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Sri Lanka’s public debt was Rs. 7,391 billion on 31 December 2014 (about 70% of GDP). It rose to Rs. 8,503 billion by 31 December 2015 (about 76% of GDP), and according to estimates it has risen to approximately Rs. 9,700 billion by 31 December 2016, (about 82% of GDP); an unprecedented increase of about Rs. 2,309 billion (or 31%) in just two years!

In that scenario, the Prime Minister has repeatedly claimed that the Government is facing a massive debt crisis which has made it imperative that the ownership of the Hambantota Port and 15,000 acres of surrounding lands be “leased” to foreign investors for a period of 198 years. He has also claimed that such action would reduce the debt by $ 1,100 million, or about Rs.165 billion.

In the meantime, it is now well known that the unwise and dubious policies of the present Government’s economic team caused the massive depreciation of the rupee during 2015 and 2016, adding at least Rs.450 billion to the public debt, while the increase in interest rates during 2015 and 2016 is estimated to have added a further Rs.125 billion to the debt servicing cost; a total of about Rs.575 billion.

In addition, the politically-motivated increase in public servants’ and pensioners’ emoluments increased the Government’s expenditure by about Rs.400 billion for the two years 2015 and 2016, which too, had to be borrowed by the Government. Accordingly, any person could easily work out that the sales proceeds of the Port and surrounding lands would be only about 1.7% of the current public debt, while the debt increase due to the depreciation of the rupee, the increase in interest rates and the increase in public servants’ emoluments totaling Rs. 975 billion, is as much as 10.0% of the current public debt; the entirety of which the present Government should be held responsible.

If one asset is sold, and funds so raised applied to acquire a better-performing asset, such action would make sound business sense. However, in the case of the Hambantota Port, the sales proceeds are expected to fund the budget of the government, and (according to the Central Bank Governor), to partially replenish the foreign reserves of the Central Bank which have eroded from $ 8,208 million as at 31 December 2014 to just $ 5,100 million by mid-March 2017. Consequently, selling the Hambantota Port and the adjoining lands could be likened to an investor selling the best shares in his portfolio to raise money to pay his grocery bill!

The Hambantota Port is undoubtedly Sri Lanka’s most important growth-stimulating asset and is the country’s foundation for economic growth for the next several decades. Selling this strategic asset to foreigners to ward off a much-hyped crisis that this government has wittingly or unwittingly created, but “marketed” shrewdly in order to justify this highly-controversial, anti-national sale, is clearly against the long-term interests of the country and its future generations.

Foreign investors may be naturally driven by the greed to enjoy the massive windfall through the hasty acquisition of this strategic asset at a fraction of its true long-term value. However, they would do well to remember that if they do so, they run the risk of a future Sri Lankan administration restoring the current status quo for the greater long term well-being of the people of Sri Lanka. Sri Lankan history records many instances where assets alienated against the will of the people were re-vested with the people. There is no reason to believe that the future would be any different to the past.

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Capital Gains Tax to hit CSE?
Rs. 350 b in value wiped off stock market so far this year
CSE not consulted before directive, stock market officials surprised
Questions why Share Transaction Levy retracted if replaced with Capital Gains Tax
Tax expert says positive move to strengthen public revenue

