First with the news and free with its views                                     First with the news and free with its views                             First with the news and free with its views                                    


September 9, 2007  Volume 14, Issue 12









Key economic indicators headed in the wrong direction

By Mandana Ismail Abeywickrema

The government in a bid to finance its expanding deficit before the presentation of the next budget has imposed taxes to shore up revenue and in the process further burdened the masses.

Just two months prior to the budget presentation, the government last week introduced new taxes and amended several existing ones to bolster revenue in order to achieve the targets set out for the year. The budget deficit currently stands at 8% which is US$ 1.76 billion.

No option

Enterprise Development and Investment Promotion Minister, Sarath Amunugama said that the government had no option but to propose the amendments to the existing tax structure as revenue had to be increased to keep up with the growing expenditure on fuel and war.

Meanwhile, Minister Lakshman Yapa Abeywardene told the media last week that the total subsidy bill of the government was 5.4% of the economy.

Amunugama forecast a growth of 6.5-7% for 2007 and also told parliament the government was forecasting a growth of 8% for 2008.

Amunugama’s 2007 forecast however is below the Central Bank’s target of 7.5%.

Analysts say that with the country’s economic fundamentals in a mess the government was facing a serious cash crunch and the growth forecast seemed unrealistic.

Economist, Dr. Harsha de Silva said that the government was facing a serious cash crunch and was finding it difficult to raise domestic funds with Treasury Bond rates already high at 17% plus. "It is in the bad books of friendly lenders on human rights and other issues," he said, forcing the government to resort to commercial borrowing.

The cancellation of the Millennium Challenge Account money amounting to some US$ 580 million and the US$ 500 million bond which is also in trouble due to the global turmoil (that has almost doubled the risk premia for ‘junk bonds’ like the one Sri Lanka is about to issue) has left the government with no option but to strangulate the people already suffering with the high cost of living.

Regressive tax

According to de Silva, the telecom tax is an anti-poor or regressive tax. "The average telephone bill of the six million users (based on Dialog data) is only Rs. 344 a month (90% are pre-paid users). So a Rs.50 tax on them is 15% as opposed to 1% on a rich person’s bill of say, Rs.5000. Already the average person pays Rs.53 in taxes and with the Rs.50 flat tax and the 5% increase in the levy the average user will have to pay (even after reducing his/her use) around Rs.117 to the state as taxes," he explained.

He also noted that at a time the country was expecting the mobile telecom penetration to reach 64% by 2010, this tax would reduce penetration to 55%. "Mobiles help increase productivity of people and save money, so this will reduce the wide economic benefits through mobiles. The mobile tax will have a huge impact on millions of people," he said.

Interestingly, the Marxist JVP too believes that the new telecom tax would have an adverse impact on the sector’s growth.

JVP Parliamentarian Anura Kumara Dissanayake said that the new taxes would definitely discourage people from using mobiles. He also refuted the government’s argument that the tax would not have a drastic impact on the low-income earners.

Dissanayake said that the amount in a mobile phone bill couldn’t determine a person’s income level.

"That is not true. A person with a Rs. 5,000 mobile bill may not necessarily be a high income earner," he said. Dissanayake questioned as to why the government did not tax the companies engaged in the mobile phone business, which has expanded operations in the country, rather than tax the poor people.

Burdening the people

The JVP also charged that the government in the guise of serving the people was actually burdening them with additional expenses.

The JVP last week said that government was moving to reduce the fertiliser subsidy. (A bag of fertiliser would therefore be increased from Rs. 350 to Rs. 750).

De Silva said that although there was no independent confirmation of it, the government has promised HSBC, JP Morgan and Barclays at the July 11 presentation that subsidies will be cut drastically (the government’s choice of word) in 2007 and 2008. "The figure given is from 5.1% in 2006 to 3.9% in 2007 to 3.8% in 2008. In rupee terms this is a drop from Rs. 144 billion to Rs. 126 billion to Rs. 142 billion," he said.

"However, with the actual situation in a country with such high inflation (now 17.3%) one must look at the real value of the cut. In real terms, that is after assuming 15% inflation (benefit of the doubt to the government) the real cut in 2007 will be Rs. 40 billion and another Rs. 25 billion in 2008," de Silva added.

Govt. to cut subsidies

Be that as it may, while the government has pledged to cut down on subsidies to obtain the US$ 500 million bond, a sum of US$ 4.7 billion is still idling in the Central Bank coffers, which have been received by the country for development projects.

UNP Parliamentarian Kabir Hashim said that the government was in possession of a sum of US$ 4.7 billion in non-utilised foreign aid.

"The funds have not been used as the issue of transparency comes into play since they have been granted for specified projects," he said.

Hashim also said that the government move to secure more foreign loans would drain the country’s foreign reserves. "This would cause the rupee to depreciate and the government would have to print even more money pushing inflation over the sky," he added.

The government’s increased expenditure due to the introduction of the fuel subsidy and increased expenditure on defence has pushed the budget into a huge deficit.

De Silva pointed out that according to the Finance Ministry’s 2008 budget call just released, the deficit for 2007 was to be 9.2% of GDP. But they are now trying to revise it downwards to 7.9%, he said.

Contrary to Mahinda Chinthana

"This is amazing. Public investment will be cut by an entire 2%. So that is how they are trying to manage the deficit. The Mahinda Chinthana called for increases in public investment, not cuts in it," de Silva said.

