The Sunday TimesBusiness

4th August 1996




Banish wait-and-see policy and act, says Vanik boss

The chairman of one of the countries' youngest financial institutions called upon the private sector to snap out of its wait-and-see attitude and act with long term objectives in mind.

"There is pall of gloom hanging over the economy", Vanik Chairman Dr. W. M. Tillekeratne said.

GDP growth was predicted to go down, defence expenditure may be as high as 6.5 per cent of GDP, leading to a budget deficit of 10 per cent of GDP. Though the current account was improving with the help of private transfers and a improving trade balance, this was largely due to declining imports, which also indicated weakness.

Meanwhile the business sector had lost confidence and was in the grip of a 'recession psychology', and there were warnings of stagflation.

"But recession is a temporary phenomenon" Dr. Tillekeratne said. "Business should take this opportunity to consolidate"

Vanik Chief Justin Meegoda said though the company was hoping to go to the subcontinent and had already made arrangements to set up a financial services company in Bangladesh, they were looking to strengthen their position in the local market.

Vanik was also keen to develop the country's capital markets particularly debt securities.

Securities trading was at present largely confined to Colombo. Vanik however was acting to popularize the concept in the provinces.

The recent Vanik debenture was also promoted in the provinces with this objective. Vanik had managed to raise Rs 150 mn from the issue which was below their target of Rs 600mn.

Mr. Meegoda said one problems dogging the stockmarket was that it was overdependent on foreign investors.

"Up to 60 per cent of our turnover is from foreigners. This is not a healthy situation" he said.

Mr. Meegoda said local brokers had been complacent when they had large orders from foreign investors which was more profitable than local orders which tended to be small. Now they were paying the price.

Vanik head of Corporate Planning said though the company's gross income had grown in 1995, profits had fallen by 61 per cent to Rs. 100m from Rs 147m in 1994.

LB Finance had contributed to profits last year.

Reasons for the fall in profits were, lower income from quoted investments, lower income from underwriting and issue management and high interest expense.

Mind Your Business

Generators stall

For some business houses, nothing seems to go right these days.

Take the case of the reputed generator importer. Just after the government announced tax concessions on imported generators, the company ordered a large consignment, hoping the curse of the weather Gods will continue.

Now the consignment has arrived but the day time power cuts are also off. So, there are few takers for the generators and the losses will run into many millions...

Burger King eyes Lanka

The Hut is here and so is the old Colonel with his original recipe. The local franchisees of both outlets are established companies.

Now, we hear the King who sells burgers is also prospecting for local outlets.

And, bidding for the local agency is fast and furious, they say.

Subsidy blast

Ever since Madam spoke of eliminating subsidies, prices seem to be reaching for the sky.

Cigarette and liquor prices were already up anyway; flour prices were increased and now we hear of eliminating the subsidies on diesel.

What next is the question and telecommunication charges are a likely answer.

Liberalisation: pros and cons

One serious complaint of local industrialists is the continuous liberalisation of trade which affects their productivity and sometimes their viability. The reduction in import tariffs in recent years and the impending reduction in tariffs together with the SAPTA/SAFTA arrangements are likely to affect many local industrialists adversely. It is opportune for the government to look at the issue of trade liberalisation in relation to our domestic industrial structure, the factual conditions governing our industrial production, the long term objectives of our industrialisation and our industrial priorities and interests.

The argument for the liberalisation of trade is well known. These arguments are more potent for a small country. A limited raw materials base, small domestic market and the inability to industrialise on a large scale for the domestic market and derive economies of large scale production make it imperative that the country requires a liberalised trade regime.

The growth of Sri Lanka’s economy is inextricably connected with the development of a vigorous and vibrant export sector. In fact in the last two decades it is the growth of the export sector which raised the country’s economic growth and provided considerable employment. Despite the prevailing gloom over the economy in the first quarter of this year, exports grew by 10 per cent. This is a considerable achievement given a continuous rise in imports over the last decade and the prevailing financial and other difficulties in the economy. Besides the growth itself, there has also been a diversification of our exports and new industrial products are being added to our export list.

