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Economy
in a quagmire
The LSSP, which
is a constituent party of the UPFA, conducted a protest campaign
against the rising cost of living last week. Pictured are LSSP
activists at the protest |
By
Mandana Ismail Abeywickrema
The
government would have to seriously take stock of the economy very
soon. To add to the woes of the falling rupee and rising world oil prices, the country is
beset by a debilitating drought that would make imports of food
items like rice inevitable.
The
impact of the rapid depreciation of the rupee against the dollar
from Rs 98 in February to Rs 104 in August has simultaneously
created a cash crisis in the country and increased the cost of
living. And given the rising world market prices in oil, the
impact on Sri Lanka is doubled.
The
most affected institution of them all, the Ceylon Petroleum
Corporation (CPC), has borne the brunt of the escalating global
oil prices and the depreciating rupee.
The
corporation is yet to receive its fuel subsidy dues from the
Treasury, amounting to billions of rupees. The amount due since
February to June is Rs. 5.9 billion. |
However,
according to the monthly costing system, CPC needs to further increase
the price of petrol by another Rs. 2.50 per litre while diesel needs to
be increased by Rs. 12.50 and kerosene by Rs. 12.10. These figures have
now been forwarded to the Treasury and the CPC is awaiting further
instructions from the government.
According
to Chairman, CPC, Jaliya Medagama, the Treasury response could come in
only two forms - either by allowing the price revisions or to subsidise
- either the people pay or the government pays for them.
"In the event the Treasury fails to respond, the assumption
of fuel being further
subsidised is inevitable."
CPC
financial crisis
When
asked whether CPC could continue to import and supply fuel to the
country with unpaid bills from the Treasury and other public
institutions running into billions of rupees, Medagama responded that
the situation indeed looked bleak as CPC is faced with a financial
crisis.
However,
Medagama observed the government and the CPC are now looking at
alternative methods. The country is holding negotiations with several
crude oil exporters - Iran, Malaysia and Saudi Arabia - to extend the
time given to settle payments for oil imports. Though the present
deadline is one month, negotiations are on to further extend this period
to six months.
The
Indian credit line too plays an important role in easing the burden
shouldered by CPC. Although these short-term solutions would perform as
a conduit in reducing fuel bills in the country, the
need of the hour is to look for a long-term solution as well.
As
to when the CPC would receive at least part of the billions of rupees in
dues is something nobody knows. Medagama too is uncertain of when the
CPC would receive its dues.
However,
he maintained the CPC goes to either the People's Bank or the Central
Bank and imports oil through LCs, but the difference in the actual cost
and the price of sale pose great problems. CPC imports oil worth US$ 90
million per month.
When
asked whether a decline in global oil prices would really make a
difference in the local market given the fact the rupee might depreciate
further, Medagama asserted it would still remain a difficult situation
as there would still be a big difference in the pricing structure due to
the falling rupee.
The
Ceylon Electricity Board (CEB) too is another institution in crisis. CEB
has been affected by the increasing fuel prices as the cost involved in
power generation is solely dependent on it.
In
the event the generation of hydro power is compromised due to a drought
thereby bringing in an increase in thermal power, the increase in the
usage of diesel for the purpose would in turn affect the cost involved
in power generation. An increase in electricity rates at such a juncture
would be almost uncontrollable.
Prices
of milk foods and pharmaceuticals to increase
In
the meantime, the prices of pharmaceuticals and milk foods are also
expected to see an increase in the coming months. In the case of
pharmaceuticals, prices of certain essential drugs have already been
increased. To remedy the situation, the government has brought 600
pharmaceuticals out of the 6,500 available in the country under the
Consumer Affairs Act.
While
the prices of some pharmaceuticals have increased, certain drug cartons
do not indicate the selling price any more as the prices are subject to
constant revisions.
However,
pharmaceutical importers making proposals to the government have
requested that in case they are brought under the act, they be allowed
to maintain a profit margin of about 69% from the 63% they enjoy at
present.
Commerce
and Consumer Affairs Minister, Jeyaraj Fernandopulle maintained the
government cannot allow importers to enjoy such a profit margin as it is
unfair by the consumers.
Under
the scheme, a pharmaceutical that costs Rs. 100 would be sold to the
consumer at Rs. 174.
Fernandopulle
says that the harassment of patients has to be stopped, adding that the
Ministry would ensure a reduction in the prices of essential
pharmaceuticals.
As
for the price of gas, the present selling price of a Shell domestic
cylinder stands at Rs. 690 while a Laugfs cylinder costs Rs. 650.
However, on Friday, Shell requested a further increase in a domestic gas
cylinder by Rs. 90. The Consumer Affairs Authority is yet to decide on
the matter.
In
a bid to bring relief to the consumers, the government plans to
encourage the third player in the market - Mundo. Distribution of Mundo
did not take off the ground during the previous regime due to the
alleged involvement of politicians who prevented the supply ship from
even unloading in the country's port.
Fernandopulle
said that the government is planning to remove all barriers that prevent
Mundo from entering the market.
The
price of milk foods likewise would see an increase in the coming weeks
as importers find it difficult to maintain prices further, due to the
present dollar rate. Milk food importers have requested a hike of Rs.
14.
