Columns

• Cabinet approves PM’s proposals to raise syndicated loans of US$ 3 billion through a coalition of foreign banks; Attorney General expresses concern over contract
• UNP-SLFP ministerial council to study and report on Mahendran issue; major re-structuring of Central Bank
• Kosgama damage and compensation as high as costs for major development projects; more details emerge on ammunition depot

By Our Political Editor
One of the biggest woes for the United National Front (UNF) Government appears to be the never ending saga of imposing taxes, recognising thereafter that it had affected some sections of society and amending them.
It began with the budget 2016 which Finance Minister Ravi Karunanayake introduced in Parliament in November last year. The periodic revision of his revenue proposals came mainly from President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe. True, Karunanayake became the butt end of most criticism and it continues.

Just nine days ago, he faced a No-Confidence Motion not for the entirety of his treatise. The thrust of the motion was that he introduced ad hoc changes and thus misled Parliament. The “Joint Opposition” boasted that its move was a “litmus test” for the Sri Lanka Freedom Party (SLFP) segment of the Government. Here was an opportunity, the “Joint Opposition” thought, that would force SLFP members to rebel against their United National Party (UNP) counterparts in the wake of mounting living costs. However, it boomeranged on the “Joint Opposition”. Other than vituperative personal remarks against Karunanayake, there were no startling revelations. In the wake of a possible opposition onslaught, despite differences over some issues, both the SLFP and the UNP got together. President Maithripala Sirisena turned up in Parliament to defend Karunanayake, one from a group in the UNP that backed his candidacy at the presidential election. The rest is now history.

Yet, “Joint Opposition” leader Dinesh Gunawardena insisted that “we put our views across.” He told the Sunday Times, “The motion was delayed by four months. Our thrust was to expose the mismanagement of the economy.” He said tomorrow (Monday), they would nominate one member to overlook each Ministry to “monitor corruption and other malpractices.”

Other than that, the “Joint Opposition” is not giving up. On Thursday, shops in the Galle area put up shutters protesting over the introduction of the Value Added Tax (VAT). Similar scenes played out in Maharagama on Friday. The VAT was introduced by Prime Minister Ranil Wickremesinghe. It came on the eve of the Government reaching finality then on an International Monetary Fund (IMF) Extended Fund Facility (EFF) for Sri Lanka. Early this month, US $ 1.5 billion was approved by the IMF board of directors. That a 15 per cent imposition of VAT had a devastating effect on low and even middle income groups is all too well known.

Acknowledgement this week came from Deputy Enterprise Development Minister Eran Wickremeratne, who said the Government was aware of the hardships faced by the people. In some instances, a 15 per cent VAT has been imposed on sectors where there was no such taxation. Another area where the VAT has had a crippling effect is on soldiers in the armed forces. Most of them re-loaded their mobile phones once in five days or in a week. Now, they say, within two to three days they would exhaust their talk time and money. Thus, keeping in touch with their families has become a difficult exercise. Unlike in other sectors, such issues also contribute to low morale. That such a phenomenon, coming as it does, ahead of alleged war crimes inquiry perhaps next year, should be no cause for comfort for Government leaders.

If Finance Minister Karunanayake thought his worries over taxation issues were over, that was not to be. He learnt to his dismay, as he confessed to confidants, that new taxation decisions that included matters he was unaware of, were made public on Thursday. It was Special Assignments Minister Sarath Amunugama who declared that the 15 per cent VAT would apply to sales of Liquor and Cigarettes. According to a Finance Ministry official, Karunanayake was unaware that liquor too would be included. On Thursday, he met senior management officials of the Ceylon Tobacco Company, which enjoys the monopoly to manufacture cigarettes in Sri Lanka, to inform them of the tax hike. The decision to bring them under the VAT regime had been taken at a meeting of the ministerial committee on economic affairs. The increase was to set off the loss to be incurred when medical tests and Dialysis by kidney patients are excluded from VAT. In May this year, similarly, Amunugama declared that plans to include VAT for water had been dropped. This was because it would cause hardships to the people.

