By
C.A.Chandraprema
The first fully fledged budget of the UNP-SLFP coalition was as cleverly crafted as the circumstances would permit. The government had some difficult reforms to implement not just because the IMF recommended them but because the reforms mentioned in this budget were a prominent part of the UNP’s own parliamentary election manifesto.
In order to head off possible resistance to those reforms, the government has sought to give more concessions to the people – a wise strategy. The levy on potatoes was reduced by Rs 25 per kg, big onions by Rs. 25, the price of a 400 gram packet of locally manufactured milk powder has been reduced to Rs 295/- and the local milk powder manufacturer, will get a subsidy of Rs 30/- per 400 gram packet. Infant milk powder has been reduced by Rs. 100 per kg. The price of canned fish (425 grams) has been reduced to Rs. 125. Certain varieties of rice also have been brought under price controls.
The maximum retail prices of sprats and dhal have been reduced to Rs. 410 and Rs. 169 respectively. The price of a gas cylinder has been reduced by Rs. 150. The private sector which was rattled by the super gains tax has been pacified with a corporate tax rate of 15% with a higher rate of 30% for the betting and gaming, liquor, tobacco, banking and financial services, insurance and leasing and trading activities.
The maximum personal income tax rate has been fixed as 16% and the tax free threshold has been raised from Rs.750,000/- to Rs.2.4 million – a move that will no doubt make a lot of private sector employees happy. The 2.5 percent withholding tax on interest on fixed deposits has also been lifted. The Rs. 10,000 allowances will be considered for the pension payment at the time of retirement.
The senior citizen’s fixed deposit scheme giving a return of 15% per annum has been extended by lowering the eligible age to 55 and increasing the ceiling from Rs. one million to 1.5 million. Fishermen are to be provided with a life insurance cover of Rs.1 million in the event of accidents when at sea. Even if fisherman have to make contributions to this scheme it will still be popular among fisher folk. The public servants who have made a payment towards the purchase of a motorcycle have also been promised that their motorcycles will be given to them. The July 1980 strikers are also to be granted a lump sum payment per person of Rs. 250,000/-. The construction industry has been promised that their dues will be paid in time through a Payment Guarantee Security Act.
The budget also calls on the private sector to increase worker salaries by Rs. 2500 at least in two instalments. So a lot of people are happy. But there are wrenching reforms which will cause much gnashing of teeth as well. Before we get to the said reforms, there is another proposal which at first sight may look innocuous, but one that will destroy one of Sri Lanka most stable industries and the government with it. This is by far the most dangerous provision in the budget.
Proposal to destroy local tea industry?
This is the provision made to allow the import of tea for value addition and re-export. This threatens the immediate collapse of the over one and a half century old tea industry with catastrophic consequences for the government itself. For some time now, tea exporters have been agitating for the liberalisation of tea imports so that they can import cheap tea from overseas and re-export it after blending with Sri Lankan tea. The model held up as an example was Dubai which functions as a major tea blending and re-export centre without having a single tea bush of its own.
The idea was that Sri Lanka too should build a similar re-export industry by allowing the import of tea. At present too certain very limited quantities of tea are imported for blending purposes. But what this new proposal envisages is the bulk importation of tea for re-export after blending. Such an industry would have been quite ok, if we had not been a tea producing country. But we are a tea producing country. If the government allows tea to be imported, what is going to happen to all the local tea producers?
This country has over 388,000 tea smallholders who produce over 75% of the tea output. The other 25% is produced by the corporate sector which employs tens of thousands of estate workers. If the government allows the bulk importation of tea for blending and re-export, this will cause an immediate and drastic collapse in the tea prices at the Colombo auction throwing the smallholders and the estate workers out of work.
The tea industry was in the throes of an unprecedented cyclical downturn to begin with and international demand for tea was low, the prices were low and some tea even remained unsold. Every commodity goes through cyclical booms and busts. If even oil goes through such cycles it is hardly surprising that tea would have to go through similar periods. The tea industry has gone through many such cycles since the nineteenth century but it has stood the test of time and provided a living for hundreds of thousands of people for over a century and a half.
Besides, Ceylon tea is something unique, much sought after to blend and upgrade other teas. While it is true that the cost of production of Sri Lankan tea is higher than in most other producing countries and consequently the price of Sri Lankan tea is higher, the answer to this is not to allow the importation of cheap tea from overseas to be blended with Sri Lankan tea and the price of our exports to be brought down in that manner but to increase yields per acre.
