Interview

If budget deficit widens fur ther price revisions

Treasury Secretary, Dr. P. B. Jayasundera in an interview with The Sunday Leader said that the government has a clear economy policy which has been presented to and accepted by the donor agencies. He expressed confidence in maintaining the budget deficit at 8% by limiting the amount allocated for subsidies at Rs. 7 or 8 billion. Dr. Jayasundera also observed that a possible increase in the amount allocated for subsidies would mean the government would have to revise prices.

"When we revised the budget deficit to a realistic 8% what we indicated was that we would have to accommodate certain priority expenses. The government wants to keep development activities moving, especially the ongoing foreign projects and there are certain margins the budget can accommodate with the change from the original deficit to the 8% target. So there is one and a half percent additional increase because of it. However, up to that it is compatible with the inflation target, the growth target, etc., but if the oil prices continue like this unless we will have to make a revision or the deficit could increase," Dr. Jayasundera said.

Following are excerpts of the interview: 

By Mandana Ismail Abeywickrema 

Q: Does the government have a clear economy policy? If so what is it?

A: Yes the government has a clear policy strategy. It has been well articulated in the government economy policy framework, which has been presented to the donors. It was articulated at the donor conference held recently at the Sri Lanka Foundation Institute and it has also been presented to the private chambers. It has also been discussed widely in the media and is being built up on that overall framework.

Q: If as you say, the government has a policy, why are the financial institutions like the IMF stating you don't have one and are holding back the PRGF tranche?

A: It is completely wrong. The IMF itself attended this meeting. IMF can take a position, which they can describe in their own terminology. Definitely it is not their policy strategy, it is a government policy strategy. If we had presented their policies then it would be an IMF strategy. The disbursement has been held not because the policy strategy is not right. It has been held back because the previous PRGF was suspended last year, so those conditions are why the PRGF has been suspended. The IMF has to explain why those conditions have not been met. It has nothing to do with an absence of a policy framework. We have already explained the whole direction and the fiscal framework to the IMF.

 When the IMF staff visited here they were very happy and were ready to accept that new assessments had to be made before entering into a programme. All the assumptions and conditions under which the original PRGF was formulated need to be changed, so they agreed the government must have time and they started to be properly vigilant about what was happening and taking stock of it. We indicated that we first want to consolidate our position.

The original budget was presented within a PRGF framework and by the time the first report was issued in terms of fiscal responsibility, the deficit had already changed. Since then when stock was taken on what has happened revenue assumptions, expenditure assumptions all have changed. It was on that basis the government announced that the deficit for this year is likely to be around 8% of GDP. Since then in order to manage the deficit within that overall framework the government has taken a series of measures.

First to ensure the continuity of the ongoing policies. On that basis, revenue enabling legislation to give effect to the 2003 and 2004 budget proposals were made and now they are going to parliament and on that basis we are consolidating on the revenue side. At the same time, we are trying to protect public investment to the levels committed by the budget. We are trying to expedite the implementation of the donor funded projects because those projects have been built into the national budget and we have started talking to the major donors, Japan, ADB, the World Bank and others. In terms of that, the individual and bilateral development schemes have been executed and with the World Bank itself we have executed more than four loan schemes. With the ADB we have finalised the country assistance strategy from 2004-2008. So its there, it's an evolving process and once that process is completed we will also talk to the IMF to release the PRGF.

No government in my opinion should go to the IMF unless it has an overall framework to negotiate because the IMF will have certain views, but the government has certain views in terms of the whole situation.

Q: How serious an impact will the decision of the IMF have on the economy and the budget?

A: The IMF does not support the budget. IMF basically provides funds to the Central Bank to back up the reserves and that is done over a period of time. So this is a three year programme, each tranche is about US$ 81 million and those are the releases in terms of conditions.

However, in terms of the original fund programme apart from the macro parametres like the budget deficit, credit to government, credit to corporations, reserve money targets, other areas also include structural benchmarks like Revenue Authority, People's Bank privatisation and some reforms in the labour market about the compensation formula, etc., have been the major ones. In terms of new conditions, definitely the IMF will have to start working with a new budget deficit target moving towards a medium term and the medium term fiscal framework is being worked out with the World Bank to formulate the 2005 budget, so it is an ongoing process.

So there is nothing to say that the IMF will have an impact because even if these conditions are met they have to take into account how the country, when compared with others adjusts to situations like the oil shock, for example. The country is also going through an external shock by way of the severe drought. That will have an impact on the growth targets and inflation. The fund will have to rework all these and then work towards a more related process. That process is underway and we are planning to engage in that process. First, the government must make its own management programme and tell the IMF they have to fall in line. That is why the government has already responded like any other country, having assessed the situation, initiated price corrections in petroleum, gas, transport, electricity. All these things are basically lined up having recognised the hard political and social realities in the country. That is what economic management is. The IMF is only one component of this whole process.