An already-dampened Colombo Stock Exchange (CSE) could be severely hit if an unforeseen directive to impose the Capital Gains Tax is implemented by the Government after a hiatus of 29 years, a senior official warned yesterday.
CSE Chairman Vajira Kulatilaka told the Daily FT that the perceived impact of capital gains tax after many years of absence would be far larger than the actual impact, likely resulting in a further decline of trading activities on the Bourse.
“People will definitely have a negative perception of this and that impact is going to be larger than the real impact of the tax and how much people will be taxed due to this,” he stressed.
On Friday (4) due to continual pressure to promote fiscal consolidation the Cabinet held a special meeting and approved new tax reforms. The possible reintroduction of the Capital Gains Tax after three decades was the highlight of the meeting.
The move came as a surprise in the backdrop of Bourse earnings dwindling over the past few months. CSE’s market capitalisation as of last week amounted to Rs. 2,588 billion, down by 12% from Rs. 2,938 billion as at end 2015. The All Share Index and S&P SL 20 Index were down by 12% year-to-date as well.
Noting that Cabinet did not consult CSE officials before taking a decision which would directly impact the stock market, Kulatilaka said more clarity on this issue was needed without further delay.
  “It was quite a surprise for us actually. They should not keep us in the dark and we cannot expect the CSE to calm down and trade as they are already distressed with the way markets are behaving. They should have also publicised the rates and the duration for which capital gains will be taxed,” he asserted.
Meanwhile, he questioned why the Government removed the Share Transaction Levy, which traders and investors were already familiar with, if they were planning to introduce the Capital Gains Tax. “We were happy about the Share Transaction Levy being removed recently from the Budget but now with the Capital Gains Tax, we are back to where we started or even worse; now we will have to wait and see.”
Kulatilaka pointed out that liquidity had been a significant issue for the CSE and enforcement of the new policy could starve the stock exchange of much-needed funding flow.
  “The stockbrokers are very dissatisfied with this move. In addition we all know how our stock market is faring. How will positivism spread with such situations occurring? I’m aware of the budget deficit problems the country is facing, however massive capital gains being available to be taxed right now is also questionable,” Kulatilaka opined.
However, a tax expert speaking on condition of anonymity told the Daily FT that from a social inequity point of view, the Capital Gains Tax should be re-introduced into the tax system.
“The Government has to tap all of its resources to meet its revenue targets because right now we have no other choice. In my opinion Sri Lanka has one of the most liberal tax systems in the world. The stock market was given a long grace period without this tax and therefore I won’t buy that it would be the sole reason to deprive stocks further. However I agree that the Government should have kept the Share Transaction Levy if it was going to come up with this as the impact would be less,” the industry expert said.
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Sri Lanka’s 2016 Budget was commented by most as a mixed budget. Biz and the people were looking at the Budget based on the Prime Minister’s policy reforms statement presented in Parliament on 5 November. The following were included in the PM’s statement:
“Our final goal is to improve and enhance the living standards of the people; it is the goal for which we have obtained the approval of the people at the election.”
“To take us on that journey, to enable us to climb to those heights, I believe the right political climate has now been created in the country. The two main political parties in the country have come together to form a National Government of Consensus. The main objective in forming a National Government is to provide a common platform to deliver long term social economic solutions that can solve the key problems of the country. This would be towards achieving stability and embark on a speedy journey of progress. We may not get another opportunity such as this.”
 

“When looking back at our history, we can be proud of the open market economy practiced during the time of Manawamma to the period of prosperity under Maha Parakramabahu. We traded in spices, precious stones, elephants and rice with the world. We were considered a key import and export hub. We believe that with the planned economic remedies, we will be able to bring back such an era of prosperity for the nation once again.”
“In order to be able to do so, we must be able to get the economic foundation right. Multi-disciplined economic strength; local competitiveness, international trade and investments must be in our sights. A knowledge based Social Market Economy built on social justice principles must be fostered. The key areas to build this economy are the availability of global opportunities for education, strengthening of the health system to face health concerns of the 21st century and the ability to ensure mobility successfully.”

 

“Accordingly, I believe that is our collective responsibility to make the best use of the opportunity we have been given. In such a setting, we plan to pay attention in the medium term to a few important areas of concern:
1. Generating of one million job opportunities.
2. Enhancing income levels.
3. Development of rural economies
4. Ensuring land ownership to rural and estate sectors, the middle class and government employees
5. Creating a wide and a strong middle class”
 
 
“Let us learn the lessons from the past. We will celebrate 75 years of independence in the year 2023. If we walk the right path, we have the potential to become one of the strongest economies of Asia. So let us seize the opportunity – let us rise higher towards our goal.”
“What has happened today? Once recognised as the most open economy of South Asia, we have today been given the infamous title as the most corrupt economy of Asia.”
“We all agree that State enterprises must be more efficiently run. This can be achieved by ensuring that good economic management is practiced and efficient managers are put in place.”
“We will also need to review the tax concessions given to investors. We must question whether we have achieved our objective with the tax concessions given so far. We need to re-evaluate these measures and bring them in line with changing times. We should ideally become a low tax regime.”
The PM’s statement was quite positive and promising. However, some of the areas the PM addressed in his policy statement are not reflected fully in the Budget. We as a country need a clear-cut economic policy which can win the confidence of the Business, Foreign Direct investors and the People of our country.
 
