Columns

• Hopes of agreement before April 10 as PM goes to China with top ministers, appeal likely to write off loans
• Tax chief’s circular on new rates withdrawn, not an April fool’s joke,  but on Finance Ministry order
• Delay in local polls gives more grassroots support to Rajapaksa’s group, while Sirisena’s position gets weaker

The Government this week stepped up efforts to resuscitate the country’s economy in the wake of a looming financial crisis. Towards this end, top level talks got under way on Friday with an International Monetary Fund (IMF) mission which arrived in Colombo the previous day. It is headed by Todd Schneider who has led previous IMF missions to Sri Lanka. Representing the Government were Prime Minister Ranil Wickremesinghe, Finance Minister Ravi Karunanayake, Development Strategies and International Trade Minister Malik Samarawickrema, Central Bank Governor Arjuna Mahendran and Prime Minister’s Advisor R. Paskaralingam.

In an acrobatic move, the Ambagamuwa Pradeshiya Sabha’s former UPFA member Helapriya Nandaraja stood on his head as part of a widespread protest against the postponement of local council elections.

The thrust of these talks, a Government source said yesterday, is an IMF standby facility. It could be either US$ 1.5 billion or US$ 2 billion. “We hope to wrap up discussions on the subject this week,” the source said, adding that “Friday’s round dealt with preliminaries.” Yesterday, the IMF team got down to the specifics with a team of Government officials, so finality could be reached before April 10. According to Premier Wickremesinghe, the IMF has also agreed to a request “to identify ways to manage and prevent expenditure arrears.” This is in respect of public sector institutions. He noted that “particularly State Owned Enterprises (SOEs), under the Rajapaksa regime due to their inefficient management, remains a serious concern.” Among the criteria the IMF has sought for the standby facility are measures to make productive state-owned enterprises which are running at colossal losses.

SriLankan pilots up in arms
It was only last week, the Sunday Times (political commentary) revealed the humongous losses suffered by SriLankan Airlines, the country’s national carrier. It became the subject of discussion when the Pilots Guild met at its office at Diyawanna Place in Rajagiriya last Sunday. Of some 300 pilots employed by the airline, more than 50 turned up. The main subject of discussion, for which the special meeting has been summoned, was a proposal to the pilots by the management to forego their annual salary increments during the current year. It was only last week Eran Wickremeratne, Deputy Minister of Enterprise Development (and not Deputy Foreign Minister Dr Harsha de Silva as erroneously reported) told Parliament that SriLankan’s outstanding debt with the banking sector, particularly with state banks, led to capital being tied up. This, he said, prevented the banks from lending for other productive activities such as agriculture and small-and-medium term enterprises.

Speakers at the Pilot’s Guild meeting criticised the management for what they called their inefficiency in not being able to make an economic turnaround of the airline. One of them said that the Chairman and the Board of Directors had been in office for 15 months but there had been no marked improvement. Colossal amounts were just being spent and they had not produced results. One pilot noted in his speech that it was inadvisable to reject the call to forego salary increments. He said the Government would place the blame on them for the deteriorating financial situation. Another pilot said that if Premier Wickremesinghe removed the existing Board of Directors from office, not only the pilots but air crew and even engineers would agree to forego half their salaries for one year. He said this was not possible now with the present directorate that had done ‘little or nothing’ to help the airline. Hence, it was decided that a Committee go into the matter. The Committee will liaise with other trade unions in the airline. They will also raise with the management what ‘sacrifices’ they propose to make to save the airline which is now in a perilous financial crisis. However, the engineers union has decided that it would not agree to a suspension of increments.

The pilots meeting also saw bitter criticism about what they called the continuance of ‘extravagant lifestyles’ by some members of the management. It was alleged that they drew huge pay checks and were still seeking funding from the Government to retain their positions and run the airline ‘to its graveyard.’ It was noted that the SriLankan office in Rome was being closed down from May 1. The closure of offices in Frankfurt and Paris was also under consideration but no decision has been taken. Informal soundings have also been made to offer the four Airbus A 350s already contracted with the manufacturer to be given to Turkish Airlines possibly on lease.

