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Point of view by I. P. C. Mendis

The masses were waiting with bated breath for the goodies promised with the third budget of the UNF government after the so-called consolidation of the economy over the last two years.

They were virtually gnashing their teeth and waiting to see whether the prorogation would be followed by a dissolution. If that happened, it would have spent vengeance on the President in the context of hopes that had been built up in the country about reduction in the COL, more particularly with the working class smacking their lips and counting the green notes of the four-figure increase, not to mention the poor pensioners suffering from the hard times brought about by the single digit interest earnings.

Dissolution was not to be and the slogan of jealousy and anti-social conduct on the part of the President and the PA towards the so-called liberal handouts anticipated in the budget, was not sustainable in terms of what was eventually on offer.

A terrible anti-climax indeed. For the broad masses and the working class, what little the right hand chose to give has been subtly snatched by the left hand. The shepherd who was to have led them to the promised land has by instinct and habit veered into familiar territory in search of his favourite sheep (not the lost ones) that had been fattened in the last two years to give them more sustenance.

Indeed, this will be the sordid story which ever government is in power so long as they are in the clutches and the grip of the Bretton-Wood twins and powerful donors who treat us as a puppet on a string. What a chance the government missed politically by the President's decision not to dissolve and what a spoil-sport she can be!

Public debt

Public debt has been reduced from 103% in 2001 to 100% in 2003 - a very marginal decrease over two years. Nothing to crow about, particularly considering what is in store. Also, it appears that the external debt ratio has been reduced to 9.2%. The Finance Minister is extremely conscious of the need to bring down the public debt which he says had reached unsustainable levels.

The position is irreconcilable with the concept of development projects identified at the Tokyo donor conference at which a massive US $ 4.5 billion had been pledged. For development projects to be implemented through foreign funding, local funds have necessarily to be provided unless the foreign aid constitute outright grants.

Now, how on earth can such local funds be generated without borrowings particularly in the context of bonanzas being doled out, amnesties given and collection machinery proving rusty?

The Finance Minister's concern about the public debt and external debt ratio can be well appreciated, yet, is he not a prisoner in his own domain? Is he saying all this for public consumption and not facing reality? In fact the nett borrowing requirement for 2004 is projected to be 65 billion.

On the heels of the budget presentation came a Bill to amend the Appropriation Act to increase government borrowings from Rs. 316.6 billion to Rs. 375.5 billion and to introduce a supplementary estimate to accommodate expenditure of Rs. 20.757 billion excluding a foreign grant of Rs. 600 million.

And it was in July this year that the Finance Minister patted himself on the back and proclaimed in Parliament that there had been no supplementary estimates 'so far'. Indeed, his euphoria about his well-managed public debt and external debt ratio can well be short-lived.

Export earnings were 10% higher in dollar terms than last year, he says, primarily due to the strong performance of the industrial sector which grew by 12%. Instead of consolidating and improving the position, he has reduced the customs duty bands from 6 to 5 and reduced the 20% surcharge on duty to 10%.

The 1977 government by liberalising imports killed whatever industry we had. Choksy is following suit by encouraging imports and frustrating even the modest growth he talks about. His belief that local and export industry could benefit by a reduction of cost of imported inputs, can well be a dream if the imported whole product happens to be less than the local one in the case of local industry.

The cost of production of local goods, is not solely dependent on the quantum of import duty. The high cost of energy, water, communication, labour etc. contribute in no small measure and may more than off-set the relief on duty.

Wage increases in the government sector will necessarily have to be passed on to the private sector as well, including BOI projects without which labour unrest and consequent adverse effects cannot be avoided. A strong and meaningful industrial sector is not capable of being built up without affordable infra-structure facilities and of course government protection. Palliatives is not the answer, nor a laissez faire for the private sector. We should take a cue from some of the Asian Tigers such as Malaysia.