Q: Will the government be able to provide the 70% salary hike in the forthcoming budget?

A: Government does not speak of a 70% salary hike as far as I am aware. What the government has said consistently in terms of that is when the election manifesto speaks of a correction in salary anomalies. It is said very clearly. Various people are speaking on political platforms of various numbers, but upon having taken over the responsibilities of a government, it appointed an interim commission on administration with very wide terms of references. One of the terms of reference was to look into salary anomalies and move on to a more realistic, sustainable, credible salary structure in the public service and the reason why salary anomalies have become an issue is because there has been some sectoral wage corrections in the last one year which have created huge salary anomalies.

Right now, the universities and the health sector are such examples. Now in the case of universities there was a separate committee appointed. If it is within the university sector it could be corrected, but if it is in other sectors there may be issues.

This interim commission is looking into recommendations made by a previous salaries commission and everybody is waiting and struggling for their own demand and at the same time there is a technically feasible duration within which you have to address these problems.

As for next year's budget, the government and the cabinet all have indicated that they want to work with a fairly decent wage increase for the public sector. It is also committed providing employment to many unemployed people as a matter of priority. In the context of the current economic difficulties, the only way people can face these challenges is by increase in income. So we have to look at the entire tax structure, expenditure policy and in that context the government remains committed to accomodating a wage increase.

Q: Will the government go ahead with the third player in the petroleum market - Bharath Petroleum Corporation (BPC)?

A: No, it depends. The trade unions have made representations to the President and the ministers and they have said that they can submit viable alternative proposals, so the President agreed that the proposals will be given due consideration. We are expecting those proposals to come and the relevant agencies - the Strategic Enterprise Management Agency and the Ministry itself will examine those proposals and once the overall cost benefits are examined; I suppose the government will take a decision.

Q: With regard to the BPC issue, the JVP being part of the government instigated a strike by the CPC trade unions. What do you have to say on the matter?

A:  I didn't see it as a JVP instigated thing as a partner of the government. I have seen many such events in my career under different governments sponsored by partners of the government. The harsh reality in Sri Lanka is that trade unions belong to political parties, which would have a direct or indirect involvement with the government. So when the trade unions go on strike, you can't say the stakeholders of the government are responsible for it.

Q: But in this case, JVP ministers have gone on record voicing their disapproval of bringing in the third player?

A: Well, in this case, I have also seen SLFP ministers voicing their disapproval. The Power and Energy Minister had his views on the matter. There are certain people who think this is wrong. Some politicians even think that you don't even need a second player.

In the case of the CPC, it is not a case of supporting or not supporting a third player, it is an ongoing transaction. From the credibility point of view, the government, be it the UNP or the PA, unless it is a transaction totally unjustifiable, should ensure the continuity of the process. This transaction was internationally advertised and so many companies applied, which reflected the confidence the people had on Sri Lanka, and three were shortlisted and asked to bid.

Just because a government changes, you don't abandon the process. When the present government took over, their expressed desire was to slightly alter the process and continue with the matter.

Any government must ensure the continuity of the right thing. A change of government is to correct the wrong things and in this case I think there has been a lot of misinformation and overreaction.

Q: Isn't there a danger in bringing in a third player also from India, making us totally dependent on India for oil?

A: Today in the global market environment having many companies operating in Sri Lanka even on the one field will not be the indicator that the country is dependent on that country. In that case, why did Sri Lanka enter into a free trade agreement with India? The agreement has even extended to the service area. So that is basically recognising the positive benefits of much more integrated regional cooperation. India itself has very large competitive oil suppliers. India is also importing oil. As a result, having a fuel company here would not mean we are relying on India.

In fact, in my view, a third player is certainly in the best interest of the country. Definitely three players are better than two players and that is how it should be looked at.

Q: Has India agreed to offer the US$ 150 million credit line to buy petroleum products from India and if so what are the terms?

A: Yes. That is final now. The terms are that it is repayable over a period of seven years with a one year grace period and it is on a interest of libor plus .5%. From that credit line we can import petroleum products from India.

Q: Do you see an impact on the economy due to the dollar rate?

A: No. The credit line is a major support factor to stablise the exchange rate. The dollar has been under pressure because of the significant demand rising from the high oil prices, so the annual cost of imports has now gone up to about US$ 1,200 to 1,300 million from about US$ 850 to 900 million range, so that there is no additional pressure and US$ 150 million can be taken out from India.