As for the likelihood of the government achieving its revenue targets for the year and the growth targets, de Silva said that the rupee value revenue targets could be met because it includes inflation, currently at 17.3%.

"Revenue as a ratio of GDP, which is the more important one will be off target. Growth targets will also be most definitely off. Even the government has downgraded it to 7% from the earlier 8% plus. But others put it even lower. Quarterly growth last quarter is only 6%, the lowest in two years," he said.

De Silva said that the country’s economy is facing serious problems with high interest rates hindering real investments.

SMEs hit

He said that as a result, SME people have to borrow at 30%. "How can they survive?" he questioned.

He went on to say that inflation was unbelievably high at 17% plus and the cost of living was soaring, making people cut back on everything.

"Exchange rates saw a dramatic fall just last week. So the macroeconomic fundamentals are messed up. What should be going up is coming down (growth) while what should be coming down are all going up — interest, inflation, exchange rates," de Silva pointed out.

According to him, the government must rethink its economic management strategy. "It must realise it cannot have the cake and eat it too. They must go in for meaningful reform even now if we are to avoid becoming a failed state, even though Lee Kwan Yu just called us one last week," he said.

Siyambalapitiya justifies new taxes

State Revenue and Finance Minister Ranjith Siyambalapitiya said that although the country’s debts amounted to Rs. 1,200 million, it has seen a decline in comparison to the GDP.

Siyambalapitiya said that the country’s debt in comparison to the GDP, which was 105.5% in 2004, has been reduced to 93% in 2006. "We expect it to be 86.5% this year," he said.

Siyambalapitiya told The Sunday Leader that the government was hopeful of collecting up to Rs. 1 billion from the newly imposed taxes and amendments made to already existing taxes.

"The government has lost Rs. 10 billion per year due to the tax concessions given on essential items. It was a measure taken to reduce the cost of living. Now the government has to recover at least part of the loss," he said.

According to Siyambalapitiya, the 10% tax on mobile phones was imposed as the telecommunications sector has performed extremely well in the past year.

"If a sector is performing well, the government has the right to take measures to impose taxes to increase revenue, especially at a time when the government has granted many concessions to the people that have made the state lose billions of rupees," he said.

He also said that some of the taxes have been misread by the people, especially the excise duty amendment on vehicles and semi-luxury items. "Most items are under-invoiced by importers, therefore the government adds 10% to the price quoted before adding taxes. Now the government has decided to add 15% on the quoted price. Some have however misinterpreted it and said the government was taxing 15% on imported items," he said.

Tax on vehicles

Another amendment was made to the 2.5% tax imposed on vehicles imported for personal use. "When vehicles for personal use are imported there was a 2.5% infrastructure development tax added to it. Now the government has structured a tax system that would vary according to the engine power of the vehicle," Siyambalapitiya said.

He explained that vehicles with 1600cc engine capacity would be taxed 2.5%, vehicles between 1600 and 2000cc engine capacity would be taxed 5% and vehicles above 2000cc engine capacity would be subject to a 6.5% tax.

Responding to opposition charges that the government’s decision to impose new taxes two months before the budget was to present a rosy budget in November to hoodwink the public, Siyambalapitiya said that the government had to incur unaccounted expenditure this year and hence had the mandate to achieve its revenue targets through other means.

"The loss of Rs. 10 billion for the year was not included in the last budget, but it happened. Now we have to find means to obtain at least a part of it," he said.

Siyambalapitiya said that contrary to statements made by the JVP, the government has not cut down on subsidies granted to the poor and that even with additional expenses like subsidies and defence expenditure, the government was faring well on the economic front.


World Bank, ADB, caution govt.

Lending agencies, the World Bank and the Asian Development Bank (ADB) have last Thursday said that Sri Lanka needed to cut government spending to reduce fiscal imbalances, lift real interest rates, and rein in money supply growth to stabilise the economy.

Representatives from the World Bank and the ADB addressing a seminar had said that the government also needed to ensure that public sector workers increased productivity in exchange for a wage rise, and it had to take long-term steps to cut the high current account deficit.

"Sri Lanka should reduce its fiscal imbalances, slow down monetary growth, and bring the economy back to the long-term trend," Senior Country Economist, Claus Pram Astrup said.

"Managing the economy in the short run is not an option — the wheels of the economy are spinning too fast," he had further said.

According to him, the labour market was tight, and strong consumer spending was adding to import demand and a wider current account deficit.

Country Economist, ADB, Johanna Boestel said at the seminar that low foreign exchange reserves along with high public debt and inflation was a risky combination.

Budget 2007 — estimated revnue

During the last budget presentation the government set out its revenue measures. The government estimated revenue was Rs. 15.95 billion for 2007.

Following are the revenue measures highlighted in the budget last November:

Changes in Income Tax Rs. 1,500 mn

Changes in VAT Rs. 2,700 mn

Adjustments in cess Rs. 1,200 mn

Adjustments in Customs Duty and removal

of duty waivers Rs. 2,500 mn

Adjustments in Excise (Special) Provision Tax Rs. 1,250 mn

Port and Airport Development Levy Rs. 4,000 mn

Regional Infrastructure Development Levy Rs. 1,600 mn

Visa fees and revision of passport fees Rs. 1,200 mn

Total Rs. 15,950 mn

(Rs. 15.95 bn)

The govt. has pledged to cut down on subsidies to obtain US$ 500 mn. But a sum of US$ 4.7 bn is idling in the Central Bank coffers received for development projects. The funds have not been used as the issue of transparency comes into play since the money has been granted for specified projects



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