Rectified spirits

Excise duty on rectified spirits has been increased from Rs. 36 per litre to Rs. 200 per litre. While his intention to contain the production of illicit liquor is laudable, it is arguable as to how by this measure he intends to rake in an additional Rs. 950 million in revenue, unless he assumes that as in the case of cigarette smokers, the consumption will not be affected adversely.

Indeed, he accepts that illicit liquor has it adverse effects on the health of the public, yet through his calculation of additional revenue of this magnitude, he seems to negate his own argument. Shedding crocodile tears on health hazards is no big deal without taking meaningful and drastic measures to eradicate the menace or unleash the tax department on them as in the case of casinos, if meaningful action is not possible.

Yet, how to get them on the wrong side with the proportional representation system? Be that as it may, the Minister seems to have in mind the diluted rectified spirits used to fill up 'gal' arrack bottles to be sold in licensed liquor outlets and elsewhere. This measure will, no doubt, benefit the distilling companies. The Minister however, does not appear to have addressed his mind to the Kassippu menace where the health hazard is equally prevalent or even much worse with ingredients like cockroaches, lizards, snakes, goda and what not. Such brews do not need rectified spirits.

Inflation has declined to 7.2% and has resulted in lower interest rates which will encourage investment, he says. He obviously refers to lending rates. It is common knowledge, however, that the single digit inflation rate has not in real terms favourably affected the cost of living. It only satisfies the economic theoreticians in the Central Bank and outside.

Be that as it may, the statement is indicative of the bias the Minister has towards a certain class and his inability to balance developmental aspects with livelihood of the masses.

He has already in his second budget convinced himself that the duty concessions he had granted had not been passed on to the consumer. He has been frank and open enough to tell the country that VAT has not been either paid or collected - a massive 20 billion.

Has he ensured that the machinery is in place to see that the loans granted to investors and entrepreneurs at reduced rates of interest are utilized for the purpose they are meant and the resulting cost benefits would trickle down to the consumer? Perhaps, the Minister will have to repeat his lament in future budgets while the masses, especially those who much depend on interest incomes to survive will be sandwiched. Talking of investors, will he ensure that foreign investors are compelled to bring in their own foreign exchange and not depend on local borrowings as has happened in the past and more recently with the IBIS deal?

Stock Market

Much has been said about the recent performance of the stock market. The fact that an amnesty has been given and black money is in circulation should not be lost sight of. Perhaps, the government could take credit for it.

There are also the small investors who have been virtually pushed to 'gamble' in the stock market by reason of the loss of income through interest earnings. Yet, precious little has been done to replace the obsolete company law with a new Act to safeguard the interests of shareholders. The draft of a new Act is gathering dust in the Ministry of Trade and Commerce for the last so many years effectively frustrated by vested interests while some companies play ducks and drakes.

The existing legislation is completely director-friendly and auditing arrangements wishy-washy. Nothing has been done while shareholders have been left in the lurch in some instances.

Deposits from the public are being taken in diverse ways without the usual institutional backing and debentures are permitted to be floated by companies which are in the red and tottering in some instances but showing operational profits without reckoning huge accumulated losses. Lessons have not been learnt and small investors are being left to their own devices without adequate control and guidance by government. The stock market is incapable of being developed unless the government steps in and builds investor-confidence.

The Minister is elated that the amnesty has been successful and there had been a record 51,000 declarations. It would appear that his elation is rather premature without Inland Revenue examining these declarations and computing the nett result in financial terms. It may be that a majority of the declarations have lamented that they have incurred losses!

Foreign Direct investment

FDI is said to have increased from US$ 82 m in 2001 to US$ 2.9 billion in 2003 and expected to rise to 3 billion by the end year. It would be best for the Minister to ensure that what he gains on the straight is not lost on the roundabouts.

His contention about enhancing industrial production and employment opportunities has necessarily to be weighed against the closure of more than 40 companies so far and employees thrown onto the streets.

