The People's Alliance's Vision 21

Medium Term Fiscal Policy Direction 2000-2002

(Percentage of GDP)

1999 2000 2001 2002

Total Revenue 17.6 18.6 19.2 19.9

Tax Revenue 14.9 16.1 16.8 17.6

Non-Tax Revenue 2.7 2.5 2.4 2.3

Total Expenditure & Net Lending -25.6 -26.2 -25.2 -24.9 Recurrent Expenditure -18.6 -18.0 -16.7 -15.9 Public Investments -7.0 -8.1 -8.3 -8.8 Restructuring -0.3 -0.4 -0.4 -.0.5 Others 0.3 0.3 0.2 0.3 Total revenue-recurrent expenditure Current Account Surplus -1.0 0.6 3.0 4.0 Budget Deficit (-) -8.0 -7.6 -6.0 -5.0 Financing Grants 0.6 0.6 0.6 0.6 Foreign Borrowings 0.7 1.1 1.3 1.3 Domestic Borrowings 6.7 3.5 3.0 2.3 Divestiture Proceeds 0.0 2.4 1.1 1.0

Figures may not add up as numbers are rounded off

Economic targets summarised.

* Achieve an economic growth of 7 per cent to 8 per cent on a sustainable basis and raise the current average per capita income of Rs.60,000 per year (US$ 850) to Rs.175,000 (US$ 2,500) by the year 2010.

* Raise the income levels of the poor by raising their share of income from the current 4 per cent to 15 per cent by the year 2010.

* Promote financial discipline in the Government. Having brought down the budget deficit to 8 per cent in l999, our aim is to reduce it to 4 per cent in the medium term and to 3 per cent by 2010.

* Contain inflation, which has been brought down to 5 per cent from 14 per cent, at around 3 per cent.

* Raise national savings, which have been increased from 17 per cent to 23 per cent during the last 5 years to 35 per cent by the year 2010. This will make us less dependent on foreign borrowing to support investment and development.

* Ensure the growth of money supply in line with development needs and economic growth to achieve financial stability. As a result, we expect the interest rate to come down further.

* Provide drinking water, electricity and housing to all by the year 2010 and widen transport and communication facilities all over the Island.

* Complete the new highway system linking Colombo with major cities by the year 2005 and modernise the entire transport system by the year 2010.

* Create skills that are necessary for modern economic progress. We propose to provide 3 fully equipped schools in every district. Special facilities will be provided for the teaching of science, technology and foreign languages.

* Provide vocational training as well as other skills to all those who do not seek higher education.

* Develop rural hospitals and establish a well equipped central hospital in each district.

* Provide at least 75 per cent of the plantation sector needs for housing, drinking water, electricity, schools and health.

* Modernise domestic agriculture, diversify plantation crops, increase fish and livestock production, enter into up market industrial production and promote modern services to build Sri Lanka as a regional hub.

* Reduce drugs, alcohol, smoking and other social abuses by at least 75 per cent.

* Establish elderly homes and facility centres in all districts to care for the elderly population.

* Establish an authority to ameliorate the conditions of the people affected by the war and terror.

Medium term growth strategy - 2000-2005 Fiscal Policy

Our fiscal policy strategy enunciated in successive budget speeches since l995, was formulated within a medium term budgetary framework with a view to correcting the longstanding fiscal imbalances in our country because any correction of such imbalances is not feasible in a short time span, given our commitment to reducing the burden of the inevitable cost of such adjustment to the majority of our people.

The thrust of our medium term strategy was to raise public savings, contain the budget deficit, reduce domestic borrowings and thereby release more resources for productive use by our private sector.

This fiscal strategy is consistent with our macro economic vision to reduce the rise in the cost of living (inflation) as well as the cost of funds (interest rates), a course of action, which is essential to reduce poverty and unemployment.

Although we have not been entirely successful in reducing the fiscal deficit to the level we should have reached by now, our progress in fiscal consolidation effort has proved substantial.

