The purpose of this article is to briefly evaluate the implications of the current economic situation arisen by the calamity of the Golden Key Credit Card Company (GK) and make appropriate recommendations to revive the situation.
Did the government give due consideration for the economic development or sit back when the much controversial GK issue was originally exposed? It can be argued that the Central Bank (CB) has failed to take appropriate actions to safeguard the depositors and as a result of mismanagement of this crisis, today the entire financial sector is in a detrimental position.
In fact the issue began after the Sakvithi scam and most veterans in the banking and financial sector could not project the implications the country would face as a result of money withdrawal from the private finance companies and the need to establish a positive mindset among the investors and the general public.
The issue of GK, from what I have read in the newspapers, arose due to few large investors withdrawing money after the Sakvithi issue and GK complying with these requests. It is quite evident that considering the Pareto's 80/20 principle, 80% of the number of depositors - ie; 7200 of the 9000 depositors- contributes to only 20% of the deposit value. Considering this principle the average investment of individual depositors can be calculated at Rs. 722,222.00. These people who fall into this category are heavily financially burdened by not receiving the monthly rebate and who were/are dependent on this income of an average monthly rebate of Rs. 12,037.00.
On the other side of the equation 1800 people/families ie: 20% of depositors, were lavishly spending and contributing towards the national consumption and thus the government would any way earn revenue through the taxes on those goods and services purchased. However, being in the very high income bracket it is unfair for them to avoid paying taxes.
It can be estimated that the monthly rebate outflow of GK amounts in excess of Rs. 433 million, ie: Rs. 5.2 billion per annum. This is all spending money irrespective of the unethical practices of the GK company officials and in the mismanagement of the fund flows.
If the total interest on fixed deposits held by all other finance companies can be estimated hypothetically as an example, it could be well above Rs. 1.5 billion per month, which is all adding to the spending power of the Sri Lankan consumers. At present due to disturbing the depositors and withdrawals of deposits from even other established finance companies it does not seem that these monies are circulated within the money supply chain. Six to eight months ago private sector companies felt the drop in consumption mainly contributed by the lower and middle class due to the fall in prices of certain agricultural products as well as closure of factories and loss of jobs and not much due to the world economic crisis.
It appears at present that the wave has hit even the top income earners and they too curtail there purchases, which can be somewhat attributed to the loss of interest income and hope of any future economic prospects. If these rebate/interest money can be circulated which amount to in excess of Rs. 18 billion per annum, the VAT income which can be estimated at approximately Rs. 2.7 billion per annum can be earned by the government from the goods and services sold leaving aside the WHT on the direct interest income which is Rs. 900 million per annum. Six to eight months ago, private sector companies felt the drop in consumption mainly from the lower and middle class due to falling prices of certain agricultural products as well as closure of factories and loss of jobs, not much due to the world economic crisis. It appears at present that the wave has hit even the top income earners and they too curtail their purchases, which can somewhat be attributed to the loss of interest income and hope of any future economic prospects.
If these rebate/interest money can be circulated which amount to in excess of Rs. 18 billion per annum, the VAT income which can be estimated at approximately Rs. 2.7 billion per annum can be earned by the government from the goods and services sold leaving aside the WHT on the direct interest income which is Rs. 900 million per annum.
So the question is "whether to focus more on high consumption and government earnings to be determined by predominantly VAT component and less focus on WHT which can help bring down the interest rates". It is a matter for the Tax Department to debate and arrive at a conclusion considering the economic implication of the taxation policy relevant to today's climate. Where do you trade-off?
With the exposure of the GK what happened was that the investor confidence fell and people started withdrawing deposits even from well established finance institutions. The anticipation of the Tax Department and the CB would have been that due to the lower investor confidence of the private sector, these depositors would withdraw and invest in government banks so that the government sector borrowings could be secured without increasing the money supply by other means. But, did that happen? If it did happen more lending can be granted at lower interest rates.
Lessons and actions for the government
The predominant factor is "managing investor confidence" for a stable economy. The government should have intervened directly and immediately taken control of the management of GK under the guidance of the CB and started paying the monthly rebates. The secondary issue is to take appropriate legal action against the company directors and lastly obtaining unpaid taxes from the depositors.
In any economy there is a certain amount of undisclosed money, and one needs to get the best out of it by letting the money flow and government earnings to be derived through growth and thereby taxation. But, the skill to know the limits is vital in an open economy. This again reflects in the investor confidence which is a key ingredient for successful management of the economy.
Unfortunately, the economic implications of the GK issue were forgotten. As we see, litigation was the priority, secondly the recovery of taxes and lastly to safeguard the depositors. Many months have passed since December 2008 and yet the focus on securing the depositors and thereby building investor confidence does not seem a reality.
The IRD also should have a clear picture of the tax sources. It is very surprising to note that the IRD was unaware of the rebates paid monthly to the credit card deposit holders by the GK which implies that the GK Company too would have not paid due taxes.
There is a growing concern and a need to ascertain the income and tax payments of people who are directly and indirectly involved in politics. It is shocking to note how a late minister’s wife inherited such a wealth of Rs.600 million as speculated. There is also speculation that some top military personal too have invested large sums of money at GK. This brings a need and responsibility for the IRD to expose all politicians' (all parties past and present) wealth and their income tax payments to the government, which is a very fair request. Let us begin from this point so that every citizen is clear and aware of a transparent political system before these innocent 7200 depositors are penalised.
It is not too late even now for the CB to intervene and inform the Attorney General's Department the importance of the reverse direction of the appropriate actions to safeguard the investors and to give due redress mainly to the 80% of depositors by starting to pay the rebates even at lower interest rates and have a tax recovery schedule.
The priority of rebate payment can be paid based on the Pareto's 80/20 rule which means that the priority can be given to the 80% of the total depositors (7200) who are in real need of the rebate income. This will increase the investor confidence and stop the withdrawals from other finance companies and thus will help increase the money flow within the economy. |
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