‘We are facing a recession’
Finance and State Revenue Minister and Deputy
Finance and Planning Minister Ranjith
Siyambalapitiya says the country is facing a
recession and has recorded a decline in its growth
rate. However, he said that in comparison to other
has faced the economic crisis well. “The global
crisis has affected us and we accept it. An island
like ours cannot escape the impact of a global
crisis. However, when compared with other countries
we have faced the crisis well without falling,” he
said in an interview with The Sunday Leader.
Referring to the IMF loan, Siyambalapitiya said
there were no conditions attached at present. “The
Mahinda Rajapakse administration will never agree to
any condition that would be bad to the people,” he
By Mandana Ismail Abeywickrema
Q: What is the impact of the global economic crisis
on Sri Lanka and where exactly is the country’s
Sri Lanka started to feel the impact of the global
economic crisis from August 2008. It is clear when
you look at the economic statistics. At the
beginning of 2008 we planned for a 6% plus economic
growth for the country. Till September we achieved
this level, but after September, the growth rate
declined to 4.3%.
Also, we planned our exports to grow by 10% in
2008. Till August we recorded a 10.1% growth in
exports, but afterwards it declined to 6.5%. It was
a clear indication of the impact of the global
recession felt by the country. We felt the impact at
once. Even in the balance of payment (BoP), we
targeted a US$ 400 million surplus and till
September we recorded a surplus of US$ 500 million.
However, within the next three months we recorded a
negative figure — we recorded a US$ 1,000 million
deficit. Therefore, the global crisis has affected
us and we accept it. An island like ours cannot
escape the impact of a global crisis. However, when
compared with other countries we have faced the
Q: The government including the Central Bank
Governor on many occasions said the global crisis
would not have any bearing on Sri Lanka’s economy...
A: The Central Bank Governor has not said
that Sri Lanka would not be affected by the global
crisis. He has said the impact would be less, which
is different from saying no impact at all. The 2.5%
growth rate forecast is the bottom level. Growth
could vary between 2.5% and 4.5%.
one can exactly explain the economic recession. Some
say it is similar to the recession in 1970. Some
equate it to the recession in 1930, and others say
the present situation has happened after hundreds of
years. The economic recession can be at the
beginning stage or mid level or at the end. No one
can exactly explain it.
What we can say is that when you compare the
country’s situation with the world situation, we
have faced it well. The US released a package of US$
700 million to its financial institutions, but they
were unable to overcome the problem.
Sri Lanka, none of the banks have crashed. If you
deposit money in a legally recognised bank — not an
unregistered financial institution — you can
withdraw that money when you want to. But we cannot
say when the recession would end. Each time the
world has faced a recession, it has been unique.
Q: Is the country facing a recession?
A: Yes, the country is facing a recession. As
I have said, our exports have recorded a decline and
economic growth has also declined. But we have faced
these situations well.
also had another big problem — the war. If you look
at 2008, the minimum amount spent on the war is
about Rs. 200 billion. We faced the economic crisis
while fighting the war. The war is now coming to an
end. Therefore, it is all right to think that we
have passed the most difficult stage.
Q: The Central Bank Governor has said Sri Lanka is
just a few weeks away from receiving the first
tranche of the US$ 1.9 billion IMF loan. What would
these funds be utilised for?
A: The IMF loan will be used to help the
country’s balance of payment (BoP) and not for
anything else. The IMF provides loans only to
address BoP issues and not for any other purpose.
Q: What are the conditions Sri Lanka has to meet to
receive the IMF loan?
A: There are no conditions at present.
Q: Does that mean the IMF is providing a loan
without any conditions to Sri Lanka?
A: No, there are no conditions at present.
But let me explain. When you say the IMF, the first
thing that comes to mind are a lot of conditions.
Don’t think like that; think why the IMF has decided
to give loans. The IMF was formed in 1945 to provide
funds when there was a global crisis like at
joined the IMF in 1952 by paying US$ 45 million,
which was a big amount at the time. We became a
member of the IMF to get help when we were faced
with an economic problem. After World War II many
countries were faced with various economic problems.
have so far taken loans 22 times from the IMF. The
largest loan, when compared to the GDP rate, was
taken in 1989. The IMF generally provides loans that
are 100 times the value of the shares the
respective countries had with the Fund. This time
around, the IMF has said it was willing to give 500
times the value of the country’s shares as a loan.
That was because countries are in need of money —
not only Sri Lanka.