Sri Lanka has one of the lowest yields per acre of any producing country and that accounts in large part for the higher production cost. The government has not given thought to the question if Sri Lankan tea exporters were going to source the bulk of their tea from foreign sources, who is going to buy the tea that is produced in Sri Lanka? The other question that the government should ask itself is whether any other tea producing country in the world has allowed the bulk importation of tea so as to make their tea exports cheaper on the international market?
This move will benefit a few tea exporters. The tea blending process is now fully automated and does not create any real employment opportunities. But if the importation of tea for blending purposes is allowed, it will throw hundreds of thousands of smallholders and tea estate workers out of work. The government is looking at labour unrest in the estate areas and widespread distress in the smallholder dominated South.
Thondaman, Digambaram, Radhakrishnan and even Mano Ganesan should be up in arms over this decision. It was just the other day that the prime minister met the large plantation owners and impressed upon them the need to increase the salaries of estate workers. The plantation company owners had said that they are unable to do so, because they were already running at a loss. Then the PM had said that money would be allocated from the treasury to increase the worker’s salaries.
By doing that, the PM was obviously trying to win the estate workers over. But what will happen with this latest proposal is not increasing the salaries of the estate workers, but depriving them of the wage they already have as well. This is one budget proposal that the government will have to rethink very fast. The budget proposal says that ‘the tea industry’ made strong submissions to liberalize tea imports to Sri Lanka. What is meant by the term ‘tea industry’ here are just the exporters, not the producers.
The budget provides some relief to the beleaguered plantation companies by making provision for the extension of the leases on the land for 50 years and a pledge to review the management fees. Companies engaged in tea and rubber plantation have also been granted a two year tax exemption period. But those concessions will mean nothing if the import of tea is liberalized.
Elsewhere in the budget speech, the finance minister talks of the need to develop ‘high margin, value added, branded export products’. Ceylon tea and Ceylon cinnamon are two unique products where the achievement of a branded product is easiest, and here is a proposal to destroy for good that very industry!
The Temasek and pension fund experiment
One reason why the government trod lightly in this budget, announcing some populist measures to pacify the public is because they had taken on some very difficult tasks. Foremost among these difficult tasks is bringing all state owned enterprises under one holding company to be managed thereafter on a commercial basis with market based pricing. Shares in this holding company are also to be sold on the stock exchange in what will in effect be the biggest privatization drive in this country’s history. It has to be said that the government did obtain a mandate to implement this scheme because this was a prominent part of the UNP’s election manifesto.
The IMF for its part had also stressed in their September 2015 statement that state owned enterprises should be restructured and allowed to make market based pricing decisions. Bringing state enterprises under one umbrella sounds easy enough. Back in 1965, when the UNP formed a government after nine years of SLFP rule, all the state owned enterprises that the SLFP governments had created through the acquisition of private enterprises or the setting up of new institutions, were brought under one ministry led by V.A.Sugathadasa.
So the government should have no difficulty in bringing all state owned enterprises under one umbrella organization. What happens after that is the question. Some of the other state owned enterprises or enterprises in which the government has shares like the Hilton Hotel and Lanka Hospitals will be sold off outright to the private sector, so we have to assume that what will be brought under the holding company envisaged with be the other state owned enterprises and particularly the ones most often mentioned as being a drag on the economy like the CPC and the CEB. What will cause friction will be if any ‘restructuring’ is attempted with a view to putting these organizations on a commercially viable footing.
There will be no point in having a Tamasek model holding company unless the group as a whole is turned into a profit making enterprise. Nobody is going to buy shares in this company unless it makes profits. The management of these enterprises will also have to be privatized if they are to be put on a commercially viable footing. Nobody in his right mind will oppose any attempt to reform some of these ‘mafia’ ridden government owned enterprises and it has to be hoped that the government will succeed in this endeavour. But nobody should expect the process to be easy.
The government has got a mandate at the election to go through with this reform but pushing it through will be a wrenching experience. We may be looking at a situation of strikes and power outages and the whole population being held hostage by the unions. The budget speech specifically mentioned power, energy, ports and airports, airlines and water supply in mentioning which enterprises will be ‘made independent’.