The export oriented industries are no doubt the beneficiaries of the liberalisation. Those industries could gain from further liberalisation. But our concern is mainly with industries catering to the domestic market.

Industries catering to the domestic market also serve a useful function. They provide significant employment opportunities, the development of national technology and cater to particular segments of the market. Such domestic manufactures could also be a foundation upon which export oriented manufactures could be developed. In any event, they have served a very useful purpose by import substitution of many products and saved the country’s foreign exchange. A dollar saved, it is quipped, is a dollar earned. Let us not forget this.

Domestic industrialists complain that lower rates of tariff for the finished product than the components’, dumping, smuggling, duty free allowances and the benefits of large scale manufacture by foreign enterprises place them in a disadvantaged position. The impending further liberalisation of trade, they argue, may make the situation much worse. They may be wiped out. And a large number of workforce may also be threatened.

The government must not adhere to advice from multi-lateral agencies uncritically. They must examine recommended policies in the light of the ground situation and our short-term and long term national interest. Trade policy must benefit our people, it must seek to increase employment and enhance incomes. A blind adherence to liberalised trade can hurt us.

The government owes these industrialists a careful study of their problems and a determination of a trade liberalisation consistent with domestic industrial development and national objectives. This must surely be a priority. The National Development Council should look into this matter in great detail and come up with either the rationale for continuous liberalised trade or develop a selective policy on liberalisation which would benefit the country.

Subsidy removal:target the rich

By Asantha Sirimanne

With the President giving notice of the government’s intention to scrap subsidies, speculation is rife as to where the axe will fall next.

Though the President has given the escalating Defence expenditure as the reason for the subsidy cuts, some observers suggest that the Enhanced Structural Adjustment Facility the government is said to be currently negotiating with the IMF may have more than a little to do with it.

A recent report by a team of World Bank and government experts proposed a blueprint for future government action to rationalize the welfare schemes of the government.

Public spending in Sri Lanka on social security, welfare and housing at 4.5 per cent (1992) of GDP is said to be relatively high compared to countries such as Malaysia (3.4 per cent o GDP), Mexico (2.3 per cent) and Thailand (1%).

However the World Bank says the actual transfers to the poor are not high as large sums are spent on general subsidy schemes which do not discriminate between the poor and the rich.

“Because of ineffective targeting, Sri Lanka’s safety net programmes transfer relatively modest sums to a large fraction of the population rather than adequate sums to the very poor,” the report noted.

Though meeting the needs of the poor should be the number one priority of transfer programmes, these programmes “appeared to be under funded and in disarray,” according to the World Bank. Some programmes transferred amounts as small as Rs 100 to the destitute, while newly destitute households could not enter the food stamp programme and 50,000 qualified households were on a waiting list for public assistance.

The Samurdhi programme is intended to benefit 1.2m households, compared to the 1.5 m households on food stamps.

One of the worst offenders was the new governments” increased flour subsidy resulting from a promise of making bread available at Rs 3.50. According to the World bank the richest 20 per cent of households received 32 per cent or Rs 1,600m of the Rs 5000m subsidy in 1995. The poorest 20 per cent of households on the other hand received only some Rs 400m.

In addition, the households in the top 60 per cent of income distribution reportedly receive one third of outlays on food stamps.

The report recommended the scrapping of general commodity subsidies as a priority short term measure, and others such as the free school uniform scheme.

“The priority measure in this area is to eliminate as quickly as possible the regressive wheat flour subsidy as well as the fertilizer subsidy,” it said. The fertilizer subsidy cost the government Rs 1,345m in 1995 and is budgeted to cost Rs 1,500 m this year.

While bread prices were raised last week, top government officials have publicly stated that the fertilizer subsidy will stay on for the moment. However the World Bank says the richer farmers benefited from the subsidy more than the poorer farmers.

In addition, the bread subsidy increased consumption of flour and depressed the price of rice, affecting local farmers.

However, the report says lower rice prices were beneficial to the very poor as most of the poorest 20 per cent households were net consumers of rice.

The answer lay in giving cash transfers to a well screened set of poor households who needed subsidies most.

