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• Govt. negotiators in Washington to press for enhanced bailout of US$ 3 billion, but even then more taxes and price hikes
• Wide criticism of Cabinet obesity with number nearing 100: Rs. 5 million a month to maintain each minister
• Show of strength on May Day: Maithri’s SLFP meeting in Galle, Joint Opposition formally invites Rajapaksa for Kirulapone meeting

Concerns over Sri Lanka’s deteriorating balance of payments crisis have heightened after an International Monetary Fund (IMF) mission concluded its staff level talks with the Government last Monday.

The reason – the two sides reached broad consensus on an Extended Fund Facility of US$ 1.2 billion for a 36 month period from the IMF. This is on the basis of assurances on fiscal matters the IMF received from the Government.

The IMF mission led by Todd Schneider said in an eve of departure statement from Colombo that “discussions will continue in Washington DC on the margins of the Spring Meetings of the IMF and the World Bank, with the objective of concluding a staff -level agreement with the authorities, subject to approval by the IMF management and the Executive Board, in the next two weeks.” They were in Colombo from March 31 to April 11.

Further talks have been necessitated by the Government’s requirement for an enhanced Extended Fund Facility. The amount is US$ 3 billion – a sum which highlights the gravity of the adverse financial situation. Both Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran are now in Washington DC pressing Sri Lanka’s case for the increased amount. Karunanayake is an IMF Governor representing Sri Lanka whilst Mahendran is alternate in the light of the positions they hold. If indeed an enhanced arrangement is forthcoming, a matter that will hinge solely on further IMF pre-conditions, there is no gainsaying that there would be tougher income generating measures among others in the pipeline. That is besides those already agreed upon for the projected US$ 1.2 billion dollar arrangement.

W.A. Wijewardena, a former Deputy Governor of the Central Bank, told the Sunday Times that even the US$ 3 billion sought would be inadequate given the enormity of the balance of payments crisis. Repayment of foreign loans/interest in the next 12 month period alone amounts to US$ 4.5 billion. Thereafter, another US$ 4 billion would be needed but freely available reserves in the Central Bank remain at only US$ 5.5 million dollars. Sri Lanka was now a party to the IMF’s Special Data Dissemination Standards (SDDS). In keeping with this, the Central Bank is posting on its website data which could allow anyone to carefully determine the financial situation, he explained. Thus, with the analysis of financial data, the issues faced by the Government are transparent and cannot be hidden.

“It must be borne in mind that Extended Fund Facility is given to the Central Bank of Sri Lanka — and not to the Government to finance the budget,” Wijewardena pointed out. The idea, he said, was to build up foreign reserves and bolster confidence in the rupee. The US$ 1.2 billion Extended Fund Facility on which consensus has been reached, he said, could only be drawn in tranches. For example, a tranche of US$ 300 million at a given time would be grossly inadequate. He said during the previous administration there was an inflow of funds by way of Government securities, a facility which they provided. There was US$ 5 billion. However, in the past two months US$ 2.8 billion dollars have left the country. The foreigners were withdrawing them. The remaining US $ 1.7 billion will also leave soon unless the Government is able to convince foreign investors that it would stick to a credible macro-economic policy framework. That involves a logical, compatible fiscal, monetary and foreign investment policy by the Government. This is the biggest challenge for the Government in the years to come, he cautioned.

Joint Opposition hits out
On the political front, the Government’s dialogue with the IMF has come in for strong criticism from Opposition parties. This is particularly over the new revenue proposals and what the ‘Joint Opposition’ calls more new measures to come. ‘Joint Opposition’ Leader Dinesh Gunawardena told the Sunday Times, “We will organise countrywide protests against more and more burdens being placed on the people through taxes. It will begin with our May Day rally in Kirulapone. Responding to criticism that it was the Mahinda Rajapaksa administration’s mismanagement that has led to the current economic crisis, Gunawardena replied, “They made people believe it. They gave all kinds of assurances before the presidential and parliamentary elections. They have been in office for over a year. What have they (the Government) done to arrest the situation? Different ministers and their deputies are speaking in different voices. Some were talking about economic prosperity whilst others were showing no interest in the welfare of the people.”

