The Sunday TimesBusiness

10th November 1996




'Big push for private sector'

It's a development-oriented budget, Vice Chairman of the Chamber of Commerce and Chairman, John Keels Holdings, Ken Balendra said voicing the opinion of the chamber.

The signals sent out by the PA government's third budget last Wednesday were the most definitely positive signals seen for some time, he told The Sunday Times Business.

While the war effort must go on, the push on the economic front must continue parallely and this is what this budget had achieved, he added.

With the new incentives and concessions the economy must move, bringing in new investments and generating more employment, he said.

He added that the government had taken note of all the suggestions made by trade chambers and the private sector in general. Airing these proposals and sugestions the consideration it deserves is a motivating factor, for the private sector, he said.

Last Wednesday's budget also gave the signal for the economy to move at high speed, putting to rest private sector fears that government policy although moving in the right direction was not getting speedy follow up action.

The private sector will cotton on to this signal and will run with it, he said. (RJ)

Budget '97: first impressions

In his first budget speech, the Deputy Minister of Finance announced that the PA's first budget was only the beginning of a "voyage to prosperity". He charted the course with a budget "presented in a three year budgetary framework and a six year economic framework... [with] economic reforms which will see us earning twice our current incomes by the end of the century. It is a beautiful dream..."

The table illustrates how harsh realities of terrorism and neglected infrastructure, compounded by inefficient governance have intruded on this beautiful dream. In almost every case the indicators have not even come close to meeting the target.

In reality, the budget deficit has soared due mainly to defence expenditure. The privatisation programme, the centrepiece of previous PA budgets, has been plagued by weak demand and some dubious dealings. Additionally, contradictory policy signals have damaged business confidence, a low import duty regime threatens domestic industry; witchhunts of the public service have paralysed the bureaucracy, and high quality human resources in all sectors are inadequately utilised. Therefore, it is important that the 1997 budget, which seems to have heeded the private sector's calls (we discussed the private sector's expectations in last week's Comment, be considered against this backdrop of economic and political realities.

The new investment allowances, accelerated depreciation allowances, and broader fiscal incentives for advanced technology and the promising area of computer technology are powerful incentives for investment, particularly because they take into account the current liquidity crisis in business. The problem of funds at competitive rates of interest is again addressed in the decision to allow exporters to borrow offshore. Exporters get a further boost through the easing of criteria for import duty exemptions on import inputs, which will also encourage exports by small and medium scale exporters. Fruit, vegetable, flower and foliage exporters, long constrained by high air freight rates, will receive full rebates of the air freight rates.

Industrial estates, parks and townships provide valuable infrastructure for industry. Even more significant for domestic industry was the Minister's remark that the government recognised that limited protection for domestic industry was sometimes necessary for good reason for which relief beleaguered industrialists, complaining about the precipitate reduction of tariffs, will give much thanks. Another irritant the distortions arising from the dual treatment of BOI and non BOI enterprises has also been targeted for study.

The increases in personal tax free allowances and slabs are a neglected corollary of a competitive maximum tax rate, but it took courage to introduce them. By comparison, in Malaysia and Thailand, where maximum personal tax rates are similar to Sri Lanka's, the slabs are vastly greater. The amendments give us a fighting chance of emerging from the rut of the grossly inadequate domestic savings rate of 16% of GDP to levels which could have a significant impact on investment. The budget also contained the first tentative step towards widening the tax base by making staff of commercially oriented public corporations effectively liable to tax. Another reform is the elimination of double taxation of companies and shareholders by allowing full imputation credit on dividends of quoted companies.

Dr. Peiris deserves the thanks of the public for making inroads into wasteful government expenditure, and into the inhuman tax on terminal benefits benefits which, when retirement age arrives, have already been decimated by inflation and do not warrant any tax at all.

Human resources are also marked out for benefits. The public service will receive a major salary increase, combined, quite reasonably, with expenditure controls. An innovative government-private company will sponsor a pioneering training programme for educated youth. Human resources are also to be harnessed through a self employment programme for youth.

An impressive feature of the tax incentives and reforms is that they seem to have been carefully targeted to deal with specific problems retarding economic growth. Given his very limited room for manoeuvre, the Deputy Minister of Finance has provided incentives which are capable of giving the economy the major stimulus it needs.

Two important questions arise about the budget. First, how is the budget deficit to be bridged?

With no details being available except aggregated figures of foreign and domestic borrowing, it is not possible to gauge the implications of the method of financing. Second, has adequate attention been paid to poverty alleviation? As Dr. J.B. Kelegama mentioned in an interview with The Sunday Times Business last week, "the poorest sections of the population who will be adversely affected need to be compensated by targeted relief."

A budget by itself can achieve much, but there are important factors influencing economic progress which require separate action. The Deputy Minister of Finance has done all that anyone reasonably could. It is now up to the government as a whole to eliminate the canker of political thuggery which remains the biggest stumbling block to progress, and to hone its people management skills.

                         	Beautiful Dream		Grim Reality
                           	1995	1997		1995	1996
 Growth rate			6%	7-8%		5.5%	3.7%
 Investment/GDP ratio		24%	30%		27%*	25.1%**
 Budget deficit/GDP		10%	6%		7.5%	9%
 Inflation			7-8%	5-6%		8%	15%
 Current account deficit/GDP	6.4%	5%		4.2%	5.6%

* 1994 estimate. ** estimate

Security heightened in new currency notes

The new currency notes bearing two additional security features in the denominations of Rs.1000, Rs. 500, Rs. 50, Rs. 20, and Rs.10 have been issued by the Central Bank, a bank release stated.

These notes bear the signatures of the President and Minister of Finance and Planning, Chandrika Bandaranaike Kumaratunga and the Governor of the Central Bank, A. S. Jayawardena and are dated November 15, 1995.

The Central Bank from its inception has taken steps to improve the security features of the currency notes to prevent counterfeiting. In keeping with this policy, two new security features have been incorporated in the latest issue of currency notes, the release said.

In the new series, the sword in the watermark has been highlighted and will appear brighter than the rest of the subject when viewed against background light. This feature will discourage counterfeiting.

A Multi Layer Latent Image feature (MLLI) has been introduced in place of the existing latest image feature at the bottom centre of the notes. The new MLLI feature will be resistant to photocopying equipment and hence, will discourage counterfeiting.

These new notes are now being issued for circulation along with the existing notes of the same series, which will be phased out gradually. Both types of notes are legal tender in Sri Lanka and a liability of the Central Bank of Sri Lanka.

Market Focus by Analyst

Speculative buying of plantations and financial sector shares by retail buyers has pushed the market to the ASPI 620 levels, a signal for profit-takers before any further increase in indices is to be expected in the coming week. Speculation of Vanik Inc take-over attempt of Forbes Ceylon or its subsidiaries was making the rounds in the CSE with price appreciation of both these companies witnessed during the week. The question that arises from this is, can this be a hoax to increase respective prices of these companies by interested parties?

With increase in prices of plantation stocks, the Merchant Bank of Sri Lanka which was saddled with these stocks for some time is in an enviable position. These stocks would-be recording enormous book- profits which could surge MBSL's profit levels in the coming months. This has reflected already in its appreciation in price and there is more room for improvement.

New public issues are expected to be in the offing in mid-December which could be very profitable if the upward-trend in the market is sustained. Privatization of AirLanka and Telecom is also expected during this period. The Over The Counter (OTC) market also could be very profitable for speculative investors with more listings expected.

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