Pakistan has taken 1,000 times its share value as a
loan and Iceland took 1,200 times. The IMF has
agreed to give 500 times the share value because the
Fund knows it is their time to help. It is three
years since President Mahinda Rajapakse assumed
office and we are moving forward according to a
clear programme. Even with the IMF we are discussing
on how best to work together along with our
programme. There is no need to fear about conditions
that would be harmful to people. The Mahinda
Rajapakse administration will never agree to any
condition that would be bad to the people.
Q: How do you respond to the allegation on moves to
prune the public sector and other welfare measures,
typical IMF conditions?
A: There is no such thing. This has become a
political issue. The Public Service Commission
brought in some reforms, and it was blamed on the
IMF. Now the rains experienced in the last few days
would also be blamed on the IMF. That is how we try
to gain political mileage these days.
With the military victories, the opposition has
become helpless and has nothing to say. They said
the war cannot be won, but now the war has been won.
It is not a victory for a party, but for the
country. The opposition has to survive, so now they
have made the IMF an issue.
The country is in need of money and the best
institution to get it from is the IMF. As a mid
level country, no one is going to give us money at
the terms applied to poor countries. In that sense,
if we are to find money, we have to borrow from
outside. Indonesia borrowed money in that manner at
a 10% interest rate.
It is now a time when all countries try to hold on
to their money and not give loans to other
countries. We are in discussion with the IMF to get
a loan at low interest rates. When considering all
the issues, the IMF is the best institution for us
to get the necessary funds. We have managed to
reduce the debt ratio that stood at 105% GDP to 81%.
Q: Apart from the IMF loan, how does the government
plan to address the present crisis with its
dwindling foreign reserves?
A: We have a big package to address the
issue. We have invited the Sri Lankan diaspora to
invest in the country without any taxes. We could
not achieve the target with the Diaspora Bonds, but
it is not unsuccessful. On the other hand, we are
also developing our export sector. We have done a
lot for the export sector. If you take the apparel
sector, the government has decided to give 5% of the
export value as manufacturing relief to that sector.
introduced a tax recently, but exports have been
exempted from this tax. These are some of the
measures taken to increase the country’s revenue. I
was asked as to how the government maintained a
continuous 6% growth rate. The reason for that is,
we did not let go of anything. While fighting the
war, we built roads, gave jobs to graduates and
started several development projects. We did
Even in the BoP problem, we are not looking only at
the IMF to solve it. The main areas we are looking
at is to increase the country’s exports while
reducing imports. We have imposed a 15% tax on wheat
in order to reduce imports. We produce sufficient
rice for the country. Therefore, there is less need
to use wheat flour.
Q: The government has increased many taxes and
levies after the 2009 budget claiming to be for
development work in the north and east. Has it not
added to the burdens of the business sector and the
A: We have recognised taxes and managed them
well. Yes, taxes are a burden on the people as it is
charged from them. However, the same theory applies
under every government. The main principle in taxes
is that it should be simple. The person paying the
tax should know for what he is making the payment
and we have to recognise the social status of the
When VAT was introduced by the UNP, it was in three
tiers — 5% on essentials, 15% on essentials and 20%
on luxury items. After a few months, they decided to
simplify it and made it 15% for all items. As a
result, the person purchasing a luxury item and a
poor man purchasing dry fish from a boutique, all
had to pay 15% VAT.
Although the tax was simple, everyone had to pay the
same amount for purchasing various items. We have
not done that. We are looking at a good tax regime.
In 2007, while fighting the war, we allowed a Rs. 15
billion reduction in state profits by exempting
several essential items from taxes. This amount was
Rs. 10 billion in 2008.
did levy taxes in places where we could apply them.
We charged a 10% tax on mobile phones — rather than
charging a tax on dhal we charged it on mobile
phones that are widely used in the country. It is by
collecting these taxes that we fought the war and
built roads. We did not charge tax on essentials,
we made losses there; but we charged from other
In Sri Lanka, 60% of the taxes are indirect taxes
while direct taxes amount to about 35%. The scenario
is different in developed countries. We are now in
the process of increasing direct taxes and reducing
indirect taxes. For that we are trying to increase
income tax. We are increasing the number of income
tax files by 100,000 each year. Although there needs
to be 1,000,000 income tax files, there are only
400,000 at present. We are now in the process of
Q: The increase in the government’s expenditure bill
indicates bad economic management. What are the
specific areas that have seen heavy overspending in
the state sector?
A: People behave in different ways. We at the
Finance Ministry have to lead by example and reduced
our expenditure drastically. We proposed a stimulus
package of Rs. 16 billion to provide relief to
exporters and the business sector. In order to find
funds for it, the President as the Finance Minister
proposed a 15% cut in his allocations, another 15%
from the Prime Minister’s allocations, 10% from the
ministers’ and 5% from state expenditure.
