Abolishing PERC and challenge of
reforming the state sector
govt. has decided to abolish the Public Enterprises Reforms Commission (PERC) as
it finds the outfit redundant with their declared policy of non- privatization
of the state controlled enterprises.
We have no issue with that as in many countries essential public utilities are
run by the state and in some countries they are run as efficiently as the
private sector entities.
Therefore at least in theory there is no reason why we in Sri Lanka cannot do
the same thing. However, the looking back at our history it is clear that the
facts have been different throughout our post independence era.
All state entities – the service oriented government departments as well as the
government owned enterprises are infested with chronic politicization resulting
from the government ownership. This has led to all sorts of political
interference in day-to-day management of these institutions.
The commonest maladies in these institutions are over staffing and lack of right
person for the right job because of politically motivated recruitment;
promotions based on political affiliations rather than efficiency or good
performance; financial mismanagement and the dominance of politically affiliated
This is one of the reasons why multi lateral funding agencies such as the World
Bank and the Asian Development Bank have often insisted on privatization as a
means of reforming the state-run sectors of the economy whose inefficiency has
been hindering the progress of the economy.
In the developed West, in Singapore and Dubai and even in our neighbouring India
we find some efficiently run state owned enterprises. However, we are yet to see
anything of that sort in Sri Lanka. On the contrary we have witnessed
unprecedented vast improvements in sectors like telecom and insurance after
liberalization and privatization.
In a situation like this, the biggest challenge is how to increase the
efficiency in the state sector entities especially in areas such as electricity,
railway, and water services which are vital for the efficient running of the
Despite many efforts to improve them without privatizing we have not seen any
progress in the past. The kind of infrastructure support provided by these
entities for the entire economy is so vital that the postponement of the
resolution of these issues can be detrimental to the future of the entire
Therefore it is essential to look for avenues of reforming these sectors and to
introduce private sector norms of work, if we are to achieve economic
development without privatizing these entities. It seems to be a monumental
A practical approach to
inflation in SL
If an economy identifies what type of inflation is
occurring (cost-push or demand-pull), then the economy may be better able to
rectify. Though the reasons are obvious for the inflationary trend in our
country for many years, have the authorities managed to arrest the main cause
irrespective of the unpopular measures they have to undertake. Has the real
cause being understood and addressed and right measures being taken to rectify
it or have we tried to justify the figures for political gain and prove to the
public using same figures that there was no inflation or it had been well
By Haris Salpitikorala
Inflation is defined as the rate (%) at which the general price level of goods
and services is rising, causing purchasing power to fall. In a market economy
rise and fall of prices due to supply and demand for some items are common and
that is not inflation. Inflation occurs when most prices are rising by some
degree across the whole economy. Inflation is not simply a matter of rising
prices. There are endemic and perhaps diverse reasons at the root of inflation.
Two main inflationary trends are
This is a result of decreased aggregate supply as well as increased costs of
production, itself a result of different factors. The rising cost of running a
business such as import tax, communication cost, energy, labour and material
etc. will directly affect the cost of the goods. In Sri Lanka this is more than
true when we look at how the cost of different taxes, duties and essential
services had gone up during the last 10 years.
Demand Pull Inflation-
This is a result of increased demand for limited supply of goods. It could be
the result of many factors, including increases in government spending,
providing jobs in the government sector etc. If government decides to fuel the
economy’s engine by decreasing taxation, giving consumers more spending money
while increasing government spending in the form of buying services from the
market (such as building roads or schools) this creates more money supply in the
market. By paying for such services, the government creates jobs and wages that
are in turn pumped into the economy. Pumping money into the economy is also
known as “pump priming”. If unchecked, this may create demand pull inflation.
Identification of the main cause for inflation
If an economy identifies what type of inflation is occurring (cost-push or
demand-pull), then the economy may be better able to rectify.
Though the reasons are obvious for the inflationary trend in our country for
many years, have the authorities managed to arrest the main cause irrespective
of the unpopular measures they have to undertake. Has the real cause being
understood and addressed and right measures being taken to rectify it or have we
tried to justify the figures for political gain and prove to the public using
same figures that there was no inflation or it had been well controlled?
In Sri Lanka we need to look beyond the text book theory to rectify this
situation, accept and admit the real cause irrespective of the political
unpopularity or otherwise. This need practical people and not the text book
Have the prices in all sectors in Sri Lanka, gone up well beyond the limit of an
average man during last 10 years? The answer is, yes. Then whoever tries to
justify the low inflation using statistics is not going to paint the real
picture in the mind of an ordinary man who experiences the price increases in
his weekly trip to the market to buy his provisions.