The reduction in dis-savings from 3.8 per cent in 1996 to l per cent of GDP in 1999, consolidating the overall deficit at 8 per cent as opposed to 10 per cent of GDP and raising public investment from around 6 per cent to over 7 per cent of GDP are clear indications that we have introduced a growth oriented fiscal policy strategy during the past five years.

It is by recourse to this strategy that we succeeded in reducing the annual increase in the cost of living from 16 per cent in 1996 to around 5 per cent this year.

Interest rates, although still high, declined to about 14 percent to 16 per cent from over 30 per cent. National savings rose from l9 percent to 23 per cent of GDP, investment stabilised at around 25 per cent of GDP and the economy sustained a growth rate ranging from 3.5 to 6.5 per cent against the background of strikingly unfavourable world economic conditions attributable to terrorist activities and high defence spending.

Despite a temporary setback to our export earnings during the last year owing to East Asian crisis and an appreciable decline in tea and rubber prices, our debt service was contained at a durable level of around 13 per cent.

During the last five years, our economic policy was able to insulate our economy from balance of payments difficulties.

The resilience of our economy was clearly reflected in our external assets position which stood at the US$ 2,500 million level during this globally problematic period.

As announced in our Vision 21, our aim is to accelerate the present rate of economic growth of 4-5 per cent to 7-8 per cent range in the medium term. While this rate of growth can bring down our unemployment to a level below 4 per cent and create employment opportunities for virtually all persons seeking employment, it is necessary to contain the rise in the cost of living at around 3-4 per cent if we are to succeed in our poverty reduction strategy.

This will necessitate a renewed commitment to reduce fiscal deficits to a level below 5 per cent by 2003 from the current level of 8 per cent. We propose to move in this direction over the next three years.

The medium term fiscal policy direction is shown in the above Table.

When all this has been said, it remains undeniable that peace is essentiaI if we are to attain the rapid economic growth path, which we have targeted in our Vision 21. Defence expenditure should decline to around 3 per cent of GDP to make budgetary policy conducive to the accomplishment of high economic growth.

We must establish a tranquil environment in the country to achieve the full potential of our key economic sectors such as food crops, fish, livestock and tourism and contribute to the growth of the national economy. The peace dividend and matching foreign support will administer a powerful fillip to rehabilitation and reconstruction activities in the North-East, which will accelerate the growth process further.

We must also recognise that we have to encourage substantial capital inflows into our economy to build our external assets, improve domestic liquidity, reduce interest rates and raise investment by both the private and the public sectors.

The on-going transactions such as international listing of Sri Lanka Telecom are designed to attract US$ 300-400 million to achieve this objective.

This strategy will also be complementary to the Government's fiscal consolidation programme, as it will reduce the cost of public debt, which now accounts for over 5 per cent of GDP.

Infrastructure

There is an urgent need to accelerate the development of modern infrastructure facilities. We have expanded much effort and achieved a great deal in the improvement of the economic infrastructure. The economy is already benefiting from the improvements particularly in the fields of gas storage and distribution, telecommunications, the port, electricity and aviation. These are new areas of private investments, which previously were exclusively undertaken by the Governrment.

These facilities are expected to expand to a considerable extent during the next two years. In order to increase the annual cargo handling capacity to over 500,000 tons, a new Airport Cargo infrastructure project will be implemented with an estimated cost of US$ 70 million from this year.

Four private sector power projects will commence construction this year to make possible an additional power generation capacity of 250 MW. A further capacity of 350 MW will be added before 2006.

Services

The service sector has recorded considerable growth in recent years. The development of telecommunication services, on-going expansion of sea, port as well as airport facilities, development of banking, finance and insurance services, property development, expansion of modern infrastructure, development of tourism, external trade and liberalisation of financial services will boost Sri Lanka as a service hub in the region.

The Government's medium term development strategy aims at attracting large investment flows into these services to sustain a high rate of growth in the service sector which accounts for over 50 per cent of GDP.

