The Sunday TimesBusiness

3rd November 1996



"Target relief to adversely-affected poor"

One of Sri Lanka's top economists Dr. J.B. Kelegama, who had a hand in preparing five budgets fields questions on the IMF, on reducing subsidies on inflation and the significance of the present budget.

Excerpts of the interview:

Q: Dr. Kelegama, when you were in the Treasury, you would have played a major role in preparing the budgets in the sixties. Can you say something about budgets of that decade?.

A: Yes, I had a hand in preparing five budgets, a "blue" budget in1963 for T.B. Ilangaratne, a "red" budget in 1964 for Dr. N.M. Perera and three "green" budgets in 1965, 1966 and 1967 for U.B. Wanninayake. As I was Director of Economic Affairs and Director of Supply and Cadre in the Treasury, I was directly involved in budget preparation. It was a challenge and a pleasure preparing budgets then, for we had much greater freedom in the choice of measures for raising revenue, providing relief and achieving economic and social objectives of the government. In other words, the main concern of the budget then was the domestic economy and social welfare and not to please external agencies.

Q: Can you explain this further?

A: Well, it is simple. If your debt to a commercial bank is small, the bank will not normally be much bothered, but if your debt is large, the bank will be much concerned and may, in fact, keep a close watch on your business and monitor your operations as its funds are at stake. In 1965 Sri Lanka's external debt was only Rs. 549 million, or 7 percent of GDP, but in 1995 it had risen to Rs. 345,834 million or 58 percent of GDP. The larger the country's external debt, the greater is the influence of the lenders. In addition, the developing countries are bound by international codes of behaviour in trade, foreign investment and intellectual property rights by WTO and they are compelled to observe greater discipline in fiscal and monetary affairs to qualify for financial assisitance from the IMF/World Bank. Thus there is less freedom in national budgeting today than thirty years ago. In fact, it is said that the de facto Minister of Finance in a developing country is the I.M.F.

Q: Is the IMF all that powerful?

A: It is powerful if you have to depend on its loans and credits - like any lender. Take the case of India. The IMF helped India to overcome its serious balance of payments crisis in 1991, but on condition that India undertook market oriented economic reforms. A few days back Pakistan was forced to devalue the rupee by nearly 8 percent and to agree to reduce the budget deficit and current account deficit in order to obtain a $600 million standby loan from the IMF. If a country puts its own house in order there is little need to go to the IMF for loans and there will be no direct or indirect pressure on its policies; but few developing countries are in the this position. It is admitted that some economic reforms are necessary in developing countries and being a member of the IMF we have to take note of some of its concerns. There is however, no need to be more IMF than the IMF itself in carrying out these reforms.

Q: Dr. Kelegama, as regards the forthcoming budget, what, in your opinion, is the significance of the budget and what do you think the budget should do in the current economic situation?.

A: The significance of the budget is lost now as most of the measures to either reduce government expenditure or increase revenue are taken before or after the budget. This is a recent practice and, as a result, the budget itself contains few major proposals on revenue and expenditure. For instance, the prices of petrol, diesel, wheatflour and bread, alcoholic beverages and cigarettes and bus and rail fares were raised in recent months before the budget. Such measures would have been announced through the budget in the past. Therefore, the public do not look ahead to the budget anymore and there is no excitement in the budget.

The main concern of the budget is to find adequate funds to meet the rising expenditure, mainly on account of the war against terrorism or to reduce the large budget deficit to manageable proportions. This could be done by cutting expenditure or increasing revenue or by both simultaneously. There is a limit to reducing expenditure. Expenditure on defence, debt service and pensions absorb about 52 percent of total government expenditure and 93 percent of government revenue and this cannot be reduced. Similarly current expenditure on administration and social and economic services cannot be cut without adverse effects on administration, social and economic infrastructure. Year after year capital expenditure of the government had been cut in order to reduce expenditures from 6.8 percent of GDP in 1991 to a planned 5 percent in 1996, but this has been at the expense of economic growth. The 1997 budget too may cut capital expenditure but it will slow down economic growth further.

Q:What about reducing subsidies.?

A: The main subsidy is the wheat subsidy and this has already been reduced by an increase in prices on two or three occasions. The removal of what is left of the subsidy will no doubt contribute to the reduction of government expenditure; it will also be favourable to the expansion of domestic paddy production, but it will push-up the general price level and cost of living and eventually wages and the cost of production. The poorest sections of the population who will be adversely affected may need to be compensated by targeted relief.