Details of how the new changes came to be discussed at the ministerial committee and how the adjustments were brought about are not clear. However, President Maithripala Sirisena did tell the Sunday Times in an exclusive interview last week that he would submit proposals to strengthen the economy and reduce the cost of living. He also said that when he took over as President, the foreign debt remained at Rs 9,000 billion. And now, many matters arising from the fast deteriorating balance of payments position have become a high priority issue. So much so, the matter was the subject of a detailed discussion when ministers met for their weekly meeting last Tuesday. An immediate necessity for the Government, it was pointed out, was to settle a US$ 700 million currency swap with the Reserve Bank of India (RBI). The Indian Government had heeded a request from its Sri Lankan counterparts for the swap on the basis that it would be returned no sooner the IFM’s extended fund facility was received.

The exigencies of this situation appear to have prompted the Cabinet of Ministers to approve a memorandum by Premier Wickremesinghe, in his capacity as Minister of National Policies and Economic Affairs, to obtain a “Foreign Currency Term Financing Facility (FTFF),” or simply put, raising of syndicated loans through a coalition of foreign banks. The amount is said to be over three billion US dollars. The decision to go ahead with the facility is notwithstanding serious reservations expressed by Attorney General Jayantha Jayasuriya. In February this year, the Government had issued letters appointing “Mandated Lead Arrangers and Bookrunners” (MLABs) to four leading foreign financial institutions – Citigroup Global Markets Asia Limited, Emirates NDB Capital Limited, The Hong Kong and Shanghai Banking Corporation Limited and the Dubai based Mashreq Bank. They in return submitted to the Government “commitment” letters. The mandated lead arranger (MLA), is the investment bank or underwriter firm that facilitates and leads a group of investors in a syndicated loan for major financing. A Bookrunner usually is the main underwriter or lead- manager/arranger/coordinator in equity, debt, or hybrid securities issuances.

Last week, the Government decided to bring in a fifth bank — Credit Suisse AG as an MLAB on similar terms. Potential investors were given an “Information Memorandum” to make them aware of the syndication arrangement. A Steering Committee (SC) and the Attorney General’s Department negotiated the draft Facility Agreement. Now, the Attorney General has in a four page letter to S.R. Attygalle, Deputy Secretary to the Treasury, a copy of which the Sunday Times has seen, made reference to provisions in the agreement that needed careful attention.

This is how the main building of the Sri Lanka Army's Central Armoury looks now. All varieties of ammunition stored inside were lost due to explosions and the resultant fire.

One is the reference to the words “sanctions” and “Restricted Party” which “provides for situations where the Loan granted to the Government of Sri Lanka will be cancelled and the GOSL being required to make repayment, immediately, of the entire Loan, upon the occurrence of any event…” The AG has explained that sanctions in the draft Agreement does not refer to those imposed on Sri Lanka but to sanctions on “any other country, institution or person” by the United Nations, the European Union, the United States, the United Kingdom, the country of incorporation of each of the banks on any country in which the Facility Office of one of the banks is located…..”

The AG has also pointed out that the banks in question, with the consent of the borrower, transfer all rights under this Agreement to other banks in terms of a clause. Accordingly, he has noted, the other banks will be entitled to cancel this Loan and demand repayment not from the banks which provide the funds. Among the other issues raised by the AG:

•  The Government of Sri Lanka requested that the sanctions referred to in the draft should be defined as sanctions imposed by Law in the relevant jurisdiction by the country imposing the sanctions. This requested amendment is consistent with the concerns identified by the Banks, in that, in the absence of any violation of law or regulation no Bank would be liable to the imposition of any fine or penalty. The Banks have refused all the amendments. They have taken up the position that they would suffer reputational damage if they were to cancel without good reason.
• A further and more serious consequence of cancellation of this Loan would be that the cross-default provisions in all other international agreements the Government of Sri Lanka has entered into in relation to foreign borrowings will be activated, particularly if the GOSL is unable to make repayment of the entire outstanding Loan upon cancellation. The consequence would be that all the Government’s outstanding international commitments would be immediately repayable. (The bold highlighted line is from the AG).
• In the absence of the amendments suggested by the GOSL, they will not be in a position to know whether the Banks in fact had valid reason to cancel the Loan….
• In terms of the Facility Agreement, if the Government of Sri Lanka, or any Governmental Agency or any private individual, directly or indirectly uses the proceeds of the Facility to deal with any country or person subject to sanctions, it may lead to cancellation and repayment of the Loan immediately….