Fernandopulle
said the government is looking at alternative methods of curtailing
prices by importing milk from India. He went on to say the government
has already received samples from Indian companies and a decision would
be reached shortly.
Scarcity
of rice expected
Adding
to the problems, the prevailing drought in the country is expected to
create a scarcity of rice in the country. After meeting with the
farmers, dealers and stockists, the government would decide on the
amount to be imported to meet the needs of the country.
Minister
Fernandopulle said the government might have to import rice by October
adding that prices of rice however, see an increase during the months of
November and December.
Media,
Ports and Aviation Minister Mangala Samaraweera said the government
would bring down the cost of living to an extent, adding that people too
would have to bear price increases in some items.
Samaraweera
went on to say that money used for subsidies could be otherwise used for
development activities. Speaking to The Sunday Leader, Samaraweera
observed that although the depreciating rupee would have an impact on
oil imports even if global prices were to reduce, the government is
looking at alternative methods of bridging the gap.
Dilemma
According
to the Central Bank monetary policy report for August, the sharp
increases in international fuel prices have posed a dilemma to the
authorities on whether to change prices in the short-term and make
necessary adjustments, or to make changes in the long-term and face the
consequences.
It
would be difficult for the current monetary policy stance and the fiscal
discipline - to which the government is committed - to be maintained, if
adjustments are not made in the economy to reflect adverse developments
that are taking place elsewhere, which have a bearing on Sri Lanka.
In
this context, the recent increase in the price of petrol and permitting
the price of LP gas to be raised are positive steps. However, it would
be necessary to accelerate adjustments in other prices, such as diesel
and kerosene too to reflect the current international prices. It is not
prudent for the exchequer to bear the cost of such subsidies as it
amounts to sacrificing other essential public expenditure programmes.
Faster
adjustment will create greater resilience in the economy, enabling it to
grow in the long-term. Hence, all sectors of the economy would need to
make quick adjustments to reflect prevailing conditions.
In
another development, the government in a bid to stand by its 'Rata
Perata' manifesto, has decided to reintroduce the 100% transfer tax on
property acquisitions by non-citizens.
The
private sector has voiced concern over the decision and a delegation of
the Ceylon Chamber of Commerce (CCC) last week met with Treasury
Secretary, Dr. P.B. Jayasundera to discuss the matter.
According
to sources at the CCC, Jayasundera has responded by saying that chambers
and the business community would be given a time frame to put forward
amendments to the act, before finalising the matter.
Driving
away investors
The
proposed bill if implemented would drive away investors from coming in
to the country while posing many barriers to those already in business.
Considering
the present situation, the economy is in a quagmire and the government
has finally acknowledged the fact that subsidies are not the answer to
address economic difficulties faced by the country.
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Proposed
tax on transfer of property causes stir
The
government's plan to impose a 100% transfer tax on purchase of
property in Sri Lanka by non-citizens has created a stir.
The
bill titled 'Tax On The Transfer Of Property,' which was presented
to the Supreme Court for determination, had not only reintroduced
Part VI of the Finance Act No. 11 of 1963 - to impose a 100%
transfer tax on property purchases by non-citizens - but also
introduced a new section, Section 58 (3A), wherein any company
incorporated in Sri Lanka which has a foreign ownership in excess
of 25% would be considered to be a non-citizen for the purpose of
the imposition of the tax.
However,
the position to date has been that when a company is incorporated
in the country, it is considered a citizen of Sri Lanka for the
purpose of the act. As a result, all BOI companies did not have
any issue with these provisions prior to 2002 when the transfer
tax was in place.
Most
of the companies listed in the Colombo Stock Exchange (CSE) and
all BOI companies with foreign investment or where there is a
joint venture partner would, in the event the bill is passed, be
non-citizens and liable to a 100% transfer tax on the acquisition
of property.
In
addition, the various concessions offered by the BOI would be
completely nullified at the inception of any project as a 100% tax
will be imposed on land acquisitions. As for public quoted
companies with foreign investment, most companies would find it
difficult to plan any acquisitions of assets for its future
expansion since the possible movement in its shareholding in the
interim would be cloudy.
The
government has taken a policy decision with regard to the
reintroduction of the 100% transfer tax which was imposed on
non-citizens who purchase property in Sri Lanka under Part VI of
the Finance Act No. 11 of 1963. This tax was confined to land by
the Finance (Amendment) Act No. 22 of 1992 and by a subsequent
Gazette dated February 8, 1995, it also ceased to apply to the
sixth floor and above of any registered condominium property.
By
the Finance Act No. 11 of 2002, the transfer tax was completely
abolished by the repeal of Part VI of the Finance Act No. 11 of
1963. On July 3, 2004, Treasury Secretary, Dr. P.B. Jayasundera
had published a newspaper notice specifying that Part VI of the
Finance Act No. 11 of 1963 was to be reintroduced and that all
non-citizens purchasing any property after June 9, 2004, would
have to pay the transfer tax.
The
present bill has been referred to the Supreme Court as an urgent
bill by cabinet on August 2. On August 6, a bench of the Supreme
Court comprising Chief Justice Sarath N. Silva, Justices Yapa and
Udalagama considered the contents of the bill and have now
communicated their determination to the Speaker. |
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