‘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 countries, Sri Lanka 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 said. Excerpts:

By Mandana Ismail Abeywickrema

Q: What is the impact of the global economic crisis on Sri Lanka and where exactly is the country’s economy heading?

A: 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 crisis well.

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%.

No 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.

In 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. Sri Lanka 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 present.

We 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.

We 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.

We 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 everything.

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 masses?

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 tax payers.

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.

We 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 areas.

 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 increasing this.

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.

As 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 clearer picture.

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 potentially cancelled.  

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 worked?

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 kilograms.

If 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 Sri Lanka 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 lower yields.

If 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.

In 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 view?

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

of 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 sector.

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 mistake.