Premier Wickremesinghe told his ministerial colleagues this week that he would seek their approval for the Draft Facility Agreement “having examined the risks that arise.” He emphasised that “in the background of time constraints and the urgent requirement for foreign resources” it was necessary. Matters outstanding or of a contentious nature are to be gone into by a Committee that has already been appointed. The recommendations were approved. A ministerial source said the Megapolis and Western Province Development Minister Patali Champika Ranawaka expressed opposition to the move and dissented.

Kosgama tragedy adds to the crisis
Premier Wickremesinghe’s plea to his colleagues to approve the draft Facility Agreement despite the risks pointed out by the Attorney General underscores the seriousness of the balance of payments crisis Sri Lanka is facing. Other than meeting the recurring commitments, heavy financial burdens have also been cast by two major developments. One was the floods and landslides that caused death and devastation. Costs of reconstruction and rehabilitation of areas, now under way, is a drain on resources. Added to that is a bigger burden, the fire at the Sri Lanka Army’s Central Armoury. As different investigations have got under way, details of the colossal damage it has caused, particularly to the Army, is now unfolding.

Just two months after being elected, President Sirisena received a written request from Army Commander Lt. Gen. Chrisanthe de Silva seeking permission from the Government to re-sell an assortment of ammunition. The stocks which included ammunition for artillery guns, armour, Rocket Propelled Grenades (RPGs) and a variety of small arms ammunition. The residual quantities have been added up after setting apart requirements for the next five years. This is also taking into consideration the extensive use of ammunition for training purposes. So much of stocks have been available and had been imported ahead of offensives to militarily defeat the Liberation Tigers of Tamil Eelam (LTTE). President Sirisena acted promptly by forwarding a Cabinet Memorandum to resell the excess stocks of ammunition at a lesser rate than what was paid for when procuring them. The Cabinet of Ministers gave approval in June 2015.

The supplier, China’s state owned NORINCO (The China North Industries Corporation), was approached. They sent a two member delegation to Sri Lanka. The duo inspected the stocks at Kosgama and other dumps but made clear that re-purchase will be only if the ammo stocks were stored in accordance with laid down procedures. The purchase price for the excess stocks in the Army’s hands, according to a high ranking source, was more than Rs. 20 billion. That was for more than 19,000 tons and the re-sale would have led to only a third or little more of the purchase price, said the source. Of this quantity, 12,000 tons had been moved to an ammunition storage facility in Veyangoda leaving only 7,000 tons at Kosgama. Further stocks have been placed in Welisara and Beragala near Mawanella.

Whilst re-selling the ammunition, the Army has been negotiating with NORINCO for the purchase of a huge Ammo Dismantling Plant, one used to mechanically destroy outdated ammunition. The cost was to be set off against the re-sale price for ammunition to be returned. Two Army officers were set to travel to China for this purpose when the fire occurred. This is because periodically large stocks of ammunition are becoming outdated. The source said stocks purchased in 1990 were still being retained. The Central Environment Authority (CEA) has put a halt to the practice of armed forces dumping ammunition in the deep sea though it was earlier considered a safe practice. This is because water pressure at higher depths crushed the ammunition beyond any use.

The high ranking source said that 80 percent of the ammunition stored at the Central Armoury in Kosgama were of Chinese origin. The remainder had included around 30 per cent of ammunition for armour from Eastern Europe, the source added. “There were also other options we could have resorted to, like giving friendly countries the excess stocks and obtain other items. When these came to mind, the fire had broken out,” the source added. There were 428 personnel at the Central Armoury when the fire broke out in one of the main buildings where the ammunition was stored. Army Commander de Silva has appointed his own four-member Court of Inquiry to probe the incident. Headed by Major General Dhammika Pananwala, this Committee, among other matters, will determine whether there was negligence on the part of any officer or others that led to the fire and whether safety precautions were taken.

