The stock-market speculators who rushed to buy shares in the first few days of
December, when a UNF victory seemed probable, must be a bitter lot now. Six weeks later,
with a UNF government firmly in the saddle, nothing has happened to boost market
confidence. The treasury is broke, taxes cannot be collected, debt servicing is dicey,
growth is negative and there is no silver lining in sight.
Thankfully, the UNF's ministers have been slow to insult our intelligence by blaming
the nation's ills on the PA government. Everyone knows it was the folly and corruption of
the Kumaratunga administration that drove the country to the dogs. That said, what is to
be done now, apart from the ministers in charge wringing their hands helplessly?
A good place to start is by stimulating investment. Not just foreign investment -
foreigners are loathe to invest in unstable countries - but local investment. The best
form of stimulating investment is by providing industry with tax incentives and stability
incentives. In addition to 20% taxation by way of GST and NSL, Sri Lankan industries pay
30% to 40% by way of income tax on profits. This tax on value addition means that
companies are able to pass on to their shareholders rather less than 50% of the profits
they make. What greater disincentive could there be to investors?
Bandula Gunawardana is an astute man. He spotted the problem right away and was not
ashamed to articulate it. Speaking on national television soon after becoming deputy
minister of finance, Gunawardana pledged to remove taxation on capital investment. A bold
step, indeed. Ronnie de Mel did much the same thing when he was finance minister by
introducing the lump sum depreciation scheme, where investors could deduct the entire cost
of industrial-production plant and machinery from their profit and loss account in the
year of purchase. It led to a spate of investment and abuse.
Abuse however, is something developing country governments have to learn to live with.
Relax controls a little, and a minority of people will succeed in slipping a fast one over
the tax man. The danger is when just so as to thwart that minority, draconian systems that
deter the majority are put in place. Gunawardana took the example of constructing a
building. This involves investment in labour, building materials, architects and the like.
Money changes hands, people get employed and the country, at the end of the day, has one
more building. But what happens the moment you start construction? The income tax man
knocks on your door and asks you to furnish a return. So what does the builder (investor)
do? He quickly realises his folly, rushes off to Pettah, converts his millions into
dollars and invests them safely in the Virgin Islands, far from the reach of the ablest
tax inspector. Net gain to mother Lanka: nil.
Gunawardana proposed instead a complete amnesty for capital investors in development
activities such as housing. No questions asked. The government could benefit instead, he
said, from the GST and NSL on building materials, and from similar taxes on expenditure by
construction workers. Clever, imaginative thinking, but will he do it? Wait for the
budget, and see.
Our mention of stability incentives refers, for example, to Sri Lanka's ridiculous
labour laws. In a fast-changing world, the skills requirement of industry too, changes
rapidly. Yet Sri Lanka's labour law prevents a turnover of labour. While a ruthless 'hire
and fire' system is clearly unacceptable, we need to look at a system when industry can
hire in good times and thereby stimulate growth, and shed employees in bad times. In order
to make this work, the country needs a social security insurance scheme that transcends
the archaic EPF system. People out of work at any time in their career and not just at
retirement should be able to draw immediately on social security until they find a new
job. They could turn the misfortune into an opportunity by learning a new skill such as
information technology. That is how a labour market is created, and that can only be good
for the economy. So long as people who do get a job hold grimly on to it without
performing and with legal immunity from dismissal, the economy can never flourish.
There are several hard decisions the government must take, and soon. One is to relax
taxation on beer and spirits. Ridiculously high taxation on soft alcohol, such as beer,
has resulted in more and more people turning to hard liquor, engendering the adverse
social consequences that go with that. However, arrack is taxed even more, putting the
legal brew out of reach of the majority, who turn to illicit moonshine or kasippu. The net
result is that increased taxation actually reduces government revenue. Chandrika
Kumaratunga slashed taxes on beer in 1995 and this led to a flurry of investment and took
a sizeable number of tipplers away from arrack into the safer beer. Then, capriciously in
1996, she jacked taxes up again, sending investors fleeing and beer-drinkers back to the
Likewise, the defence budget. One can but hope that the March budget will be balanced
on the basis that the cease-fire with the LTTE will hold. If it does not, the government
could always go back to parliament for a supplementary estimate or introduce special taxes
to take care of military expenditure. The need of the hour however, is to save Rs. 30 to
40 billion in capital expenditure on defence and pass this on instead to industry by way
of investment incentives. Tough luck for the arms dealers, but given the state of the
economy, there really isn't much choice.
What ever it is that the UNF government plans to do, it had better do it soon because
the public is already growing restless at the lack of results. Having criticised the
People's Alliance for not having put through a single development project in its seven
years in office, fifty-something UNF ministers have been in their seats for a full month
now without uttering a murmur about a major development project. What were they thinking
of these past seven years? If there is one thing that Prime Minister Wickremesinghe needs
to do urgently, it is to appoint a competent review board to make sure that ministries
perform, and help remove obstacles to performance. The 100-day programme was meant to make
a start, but given the lack of imagination on the part of most of his ministers, this has
now turned into something of a damp squib.
Wickremesinghe should not delay in injecting some vigour into his cabinet, making the
ministers more results orientated. Ministries are not places in which ministers slumber:
they should work or depart. The people expect great things of the UNF, but little has been
forthcoming by way of vision, and even less by way of action. The forthcoming local
government elections will see an end to the UNF's honeymoon with the opposition, and no
holds will be barred in the electoral battle to come. If a crack emerges in the
government's armour come March, it will be the end of the peace process, and very possibly
the end of the government itself. That will be a tragic waste of an opportunity that comes
but rarely, and for the UNF, but once.