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ECONOMYNEXT – Sri Lanka would have avoided sovereign default if the reforms initiated by a government in 2001 was completed, State Minister for Transport Bandula Gunawardana said.

Sri Lanka’s cabinet this week gave the go ahead to start a contributory pension fund for new state employees which will make the cost of the public service transparent and avoid unfunded liabilities.

The plan was originally proposed in an administration where current President Ranil Wickremesinghe was Prime Minister.

“In 2001 and 2002, knowing that the country would face this situation, the government proposed various alternative solutions,” Gunawardana said at a weekly cabinet news briefing.

“These included passing the Financial Management Act No. 03 of 2003, implementing a revenue authority by combining Customs, the Income Revenue Department, and the Excise Department, and introducing a contributory pension scheme.”

At the time Gunawardana was Deputy Finance Minister. The reforms were opposed by the Janatha Vimukthi Peramuna, who slammed the government for not hiring unemployed graduates and paying them with peoples’ taxes.

Legislator Wimal Weerawansa who was also in the JVP at the time, opposed market pricing of fuel calling it a ‘Word Bank plug’ though inflation was brought to near zero with automatic fuel pricing reducing state credit.

“If we had implemented those decisions 20 years ago, this country would never be in this position,” Gunawardana said.

“Unfortunately, at that time, the public called for the government that proposed these solutions to go home, and it did so in the following election.”

At the time then Governor S. Jayewardene, also kept monetary policy tight, helping reserves go up and keeping inflation down.

Among those who opposed the reforms were Mangala Samaraweera. He later said he regretted his actions in 2004.

Samaraweera tried to fix the budget which was de-stabilized by the so-called 100-day subsidy program of 2015 and ‘revenue based fiscal consolidation’ where spending based consolidation (cost cutting) was abandoned, with higher taxes in 2018.

However the central bank was at the time pursuing flexible inflation targeting injecting tens of billions of rupees in the banking system to mis-target a policy rate and the currency collapsed, discrediting reforms and an attempt at free trade failed.

Countries that follow similar flexible policies to mis-target rates, including Ghana, Zambia have also defaulted on their external debt after rates were cut in a post-Coronavirus recovery.

Pakistan and several other countries are also in serious trouble. (Colombo/Mar05/2023)

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