Central Bank Governor Arjuna Mahendran addressing the media on Tuesday before he and Finance Minister Ravi Karunanayake flew to Washington for crucial talks with the IMF on a bailout package.

Gunawardena said the Government was facing a “very serious economic problem.” He said the Government’s answer appeared to be heaping more burdens on the middle class and the poor sections of society. Since elections, they have not been able to deliver. No investments have come into the country. “All this is being done in the name of good governance (yahapalanaya),” he charged.
However, the Government’s position was defended by Harsha de Silva, an economist who is the Deputy Minister of Foreign Affairs. He told the Sunday Times, “At the end of the day, we need to be able to manage the economy with least burden on the people. In the past many years we have been indebted and are in a debt trap. We are repairing our international relations to develop international trade and exports. What is wrong in going to the IMF? We could obtain funds from other sources. However, the IMF is well respected. Their supporting us is a strong demonstration of the confidence we enjoy in the international community.”

Last week, the Government side briefed the IMF delegation on a number of measures to put the country’s fiscal house in order. Among these measures given in detail were:

• Value Added Tax (VAT) will be applied with effect from May 2, 2016.
• Share transaction levy at 0.30 % will be re-introduced with effect from April 1, 2016.
• VAT and NBT (Nation Building Tax) threshold will be at Rs. 12 million a year.
• VAT will be extended to Telecommunications, Health, Private Medical Sevices,Wholesale and Retail trade.

Big burden and revenue loss
Former Deputy Governor Wijewardena said that an increase in VAT to enhance revenue was inevitable since there had been an unprecedented decline in revenue. “We cannot import resources from another galaxy,” he added. He said that in 2008, a study by the Central Bank had revealed that to maintain a minister in office, the Government had to spend over five million rupees a month. “We had to factor in the salaries of his or her staff, fuel costs, telephone charges, vehicle running costs and entertainment among other matters and this came to more than five million rupees. The amount will be much higher now given the current prices,” he pointed out. His remarks assume greater significance in today’s context where the number of Ministers, State Ministers and Deputies reaches a near 100. It is not only a larger Cabinet of Ministers that have to be sustained but also, perhaps to a lesser degree, the Chief Ministers and ministers in Provincial Councils.

The IMF mission was also briefed on the budget 2016 proposals and the changes that have been effected at different stages before they were even implemented. Main among those listed were changes sought by Prime Minister Ranil Wickremesinghe. A Government source explained that the idea was to brief the IMF that alternative measures were coming though the losses incurred as a result of the measures amounted to Rs. 14,345 million (Rs. 14.3 billion).

One such measure is the introduction of a carbon tax. With the exemption of motorcycles (there are 3.3 million in Sri Lanka), three-wheeler scooters (1.03 million) and tractors (350,000), all other vehicles be subject to a levy of Rs 1,500 as carbon tax. This includes 700,000 motor cars, 250,000 Dual Purpose Vehicles, 100,000 buses and 50,000 prime movers. The withdrawal of these proposals led to a loss of Rs. 6,108 million (Rs. 6.1 billion).

The Prime Minister has also directed that the revision of vehicle licence fees will be evaluated by a committee appointed by him. He has directed that until this was done, the budget 2016 proposals should not be implemented. The first registration fees of tractors, motorcycles, three wheelers and other vehicles were to be increased by 25%, 50% and 100% respectively. The delayed first registration (100% recommended then), transfer of ownership (100%) and Revenue licence fee (15%), Conversion of fuel type of the vehicle (100 per cent). The revenue loss has been placed at Rs. 4,000 million.

Premier Wickremesinghe has also directed that company levy must be reduced from Rs. 5,000 a month to Rs. 1,000 or Rs. 1,500 a month. Private companies (45,000 in Sri Lanka), he has proposed, should be levied Rs. 18,000. Similarly the same fee, he has said, should be applied to Public Companies (3,500), Guaranteed Associated (1,500), Guaranteed Limited (300), Offshore Companies (50), Foreign Companies (290), Public Quoted Companies (279) and Unlimited Companies (2). The revenue loss compared to the increase effected in the budget 2016 is Rs. 2,439 million.