Further, it would be appropriate for the Minister to examine seriously the effects of the duty-free facilities afforded to this category and the effectiveness of the monitoring done by the BOI in this regard. It would not be wrong to say that the BOI is not geared as much as the Customs to supervise and monitor this area and it may well be that the facility is greatly abused by some with immense losses in duty and imports leaked into the market or facilities abused in diverse ways. And that holds good for some locals too who have managed to stretch themselves into BOI status and perhaps having a field day.

It is time, that customs functions be divorced from the BOI. Despite the disincentive to customs through the amnesty where their hard work in bringing to book some delinquents had been brought to naught, the Customs department could be expected to handle the function better.

Apart from the rights and wrongs, a further disincentive seems to be on the cards if the Customs Reward Fund is to be tampered with adversely in the process of "streamlining of Departmental and Statutory Funds". The increase of corruption cannot be ruled out unless the government moves cautiously.

Minority Shareholders in companies has for sometime been questioning the practice of directorates siphoning out substantial financial provisions by way of Management Fees to subsidiaries etc. This has been worked into a fine art by some directorates adversely affecting the nett profit positions.

The removal of restrictions imposed on such fees, is a direct blow to small investors and will affect the stock market which the government ostensibly is keen to protect.

It is said that the total subsidy on a bag of urea has been increased from Rs. 300 to Rs. 450. Not long after the budget was passed, one heard a radio announcement that the price of a metric ton of urea has been increased from Rs. 6,000 to Rs. 9,000. Who is fooling whom?

Withholding Tax

The existing facility of the tax free limit of Rs. 9,000 per month per deposit on interest income has been removed. In future, the tax will be on the total interest from all deposits. A concession has been given to individuals whose sole or main source of income is interest from deposits where the limit will be Rs. 25,000 per month, subject to their obtaining a declaration from Inland revenue.

This, the Minister says will assist pensioners. Pensioners will not come under the classification of "sole source of income". There could hardly be any pensioners who have saved so much as to qualify for this special limit of Rs. 25,000 per month in the context of reduction in interest rates. To generalize and say it will assist pensioners is to my mind illogical.

In any case, if there are a few, why should these old people who could hardly manage to get into a bus risk their life-span visiting the Inland Revenue Department possibly several times for declarations when the tax free employment income limit has been raised to Rs. 300,000 per year to be enjoyed without a hassle by those who are completely fit and fine? Is this the way to treat pensioners who have given of their best?

The two-band system has proved a failure and therefore a single band of 15% uniformly applied. This will certainly increase the COL notwithstanding any remedial measures subsequently taken to exempt a few essential commodities. It will surely more than off-set the meagre salary increase.

Voluntary Retirement Scheme

It is very unfortunate that the Minster had chosen to obstinately cling on to the position that the Devendra Salaries Commission had recommended a 30% reduction in staff.

This despite a statement issued by Tissa Devendra, the Chairman, last year explaining that this was not an 'across the board' recommendation the Commission had made but linked to freezing of certain vacancies, voluntary retirement etc., and more importantly it to be phased over a period of 05 years. The safety net was included. How and why, the Devendra report is being taken out of context baffles intelligent readers.

Loss Deductions

The Finance Minister has done well to take meaningful steps in this direction. It is to be hoped that this will be followed up with other measures to discipline the private sector and stop molly-coddling it if they are to be "the engine of growth" and not frustrate the policy of the government. However, first things first.

As mentioned earlier all the good intentions of the Finance Minister will be of no avail with the foundation, namely, the Companies Act No. 17 of 1982, sinking or already sunk. The immediate priority is to jack the edifice with meaningful legislation, simultaneously strengthening the Company Registrar's Department.

Reportedly there are over 32,000 registered companies now and there is no sense at all in having a department and legislation which is not geared to match such expansion. The present situation is in good Sinhala parlance - "Panina Rilawunta Inimang" (a ladder for jumping monkeys)!

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