Defence Secretary Karunasena Hettiaratchchi has already appointed a Board of Inquiry headed by a senior Air Force officer and including those from the Navy and the Army. Other inquiries are being conducted by the Criminal Investigation Department (CID) and the Government Analyst’s Department. It has been agreed that compensation for damage caused to civilian properties should be at market value. The Kosgama aftermath will add further burdens to the Government’s domestic financial commitments. It would be as high as the costs for development projects.

Arjuna Mahendran saga
It is in this backdrop that the continuance in office of Central Bank Governor Arjuna Mahendran has become a hot bed of controversy. On Thursday, the SLFP’s Central Committee unanimously adopted a resolution to urge President Sirisena not to extend Mr. Mahendran’s term when it expires on June 30. On Friday, both President Sirisena and Premier Wickremesinghe heard the views of some civil society representatives. They also said the present Governor should not be given an extended term.

Both the SLFP and the UNP leaders are keen to ensure that this issue does not lead to any estrangement. With this in mind, a council of representatives of the two sides, named earlier, have been called upon to study the issue and report back. The UNP team is made up of Ministers Kabir Hashim, Ravi Karunanayake, Malik Samarawickrema, Akila Viraj Kariyawasam and Sagala Ratnayake. The SLFP side is represented by Ministers Sarath Amunugama, Anura Priyadarshana Yapa, Susil Premajayantha, Lasantha Alagiyawanna and Mahinda Amaraweera. The Mahendran affair figured at a meeting of the Committee on Friday. A speaker for the SLFP side made clear they would not compromise on the Mahendran issue and insisted that he should go. He said that their party will not change their stance on the subject of electoral reforms too. They will meet again on July 7, Both President Sirisena and Premier Wickremesinghe are due to meet to resolve the issue.

Weeks ahead of the controversy over Governor Mahendran erupted, the Cabinet Committee on Economic Affairs chaired by Premier Wickremesinghe had been discussing the re-structuring of the Central Bank. One interesting aspect discussed was the transfer to the Treasury of the Public Debt Division from the Central Bank. In the past, not only this Division, but the Central Bank itself came under the Ministry of Finance. Allegations against Mahendran over bond issues emanate from this Division. Another proposal discussed was to establish a separate Divisional Management Board for the management of the Employees Provident Fund (EPF) under the Central Bank. A committee comprising Treasury Secretary R.H.S. Samaratunga, Economic Affairs Advisor R. Paskaralingam and Governor Mahendran was called upon to prepare proposals for this re-structuring.

The Cabinet Committee’s concerns have also focused on the Sri Lanka Ports Authority (SLPA) which is debt ridden to the tune of Rs. 232 billion. It is the biggest loss making state-owned enterprise and is followed by SriLankan Airlines which will be funded by the Treasury only until October this year. It was noted that of the Rs. 232 billion SLPA debts, Rs. 156 billion has been spent on the Hambantota port. Advisor Paskaralingam told the meeting that the SLPA had prepared a ‘masterplan’ to manage its debts.

He revealed that the Chinese Government was undertaking a study on operating the total of the Hambantota port on a PPP basis. PPP or Purchasing Power Parity is described as a theory in economics that “approximates the total adjustment that must be made on the currency exchange rate between countries that allows the exchange to be equal to the purchasing power of each country’s currency.” In respect of SriLankan Airlines, a source said, the Government is still awaiting concrete offers. The Cabinet of Ministers has already granted approval to seek a partner and to formulate an arrangement where the national carrier can function as a commercially viable venture.

All in all, it is becoming increasingly clear that the biggest challenge for the UNF Government is still in the economic front. One need not be a nuclear scientist to say that the more it borrows, the more it would have to pay back. That raises a critical question – whether there would be more taxes heaping further burdens on the people in the months to come. Already, there is considerable disillusionment over the blows they are receiving due to the increase in VAT. Not good news for a Government that is being accused of going slow on bribery and corruption allegations against those in the previous regime. It may turn out to be a no-win situation for the Government with elections to the local authorities due at least next year.