Premier Wickremesinghe, the IMF mission was told, has also made changes in the budget proposals 2016 in respect of the garment industry. Both import and manufacturing ventures are to charge VAT equally. The BOI garment charge of Rs 75 per piece, which is the current rate, is to remain. Allowable BOI garments sales to local market to be increased from 5% to 10%. The loss of revenue due to the amendments has been placed at Rs. 1,798 million.

The Government also told the IMF that Capital expenditure had also been reduced (a budget cut) and a ceiling imposed on the Ministries of Highways, Provincial Councils, Mahaweli Development, Defence, Transport, Health, Water Supplies, Irrigation, Megapolis, Education, Finance, National Policies, Prisons Reforms, Plantation, Home Affairs, Law and Order, Agriculture, Skills Development, Rural Economy, Labour and 30 other Ministries.

• The Government has already pledged to the IMF a number of areas where there would be prior action. They are:
• A new Inland Revenue Act will be introduced to simplify and broaden the tax base.
• The Board of Investment Act will be suspended, and granting tax exemptions and profit based-tax holidays to be provided for.
• Revise expenditure ceiling for each spending agency to match the budget deficit target of 5.4 of GDP will be presented to the Cabinet.
• A Cabinet Memorandum for a time bound strategy for state-owned enterprises (SOEs) should be completed by October 2016.
• Outstanding SOEs arrears/obligations must be certified by the Auditor General.
• Record the fiscal cost of non-commercial obligations in the budget starting in 2017
• Ministries’ arrears of Rs. 58 billion must be settled in 2016. Note: Six ministries are at present having outstanding liabilities. They are the Ministry of Highways (A National Savings Bank Loan of Rs. 24,100 million), Ministry of Home Affairs (Development Projects Rs. 7,833 million), Ministry of Irrigation (Gin Ganga and Nilwala Ganga projects Rs. 3,012 million), Ministry of Irrigation (Yan Oya Project Rs. 1,584 million), Ministry of Disaster Management (Disaster Rehabilitation Relief – Rs 1,525 million), Fiscal Policy Department, Ministry of Finance (Arbitration payments to Prima Rs. 7,975 million).
• A repayment strategy for SriLankan Airlines to be formulated. Note: The only loss making State-Owned Enterprise mentioned by name is the country’s national carrier. Moves are afoot for the financial statements of SriLankan to be subjected to a forensic audit by a foreign outfit. In laymen’s terms, a forensic audit is an examination and evaluation of a company’s or an individual’s financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. This is whilst the Cabinet of Ministers are expected to discuss new measures in the coming weeks on what to do with the national airline.

Three-point IMF plan
The Government is learnt to have concurred over a three point requirement by the IMF on the “medium term fiscal ceiling.” They are: (1) Overall 2016 budget deficit should not exceed 5.4% of the Gross Domestic Product (GDP). Again, in laymen’s terms, the GDP is the total monetary value of the final goods and services produced within the geographical boundaries of a country in a given period of time. (2) Primary deficit in 2017 should not exceed 0.2% of the GDP. (3) Primary surplus in 2018 to be 0.3% of GDP.

The IMF has spelt out “Performance Criteria” where the deficit in the second quarter of the year should not exceed Rs. 20 billion. It has said that the end of the year overall budget deficit should not exceed Rs. 659 billion – i.e. 5.4% of the GDP. The revenue in the third quarter, the IMF has noted, should be Rs. 1,031 billion and the cumulative primary deficit should not exceed Rs. 71 billion.

Here are significant highlights of last Monday’s statement by the IMF mission: “Real GDP growth in 2016 is expected to remain around 5 percent and inflation in the low single digits. Over the medium term, there is potential for growth to rise closer to Sri Lanka’s estimated potential output level, but prospects will hinge on a policy upgrade in the near term and removing bottlenecks to trade and investment.

“The authorities’ proposed-economic programme aims to achieve high and sustained levels of inclusive economic growth, restore discipline to macroeconomic and financial policies, and rebuild fiscal and reserve buffers. Key objectives underlying the reform agenda include: (i) improving revenue administration and tax policy; (ii) strengthening public financial management; (iii) state enterprise reforms; and, iv) structural reforms to enable a more outward-looking economy, deepen foreign exchange markets, and strengthen financial sector supervision.

