Faux pas by the Finance Ministry
View(s):Was it a faux pas, blunder or simple inefficiency that led to a major gaffe in the latest gazette ‘missile’ to the business community? Last week’s gazette pertaining to export proceeds being brought back to the country forthwith to boost sagging foreign exchange reserves is said to be a comedy of errors. “Is it an April Fool’s joke?” one expert asked, since the gazette, though announced on Friday, April 22 was actually dated April 1. According to experts, any attempt to ask exporters to bring back their proceeds should also have an order identifying the countries. Without that, the gazette would have to be revised or issued afresh. This is not the first time the Finance Ministry has blundered. It’s happening so frequently that the business community is now prone to await a statement of clarification from the Prime Minister whenever the Finance Ministry drops a ‘’brick’.
As stated in last week’s Sunday Times coverage on the sudden government order for exporters to bring back their proceeds within a week (for exports prior to April1) and 90 days for contracts after April1, the move was a re-enactment of the old 1970s era where foreign exchange was completely controlled. Ironically Finance Minister Ravi Karunanayake used the same ‘draconian Exchange Control Act” that he vowed in his November 2015 budget speech to repeal, to crack the whip on errant exporters. It was also contrary to what Prime Minister Ranil Wickremesinghe said last November in parliament, that foreign exchange management would be removed from the Central Bank.
The use of the draconian legislation was the ‘talk of the town’ in business circles last week with many captains of industry saying this was a reversal of the government’s stated objective of easing controls and bureaucracy to infuse more energy into the effort to attract foreign investors.
It was also pointed out that even though exports proceeds are repatriated, they are entitled to be parked in Foreign Exchange Earners Account (FEEA) which allows account holders to use this as and when desired without restriction. Some argue that even though export proceeds are brought back and deposited in these accounts, the user would the account holder and not the government. However it is also argued, that when the proceeds come through the money markets, it would boost foreign exchange reserves and allow the Central Bank (CB) some breathing space to manoeuvre these funds to meet urgent payments. Meanwhile the CB was in a bit of a muddle this week over two announcements, the monthly monetary review and the bank’s annual report for 2015. While the media was first informed that the monetary review would be announced by the Governor Arjuna Mahendran at a 5 pm media briefing on Tuesday,
the media invitation was later changed to a briefing on the release of the annual report. When reporters arrived at the CB auditorium, senior officials were present sans the Governor who was attending another meeting of the Monetary Board. After about 45 minutes, a few exasperated journalists left the yet-to-start briefing saying they had to rush back due to deadlines. While they were waiting, announcements on the annual report and the monetary review were separately emailed to the media. The CB annual report is silent on the structural reforms as proposed by the Prime Minister in his Economic Policy Statement in Parliament last November, which according to our economic columnist (see column on this page) was supposed to be the economic roadmap in the medium term.
Prof. S. Colombage also says that while there doesn’t seems to be a firm commitment on the part of the government to launch a robust reform package to deal with the macroeconomic imbalances, “given the contrasting ideologies within the coalition government amid outside pressures, it would be rather difficult to implement a rigorous reform package which may have political disadvantages”. This was evident when the UNP-faction in the government announced increases in VAT it was reversed by the President to exempt water, electricity, drugs, and fruits and vegetables. Apart from last week’s fiasco, the CB, in addition to its usual duties as a banking regulator, is battling on three other controversial fronts – money siphoned out a local account from the Bangladeshi Central Bank, Sri Lankans allegedly implicated in the Panama tax evasion fiasco and lack of transparency over Treasury bond issues.
The responses to these issues have been unconvincing to say the least. The lack of a proper and competent spokesperson for both the Finance Ministry and the Central Bank is a disadvantage not only to the media but also the government. The Finance Minister is not always accessible while the CB Governor is the only authorised speaker at the banking regulation, again not accessible all the time. In the midst of these issues, former President Mahinda Rajapaksa dropped an ‘economic landmine’ (to borrow a phrase the Prime Minister used at a recent media briefing) on Thursday accusing the government of taking US$7,436 million in foreign loans since January 2015, nearly half of which has to be paid back before the end of this year. “That is apart from the hundreds of billions of rupees the government has been borrowing in the domestic market by issuing treasury bills and bonds.
Now the government is trying to collect taxes from the people to repay these debts. By the time I left office in January 2015, the debt to GDP ratio was 75.5% – the lowest since 1979. Even if the debt of all public enterprises is added to the government debt, the debt to GDP ratio will still be much lower than it was more than a quarter of a century ago,” he said in a statement. Amidst all these problems, there was good news. On Friday, the International Monetary Fund (IMF) said that Sri Lanka’s request for a loan facility of US$1.5 billion in addition to other funds had been approved subject to approval by the fund board in June. The disbursement of these much-needed funds would be after next month’s approval. The injection of IMF funds would not only instill confidence in the economy and act as a positive signal to other donors but also create a good platform to attract more foreign investment, which still is on the low side.