Last Tuesday, the Cabinet Economic Management Sub Committee headed by Prime Minister Wickremesinghe met SriLankan Airlines Chairman Ajit Dias, a garment exporter, who runs a string of coffee shops in Colombo, and some members of the Board of Directors. They came in for strong criticism from Finance Minister Karunanayake and Enterprise Development Minister Kabir Hashim. Karunanayake, who has already warned that Treasury funding for the debt ridden airline will only be available until October this year, said they should focus on settling only essential debts for the time being. This is until the future role of the airline is determined. Hashim re-iterated that he was formulating several strategies to revive the airline but noted it was no easy task. The Government’s current thinking is to convert SriLankan into a regional airline. However, the question still remains whether it would be successful in persuading a foreign carrier to either partner or take over the operations of the national carrier.

According to a note Premier Wickremesinghe presented to the Cabinet of Ministers, the outstanding liabilities of SriLankan Airlines as at December 31 last year were Rs. 211,964 million which is 20.33 percent of the liabilities incurred by state-owned enterprises. The national carrier came third after the Ceylon Petroleum Corporation (CPC) first with liabilities to the tune of Rs. 365,047 million or 35.01 percent, the Sri Lanka Ports Authority (SLPA) second with liabilities to the tune of Rs. 260,221 million or 24.95 percent. The figures had been obtained from the Department of National Budget of the Ministry of Finance.

Tax hike withdrawn

According to Premier Wickremesinghe, “during the past two months, a significant amount of liabilities have surfaced after the preparation of the budget 2016, many of which were either not recorded or have not been analysed in a consolidated manner previously.” He has added that a significant part of the liabilities is reflected in the outstanding loans to commercial banks as well as the guarantees given by the Government under the Fiscal Management (Responsibility) Act No 3 of 2003. Another portion, he has pointed out, represents the borrowings of state-owned enterprises from abroad.

In this backdrop, there was countrywide confusion over a circular Inland Revenue Commissioner General Kalyani Dahanayake issued. It was also posted on the Department’s website. The issue had its origins at a March 4 special ministerial meeting where Prime Minister Wickremesinghe proposed amendments to the 2016 budget proposals. They were in respect of Corporate and Non-Corporate Income Tax as well as the Withholding Tax.

The Commissioner General of Inland Revenue said that “as per instructions received from the Ministry of Finance based on the decisions taken by the Cabinet of Ministers at a meeting held on 04.03.2016, the income tax proposals made by the Budget 2016 shall be revised and implemented with effect from 01.04.2016 (i.e. last Friday April 1).” With regard to Corporate Income Tax, the status quo that prevailed at 20.11.2015 shall be maintained “pertaining to the income tax rate applicable for Banking and Financial Services and Insurance (28%), and Liquor, Tobacco and Lottery or Betting or Gaming (40 %) sectors.”
Income tax rate applicable on sectors other than those who come under Corporate Income Tax shall be 17.5 %

With regard to Non-corporate Income Tax, the Commissioner General said that the status quo as at 20.11.2015 shall be maintained pertaining to the tax rates applicable to Non-corporate sector. She said, “Accordingly, progressive income tax rates, tax free allowance, the tax deductions and tax exemptions on the profits from employment, currently applicable to personal income tax including Pay-As-You-Earn tax, will be continued. Thus, the current PAYE tables could be applied for the year of assessment commencing on 01.04.2016,” she added.

In terms of the Commissioner General’s circular, the PAYE Tax liability of an employee shall be deducted from the employee’s remuneration and the provisions preventing an employer settling employee’s PAYE liability shall be introduced. Whilst income tax rate applicable on the profits or income from any Liquor, Tobacco and Lottery or Betting or Gaming activity conducted by individual or partnership shall be continued at the rate of 40%, the circular said that minimum tax rate applicable for individual on the profits shall be limited to 17.5%. The circular added, “The present Withholding Tax deductible by Bank or Financial Institutions on interest from deposits at the rate of 2.5 % shall be continued in line with the decision to maintain status quo in respect of personal income tax.”