The shares of these enterprises will be passed onto a Public Wealth Trust (PWT), where the Secretary to the Treasury and the Governor of the Central Bank will be the custodians. This Trust will be managed by a Board comprising of members from civil society, trade chambers, and trade unions, who will be nominated by the Constitutional Council. It is doubtful whether the mention of the Constitutional Council will pacify workers and the unions.
The government’s portfolio of investments in non-strategic enterprises such as Lanka Hospitals, Hotel Developers PLC (Colombo Hilton), Hyatt Residencies, Waters Edge, Grand Oriental Hotel, Ceylinco Hospital and Mobitel are to be sold off outright by listing them on the Colombo Stock Exchange during 2016. The monies generated through such listings will be used to retire government debt.
The government also has plans for the various pension funds. In his budget speech, the finance minister noted that there were 156 Approved Provident Funds and Contributory Pension Schemes with 168,900 members in 2014. The total assets and investments of these institutions were Rs.151 billion and Rs. 117 billion respectively at the end of 2014. The minister also noted that existing regulation and supervision of these approved provident funds by the Commissioner General of Labour is weak and therefore the savings of members in such funds could be at risk. Hence, there is a need for a new regulatory and supervisory system to ensure the safety of member funds. Therefore, it was proposed that the regulation of these pension funds be handed over to a regulatory body. This is not a bad idea as some government regulation of the smaller funds is not altogether uncalled for.
A more radical reform is that the government intends introducing a contributory pension scheme with a pension fund for state sector employees who are recruited from next year onwards. A contributory provident fund or pension scheme makes good sense but it runs counter to the culture that the people of this country have got used to. The main attraction in a government job is the government pension and if that is to change then the attraction in public sector jobs will markedly go down. People are used to the idea that a government pension will be a part of the government expenditure.
The moment the words ‘fund’ and ‘contributions’ are mentioned, the magic in the term ‘pension’ evaporates because from that time onwards, the pension depends on how well the fund does. If the fund fails, they get no pension whereas now, even if the rest of the country has nothing to eat retired government servants will still get their pension. So this is going to be a difficult proposal to implement. The government earlier had a plan to amalgamate the EPF and ETF, and turn that too into a pension fund, but the government seems to have taken a step backwards on that one. The finance minister said in the budget speech that such a strategy will only be pursued once a consensus has been reached between the government and the trade unions.
Paring the fertilizer subsidy & school uniforms
Another proposal that has the potential to be contested is the plan to replace the fertilizer subsidy with a cash grant of Rs. 25,000 for a maximum extent of one hectare for both the yala and maha seasons. The paddy farmers are not organized so there may not be large scale protests over this but pressure will be brought to bear on politicians representing paddy cultivating districts. Coupled to this change in the fertilizer subsidy is the voucher system that has been introduced for school uniforms. The introduction of cash grants is widely perceived as a precursor to outright cuts.
Some of the things said in the budget speech were quite unique. The finance minister explained away the deterioration of the values of the rupee during 2015 by saying that when the yahapalana administration took over in January 2015, they had inherited an overvalued rupee largely due to the mismanagement of the previous government, and that this eroded the competitiveness of our exporters. He claimed that the new government managed to successfully ‘realign’ the rupee. A detractor however would simply claim that the value of the rupee had collapsed!
The finance minister emphasized the importance of foreign reserves which had been sorely depleted after the Sirisena government came into power and confidently predicted that the official reserves of the country will increase to USD 10 billion by end June 2016! He however omitted to mention the fact that foreign reserves had decreased sharply after the new government took office. No one will ever believe that foreign reserves will ever go up to 10 billion USD so long as the present government is in power.
Also unique was the way the finance minister swept under the carpet the reduction in foreign holdings of government securities. During the Rajapaksa regime, there was a great deal of foreign interest in government bonds and the government had fixed a ceiling of 12.5% of total government bonds to be held by foreigners.
During 2015, as a result of foreigners exiting the local bond market, the percentage of foreign holdings declined to around 7%. The government has made a virtue out of a necessity and reduced the ceiling for foreign holdings of Sri Lanka bonds to 10% ostensibly to provide ‘more space for local investors’ and also to mitigate fluctuations in the exchange rate due to sudden withdrawal of funds by non-residents!
Courtesy:Sunday Island