• Is the revenue target too ambitious?
• Borrowings dominate budget deficit
• 11 million kgs of tea to India
• Budget 2000: Family silver-the silver lining
• The People's Alliance's Vision 21
• Wheat mills in every port hits Prima
• "Bankassurance" from Asian Alliance
• Magpek replies
• Access in leaps and bounds - Communications
• Tax proposals hit some, help others
• Livestock IPO's await approval
• Revenue protection unit to be set up
• Opinions divided on FTA benefits
• Preliminary objections rejected
• Mind Your Business - By Business Bug
• Financial reforms pep up market - Market Report
• LB Finance branching out
• BoC extends its protective arms to cover children
• Colombo scores over Kenya - Tea Update
• International Trade Services on the fast track
• Dialog GSM launches e-volution range of services
• New Aquafresh toothbrush
• Maliban Biscuits to tempt palate
• Picture future
• Rational Software for software developers

Review - Budget 2000

Is the revenue target too ambitious?

By the Business Editor

In a crucial post budget week when professional, academic and government think tanks dissected the proposals, the common consensus about the most surprising aspect of the millenniums first budget seems to be the unprecedented appearance of President Chandrika Kumaratunga in parliament to present the budget wearing her finance ministers cap.

Hailed by one and all as a very positive move, it was publicly endorsed by the IMF Country Representative Mr. Nadeem Ul Haq when he said, "She came in and owned it (the budget)." Mr Ul Haq was a speaker at a post budget seminar organised by CIMA.

There were no major shocks and jolts this time for either the consumer or the corporates, but they will however have to fork out more by way of widened bands of Good and Services Tax (GST) and the National Security Levy (NSL).

Topping the list of concerns of economists and analysts in general are two vital questions; how is the government going to bridge the deficit and is the revenue target too ambitious?

Tax revenue has been dropping since the introduction of GST in 1998. In 1997 Turnover Tax (TT) collection was Rs. 47 billion. In 1998 with the introduction of the GST, collections dropped to Rs. 39 billion and in 1999 to Rs. 35 billion. With the GST and NSL nets now widened the government estimates a tax collection of Rs. 201.8 billion for 2000.

Tax revenue which was 14.5% of GDP in 1998 and 14.9% of GDP in 1999, is estimated at 16.1% of GDP for 2000, too high a target according to some analysts.

Analysts collectively agree that the government desperately needs to enhance revenues and strengthen collection measures. But increasing the GST rate to the recommended 17.5% or even to 15% from the existing 12.5% would be political suicide in a pre- election period, some analysts say. Inland Revenue Chief, Mr. Mervyn Weerasooriya who also spoke at the CIMA seminar said that effectively the country was on a 18% tax band, with the 5.5% NSL as an additional levy to the 12.5% GST.

The NSL, which was to be a one year tax, has however been re-imposed annually and seems to have now become a part of our tax system, tax experts observed.

Economists also observed that the widening of the NSL band is likely to have a cost-push inflationary effect. They said that the ambiguity of the definition of the NSL now being imposed on all services barring the exemptions, was almost a default definition where anyone who is not a trader, manufacturer or a banker is considered a service.

Tax specialists also say that signals that the country was moving towards a lower tax regime with a 25% ceiling, seems to have lost its way in the states' revenue plan. Corporate taxes which were in the region of 60% - 50% at one time had dropped to 35% , but seems to have settled there, they said.

The governments medium term fiscal policy direction estimates a current account surplus of 0.6 of GDP, a very modest figure according to some analysts. The current account however has

seen a deficit in the past few years (although the deficit figure has been declining) unlike during the UNP regime where finance minister Ronnie de Mel's budget deficits tended to run high, going up to 17% of GDP compared to 7.6% of GDP in 2000, but however reflected a current account surplus, some analysts observed.

This indicates that the government was saving at that time, analysts said. In contrast the country's current low rate of saving 23% of GDP compared to the regions average is because of the governments dis-savings, they said.