In a surprise move on Friday, the Ministry of Finance directed the Commissioner General of Inland Revenue to withdraw the circular and pull out from its website the same contents. In other words it did not take effect on Friday April 1. It was by no means an April Fool’s joke though it appeared one. Embarrassed tax officials were to explain that a decision of the Cabinet of Ministers notwithstanding, enabling legislation has not been introduced. After such legislation was passed in Parliament, they said, it was mandatory for the new taxes to be gazetted. Without doubt, both the Ministry of Finance as well as those in the Department of Inland Revenue are aware of procedures and how such a gaffe occurred is questionable. The question is whether this indeed was the cause. There was more to follow.

The Value Added Tax (VAT) is to now remain at 11 percent. In the budget 2016, it was proposed to implement two bands of VAT – 8 % and 12.5% instead. Recommending a change, Premier Wickremesinghe told the special ministerial meeting on March 4 that “implementing such a complex multi rates in tax can result in a shortfall in revenue target further deepening the crisis.” He said that “the safe option is of a single VAT rate of 15 percent. The exemption on telecommunications, private education and private health will be removed, he added. Thus, a 15 percent VAT came into being though dates for its implementation were not specified. An authoritative Government source said yesterday that the new tax revisions had been put on hold until the ongoing negotiations with the IMF were concluded. Thereafter, the source said, required legislation would be introduced in Parliament to give effect to the revised tax changes. The source declined comment when asked whether there would be further revisions.

In the past many weeks, Finance Minister Karunanayake has been providing the ministerial meetings with an update on the total debt position. At last Wednesday’s meeting, matters arising from the issue were discussed. One was to conduct a study on the purchase of crude oil requirements by the Ceylon Petroleum Corporation (CPC) Ministers also endorsed a move for a currency swap with India and a decision to place before the Ministerial Sub Committee on Economic Management the proposal from India to construct houses for the needy in the north. Reportage of events in the media also prompted ministers to discuss their role and measures needed to ensure there was ‘factual accuracy.’

It was decided that all future weekly ministerial meetings should be held on Tuesday morning instead of the present Wednesdays. This was after some ministers pointed out that a change would give them time to visit their electorates to meet the public and see to their needs. Premier Wickremesinghe also briefed ministers on his impending visit to China. President Sirisena was to suggest in a humorous way to resolve an argument between two political archenemies – Justice Minister Wijeyadasa Rajapakshe and Regional Development Minister Field Marshal Sarath Fonseka. An argument ensued when Fonseka commented on a proposal made by Rajapakshe. Sirisena noted that one minister did not seem to understand the other. The best way out, he noted, was for them to meet at a dinner and resolve their differences. He said even other ministers would be welcome. There was a chorus from those present that they would like to attend.

China visit
Wickremesinghe and an entourage of ministers are expected to leave for Beijing on Wednesday (April 6). Among those in the delegation are Ministers Malik Samarawickrema, Sajith Premadasa, Nimal Siripala de Silva, Sarath Amunugama and Rauff Hakeem. Foreign Minister Mangala Samaraweera who flew to Australia yesterday will join the delegation in Beijing.

Several agreements have been lined up for signature. Among them is an extradition treaty, promoting investment, economic and technical cooperation, Kidney Mobile services vehicle project, sports cooperation, promoting tourism, the phase two of Southern Expressway, comprehensive cooperation between the Central Banks of China and Sri Lanka, Integrated water supply loan agreement for Gampaha, Attanagalla and Minuwangoda, cooperation between the National Science Foundations of the two countries and initial talks on a Free Trade Agreement between the two countries, an export processing zone in Hambantota, further development of the port and airport there.

Government sources say the Sri Lanka delegation may appeal to the Chinese leaders to write off some of the loans extended to Sri Lanka. This is much the same way China has done in the case of Nepal. The move, these sources say, is part of measures to alleviate the current balance of payments crisis.