Overall trends in public finance 1999

The annual publication of the Ministry of Finance and Planning titled "Trends in Public Finance 1998" was placed before the House during the presentation of the Vote on Account, 2000. It provides a detailed account of fiscal trends including the mid-year revisions to the 1999 budget out-turn based on revenue and expenditure performance.

As explained in this document, the budget deficit for 1999 was revised at Rs.88.8 billion, (7.8 per cent of the GDP) as compared to the previously announced fiscal target of Rs.68.9 billion, (6 per cent of GDP) in the background of a temporary revenue shortfall from Goods and Services Taxe (GST) and the higher cost of public debt.

Further explanation regarding fiscal performance is also provided in the Budget Estimates 2000 - Vol. 1 which have also been placed before Parliament.

The provisional data indicate an overall budget deficit of Rs.89.2 billion or 8 per cent of GDP in 1999 which is lower than the deficit of Rs.93.2 billion or 9.2 per cent of GDP in 1998. On the revenue side, collections from income taxes, excise taxes, National Security Levy and non-tax revenue showed a marked improvement, while revenue from Customs duties and GST performed below expectations largely on account of the low value of imports and high refunds under GST during the first half of the year. However, due to improvements effected in refund system, as well as in the enforcement mechanisms, the revenue from GST improved in the second half of the year, yielding an overall collection of Rs.35.5 billion for the year. Government revenue increased from Rs.175 billion (17.3 per cent of GDP) in 1998 to Rs.195.9 billion (17.6 per cent of GDP) - an increase of 12 per cent this year.

On the expenditure side, the total wage cost including that of provincial councils and security forces exceeded the revised estimates of Rs.56.6 billion by Rs. 1.8 billion owing to the correction of various anomalies consequent to the salary revisions effected in 1997 and 1998 and new recruitments.

Hence, the cost of salaries increased by 8.4 per cent. In spite of the reduction in interest rate, the cost of the public debt also increased from Rs.54.9 billion in 1998 to Rs.62.1 billion due to enhanced borrowings. Defence expenditure excluding deferred payments at Rs.48.1 billion in l999 was marginally lower than that of Rs. 51 billion in 1998.

All in all, total recurrent expenditure rose from Rs.199.7 billion (19.7 per cent of GDP) to Rs.206.8 billion (18.6 per cent of GDP) - a rise of 3.6 per cent during the year.

Consequently, the overall negative balance in the Current Account of the budget declined from Rs.24.6 billion (2.4 per cent of GDP) in 1998 to Rs. 10.8 billion ( 1.0 per cent of GDP) in 1999.

Public investment was raised from Rs.68.3 billion in 1998 (6.7 per cent of GDP) to Rs.78.5 billion (7.1 per cent of GDP) in 1999. Hence, the reduction in the budget deficit from 9.2 to 8.0 per cent of GDP in 1999 underscores the improvement in the current account operation of the budget.

Nevertheless, the delay in the further divestiture of Sri Lanka Telecom affected the receipts from privatisation. Thus, Government continued to borrow large sums of money totalling Rs.74.2 billion (6.7 per cent of GDP) to finance the budget deficit last year.

Wheat mills in every port hits Prima

Wheat imports are expected to be liberalised further with each port earmarked for one wheat mill, Treasury Secretary Dr. P B Jayasundara said.

At present, Prima (Ceylon) Ltd is the only wheat mill in Sri Lanka. The company was given a 20 year monopoly which ends in 2005. Over the last few years, Prima has imported around 800 metric tonnes of wheat and invested over US$ 100 mn into their local operation.

But Dr. Jayasundara said that the government had explored the possibility of liberalising the market before the monopoly ends, with the Attorney General's advice.

"The Attorney General adviced us to ensure that 450 metric tonnes was given to Prima and allow the rest to be opened to others," he said addressing the media last week.