Q: Who is responsible for monitoring the dollar rate? Is it the Central Bank or the Monetary Board?

A: The exchange rate surveillance is the responsibility of the Central Bank. Central Bank is the structure and the overall management and supervision is under the Monetary Board. Central Bank has various departments. Certain departments have statutory direct responsibilities like the director, bank supervision, director, exchange rate controller and so on and they are required to report to the Central Bank Monetary Board and the Monetary Board is responsible for the overall governance and the monitoring of the financial policies.

Q: What is your position with regard to the JVP's allegation that the Central Bank is trying to increase the dollar rate?

A: Those are individual perceptions. On certain occasions, I have been blamed saying that I am behind the third player privatisation, so that is the way certain people perceive things to be. I have been blamed in the past for various transactions, but that's how people perceive our actions. But these are not individual actions, these are actions taken by certain institutions and these are not single individuals driving actions.

There is a structure in the country. There is the government, the cabinet and individually someone cannot disassociate themselves and put the whole responsibility or blame on one person. You must have collective responsibility there. Similarly, the Central Bank is an organisation and if the market perception is that the exchange rate is manipulated, then the Central Bank Monetary Board is basically responsible. So, I don't go by individual comments because that is not fair, but we are used to these types of comments - sometimes they praise you, sometimes they criticise you. You cannot blame them as well. Sometimes even cabinet ministers take up such positions despite the fact that they themselves formulate them. All this is partly because they are complex problems. In overall economy management there's politics, there's professional involvement, a lot of expectations. People have a lot of views and we have to live with them.

As for the Central Bank issue, if you look at last week's Divaina, the former Central Bank governor has expressed strong views on the exchange rate saying that there are no competent people, either in the government or the Central Bank. That's hard reality and that maybe true. We can't say.

Q: Do you find it difficult to have a clear cut policy and implement them due to conflicting signals from the JVP?

A: I don't see a difficulty in implementing policies due to the JVP. They are part of the government and four members are in the cabinet and we have not seen that. Whenever they need time, they defer to discuss the matter.

There are areas where even non-JVP ministers take strong stands on certain policies and implementing market friendly policies within certain financial constraints is difficult.

Particularly when the going is good things are easy, but with the drought, the political leadership in the drought affected areas don't care what the fiscal constraints are or the situation within which the Finance Ministry manages the whole operation. Their priorities are different. They have to meet the needs of the people and provide relief immediately.

On the other hand, we are managing another side of the story. So, I don't think that the JVP has made our life difficult, but hard global realities and local realities make economic management much more difficult. It's a dynamic process and not static one. If the policy strategy can be implemented in a predictable scenario it is easy. Nobody predicted a severe drought two months ago and it has a devastating effect on agricultural districts. Similarly, even the IMF, when developing its policy conditions, did not think that oil prices would increase from about US$ 30 or 32 to US$ 50 per barrel.

If you look at the world economic outlook of six months ago, that document doesn't speak of a US$ 50 per barrel of oil whereas today it has reached that level. When we took stock of the economy in June, everybody predicted that with the US troops withdrawing from Iraq, the country would increase its oil production and prices would stabilise in the range of US$ 35 per barrel. Unfortunately that whole scenario changed and then the Saudi Arabian situation became very tense with the situation in Venezuela also not stabilising.

However, the demand for oil kept increasing. The Venezuelan situation is expected to stabilise after the presidential elections and there is hope that the prices would decline soon. Even in Iraq, after Ayatollah's visit, the situation started to normalise and prices started to drop, but it is yet to revert to previous levels.

However, unless the prices come down to about US$ 35 per barrel, I don't think we could stop the price revisions. The country needs to gradually adjust to a fairly realistic oil price level unless the world suddenly becomes very peaceful, which would take some time.

Q: What are the key items subsidised by the government and is it putting a strain on the economy?

A: The key items currently heavily subsidised are diesel and kerosene. It will certainly put a strain on the economy if we do not respond to these things. When we revised the budget to a realistic 8% deficit target what we indicated was that we would have to accommodate certain priority expenses. The government wants to keep the development activities moving, especially the ongoing foreign projects and there are certain margins the budget can accommodate with the change from the original deficit to the 8% target.

So there is a one and a half percent additional increase because of it. However, up to that it is compatible with the inflation target, the growth target, etc., but if oil prices continue to rise like this, we will have to make a correction or else the deficit could increase. The government had the courage to take certain bold steps. They also had the courage to make fairly large revisions in gas prices. Those corrections have taken the pressure out of the budget. Earlier the pressure was moving towards the two macro instruments - the interest rate and the exchange rate. Now the pressure is distributed because the root cause of the pressure - not adjusting to international prices has been taken out.