The fact that our prices have gone up tremendously shows that we have inflation
in Sri Lanka. Is it Cost –push or Demand- pull inflation? If we do not identify
the right cause, the measures that are taken to rectify it, could work on the
opposite direction creating spiral effect on the inflationary trend. So the
first is to identify the right cause for the inflation and then take appropriate
and practical steps to control it once and for all.
In a Demand pull inflation the demand goes up because people have extra money.
The government taxes and duties are generally low so people have more disposable
income... In such a situation the controlling measures are very obvious and
simple. It could be taken straight from the text book. That is to make sure the
money supply is curtailed by various methods including increase in interest
rates. As the interest rates have gone up considerably high in Sri Lanka during
the last two years, we can presume knowingly or unknowingly that we have taken
the approach assuming our inflation is demand Pull. Assumption here is that
people have more money so they spend more; therefore the demand is more. Thus by
increasing the interest rates and curtailing the money supply there will be less
money for people to spend which means people are encouraged to save more in
fixed deposits and cut down their purchasing power and the desire for
investment. These are called non productive investment but the objective to
control the demand pull inflation could be achieved by curtailing the money
supply in the market...
What is happening in Sri Lanka? Do we have demand pull inflation? Do people
spend more and buy more and more daily? Are the corrective measures taken
In an economy where people are struggling to have their three meals a day and
half of their earning is spent on their transport cost to report to work, where
do they get extra money to push the demand in order to increase the prices of
essential items and create a huge difference in the demand curve? In actual
fact, they are buying less.
The simple example can be seen in the fish market. Those who bought one kilo of
fish few years back had gone down to buy ½ kilo. In fact last month I saw people
buying 250grammes.Talk to a person who sells fish and you get the truth. It is
same with every essential item in the menu for an ordinary person. In fact the
quantity of buying has gone down and that means proportionately the demand has
gone down too.
This is the reality and it is not shown in the text book. This proves that our
inflation is not demand Pull Inflation though it appears to be. So we need to
identify the cause first before taking action to rectify it. If it is not demand
pull inflation, the increase in interest rates is not the right way to control
It is my view that our inflation is cost push inflation and it had been true
during the last 10 years or so. It is obvious when we look at the elements of
cost of production and how fast those elements have been changed in the past.
The increase in essential ingredients for production such as fuel,
communication, electricity, import duties and various other types of taxes have
pushed every thing to an extreme, making the production cost and import cost
high above an ordinary person. It has been happening every six months for the
last few years.
The guaranteed way for the government to make money to balance the budget is to
increase the cost of essential goods and services. But the cost of the above
ingredients is directly related to the production cost or all the essential
items used by the common man, may it be transport, food items or stationery.
Therefore, one simple factor here is very clear; the inflation of ours is cost
push not demand pull. Then why we have increased the interest rate which is done
in the demand pull inflationary trend. It confuses me. I feel high interest
rates work in the opposite direction in practice making prices to go up further;
When the interest rate is high (as it is above 20%) no small and medium term
enterprises could generate profit or even make enough money to pay such interest
rates. All Small and Medium Term Enterprises are run partly by bank loan or
How is it possible for them to absorb more than 20% interest as cost factor and
yet make money? So the best is not to invest or those who have invested will
have to close shops making a further shrinkage in supply of goods and services.
If you do a proper survey, there are enough examples to show that many SMEs are
closed down due to the reasons mentioned above.
Whether it is closure or non investment, both these amount to cutting down the
supply lines. The end result will be prices going up further as demand remain
the same in essential goods but the supply has become short due to lack of
investment in SMEs and closing down of existing SMEs due to non profitability or
cash flow problems.
To aggravate the situation money supply has also gone up as the jobs are given
in non productive sectors to please the graduates and unemployed youths. Having
them placed in government departments with no extra productivity will create
more inflationary trend in the economy as the cost of the above recruits need to
be absorbed by increase in taxes or printing paper money.
What we need to do is to bite the bullet and get some concrete steps worked out
to rectify the situation once and for all. Some of the ideas in this line of
• A must factor is the overall productivity has to go up. More jobs need to be
created as a priority in productive sectors and minimal in non productive
sectors. The government has to discuss with the private sector to do so by
giving them incentives or special tariff rates for energy and other elements
needed in production lines, so they could create extra employment and those
employees could contribute substantial productivity for their wages.
• Bring down the interest rates and import duties to make sure that those who
run SMEs could make money and expand their businesses so they are able to
recruit more people for productive engagement. Also, this could encourage new
investors to jump into the investment vehicle.
• New ventures should be encouraged on the basis of using local raw materials to
make sure the raw material producers would also earn a reasonable income so the
overall productivity in the country would go up and the production cost too will
eventually come down when the volume increases. Whatever the products, we are
unable to produce at a competitive price, need to be imported as to provide
people with essential goods at a reasonable price. The incentives by BOI should
not only be based on export but also take into account usage of local raw
material though the product is not sold in the local market. What we need to
encourage is the total productivity in the sectors that we could excel.