After this decision, the government permitted the Gold Coin Group of Switzerland to start a joint venture at the Colombo port. The new project would be a BOI venture with a Rs. 3.5 bn investment.

Dr. Jayasundara said the new project is expected to be completed in 18 months.

Prima officials declined to comment on the issue, saying that they are yet to receive an official notice from the government.

However, market sources say that ending a monopoly before its due time may scare foreign investors away from future deals. On the one hand the government is taking great pains to protect Sri Lanka Telecom's international monopoly, on the other hand it has sought the AG's advice to terminate another monopoly, they added.

The company has come under criticism recently and was even named by President Kumaratunga during the TV discussion last month. Prima officials say that despite adverse criticism the company is here to stay for the long term.

"Bankassurance" from Asian Alliance

Asian Alliance Insurance Co. (Asian Alliance Insurance) will tie up with Sampath Bank to offer insurance products to its customers through the Bank's branch network.

Asian Alliance Chairman Allen Pathmaraja said, that the new product will be known as 'Bankassurance' which is defined as 'exploiting the synergies between banking and insurance so as to manufacture and distribute cost effective banking and insurance products to a common customer base.'

This concept evolved in the UK over 20 years ago. As the former Singapore based Great Eastern Life Assurance Managing Director, Pathmarajah, pioneered this concept in Singapore and will be personally involved in launching 'Bankassurance' in Sri Lanka.

Sri Lanka has one of the lowest levels of insurance penetration in Asia and the involvement of banks will assure the general public easy access to insurance products. This will also help in creating the atmosphere of a 'one stop shop' for Sampath Bank customers, he said.

Asian Alliance is an authorised and registered insurer under the Insurance Act, underwriting general classes of insurance and has presently applied for a licence to underwrite life insurance.

Sampath Bank is also tipped to join Asian Alliance Insurance as an equity partner when the company goes public in the coming weeks.

Asian Alliance presently operates with an initial Rs. 150 mn capital of which Asia Capital holds 66%, Richard Peiris & Co. 26% and private investors 3%.

With the public offering the share capital will be raised to Rs. 200 mn with Asia Capital reducing its 66% stake to 50%. The public will hold 10% and Sampath Bank 15%.

Magpek replies

In response to our story "Malwatte IPO in March" in last Sunday's issue Magpek Colombo Land Plantation Management (Pvt) Ltd has sent the following statement. We write with reference to the article appearing on page one of your business page of the Sunday Times of 13th February 2000, under the heading "Malwatte IPO in March".

Please note that Magpek Colombo Land Plantation Management (Pvt) Ltd, are not the under-writers to this proposed issue and have no intention of involving ourselves in this matter. Furthermore, Malwatte Valley Plantations Ltd, was managed by us, i.e, Magpek Colombo Land Plantation Management (Pvt) Ltd, from 22nd June 1992 to 16th August 1997. Magpek Exports Ltd where not the managers, as mentioned in the last paragraph of your article referred to above."

Communications

Access in leaps and bounds

Electroteks Network Services, a fully Sri Lankan owned company that operates a global telecommunications network spanning around the world said last week that it planned to bring a 90Mbps internet pipeline to Sri Lanka to access the Internet.

This project, which is scheduled to be launched within the first half of this year, if implemented, would provide Sri Lanka with the largest capacity and the fastest internet connection. At present, Lanka Internet Services and Sri Lanka Telecom operate the highest capacity pipeline of 2Mbps.

Company officials claim that such speeds would increase the whole country's access capacity, figuratively by over 15 times over the current capacity of the whole country.

In addition, officials said that they had also incorporated a company to provide Internet services to India. Officials said that a joint venture company had been formed and was in the process of obtaining the ISP and Gateway license to operate an independent satellite communication network for Internet operations.

The joint venture would probably be the largest Internet Service Provider in India and probably in the region, officials said.

Electroteks officials added that among the many projects planned, the provisioning of telecommunications facilities to most under developed villages, rural schools and hospitals, community centres to develop the skills of rural youths was a top priority.