“A durable reduction of the fiscal deficit and public debt through a growth-friendly emphasis on revenue generation is the main priority for fiscal policy. In this context, the mission welcomed the cabinet’s decision to reduce the 2016 fiscal deficit to 5.4 percent of GDP, and advised to move quickly on tax and expenditure policy decisions endorsed by the Cabinet. Other near-term steps include a clear strategy to define and address outstanding obligations of state enterprises, start broadening the tax base by reducing tax exemptions, and introduction of a new Inland Revenue Act. The medium-term revenue effort will be based on further reform of tax and expenditure policies, supported by modernising revenue administration and public financial management …

“The mission welcomed the recent tightening of monetary policy given the steady increase in core inflation and high private credit growth. Given the long lags in monetary transmission and continued increase in core inflation and private credit growth, however, the Central Bank of Sri Lanka (CBSL) should be prepared to tighten policies further if these trends continue. The mission also recommends the CBSL take active steps to rebuild non-borrowed reserve buffers.

“The financial system appears well capitalised and liquid, but the authorities should nevertheless remain vigilant to the risk of a potential rise in non-performing loans. The mission welcomes steps toward supervision on a consolidated basis and shifting to Basel III and concurs with continued efforts needed to strengthen the legal framework for crisis preparedness and resolution.
“Achieving medium-term growth and reserve objectives and building greater resilience to external shocks will require a renewed effort toward greater integration into regional and global supply chains, higher levels of foreign direct investment, and enhancing prospects for private sector investment. To boost trade and private sector development, the mission recommends addressing protectionism by reviewing tariffs and para-tariffs.

The mission welcomes ongoing efforts to enhance competitiveness through other means, including removal of the EU fisheries import ban, and the reinstatement of Generalised System of Preferences Plus status. Further steps are needed to increase the efficiency of trade facilitation (including through full implementation of use of electronic customs documentation), remove barriers to foreign investment entry and establishment, enhance access to finance, and strengthen financial market infrastructure.

“The mission met with Prime Minister Wickremesinghe, Finance Minister Karunanayake, Minister of Development Strategies and International Trade Malik Samarawickrame, Governor of the Central Bank of Sri Lanka Arjuna Mahendran, other public officials, and representatives of the business community, civil society and international partners.”

May Day rallies
The ‘Joint Opposition’ will include a resolution expressing opposition to Government’s revision of taxes including VAT and its dialogue with the IMF. On Friday, some twenty joint opposition’ members ‘led by Dinesh Gunawardena travelled from Colombo to Tangalle for a meeting with former President Mahinda Rajapaksa, who was in his home-town for the Avurudhu. They formally invited him to attend the May Day rally, an invitation which he accepted. Another group of SLFP MPs belonging to the Rajapaksa faction of the party are to meet him today. This is when the former President visits Kandy to call on the Most Venerable Warakagoda Dhammadassi Gnanarathana Thera, the newly elected Mahanayaka of the Asgiriya Chapter.

The United National Party (UNP) is making elaborate plans for its own May Day rally at Campbell Park in Colombo’s Borella zone. The Sri Lanka Freedom Party (SLFP) rally will be held in Galle, while the ‘joint opposition’ will hold its rally in Colombo’s Kirulaponne area. Recently, SLFP organisers in the Galle District were summoned to Colombo for a meeting with the hierarchy of the Maithripala Sirisena faction. It was held to ensure that the participants bring larger crowds for the rally. Among those who took part was Sajin de Vass Gunawardena former Galle District MP and close confidant of former President Rajapaksa. The Janatha Vimukthi Peramuna (JVP) rally will be held at the BRC grounds at Havelock Town.

All eyes will be on the SLFP rally in Galle and the pro-Rajapaksa joint opposition rally Kirillapone. Both sides are busy making strong efforts behind the scenes to ensure large turnouts. No doubt, that would be a yardstick by which most would measure their different strengths and thus their future.

The National New Year holidays notwithstanding, all eyes of the Government leadership is now focused on Washington DC where the IMF would have to examine a request for an enhanced Extended Fund Facility. If the amount remains at US$ 1.2 billion, it will fall far short of the Government’s expectations. On the other hand, even if the IMF cedes the Government request for US$ 3 billion, they are still not out of the woods. In effect, that means more taxes, import curbs and other restrictions to put the economy right.