Constitution-making process
Other than focusing on economic issues, the Government will set in motion the machinery for the drafting of a Constitution on Tuesday. The first task will be the appointment of a 21-member Steering Committee which will be responsible for the business of the Constitutional Assembly (a Committee of the full House) for preparing a Draft of a Constitution for Sri Lanka. Though the United National Front Government pledged during both the presidential and parliamentary election campaigns to abolish the executive presidency, there is no mention of such a move in the resolution that was formally adopted to set up a Constitutional Assembly. This is what the preamble to the resolution, now a public document, has to say:

“…….. there is broad agreement among the People of Sri Lanka that it is necessary to enact a Constitution for Sri Lanka;
“This Parliament Resolves that— There shall be a Committee which shall have the powers of a Committee of the whole Parliament consisting of all Members of Parliament, for the purpose of deliberating, and seeking the views and advice of the People, on a Constitution for Sri Lanka, and preparing a draft of a Constitution Bill for the consideration of Parliament in the exercise of its powers under Article 75 of the Constitution….”

“Joint Opposition” leader Dinesh Gunawardena said yesterday that they would nominate MPs from their group to serve in the Constitutional Council. He said, “We have also given notice of a vote of no-confidence against Finance Minister Ravi Karunanayake.” Speaker Karu Jayasuriya is to take up with party leaders on Tuesday when the matter could be debated. The one-page motion notes that Parliament is the final authority for all financial matters of the state. It alleges that Finance Minister Karunanayake, in his 2016 budget, had misled the House and the public by giving a wrong picture. The motion accuses Karunanayake of telling a special news conference that loans to the tune of over hundred thousand crores of rupess obtained by the Mahinda Rajapaksa administration had not been accounted for in the financial system. The Minister had alleged that this was a violation of the Finance Management Act. “I have faced a lot of abuse in my political career. Such motions will not affect me. I will give the critics a fitting reply,” Karunanayake said yesterday responding to the motion.

The “joint opposition” leader said 34 MPs including those from the Sri Lanka Freedom Party (SLFP) had signed the motion. He also said that signatures were now being collected for a vote of no confidence against Minister Patali Champika Ranawaka. Mr. Ranawaka described the move as part of a smear campaign against him and added “I won’t run away. I will fight.”

Balamandalaya blows
The split within the SLFP continues with pro-Mahinda Rajapaksa group flexing its muscles in some areas. Last week, Mahinda Amaraweera, the new General Secretary of the United People’s Freedom Alliance (UPFA), was in Akmeemana to address a meeting of their Balamandalaya. It had been arranged by Deputy Minister Nishantha Muthuhettigama. When Amaraweera was addressing the meeting, there were catcalls. Some at the meeting began hurling buns and forced him to stop his speech. He was later escorted out by his personal security detail. On the same day, Minister Susil Premjayantha was interrupted at two meetings in Aranayake and Mawanella. The two ministers together with SLFP General Secretary Duminda Dissanayake had been advised by President Maithripala Sirisena, leader of both the UPFA and the SLFP, to visit Balamandalayas and brief them on the current situation in the party and attempts to sabotage it.

In some areas, it is the party’s former local authority members, who have been demanding council elections. Gunawardena said that since the tenure of the Councils, including the Colombo Municipal Council (CMC), had come to an end, it was time that the Independent Election Commission arranged to hold polls. Therein lies the rub. With a fractured SLFP where the grassroots level membership is weighing in Rajapaksa’s favour, the ruling party leaders face a formidable task. At least for the SLFP-led by Sirisena, it would invite sure defeat. Not surprisingly, their leaders have declared there would be no local polls until next year. On the one hand, under such a situation, it is the officials who will be running the local authorities. On the other, the former UPFA grassroots level leaders who served in these bodies have transformed into a stronger force for Rajapaksa. That seems to be his driving force notwithstanding the different probes that are under way into members of his family. With little or no effort, he is gaining support at the local level whilst Sirisena’s efforts to bolster his position as the unquestionable leader of the SLFP are diminishing. Proof of this comes from the encounter two of three ministers tasked by Sirisena faced when they addressed Balamandalaya meetings.

With only days to go for the National New Year, a drought coupled together with unannounced power cuts, particularly in the outstations, is a forerunner to shape of things to come. Lack of rains in vegetable growing areas, it is feared, would push prices up. The prices of bread and other flour based products have already gone up. Sooner than later, when the new taxes are formalised, Sri Lankans are in for more belt tightening.