• Production cost should not be pushed up by increase in energy cost, fuel and
import duties. Adopt special rates for electricity and import duties for
business ventures and make sure all the businesses are not only sustainable but
also make enough money to expand. This would undoubtedly attract more investors.
• All incentives should be given to increase the productivity. There is no way a
country could prosper by making the business demoralized by government
departments dealing specially with duties and taxes. It is the business men who
create jobs. So they need to be protected to make sure the productivity goes up
and when the productivity goes up the inflation would automatically come down
with little intervention from the Central Bank.
• Create a steering committee to look into all the factories that were closed
down and assist them to re open. Those owners who dumped millions of capital
want to reopen, so little help from the government to address their problems
would create over night extra production for the economy and productive
employments. This is much easier than inviting new investors by giving them
This is of course a long process but it is a sure way to cut down inflation and
bring some light into this gloomy economy. The figures are irrelevant but
practically these steps would work as business needs to be flourished in order
to increase the productivity.
Provincial Councils retard private sector
By Quintus Perera
A consensus appeared to have emerged at a recent discussion that Provincial
Council System is a failure at least in the context of Provincial Development
At the National Conference on Policy Constraints, Regulatory Barriers and
Regional Economic Development held at Galadari Hotel, last week, the three
leading speakers, Dr Sarath Amunugama Minister of Enterprise Development and
Investment Promotion; Dr. Saman Kelegama, Executive Director, Institute of
Policy Studies and Dr. Wilbert Gunaratne, Director, Centre for Development
Research, Royal Institute were all critical of the provincial governance that
gravely impeded the provincial development.
Inaugurating the conference Macky Hasshim, Immediate Past President, FCCISL and
former President, SAARC Chamber of Commerce said that the local private sector
development can be influenced at three levels – national, regional and micro,
while globalization gives rise to opportunities for local private sector
development. It could also create new threats and challenges to local private
He said that liberalization and international trade agreements can generate both
positive and negative impact on private sector development. Satisfactory
macroeconomic framework and conditions are essential to sustain the local
private sector development. He said that however, no proper policy measures have
been taken to develop such macroeconomic framework and conditions to direct
private sector development in the country.
Dr Saman Kelegama, Executive Director, Institute of Policy Studies speaking on
‘The Role of Private Sector/ Chambers in Stimulating Regional Economic Growth’
said that since independence, in the sphere of regional development the
government and the people had a major role to play. In early days there were
major industries set up in the provinces like Kankesanturai Cement factory,
Paranthan Chemical Factory, Valachchenai Paper Factory. But when these
industries were brought under provincial administration, the regional
comparative advantages were never taken into consideration.
The failure in the regional development, he attributed to the cutting of capital
expenditure to balance the budget deficit and said that various institutions
like BOI, Industrial Estates and Industrial Parks do the same thing and people
get confused as to where to seek assistance.
He said that if one looks at the provinces in our county they are demarcated
according to administrative convenience and not on the basis of economic
He said that the Provincial Councils are not geared to promote economic
activities. The reason trotted out being inadequacy of decentralization. Due to
these factors revenue mobilizing in the PCs is limited. He said that there is
redundancy in existing systems - there is the Provincial Council, the Government
Agent and the Kachcheri system. These are the bottlenecks to mobilize funds. He
said that most of the institutions under them are a failure, including the
Southern Development Authority. The only one that could be named as successful
is the Mahaweli Authority.
He said that these institutions were set up mainly to provide employment and
regional development. Since 1977 both private and public sectors were involved
in the regional development activities. Private sector was supposed to open up
industries or agricultural activities using the incentives granted but they were
found to be inadequate.
Institutions like the BOI were set up for regional development. Especially after
the liberalisation of the economy, donors also played an important role. In the
context of regional development donors mobilized funds for mega infrastructural
He said that the role of the donors gathered momentum after the economy was
opened up and they not only involved in Mega projects but also in small projects
and that is how most of these regional development activities have taken place
over the years in the country.
He said that since 1980s the country is facing huge budget deficits and when
doing the balancing act, cutting capital expenditure was seen to be easier than
cutting current expenditure, like salaries, pensions etc. These cuts affect the
regional development. He emphasized that capital expenditure is investment for
Dr Wilbert Gooneratne, Director, CDR, speaking on “Policy and Regulatory Issues
Faced by the Regional Private Sector”, said that private sector is confronted
with problems created by the prevalent legal and regulatory systems.
Dr Gooneratne said that the country’s legal and regulatory framework is outdated
and despite over two decades of an increasingly liberal market economy, the
bureaucratic system has remained rigid and control oriented, still glued to FR
and AR and by and large not so business friendly.