These cuts do not mean a reduction in salaries or
any other necessary expenditure; it is a measure to
reduce overspending. The opposition made a huge
noise about the government circular calling for a
halt to state expenditure. That circular was brought
to stop the wastage of funds.
Since 1948 there have been certain expenses met by
the government that were identified as a ‘must,’ but
we stopped that to save money. When money is
allocated to a ministry and when it is not spent, an
audit query is sent to the ministry secretary
questioning why the funds were not utilised.
a result, the ministry secretary makes purchases
like curtains and furniture to spend the money and
to avoid an audit query. This time we wrote a letter
to the Auditor General informing him that we have
stopped all unwanted expenditure. I don’t say the
unwanted expenditure in the country has stopped
100%, but we are making an effort to come to such a
level. As for Mihin Lanka, which the opposition has
criticised, it is an institution that is needed. The
country needed a low fares airline and at the time
even SriLankan was not with the government. There
were management issues with regard to that
institution as well.
Getting to the heart of the plantation problem
The government and the Regional Plantation Companies
(RPCs) are at loggerheads, trading allegations and
counter allegations on the management and default of
lease payments due to the state from the 20
privatized plantation management companies. The
Sunday Leader spoke to the Former Executive
Director, National Council For Economic Development
(NCED) that formed the Tea Cluster, Rohantha
Athukorala who was also a member of the Presidential
Committee on Tea in 2008 and currently Chairman,
Advisory Committee on Tea for the Ministry of
Industries while also sitting on the Promotional
Committee of the Sri Lanka Tea Board, to get a
By a Special Correspondent
Q: What do you think is the reason for the
Government and RPCs to be at loggerheads?
A: It is for two reasons. One - the absence
of a mechanism to monitor the leased out lands to
the private sector. Two – the absence of a forum for
dialogue where hard decisions can be taken.
Q: So are you are in effect saying that blame should
fall on the government?
A: From the issues that have surfaced both
parties have to be faulted but the state needs to
shoulder the blame in this case given that there are
serious issues that require policy reforms.
Q: Can you be specific?
A: There are many but let me take a few of
them. There is compensation that is due to the RPCs
on the land acquired by the state. The fact on this
issue is that 2% of lands are allowed be acquired by
the state for public purposes as identified in some
contracts with the private sector. The others fall
within the compensation clause. If we take the total
land acquired by the state since the private sector
took over the management of RPCs it is below 2%.
Hence what is required is to identify which of these
lands have to be paid compensation and honour this
decision. Simultaneously the RPCs who have not paid
there lease rentals which accounts for Rs.179
million as at 31st August 2008 must be paid up. A
point to note is that these two aspects are separate
issues and has to be solved independently.
Q: But the Planters Association (PA) says that the
then Treasury Secretary had mentioned that one can
be set off against the other, and there after
retracted from this position later?
A: The sequence of events was this. At the
Golden Shareholder meeting between the RPCs and the
Secretary of the Treasury on March 9, 2005 it was
agreed to off set the money due from the state by
way of land acquired as against the lease rentals
due by the RPCs. However, subsequently on October
30, 2005, the Ministry of Plantations has sent a
letter directing the payment of lease rentals had to
be done independently as they were separate
accounting procedures. This was further mentioned by
the Secretary to the Treasury at the subsequent
Golden Shareholder meeting on October 4, 2007.
Q: If the RPCs were not making profits how can the
accumulated lease rentals be paid suddenly?
A: The facts paint a different picture. The
lease rental arrears that have to be paid by the
RPCs as against the net profit earned by the RPCs
during the period 1996-2007 is only 1.2% of the
recorded net profit of Rs.14.9 billion as per the
annual reports of the RPCs. If we analyse the
arrears on the net profits of the RPCs for the year
2006/7 it is 4.0% on the recorded Rs.4.5 billion net
profit value. Hence it is payable.
One must also not forget that in 2002 the state gave
a breather to the RPCs by removing the GDP deflator
in calculating the lease rentals upto 2008. This
cost the country Rs.985 million. Separately as per
the agreement a penalty can be levied by the
government on the lease rental arrears that are due
to the state and the lease contract can be
Q: What is at the heart of the problem?
A: The absence of a mechanism of monitoring
the performance of this leased out lands that
belongs 100% to the state is the heart of the
problem. Issues will arise in the world of business
but they need to be addressed through dialogue and
that’s where the state has failed. Once again a
point to note is that 58 committees have been
appointed in the last six years by successive
governments to look into the different issues that
RPCs have been faced with but limited outcomes have
followed suit which is sad given that Sri Lanka is
known the world over for tea and with the war coming
to a close we have to now move in to a peace economy
which will happen only with strong economic drive.