It is healthy to note that the government is at least addressing these problems, as the president in her opening remarks before presenting the revenue proposals said, "The deficit situation in the current account of the budget is not wholly satisfactory. And also our national savings of 23 per cent of GDP is well below our investment requirement of 30 per cent of GDP.

The governments Vision 21 plan targets an increase in national savings to 35 per cent by 2010. (See also Vision 21 report on page 2)

The fiscal policy direction from 2000 - 2002 projects a steady rise in the current account surplus from 0.6 in 2000 to 2.5 in 2001 and 4 .0 in 2002. And similarly an improvement in the budget deficit from 7.6 % of GDP in 2000 to 6.0 in 2001 and 5.0 in 2002.

Analysts said that the drain on the current account surplus was from the heavy defence spending which was at 4.5% to 5% of GDP. Defence expenditure has been going up about Rs. 10 bn to Rs. 11 bn annually. This may be an inflationary increase but if that component were taken out the figure would look much better, an analyst said.

Treasury Secretary P.B. Jayasundera said at a media briefing last week that defence spending

this year will be less than last year.

The opening up of the financial sector was generally welcomed by its participants. From a policy point of view it is a good thing. It will also promote technology transfers, said Director General, Colombo Stock Exchange, Mr. Hiran Mendis on the government's decision to permit 100% foreign ownership in stock broking companies.

Analysts were sceptical about the actual positive results of this move in a depressed market where returns for brokers who operate on commissions on transactions is rapidly declining. Why should foreigners come and set up in a bearish market? They actually want to move out, some brokers said.

Chairman, Colombo Stock Exchange, Mr. Rienzie Wijethilleke who is also Managing Director, Hatton National Bank told the Sunday Times Business that the opening up of brokerages to foreigners was a medium term move.

" Now there is no attraction, but in an improved market brokerages from Singapore or Hong Kong can set up at a reasonably low cost and with a downscaled operation here they can make profits," he said.

Mr. Wijethilleke added that the opening up of the banking sector up to 60% to foreign ownership was a very progressive and positive move. He added that restrictions in the Banking Act would ensure that no individual could own more than 10% stake in banks and thereby ensure that foreigners could not take over a controlling interest in local banks easily. He also welcomed the stamp duty reduction on mortgage bonds.

Analysts however pointed out a downside to the opening up of the banking sector and the sweeping liberalisation of the insurance sector where a 90% foreign ownership will be permitted.

Dividends from these sectors will go out of the country if foreigners buy up in a big way, they said. In the insurance sector, part of the profits go into a general reserve which is used to absorb risk, they said. If foreigners buy in, money could be syphoned out as dividend payments and dependency on re-insurers will increase, they said.

Removing incentives to the non-export BOI companies could also inadvertently hit some major infrastructure projects lined up, SG Securities Singapore, Head of Economic Research, Mr. Arjuna Mahendra told the Sunday Times Business.

Tax holidays were given to all BOI companies with an investment of over Rs. 500 million, irrespective of their export status.

The investment limit has now been raised to Rs. 3.5 billion to qualify for this exemption, thereby knocking out almost all non-export BOI companies.

For example big corporates like Hayleys and Aitken Spence are coming up with power projects which will now not qualify, Mahendran said. After all how many companies come up with a Rs. 3.5 billion investment?" he said.The streamlining of the customs tariff to a two band system has resulted in some raw material imports being charged an additional 5%, analysts pointed out.

With the new customs tariff rates of 25% or 10%, some raw material imports that were charged a lower tariff will now come upto 10%, they said, adding that charging raw material and finished goods the same tariff was irregular.

Input costs for some manufacturers will go up and they could find competition with imported goods even more stiff they said.

The ideal situation would be to move to a single tariff band, they said. The budget speech also promised anti-dumping legislation to protect local industry and this could be imminently important to prop up the local industry now, they said.