Q: How can the government raise revenue?

A:Increasing government revenue is of the highest priority. The government has not raised revenue in the past as rapidly as increasing expenditure. Thus the ratio of revenue to GDP has fallen from about 20 percent in 1991-1993 to 19 percent in 1994 and is estimated at 19.1 percent in 1996. In Malaysia the ratio was 28.7 percent in 1993. Tax revenue in Sri Lanka was 17.4 percent of GNP in 1993 as compared to 21.4 percent in Malaysia and income tax revenue in Sri Lanka was 2.7 per cent of GNP as compared to 9.9 percent in Malaysia. It is imperative that we should increase tax revenue by higher income tax, restoration of the surcharge on income tax until the end of the war, taxing public servants who are exempt now and raising import duties and turnover taxes or value added taxes on goods consumed by high income groups. We have hitherto raised indirect taxes like turnover and excise and reduced direct taxes on income or transferred the tax burden on to those who are least able to bear it.

This needs to be reviewed as our income taxes appear to be far too liberal. Now that the tax threshold has been raised to Rs. 100,000 there is no reason to exempt public servants from income tax. There is no equity in exempting from tax a public servant drawing a six figure monthly income when a private sector employee earning one-tenth of that income is required to pay tax.

Our import duties are too low and are threatening nascent local industries which have to compete with multi-national corporations. I am happy that Professor G.L. Peiris, the Deputy Minister of Finance, has recognised the need for the protection of local industries in his interview with the Business Today of October 1996. It is also relevant to note that the recent Indian Budget left the maximum import duty at 50 percent and imposed a special duty of 2 percent on all imports, the revenue from it to be used on infrastructural projects.

Q: Will a balanced budget stop inflation in the country?

A: No. Inflation will continue even if there is a budget surplus so long as other causes of inflation remain operative e.g. the depreciating rupee which raises prices of imports, rising bank charges, electricity charges and fuel prices, increase in salaries and wages without increase in productivity, structural bottlencecks in domestic production which obstruct rapid growth in domestic food supplies and increase in turn- over value added taxes.

Q: What about domestic savings?

A: Our domestic savings are far too low, about 15-16 percent of GDP as compared to 24 percent in India, 34 percent in Malaysia, 37 percent in Thailand, 38 percent in Indonesia and 52 percent in Singapore. This is an area which we have neglected. Higher growth needs higher investment and higher investment is possible only with higher savings. We should study how the South-East Asian countries have increased their savings and launch a national campaign to mobilise savings. This reminds me of the importance of sacrifice (and saving) in the context of the ongoing war against terrorism. The government has a duty to set an example in sacrifice if the public are to make sacrifices for the war. Perhaps the best example it can set is to make all public servants including ministers and members of parliament pay income tax on their emoluments.

Union Bank: Super Savings Account

A savings account which tracks each individual deposit and pays near fixed deposit rates if it is held for over 90 days, has been introduced by the Union Bank of Colombo.

An interest rate of 15 per cent is paid for each deposit which is kept for 90 days. The interest is calculated on the daily balance and credited monthly.

ÒIf one withdrawal is made from a desposit before the end of 90 days, the interest is reduced to 14 per cent per annum,Ó the Bank said. If two withdrawals are made the rate would fall to 13 per cent and if more withdrawals are made the rate would be 10 per cent.

ÒEach deposit is tracked separately and treated on a first in first out basis,Ó the Bank said.

Assuming that two deposits of Rs. 5000 are made in day one and day two both deposits would be credited 15% per annum monthly which would result in a compounded annual yield of 16.1 per cent.

However, if before the expiry of 90 days a withdrawal is made (say Rs. 2000/=) it would be deducted from the first deposit and the interest reduced from that deposit. The second deposit would continue to earn interest at 15 per cent, a bank official said.

Called the ÔSuper Savings AccountÕ, the scheme also allows interest to be credited to a separate savings or current account so that the withdrawal of the interest does not affect the ÔSuper Savings AccountÕ.

ÒThis scheme will be very attractive to the regular saver who wants to accumulate savings with regular deposits and for those who save for a specific purpose, such as to meet the needs of children or the acquisitiion of an asset,Ó Union Bank said.

The initial deposit for the account is Rs. 5000. Any amount can be deposited or withdrawn from the account as in any other savings account and phone banking facilities were also available.

The Bank hopes that those who need a regular income too would find this scheme attractive.

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