Q: How long do you intend continuing with subsidies?

A: Looking at the total quantum of subsidies, we can accommodate up to Rs. 7 or 8 billion to maintain the 8% deficit target, and beyond that also we will have to manage with the cash flow. But beyond that price revisions would be necessary.

Q: How do you intend meeting the subsidy costs owed to the IOC and how soon do you intend to make those payments?

A: The IOC bill is a small amount of about Rs. 1.5 billion. Money to pay the bill has been allocated, but what we are trying to do is try to get the price corrections. We have to verify those claims and once everything is done we will meet the payment within this financial year. There is a lot of paper work to be done. While we owe money to the CPC, they too owe us some money, so there are issues like this that need to be looked in to.

Q: It has been said the public must be ready for price hikes. What are the key areas you expect prices to rise?

A: Not really the consumer items. Most of the agricultural products were responding to the emerging drought conditions. As a result, there will be a less than expected harvest in paddy for Yala. Rice prices are already high. It is not the norm. It is definitely more. That is the reflection of the supply condition.

There are also different prices now for bus fares and electricity and all those reflecting this. So it is an overall adjustment. Now you can see the gas prices too have gone up.

Q: Will the government subsidise gas?

A: As I said it is a choice you have to make. Is it worth subsidising gas as opposed to diesel and kerosene or something else. It is a choice. We can have the subsidy if we are willing to compromise certain development activities. We are providing some money for the rural tank programme, etc.

Q: Do you think the JVP's restoration of 10,000 tanks is a viable proposition and to what extent is the Finance Ministry ready to fund it?

A: It is not a JVP programme as such. It is a government economic strategy and we have realised that as part of our overall agriculture capacity building programme the rehabilitation of the small and medium irrigation schemes is one of the critical components. The reason why that has been recognised is that in the whole geo-political environment, the agricultural areas have been neglected because of our major preoccupation with the major irrigation projects.

To me, this drought is an opportunity to revive this project as it is only during a drought can we rehabilitate a tank.

The Finance Ministry is supporting this project in two ways. Firstly, the Ministry is working very closely with the Agricultural Ministry to work out a detailed plan in getting the community involved, in getting the cost structure very low and we agreed on a budget of Rs. 400 million for the first phase of rehabilitating 1,000 tanks. This is because of the capacity. We expect rain by mid October so within that period of time the government plans to rehabilitate 1,000 tanks. So when the monsoons begin the country will have the capacity of storing water in 1,000 extra tanks.

The Ministry also helped by taking the initiative together with the Agriculture Ministry to meet the banking community, segments of the private sector, the chambers and ask them to take part in the programme to show their corporate social responsibilities, where they could work together with a local community to renovate a tank.

Q: What is the government's position with regard to the Railway Authority and the privatisation of the cluster bus companies?

A: As far as the government is concerned privatisation is not an option. It is a very clear policy. It has been stated in our policy statement and our minister has gone on record and we have gone on record, so privatisation of a state enterprise is not an option. Railway and bus companies are under SEMA, which has been given clear instructions not to privatise. They will be restructured.

As for the Railway Authority, the government has already made the decision not to go ahead with it.

Cluster bus companies will be restructured under the corporate plan that they have developed and they will not be privatised.

Q: What are the other enterprises that are to be restructured?

A:  There are about 12 or 13 enterprises that have been brought under SEMA and they will be subject to a large restructuring plan. The business plans are being developed by SEMA and the relevant enterprises. The indication given to us is that by mid October all the plans would be ready for execution and submission for cabinet.

In the case of non-strategic enterprises, the responsibility of restructuring will be with PERC and there are certain enterprises, which will continue as they are. Then other enterprises, will initially try to make sure they adopt more structured business strategies by restructuring their asset portfolios to ensure that they will not be a burden to the Treasury and try to be contributors to the government's revenue as well.

Q: As for the graduate employment. Will they be given permanent jobs?

A:  Unemployed graduates after an orientation programme will be given permanent jobs in the public service in terms of the approved procurement means. Budgetary allocations have already been made for the orientation period and there will be provisions in the next  budget for their permanent careers. They will be absorbed to identified positions in to various positions of government agencies and they will be subject to the public service recruitment procedures and positioning.

Out of the graduates who will be given employment, over 3,000 have received first class degrees and some are with fairly high quality qualifications. And more than 50% are less than 35 years old. Most of them are skilled to revitalise the country's aging public service.