Borrowings dominate budget deficit

By Mel Gunasekera

Government deficit and deficit finance for 1998-2000

1998 1999 2000

Estimates Provisional Deviation Estimates Provisional Deviation Estimates

(Rs. mn) (Rs. mn) (Rs. mn) (Rs. mn) (Rs. mn) (Rs. mn) (Rs. mn)

Budget Deficit (66,648) (93,147) 26,499) (68,943) (89,000) (20,057) (95,900)

Grants 9,000 7,200 (1,800) 8,000 6,800 (1,200) 8,000

Deficit after

grants (57,648) (85,947) (28,299) (60,943) (82,200) (21,257)l (87,900)

Financing

Foreign Loan 16,426 10,196 (6,230) 12,283 8,200 (4,083) 14,200

Domestic

Borrowings 33,221 71,362 38,141 40,660 73,900 33,240 43,700

Divestiture

proceeds 8,000 4,389 (3,611) 8,000 100 (7,900) 30,000

Deficit% GDP 6.5 9.2 2.7 6.0 8.0 2.0 7.6

(Source: Central Bank/budget proposals)

The government made a startling revelation last week, that nearly 70 percent of the budget deficit (around Rs. 67 bn) is on account of interest payments on public debt. An additional Rs. 71 bn (5.6% GDP) is expected to be paid for borrowed funds this year.

The Rs. 95.9 bn (7.6% GDP) deficit for this year will be funded by Rs. 46.3 bn via concessional foreign loans and Rs. 122.7 bn from domestic sources.

However, new borrowings will amount to only Rs. 14.2 bn (foreign loans) and Rs. 43.7 bn (domestic loans). The foreign loans would be on account of ongoing capital expenditure projects, while new borrowings have been earmarked for major highway projects to commence this year.

On the domestic borrowing front, an additional Rs. 12 bn would be issued via treasury bonds to retire Bank of Ceylon's outstanding liabilities.

The additional domestic borrowings are not expected to add much pressure on interest rates (around 12%-12.5%), owing to Sri Lanka Telecom's public offering.

SLT's 30% sale is expected to net in Rs. 30 bn and is earmarked to retire further government debt. Privatisation proceeds from SLT (US$ 225 mn) helped the government in 1997, to retire Rs. 10 bn in treasury bills. In addition to SLT, proceeds are expected from SriLankan Airlines to Emirates US$ 25 mn (December 31), 39% from the scheduled privatisation of the National Insurance Corporation, the management stake of the remaining plantation companies and proceeds from a few farms are expected to boost government coffers this year.

At present, total government debt for 1999 stood at Rs. 492 bn, including Rs. 262 bn in Rupee loans, Rs. 125 bn in treasury bills and Rs. 105 bn in bonds.

On the external borrowings front, the government has expressed interest in going for a US$ 500 mn Poverty Reduction Growth Fund IMF loan.

The Fund is expected to push for reforms stated in the government 'vision 21 statement', beginning with public sector reforms. The decision to tap the foreign capital markets for US$ 100 mn to US$ 200 mn FRN was put off twice, pending a sovereign rating. Central Bank officials say they have not decided on whether the country would go for a sovereign rating this year.

11 million kgs of tea to India

The tea industry is drawing up plans to enter its latest market, India.

However, tea trade officials said that it was likely that only 11 million kilos from the 15 million kilos per annum agreed under the recently concluded free trade agreement would be exported this year.

They said that according to a strategy drawn up by the Tea Board and the industry, the 15 million kilos allocated was distributed evenly throughout the year. Hence, as the first shipment to India would be after March, three months worth of exports would not be utilised.

In addition their strategy plans to cater to the growing middle class and the affluent upper classes. Officials said that it was not viable to compete in the low end of the market due to the high cost of local teas of a similar quality.

In addition, they said that an incentive scheme was planned to encourage value added tea exports.

