wages to escape poverty.  

Most Samutdhi recipients can be easily diverted to an Employment Guarantee Program (public work /cash for works program) to maintain public properties, which are hitherto neglected due to a lack of funds. (Irrigation schemes, provincial and local authority roads, landscaping, schools, hospitals, etc., and various local government functions). The issue of targeting or selecting beneficiaries does not arise as only the unemployed, and the absolute poor will participate in such a program. Under such a scheme, the number seeking the Samurdhi relief grant will decrease drastically, and the public assets will be maintained.  Suppose a reasonable percentage of the above-discussed fruitless expenditure is saved through appropriate strategies. In that case, sufficient funds will be available to implement a National Employment Guarantee Scheme (cash for work) and adequate assistants to vulnerable families to alleviate absolute poverty.

 Conclusions

The above is a brief account of significant subsidies and wasteful expenditures, resulting in price distortion in the market and mal allocation of scarce resources. There may be many more such futile public expenditures contributing to the problem.  As people do not pay the actual economic costs for many things, they have gotten used to an artificial style of living, which is unaffordable to the overall economy. If we can correct a significant percentage of these distortions and unproductive spending, adequate resources can be generated to invest in a rapid growth phase and support the poor without many public debts. The government must allow SOEs to sell their products at a cost-reflective price with a reasonable profit margin, enabling them to sustain and invest further. The poor, who cannot afford market prices, should be supported sufficiently to satisfy their basic needs. Overall savings from economic reforms would be adequate for that purpose. However, cash grants will go to the wrong hands, like in the Samurdhi. Therefore, launching an employment guarantee scheme is more advisable and manageable. Then the cash grant should cover only vulnerable families. However, over the decades’ distortion of market prices and subsidies have been used as bait to lure voters, and now it is a structural issue, embracing the whole economy and the gamut of life, creating a cancerous effect. This needs far-reaching reforms, but such an attempt may backfire on the government. It shall be done with a cautious approach, step by step, with a holistic approach.

Concluded

Sirisena Amarasekara is a Sri Lankan public servant and diplomat. He is the former Sri Lankan High Commissioner to South Africa, Mozambique, Namibia, Zambia, Zimbabwe, Lesotho, Angola, Botswana, and Eswatin. He had functioned as the secretary to the Prime Minister on two occasions, and as the secretary to the Cabinet of Sri Lanka. Having completed more than 50 years of public service, Amarasekara is one of the most senior Sri Lankan public servants.

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