“The average income of households in the first decile would increase by 21 per cent (in 1994 prices) with a transfer of Rs 500 a month.” Cash transfers regarded as the best option since it enables the poor to purchase what it needed most and also enabled them to choose the store that gave them the best value.

The World Bank also hopes that the gradual reduction of protection would also benefit the poor.

On the long-term, going by the World Bank recommendations, higher education is likely to be fee based to an increasing extent.

“At university level, the priority is to give the system a more practical orientation and to introduce cost recovery in a gradual manner to raise additional resources, while ensuring that low income students continue to have access to higher education,” the World Bank says.

Hospital are also recommended to charge fees on the long-term.

“Reallocating public expenditures from tertiary services to primary facilities and to preventive health is the priority action in health.

The overcrowding in primary level partially reflects the decline in quality in primary facilities, the report noted.

“Basic education and health should be protected from cuts while cost recovery should be carried out with due regard to the poor, the report cautioned.

In the short term it advocated the increase in rail , electricity and petroleum products. According to Central Bank data, the financial position of Sri Lanka Railway has deteriorated in 1995. Revenue stood at only Rs 947 m in 1995, while current expenditure rose to Rs 1,735m resulting in an operational loss of Rs 758 mn. In 1994 the operational loss was Rs 788m. When capital expenditure was also taken into account the financial gap at Railways was Rs3,905m.

Electricity charges were raised early this year, and analysts doubt whether another increase would be made in the near term.

The new government also reduced the price of diesel soon after it came to office but had to increase it soon after. Diesel price rises are associated with cost push inflation and successive governments had adopted a policy of keeping diesel prices low at the expense of petrol by instituting a cross subsidy. The aim was to keep public goods and passenger transport costs at ow levels.

However the system had been blatantly abused by the relatively rich and the super rich by traveling in diesel powered vehicles, such as luxury jeeps, pick-up trucks and vans in addition to cars. The new government sought to limit this by introducing a diesel tax. A luxury tax was also introduced, which applied to petrol vehicles as well.

However due to protests from politicos, owners of diesel guzzling luxury vehicles such as Pajeros managed to wriggle out of the worst effects of the luxury tax while petrol vehicle owners continued to pay the tax.

To incentivise potential vehicle owners to import petrol vehicles, observers suggest that a two tier luxury tax be imposed, by raising the luxury tax on diesel vehicles further or reducing the luxury tax on petrol vehicles.

In 1995 for example, the consumption of auto diesel went up by 10 per cent while petrol consumption went up by only 3 per cent. This was half the previous year’s increase of 6 per cent.

In absolute volume terms the difference is brought into even sharper focus. Petrol sales for example increased from 184,000 metric tons (MT) to 190,000 MT (by 6,000 MT) while auto diesel sales went up from 728,000 to 796,000 (by 68,000 MT), representing an eleven fold increase.

The effects of a higher diesel price, economists say, would be a rise in the prices of all goods and services in the country. Observers suggest that further measures should be introduced to target the diesel subsidy better rather than simply raising the price of diesel, by raising the annual diesel tax further and increasing the import duty/conversion fee on diesel vehicles. In addition efforts should also be made to bring in certain types of vehicles that currently escape the net by virtue of their registration number.

Subsidies and other schemes that make up the social safety net are not intended to be a permanent feature, except for particular sections of society such as the aged, the chronically ill, the invalid, and the disabled who are not employable.

The Central Bank for example says that the relief measures such as food subsidy schemes provided by the colonial government during the second world war had prompted post-independence governments to continue on the same vein.

“This role of helping the needy in times of insecurity had been largely misunderstood by society,” the Central Bank said. “It was interpreted as a compulsory “generosity” of the government and became an integral part of development programmes”.

However free education and health-care had enabled Sri Lanka to achieve high ratings on social indicators.

The unemployed or people who are below the poverty line for other reasons on the hand are expected to be only temporary beneficiaries of welfare programmes, until they are employed or their incomes raised. Sustained economic growth is regarded as crucial to achieve both these aims.

In the absence of high economic growth, or in an environment of rising unemployment, withdrawal of subsidies are likely to create social unrest observers warn.

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