Q :In your view has privatisation of the plantations
A: A Rs.1.5 billion loss-making venture has
been turned around by the RPCs which is commendable.
But we must not forget that this is not
privatization. It is where lands have been leased
out as estates to the private sector for a lease
rental whilst the government owns them 100%.
However, from the statistics available the overall
RPCs output has declined from 143.9 million
kilograms in the year 2000 to 125.6 million
the desired level of replanting had taken place and
if the proper fertilizer applications had happened
as available reports indicate then the replanting
rate as indicated by the RPCs which is only 0.7% is
surprising when the Tea Research Institute says the
level should be 2-3%.
But it must be emphasized that all these are only
statistics. What is urgently required is how to
ensure that the spirit of the agreement is
maintained so that
can once again regain the top slot in the world of
tea exports. For this, there has to be a continuous
dialogue between the state and the private sector so
that issues can be resolved. At these meetings there
must also be a balanced discussion on content with
decisions been taken which is the need of the hour.
I feel the rhetoric and committees must stop at
least now and hard decisions are what are required
now for development.
Q: Why has the private sector not invested on
replanting and output is declining?
A: Overall production declines when proper
agricultural practices like replanting and
fertilizer application do not happen, assuming that
external conditions like weather patterns do not
drastically change. But one needs to get into the
‘heart of the problem.’ A latest TRI report states
that the total extent of Old Seedling Tea (OST) in
Sri Lanka, 75 per cent belongs to the RPCs and 91%
of them are above 60 years of age which is the main
reason for the declining yield and correspondingly
replanting does not happen the current volume of 126
million kilograms out put from the corporate sector
will decline to 98 million kilograms of tea within
the next five years. The loss to the country in
volume terms will be 28 million kg of tea per annum
and in value it will be US$ 92 million while in
rupees it will be a colossal 9.9 billion. The state
and the private sector need to get together and
address this issue. In filling is one such strategy
that can be used in the short term but a longer term
sustainable like in India is where the state
provides 50% of the funds for replanting and the
rest needs to be self financed.
Q: But why has replanting not taking place by RPCs?
A: The replanting rate is reported to be only
0.67%. The main reason being that for replanting a
hectare acre of tea it costs almost Rs.2 million and
the gestation period is around seven years. This
leads to a Financial Internal Rate of Return (IRR)
of around 13.7% which makes it non-viable especially
when the lease period is for 53 years of which 16
have already lapsed. Once again this points to that
all-important forum, for dialogue to happen. This to
my mind is the biggest failure in the privatization
process and needs to be corrected.
Q: What about the wages issue?
A: Wages is another burning issue. In 1995 at
the time of privatization, the total wage package of
a plantation labourer was Rs. 83.08 per day. It was
revised to Rs.115 in 1998 and further to Rs.135 by
2004. The total wage package increased to Rs. 260 in
2006 with a basic daily wage of Rs. 170, plus a
price share supplement of Rs. 20 and an attendance
incentive of Rs. 70 but all these wage increases had
no relation to productivity and was a result of
political pressure that even led to the violation of
a Collective Agreement between the plantation unions
and the Employers’ Federation of Ceylon.
the last two years there has been a 180% increase in
wages -- no business model can absorb this. Even
though the wage structure has now been somewhat
attendance-incentive, it has had limited impact on
worker performance. This needs to be corrected. May
be the “over-kilo-payment” is one such strategy that
can be pursued.
The other issue is the speedy approval required for
diversification to happen. So that profitability can
be improved by the RPCs through commercial forestry,
agricultural tourism, cultivation of vegetables and
fruits for exports, renewable energy to name a few.
Q: Is there any serious violation by RPCs in your
A: As per the public documents released one
such case cited frequently is Bogawanthalawa RPC
that had entered into an Operative Agreement
with Lalan Rubber for the management of their rubber
estates for the unexpired lease period on a high
consideration based without the approval
the Golden Share holder. The monies paid by Lalan
Rubbers (Private) Limited to Bogawanthalawa RPC was
Rs. 485.69 million which is over and above the lease
rental payable by Bogawanthalawa RPC to the
Government of Sri Lanka for the total extent of
lands given by Lease Agreement to Bogawanthalawa RPC.
This would not have happened if a strong dialogue
mechanism existed between the government and private
Q: So where do we go from here?
A: Half the public sector with dedication has
been able beat the LTTE in their own terrain after
30 years. Now it is up to the other half of the
public sector to steer the country to a strong
economy in the next two-three years. Tea and
tourism must be focused on as these will help build
a positive perception globally. If we do not do this
Sri Lanka will lose another opportunity to rebuild
the economy. But this time it will be a costly