Officials said they had not decided on the ratio of bulk and value added teas for export.

Officials added that since they did not want to interfere with free market operations, they would distribute the quotas on a 'first come first served basis'. This is the first time the tea industry is exporting to quotas in its recent history.

Officials added that they had to be cautious not to step on the Indian tea producers toes, as they were not very happy with the idea of Sri Lankan teas entering their market.

They said that the Indian producer would take every conceivable action to bring down or stop the trade.

In addition, we understand that Indian authorities have limited entry to two ports.

Hence, in the north only Calcutta will be open for the entry of tea, while in the south only Kochin will be open.

Budget 2000: Family silver-the silver lining

The stunning performance of the President herself present ing the Budget overshadowed the factual realities of the financials presented by her. Our concern is however to comment on the economic and financial implications of the budget.

We have often said that the fundamental fiscal weaknesses leave little room for meaningful state interventions. The government has to therefore remain largely passive owing to the huge committed expenditures, which have to be met. The concern to not allow fiscal indiscipline to affect the country's financial stability reinforces this further. Financial discipline has been attained this year too by "selling the family silver".

What a plight the government would have been if it did not have the proceeds from the sale of public assets to the extent of 30 billion rupees ? There are several themes in the Budget which confirm the government's intent to pursue its declared economic policies of 1994.

Chief among these is to maintain a low budget deficit.

Indeed the Budget figures have turned out a small current account surplus of Rs 7.2 billion. The overall deficit has been due to capital expenditure in the budget.

The overall deficit of Rs. 95.9 billion is 7.6 per cent of GDP. The method of financing this is all important. Nearly one third (31 per cent) of it is financed through privatisation proceeds, about 45 per cent from domestic borrowings, about 15 per cent from foreign borrowings and 8 per cent from foreign grants.

The domestic borrowing component would have both an inflationary impact and also starve funds which would have otherwise been available to the market. As the President herself pointed out, the proceeds of the privatisation would assist the government in maintaining interest rates at perhaps current levels.

If the privatisation proceeds were not available it would have been a different story, an additional Rs 30 billion would have had to be borrowed and this would have sent interest rates up. The government has kept faith in its policy of privatisation and the market economy.

Regulations governing restrictions on foreign share holding have been changed to permit a larger foreign share holding in insurance and banking while foreign stock broking companies are to be permitted.

These among others are the policy initiatives to bring in foreign investments into the country. Their success would however depend on many other factors, both political and economic. The government appears to be at last looking at agriculture in a more realistic manner.

The protection afforded to agriculture through a 35 per cent tariff should provide the initial stability to pursue a more comprehensive programme to improve the efficiency of our agriculture. While in the long run, the future of agriculture cannot depend on such protection, years of government neglect and inefficiency should be replaced by incentives which would ensure a more profitable food crops sector, in particular.

We hope this would be a first step in a well thought out and planned implementation of an aggressive agricultural strategy. We also hope that the very logical and reasonable abolition of radio and TV licensing is a first step in doing away with other cumbersome and poor paying tax measures. Even the question of personal income taxation should be reviewed with a view to increasing tax revenues through more effective systems such as an extended payee mechanism, at source collections and placing the collection in the hands of the payers of income tax.

The small number of active tax files speaks volumes for the ineffectiveness of the present system. The Budget 2000 has not been a spectacular one. No one expected it to be so.

It has confirmed the government's policy of free enterprise and faith in the market economy, it has attempted to contain the budget deficit under difficult circumstances, it has given agriculture a much-needed spell of protection and allocated reasonable funds for capital expenditures.

Whether the final outturn in revenues and expenditures would match the figures presented would depend very much on the performance of the economy itself and whether the defence expenditures could be kept at the budgeted levels. The results of the privatisation of Telecom would also be significant.

We hope the presentation of the Budget by the President herself is symbolic of a more proactive role by the government from now onwards. That is the need of the hour.

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