IMF identifies pervasive corruption as the main obstacle to reform in Sri Lanka

The President and the Central Bank have taken praiseworthy steps but the basic malaise, corruption, will have to be rooted out.

By P.K.Balachandran

Colombo, February 1:

The IMF’s latest Governance Diagnostic Assessment (GDA) of Sri Lanka dated September 2023, identifies pervasive corruption as the main obstacle to reform in the island nation.  

While praising President Ranil Wickremesinghe for setting out a reform program designed to stabilise the economy through a combination of steps to restore fiscal and debt sustainability, improve governance, and reduce corruption, reforms will not take root unless corruption is reined in.

Ranil Wickremesinghe assumed the Presidency in July 2022 and the IMF approved an Extended Fund Facility (EFF) Arrangement in March 2023. However, despite tentative signs of macroeconomic stabilization with inflation moderating, exchange rate stabilizing, and the Central Bank of Sri Lanka (CBSL) rebuilding reserves buffers, social tensions remain high due to falling real incomes.

Government measures to address the balance of payment crisis, including tax reforms and cost-recovery pricing in the energy sector, have raised the cost of living while continued shortages of essentials.

Large fiscal deficit and elevated debt continued to weigh on recovery prospects. The absence of visible progress on addressing corruption and holding officials to account for past behaviour raises popular concerns.

The GDA revealed systematic and severe governance weaknesses and corruption vulnerabilities across state functions. Corruption vulnerabilities are exacerbated by weak accountability institutions, including the Commission to Investigate Allegations of Bribery and Corruption (CIABOC). These institutions have neither the authority nor competency to successfully fulfil their functions, the GDA says.

No Yardsticks

Current governance arrangements have not established clear standards for permissible official behaviour, the GDA says. There is lack of action to deter transgressions, nor are transgressors punished. There is no action to get back stolen public funds that have exited the country.

Regular civil society participation in oversight and monitoring of government actions is restricted by limited transparency, and a lack of platforms for inclusive and participatory governance. A lose application of the counter-terrorism laws prevents protest.

Key institutions appear compromised. There are critical gaps in the legal and regulatory infrastructure for managing and overseeing public resources. There is limited fiscal discipline and transparency. The regulatory and legislative processes are disorganized. There is insufficient review.

The GDA says that progress made in integrating modern information technology into public sector operations and public- private interfaces, or in linking information to detect and correct inefficiencies and improprieties has been minimal.

Informal mechanisms of control take the place of rule-based systems of accountability for performance, the GDA observes. The impunity for misbehaviour enjoyed by officials undermines trust in the public sector and compounds concerns over limited access to efficient and rule-based adjudication process for resolving disputes.

Anti-Corruption Act 

The Anti-Corruption Act (ACA) substantially improved the legal environment for addressing corruption, the GDA grants. But gaining the full benefit of the improved legal framework hinges on the creation of a transparent and merit-based process, informed by input from acknowledged experts in governance and anticorruption. The system is lacking in the latrer.

The selection of Commissioners of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC), should be based on competence and integrity assessed without fear or favour, the GDA suggests.

Asset Recovery

There is a need for a modern law on Asset Recovery. Rapid operationalizing of the Anti-Corruption Act will be critical to address current corruption vulnerabilities associated with the lack of a functional system for receiving, publishing, and reviewing asset declarations by public officials.

There are competency issues in the investigation and prosecution of corruption cases.

The ability of the current anticorruption arrangements to effectively prevent, identify, and sanction corrupt behaviour is further constrained by limitations on the sharing of information across institutions, such as among the Supreme Audit Agency, the Financial Intelligence Unit, and the Anticorruption Agency.

Transparent standards for public officials, including a Conflict-of-Interest system, are lacking, and opportunities for public participation and oversight of official behaviour, including by civil society, are too restricted.

Money Laundering

While anti-money laundering mechanisms can contribute to reducing corruption vulnerabilities, current approaches to Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) system largely fail to support effective state action, the GDA says.

