Thematic

13% primary expenditure rule proposed for Sri Lanka departs from economic theory and practice

The 13% primary expenditure rule proposed in a new public finance bill is at odds with established economic theory. It will undermine “good” public spending that enhances growth, efficiency, and social welfare. It will also make Sri Lanka a global outlier, by setting a GDP based limit on primary expenditure, which is the lowest in the world.

Looking Beyond the Economic Transformation Bill

This note proposes three steps Sri Lanka could take to construct and manage high quality Investment Zones, drawing from regional and global best practices. First, is enacting a separate, overarching legislation to govern Zones. Second, is enhancing the quality of Zones by mandating minimum quality standards and establishing minimum criteria for selecting investors to develop and manage Zones. Third, is preventing conflicts of interest by separating the roles and responsibilities of regulators, developers, and operators and establishing a level playing field by ensuring regulatory independence. Underlying these proposals is the recognition that Sri Lanka needs to have a more robust regulatory framework than what is provided in the Economic Transformation Bill (ETB) gazetted on May 14, 2024. The need for such a framework is higher in Sri Lanka, given the scarcity of land and intense competition in the Asian region for foreign investments. The recommendations address three critical problems that have made Sri Lanka fall behind many of its regional peers. s. First, Sri Lanka has under-invested in both the quantity and quality of Zones. Second, it has exclusively depended on the public sector to build and manage Zones. Third, the country lacks an appropriate regulatory framework to attract private…

Blueprint for a Rational Government in Sri Lanka

A ‘Blueprint for a Rational Government in Sri Lanka‘, created by Verité Research and Manthri.lk, seeks to implement the recommendations from the White Paper on “A Rational Method for Cabinet Formation in Sri Lanka“, published in 2020. It lists down the duties and functions, institutions and acts to be implemented under the 15 ministries proposed in the annexures of the White Paper, following revisions that were supported by extensive expert consultation. This document is the blueprint by which governments can solve 3 key issues relating to irrational cabinet formation: 1. Misalignment of subjects Unrelated subjects being grouped together under one ministry. 2. Fragmentation of subjects Related subjects being split across different ministries. 3. Not having a fixed structure for ministries and their institutions Ministry purviews often change alongside ministerial appointments and shuffles, resulting in institutions shifting from ministry to ministry. The document takes on the form of an extraordinary gazette, and serves as a starting point for a more effectively and efficiently structured form of government.

State of the Budget: 2024

The State of the Budget 2024 report compiled by Verité Research assesses the financial, economic and fiscal assumptions, the computation of estimates, and reporting standards applied in the 2024 Budget Speech. The state of the Budget is set out in four main sections. Section one introduces the report, sets out its objectives, and provides some background on Sri Lanka’s budget formulation process. Section two draws attention to the various deficiencies in the budget. Section three analyses the revenue estimates used in Sri Lanka’s 2024 Budget. Section four focuses on expenditure allocations and highlights concerns regarding the 2024 budget.

Proposal for a Governance-Linked Bond in Restructuring Sri Lanka’s Debt

To address the governance risk to debt sustainability and provide incentives for the Government of Sri Lanka to implement governance reforms, this proposal sets out the structure of a novel sovereign debt instrument that can be used for countries with significant country risk in terms of future default, where the risk is likely to be correlated with the trajectory of governance. It is termed a “Governance-Linked Sovereign Bond” (GLSB). This short proposal is derived from a working paper by Verité Research that sets out the technical basis for the GLSB described here.

Backwards in Blacklisting: Gaps in Sri Lanka’s Procurement Framework Enable Corruption

The research brief titled “Backwards in Blacklisting: Gaps in Sri Lanka’s Procurement Framework Enable Corruption” by Verité Research, published in November 2023, critically evaluates Sri Lanka’s public procurement system. It highlights two significant gaps: the legal gap, where procurement guidelines don’t allow for blacklisting contractors/suppliers involved in fraud and corruption, and the compliance gap, shown by the failure to maintain a blacklist for defaulting contractors. The brief compares Sri Lanka’s approach unfavourably with other South Asian countries, noting these countries’ more effective implementation of blacklisting and their maintenance of updated online databases of blacklisted firms. The study emphasizes the need for Sri Lanka to implement robust blacklisting provisions and maintain a comprehensive online list of blacklisted companies to deter corruption and ensure efficient use of public funds.

Retirement Funds Face Regressive Taxation in Sri Lanka

In September 2023, Sri Lanka became the only country to restructure local currency debt by exclusively targeting retirement savings funds, excluding all others. This was justified by claiming that retirement savings were receiving preferential tax treatment. This insight finds both empirical and analytical evidence to the contrary, and shows that retirement funds face adverse, not preferential tax treatment.

Sri Lanka falls behind Least Developed Countries in Trade Facilitation

While there may be numerous factors contributing to Sri Lanka’s sluggish export performance, this background note highlights an important one that puts Sri Lankan exporters at a disadvantage: the failure of the government to facilitate trade by making import and export procedures efficient, less costly, more predictable, and transparent. The comparison is done by using the notifications on progress made by countries under the World Trade Organisation’s Trade Facilitation Agreement (TFA) as a yardstick. The analysis finds that Sri Lanka’s progress falls below not only its competitors and peers but also the least developed countries. Out of the 125 developing and least developed countries, Sri Lanka (ranked 104th) is among the countries that have made the least progress in implementing measures to facilitate trade. Based on the findings, this note provides three lessons Sri Lanka can learn from the experience of others and provides an indicative list of ten measures Sri Lanka can prioritise to implement.

Foregoing Competition to Secure Funding for Public Infrastructure

In 2010, Sri Lanka established a unique framework, overseen by the Standing Cabinet Appointed Review Committee (SCARC), to handle unsolicited proposals (USPs) for public infrastructure funding. These USPs inherently bypass traditional competitive bidding in procurement. The report, ‘Foregoing Competition to Secure Funding for Public Infrastructure: One-Third of Funding Secured was Non-Concessional’, scrutinizes this framework. It reveals a significant discrepancy between the framework’s intended purpose of improving USP evaluation and the actual outcomes, with a substantial portion of the funding secured through SCARC being non-concessional in nature. The report identifies two vulnerabilities in the existing procurement framework that need urgent attention: the Cabinet’s unchecked power to modify procurement guidelines, and SCARC’s ability to approve projects non-compliant with even the minimum criteria outlined without repercussions.

ISSUE 3: 17 MAY 2023 – VERITÉ RESEARCH DEBT UPDATE

This edition provides coverage and analysis of the IMF Debt Sustainability Analysis (DSA) and Sri Lanka’s progress on the 100 commitments outlined in the IMF program