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Need to privatise state-owned enterprises

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By Dr. Ruchith Dissanayake (Senior Lecturer, Queensland University of Technology)

As predicted in my previous articles, inflation will continue to skyrocket under supply constraints and negative real interest rates. The current interest rates set by the Central Bank are too low to curb the demand. Given the severity of the current situation, the government has to initially focus on securing funds from the International Monetary Fund (IMF) to pay for essentials goods. The IMF funds will, at least, partially, stabilise the economy and help avoid a catastrophe.

However, the IMF assistance is at best a temporary solution to a more fundamental problem in the economy. This is not the first time that the government has asked for IMF assistance. Since 1965, Sri Lanka has continually asked for IMF assistance. For instance, in June 2016, the IMF approved a US$1.5 billion loan to support the country’s economic reform agenda. Yes, you read that correctly. Those funds were indeed earmarked for reforming the economy. Clearly, these loans did not bring long-term prosperity.

In fact, as the IMF chief economist, the financial economist Raghuram Rajan questioned and criticised the efficacy of foreign aid. He was not wrong! These types of “arrangements” rarely work in the long-term. Fundamental reforms are needed to fix the economy. Note that I’m not blaming the IMF for aiding Sri Lanka. On the contrary, at least these funds helped in the short-run during terrible times. I place the blame solely on Sri Lankan policymakers. Some of the responsibility should also fall on the shoulders of citizens who voted such incompetent and unqualified policymakers into Parliament.

Do not waste this crisis!

Let’s examine why Sri Lanka needs to look beyond the initial stabilisation stage to actually change the direction for the country. The ongoing people’s protests have brought some of the more fundamental economic issues to the forefront of media and policy debates. Many have correctly identified government mismanagement as a serious problem. The current “solutions” put forth by policymakers include raising taxes, seeking further debt, and increasing social welfare. To be blunt, these are not solutions to the fundamental issues in the economy.

It’s high time that the people demand structural reforms for the long-term growth of the nation. This level of protests by Sri Lankans of different backgrounds is unprecedented. It is time to combine the passion seen in the streets with quality economic ideas that work. Simply being satisfied with an IMF loan and a return back to status quo would be a huge mistake. The protest must go on until there are real structural changes.

Privatise SOEs

Reducing excessive government spending and moving towards a market economy is the only way forward. Privatisation of state-owned enterprises (SOEs) is one of the most important reforms towards achieving this goal. Privatisation often results in increased productivity, efficiency, and greater economic activity through increased investment. SOEs, on the other hand, are more overstaffed, politically driven, less rigorously supervised, and operate in state-provided monopolies shielded from competition. Note that some of the people working in state-owned enterprises are in fact hard-working and dedicated. I do not place the blame on the workers but the structure of SOEs.

In a private incentivised environment, those same individuals would contribute significantly to the Sri Lankan economy. Why? In the private sector, corporations face budget constraints. Unlike the government, firms cannot simply collect more money from hard-working taxpayers or print more money. If private firms incur sustained losses, then the loss of cash flow will push them into bankruptcy. Thus, to stay competitive, private firms must provide its customers quality goods and services in a timely manner at affordable prices.

Let’s start with the financial sector, which is the heart of the economy. Is there a good reason why commercial banks such as the Bank of Ceylon, People’s Bank and National Savings Bank exist as SOEs? Clearly not! There are many dangers of having state-owned banking institutions. They tend to extend credit based on political connections and finance loss-making businesses. Do we need to give the political class even more power through financial leverage? The rest of the developed world has already moved on from state-ownership of banks and Sri Lanka must follow suit.

Currently, there are hundreds of poorly governed inefficient SOEs and regulatory bodies. SriLankan Airlines, for example, is an embarrassment in the skies. The electricity and petroleum sectors need to be privatised. Yes, there are important aspects to consider when privatising the country’s important industries. For such strategic sectors, a possible proposition is to limit the percentage of share ownership by foreign investors.

Given the sheer number of SOEs, I’m surprised that the government hasn’t introduced an enterprise just to track them all. Do you need separate SOEs such as the Coconut Development Authority, Lanka Sugar, Chilaw Plantation, Galoya Plantations, Sri Lanka Cashew Corporation, Sri Lanka State Plantations Corporation, and Kurunegala Plantations Ltd? What is next? A SOE for the development of sambola? Most of the SOEs should either be scrapped or privatised. This reduces the ongoing government expenditure and thus the burden on the hardworking taxpayer.

Do it right

Although the privatisation of SOEs is the way forward, such a large endeavour should be managed by a panel of qualified experts. The high-quality assets should not go to a few politically well-connected people. Competitive industries should be created. The valuation processes have to be transparent to the public in accordance with the established standards of international practice. The privatisation has to be done right.

In the meantime, the government should focus on reducing the budget and improving human capital through education, healthcare, and security. Also, programmes must be created to ensure that workers can transition from the state-owned to the more efficient private sector. Those are functions that can be carried out by a few small government departments. The combination of a small government and a vibrant private sector is the only way forward!

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