Now that the dust has settled over a prolonged period of elections, Sri Lanka’s business community is preparing to get back to work after the near week-long Avuruddu festivities in the coming week.
At the time this edition was going to print, the ruling United People’s Freedom Alliance (UPFA) was heading for a comfortable victory after Thursday’s parliamentary polls on the back of President Mahinda Rajapaksa’s success at the January presidential election.

2009 has been a year of uncertainty, relief and then little being done despite the war ending. While most of the focus till May was on the war, the business community was also grappling with the aftermath of the global crisis. The government, worried that the benefits of the war ending was not reflected in the economy taking off, put pressure on the private sector to invest more. However in reality the peace dividend is yet to be seen in any part of the country.

The President then stepped in and ordered cuts in interest rates which was seen as a barrier to investments. That triggered another issue: a sharp fall in interest income of depositors, particularly the elderly, who relied on this income for their daily sustanance. In another move, a bonus on interest income for those in the 60-year bracket was announced.

The run-up to the presidential elections and the subsequent parliamentary elections – a period of around six months – saw a lull in business activity which will be carried forward till the April Avuruddu vacation is over.

However most companies, particularly those involved in the consumer goods trade, have been reporting a weak January-March quarter and general expectations are that the turnaround in the economy will happen only in the second half of the year. By this time, the budget would have been presented (in May) and by June, business will perk up and economic activity will rise.

Nevertheless, of some concern is whether the budget will unfold a number of high taxes on business given the fact that the government has been stalling on budget deficit targets set together with the International Monetary Fund because of huge election spending. There is a strong likelyhood that the new budget will set out strong revenue measures via taxes to sharply reduce the deficit and keep in line with targets. This can only happen by either taxing the people or bringing in more people into the tax net, the latter of which is one of the recommendations of the Presidential Tax Commission. Taxing public servants is also under consideration.

Government expenditure has been rising sharply and according to Finance Ministry sources the 4-month (January-April 2010) Vote on Account approved late last year was already exhausted in three months. Provision has been made for the President to approve additional funds for another three months without parliamentary approval, as provided by the law.

Read between the lines in the Central Bank’s annual report for 2009 released on Monday and we are indeed in a crisis. Sri Lanka is living on borrowed money with huge, high cost loans with annual interest payments alone being much higher than revenue. Exports were down and growth considerably slowed down. There are expectations that the economy will grow to the 6% level but that would be from a low base.

The first three months of the new government will be engaged in tackling the economic crisis, raising jobs and ensuring inflation is kept at manageable levels.

The private sector would be the government’s saving grace if it is able to spur growth in the country particularly in the north and the east. That however depends on whether the budget will provide the right incentives to invest and new taxes are not too uncomfortable to the private sector. If the ‘nice’ things happen, it will indeed be back to work for business.