The Economic Column

26th May 1996

The economy: will sanity ever dawn?

By Our Economic Correspondent

The Presidential Tariff Commission recommended to administer what was called a variable rate of duty on essential food items, such as rice, wheat flour, masoor dhal, sugar and milk powder. This was because of the volatile nature of price of commodities in world markets and to minimise international price fluctuations effecting local producers and more importantly, an affordable price for the consumers.

The commission was headed by the Deputy Secretary to the Treasury and the other members were the Chairman, Fair Trading Commission, President of the Federation of Chamber of Industry & Trade, Chairman IDB, representative of the Central Bank, Director, Ministry of Industries and the Director General of Customs.

In keeping with this principle as regards the duty on milk powder, Treasury officials, in consultation with the Ministry of Livestock Development, milk powder producers, Milco and the importers of full cream milk powder used to work out an appropriate duty, taking into consideration the need to assist the dairy farmers while ensuring affordable prices to consumers.

In the case of full cream milk powder, the target price to local producers that was determined was US $ 1,950 per metric ton ex factory. When the landed cost without duty was below this amount an appropriate quantum of duty was levied to raise the landed cost to US $ 1,950. The same principle is being adopted by the EEC with regard to the import of sugar etc., from associated countries. This is what is called Price Equalisation Formula.

The price of full cream milk powder was US $ 2,390 in 1994: US $ 2,240 in l995: US $ 2,550 in 1996 (early part). The legal duty leviable is 20%. In 1994 the duty was reduced from 20 to 10% in order to make the standard milk powder i.e. Lakspray available around Rs.55/= per 500 gms. pack. The Treasury, in consultation with all parties ensured that the benefit of partial duty waiver was passed on to consumers with the least delay.

The Treasury officials who were handling this effected duty adjustments periodically ensured that the benefit of duty reduction was passed on to consumers almost immediately through various schemes. For instance, on the last occasion when the duty was brought down from 20 to10%, importers were permitted to clear their consignments by depositing the full duty with the customs at the normal rate and after the new stocks were cleared and the old stocks were turned over, the duty waiver was given, so that the price reduction was almost instantaneous.

Similarly, when the duty of drugs was removed, the price reduction was made effective immediately and duty and taxes paid on the stocks Iying with the wholesalers and importers were refunded by the Treasury. Therefore, it is absurd to say that a reduction of the duty will only benefit the importer.

The Government is listening to policy advice given by the auto pilots who are novices. If the Government had only listened to officials who have worked on this for years, it could have certainly found a way to abolish the duty of 10% and pass on the benefit to consumers without much delay. More so because, the stocks in the hands of the dealers don't last for more than a week and half. So it's an absurd argument that the duty reduction will fatten the importers.

At present, full cream milk powder is charged a duty of 10% on the CIF price and there is no turnover tax. However, a duty of 10% is levied on triple laminate, a key packing material and also 35% duty and TT 20% on other packing materials. At a time when the international price of full cream milk powder is far above the target price of US $ 1,950 per metric ton, there is absolutely no case to levy any taxes on full cream milk powder which is consumed largely by children who are a vulnerable group in our society.

In fact, the previous government had directed to the Treasury to work out the budgetary implications to provide a glass of milk free to every child under 12 years because milk is an important nutrient for the growth of children. It is totally immoral to continue to levy taxes amounting to about Rs. 20/= per kg. and trot up unacceptable reasons as to why the duty and taxes could not be removed.

The Government had waived duty on wheat, rice, masoor dhal, sugar etc. So why can't the duty on milk powder be abolished altogether? It is recognised that price paid to daily farmers should be remunerative. The revised price of Rs. 12.60 per litre, should not increase the ex factory price of milk powder producers beyond US $ 2,100 per metric ton. So when the landed cost of imported milk powder is well over US $ 2,500, what is the rationale to levy duty, except perhaps, to subsidise inefficient producers. There is this company that is only producing 4000 to 5000 metric tonnes of milk powder, although the designed capacity is 10,000 metric tons. The cost of depreciation at 4000 metric tons is almost double. It spends Rs. 5000 per metric ton on advertising to sell its products, the margin to dealers is well over Rs. 4,500 per metric ton. All this is possible because the high price of imported powder and the heavy tax.

A sensible Government should compel them to increase the price paid to the farmers. This is not being done although the Minister of Livestock Development was lobbying for a long time.

The Presidential Tariff Commission had recommended a target price of US $ 500 per metric ton for sugar and the duty is varied to ensure this. Mr. N. U. Jayawardena was advocating a Permanent Tariff Commission to examine the tariff issues on a current basis and make appropriate recommendations. This has fallen on deaf ears!

It is alleged that a certain Central Bank bureaucrat did not advise the President to renew the mandate to the Tariff Commission. Instead his subordinates have made a mess of the tariff policy, the fiscal and monetary policies. These virtual adventurists have forced a virtual recession of the economy.

We are now in the throes of a stagflation. Business houses are saddled with heavy interest burdens and face losses. They are putting up their shutters. On the other hand, it is a tragedy to create jobs like recruiting additional 2000 hands to the CPC at an extra wage bill of Rs.240 million. The permanent CPC staff is demoralised. The corporation will have to borrow or seek duty waivers to fund this bill. it's borrowings will push up interest rates and throttle the private sector. What is needed today is sanity in economic management! Will that sanity ever dawn?

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