 

Generating one million job opportunities is the first priority of the PM’s policy statement. He mentioned in his speech this requires Foreign Direct Investment (FDI). As it is we are one of the countries in Asia which attracted the lowest FDIs. Chart 1 indicates 2000-2014 FDIs in Asia. We are not even in the picture. Then how are we going to achieve this big target? Are we using the same strategy, same people?
We need to think of a good strategy and a process to execute. This should be the next step and hope the government will implement e right mechanism in order to realise the goal of one million jobs in three years.
I believe the PM wanted to create a large amount of jobs in the private sector and not in the Government. If this is in the private sector then the Budget urging the private sector employers to increase the salary by at least Rs. 2,500 per month is quite unethical.
Sri Lanka has a free market economy and the salaries of the private sector should be based on the supply and demand. Most of the private companies today practice and promote productivity based wages. The workers have the talent to achieve higher productivity tend to make more money and this will improve the competitiveness and productivity both.
In addition the Employers’ Federation of Ceylon (EFC) is there to address the issues related to this area with the State and with the chambers involve in the trade and commerce. There was no consultation with the Chambers or with the EFC and announcing this in the Budget can create a negative impact in generating the one million job target.
Charts 2 to 4 will indicate us some of the areas we should improve in order to attract FDIs. Ease of doing business is very vital for Sri Lanka and needs quick improvement.
 
 

Enhancing income levels is the second priority. Chart 5 shows us the situation in some of the Asian countries. We have come up a long way from 1980 to 2014. However comparing with the countries like China and India which have over a billion people, they have done well with their huge populations.
Our country has a very high literacy rate supported by IT literacy too. We should create good opportunities for our talented youth to stay in the motherland, create a higher value addition and enhance the income levels. As it is we are performing much lower than the potential. We need a clear vision and a mission to improve the income levels in our country. The agricultural based rural areas should be assisted by the government with new technology and innovation to improve the productivity.
Development of rural economies: Ensuring land ownership to rural and estate sectors, the middle class and Government employees. Creating a wide and a strong middle class.
This has become more of a political promise for a long time. This is something easy to say but difficult to handle with the existing system. We found this is a subject addressed from the election campaigns until end of regimes. The results produced in the past is unsatisfactory.
The biggest challenge here is how to use the same old systems and the same old people and produce rapid results. There should be an innovative approach and a motivating mechanism to be created. Land ownership is also an identified problem for the development of rural economies. The delays should be minimised by changing bureaucratic system with more modern approach. If the Government is capable of handling the development of the rural economy, well that itself can create a wide and a strong middle class in Sri Lanka.
 
 

From the PM’s policy statement we find the Government has identified one weak area: “We all agree that State enterprises must be more efficiently run. This can be achieved by ensuring that good economic management is practiced and efficient managers are put in place.” We have to wait and see how good people will come to manage these State enterprises and how good results they will produce. If no good managers are appointed to places, this will create a hole in the bucket situation.
If we refer to the Budget 2016 we see a few conventional issues. How the Inland Revenue Department will increase tax net for personal income? It is very important to increase the number of personal tax files as well as Small and Medium Enterprises too. If this can be done they will also start good business practices which can benefit everyone in our country rather than putting more of a burden on poor people with more and more indirect taxes.
 
 

A new tax was imposed in Budget 2016 for withdrawals from banks of over Rs. 1 million. The Finance Minister requested recently all the Sri Lankans living abroad to bring their money to Sri Lanka and no questions will be asked. After bringing the money every time when they need to withdraw if they are taxed, the chances of investments coming to Sri Lanka will be very remote.
As a country we have to believe in creating a clear policy for the development of Sri Lanka. What we lack is a clear policy. If we can maintain consistent polices rather than changing time to time, in every budget surely there can be a clear progress. As it is we are at the best time for this and in the PM’s statement he explained as follows:
“To take us on that journey, to enable us to climb to those heights, I believe the right political climate has now been created in the country. The two main political parties in the country have come together to form a National Government of Consensus. The main objective in forming a National Government is to provide a common platform to deliver long-term social economic solutions that can solve the key problems of the country. This would be towards achieving stability and embark on a speedy journey of progress. We may not get another opportunity such as this.”
We are very hopeful and patient… We have to wait for some time and see the results, always reminding ourselves of this quote by Aristotle: “Patience is bitter, but its fruit is sweet.”
 
 
[The writer is Chairman of the International Chamber of Commerce Sri Lanka (ICCSL).]
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