They also plan to promote setting up of specialised office complexes here for Sri Lankans to work for foreign companies. More specifically to answer and assist their customers with their queries while in Sri Lanka itself. He said this would be possible as international calls, in future would cost the same as a local call, thanks to modern technology.

Tax proposals hit some, help others

By Dinali Goonewardena

The year 2000 budget has revealed a kaleidoscope of tax proposals which seek to nurture some industries while stretching out its tentacles to net in others. Withholding tax has been expanded to cover "overall services" while industries which were excluded from GST will no longer be exempt to enable them to benefit from an input credit. Provisions have been made to enable the venture capital industry to opt out of its ten year tax holiday and invest in the software industry and priority sectors but the venture capital industry is disinterested. And the National Security Levy will now bear down on services.

At present the Inland Revenue Act requires a 5 per cent deduction to be made and paid to the Inland revenue on professional services to a partnership or individual. The tax constitutes an advance payment of the professional's tax liability. The budget expands this payment to cover overall services and includes payments to corporate bodies and other businesses. At a glance this has left many an analyst reeling since this definition would include even services such as telecommunications and the hotel industry where tourists and other individuals would have to retain 5 per cent of their bill and pay it to the Inland Revenue. But Inland Revenue officials were quick to clarify this and insisted individuals would not have to retain the 5 per cent . Instead the budget proposals seek to net businesses providing services which are not of a professional nature such as security services, construction and transport. "In practice this is a cumbersome tax which most people don't comply with," Partner, Nithya Partners, Naomal Goonewardene said. .

The budget also contained proposals to exclude certain industries from Goods and Services Tax. (GST) Burial and cremation services, artificial limbs, crutches, hearing aids, wheel chairs, crop and livestock insurance, Agrahara Insurance and free or subsidized meals provided to employees at work will be exempt pending amendments to the law. Consideration has been given in the budget to representations made by industries exempt from GST which were unable to benefit from the input credit.

Industries which are not exempt from GST may charge customers GST and deduct GST paid on inputs to arrive at a net GST payment. However industries which are GST exempt can not charge customers GST and have to bear the burden of GST on inputs as a net off is not possible.

Certain industries including timber, cement and meat including poultry will no longer be exempt from GST. Poultry industrialists welcomed the proposal and said it would make them more competitive with imported frozen chicken which was cheap. How this will translate into consumer pockets is yet to be seen , they said, indicating a rise in the price of chicken for consumers. The poultry industry will however be affected by the introduction of a 5 per cent duty on maize, which is a major component of the chicken feed.

However not all industry players being brought into the GST fold were enthusiastic. If 12.5 per cent GST is introduced the price of cement will increase by Rs.25, we will be forced to pass it on to the customer, Joint Managing Director, Tokyo Cement, S R Gnanam said. He said GST incurred on inputs was restricted to a small quantity of gypsum in the case of Tokyo Cement but said other players in the cement industry might benefit from being included in the GST net.

The budget contained proposals to amend the law to enable venture capital firms to opt out of a ten year tax holiday in order to invest in industries of their choice with particular reference to priority sectors (agriculture, exports and construction) and software industries. At present there are guidelines which dictate which industries venture capital firms can invest in, in order to enjoy the tax holiday . "Under the present guidelines venture capital firms can invest in priority sectors and information technology. The sectors which they cannot invest in are real estate, tourism and trading and these have not been dealt with in the budget," Chief Executive Officer, C F Venture Fund and President of the Venture Capital Association, Samantha Rajapaksa said. "There is no reason to opt out of the tax holiday," he added.

The budget revealed that the National Security Levy is here to stay and it will, for the first time, embrace services. Analyst expect this to effect cost push inflation. However expected revenue from the expansion of this tax base is estimated at Rs. 850 mn. Services such as electricity, water, health, educational establishments, construction, transport, hotels, brokering, repair services, government agencies and statutory bodies will be exempt from this tax.

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