Current practices by financial institutions largely fail to identify suspicious transactions. At the same time, weaknesses in the legal framework, problems in cooperation on corruption-related issues between competent authorities, and issues in establishing effective protocols for collaboration with foreign jurisdictions impair sanctioning corrupt officials for money laundering offenses or recovering stolen assets.

State Owned Enterprises  

The acceptance of unsolicited capital investment proposals lacks transparency and competition. These have contributed to a large and growing portfolio of “problem” projects and raised corruption concerns.

Substantial governance weaknesses exist across the management of State-Owned Enterprises (SOEs), including a lack of clarity in the government’s portfolio, the absence of an explicit state policy to guide the management of its financial stake, and limited regulatory guidance and monitoring of the selection of executives and representatives of the state on Boards of Directors.

The lack of oversight and transparency around the operation of state enterprises enhances exposure to corruption vulnerabilities, especially regarding procurement and other forms of contracting, and capital investments.

Weaknesses in internal audit and control processes place an excessive burden on the Auditor-General to identify corruption risks.

The absence of effective mechanisms to follow up on audit findings and observations contributes to the persistence of problematic procedural and managerial practices while restricting accountability for past actions.

Public Procurement

Corruption vulnerabilities in Public Procurement remain high. The absence of a public procurement law creates ambiguity in the legal framework, and has contributed to high-levels of political engagement in the selection of procurement winners, poor contract management, limited transparency and a lack of oversight of procurement processes and outcomes.

Tax Practices

Sri Lanka has recently made marked progress in increasing the clarity of the legal framework around taxes, including reducing the number of tax incentives, and providing for integrity and oversight provisions.

However, modifications of the tax laws occur frequently and with little notice or centralised consideration. Substantial corruption vulnerabilities are created through the granting of high-value and long-lasting concessions for investments determined to be of “strategic importance” in a process that lacks clarity and transparency.

Corruption risks stem from the Special Commodity Levy, which provides for excessive levels of ministerial discretion in granting tax changes relating to specific commodities with immediate effect.

The absence of clear mechanisms for information sharing among authorities responsible for tax policy and Revenue Administration limits the soundness of policy choices while it restricts the ability to identify and address shortfalls in expected revenue collection.

Exposure to corruption in customs and tax administration is substantial, given the absence of effective systems for performance monitoring and detecting and sanctioning of officials for improper behaviour.

Poor Digitalization

The limited progress that has been made in digitizing processes in tax and customs requires users to maintain high levels of direct interaction with officials and reduces the ability to identify integrity issues through data analytics.

Central Bank Governance

The Central Bank has successfully worked to avoid a banking crisis and has established mechanisms to monitor compliance with core financial sector rules, GDA says.

The enactment of the Central Bank of Sri Lanka Act of September 2023 is a critical step in addressing some of these issues, including by improving aspects of the CBSL’s institutional, personal, and financial autonomy, as well as the appointment process and qualifications for the Governor of the Central Bank and other senior officials.

Corporate governance provisions, often defined in state bank statutes, do not reflect good practice and international standards in areas like the competency and integrity of directors and the composition and role of the Board.

The rules and regulatory practices applied to Non-Bank Financial Institutions (NBFI), are not aligned with proportionality considerations. Oversight of prudential regulations around lending limits to borrowers is undermined by exemptions given in the “maximum amount of accommodation,” regulation.

The tendency for financial regulations to be applied in a somewhat fragmented manner encourages excessive focus on narrow compliance checking, without adequate attention to broader governance risks.

Contract Enforcement Weaknesses

There are risks of corruption in Contract Enforcement and the Protection of Property Rights in ways that substantially constrain private sector development.

Multi-year waiting times for the resolution of contract disputes prevent reliance on courts for effective and fair resolution of disputes and encourage disputants to find ways, not always legal, to speed up adjudication.

Widespread confusion over the allocation of property rights and the lack of progress in digitizing property records generates extensive long-term legal disputes and promotes resort to opaque means to influence the resolution of disputes.

Integrity of Judiciary

Concerns about the integrity of the judiciary have grown over time, given the strong incentives of private parties to use illicit payments as a way to solve legal problems. There is a need to strengthen the independence and competency across the legal sector, the GDA says.