• Stringent conditions under Sri Lankan Govt. pact with IMF
• Mind your business
• Local firm in gas cylinder production
• US Govt. rejects ban on GM food
• Launch of two banks
• The increasing debt burden
• Resolution of disputes under the Industrial Disputes Act
• News

Stringent conditions under Sri Lankan Govt. pact with IMF

Last month, Sri Lanka received a $523 million overseas assistance package from the International Monetary Fund and other aid givers helping to boost economic growth and shore up foreign exchange reserves.

A letter of intent to the IMF from the government signed by President Chandrika Kumaratunga and Central Bank Governor, A.S. Jayawardene, in seeking the IMF package says that as a contingency measure, duties on cigarettes would be raised if needed. All new tax incentives approved by the BOI in 2001 would be subject to review in two years, but such reviews would to have to conform to the legislative requirement in Sri Lanka.

The letter, accompanied by a memorandum on economic and financial policies, said civil servants will receive no pay rise during 2001, and outlays on other goods and services will be tightly controlled. There will also be a hiring freeze on civil servants.

Security related spending will be reduced to Rs.63 billion in 2001 implying a reduction of nearly 1 percent of GDP. All transactions will be recorded and monitored through the budget, and any overspending of security related expenditure would be offset instantaneously by further measures, the memorandum to the IMF said.

In addition to raising excises on cigarettes, consideration would be given to excises on other items, a possible increase in the GST and immediate expenditure cuts on goods and services and domestically financed capital spending.

The report said the priority areas will be health, education, power, and road rehabilitation. In particular, as large foreign-financed infrastructure projects are entering a major construction phase, disbursements are expected to increase. Other rupee-funded projects, however, will be kept to a minimum; the construction of new buildings in particular will be curtailed.

"Domestic debt financing of the budget will be reduced in part through increased privatisation proceeds. The sale of the Co-Operative Wholesale Establishment's wheat operation to Prima is ongoing and we expect the sale of Shell and Telecom shares and the opening of the insurance sector by the fourth quarter of 2001," the report said.

It said the government has set out a timetable for adjusting administered prices, especially those for oil products, public transportation and utilities. By March 2001, domestic petroleum product price increases will have eliminated operating losses of the Ceylon Petroleum Corporation, the report noted.

An automatic pricing mechanism will be put in place by end-2001 that will ensure that domestic fuel prices are adjusted sufficiently on a timely basis to pass on changes in international costs, enabling CPC to avoid recourse to bank financing, the report noted.

The report said privatisation receipts, nett government borrowing of about $130 million, and foreign direct investment close to $190 million, are expected to finance the current account deficit.

The report said public enterprise restructuring would include privatisation of commercial activities and administrative restructuring of the Ministry of Finance and the Central Bank. Labour market reform will aim to facilitate greater labour mobility while ensuring that an adequate social safety net is put in place. A working group on labour market reform will establish a standardised formula for compensation, and establish fixed time limits for approval by the Commissioner of Labour for involuntary employee separation. The social safety net will be dedicated to job counselling, job placement and re-training of displaced workers.

The report noted that to address the structure of the budget and enhance transparency, dependence on the National Security Levy would be reduced. The changeover will be initiated with the 2002 Budget. There will be a significant reduction of NSL and a compensating increase in GST, with the timing and the amounts to be decided during the September programme review. "We envisage the full integration of the NSL with the GST by end-2004. Starting with the 2002 budget, no new tax incentives will be provided by the Board of Investment, which will be subsequently eliminated, and the granting and monitoring of all tax preferences will be consolidated to the Inland Revenue Department. In particular, subject to resolution of the legal dispute, the customs regime of BOI and non-BOI importers will be unified under the Customs Department," the report added.

Mind your business

Mayhem boosts business

Since the clashes erupted in the hill country, a backlash of some sort in the city and elsewhere was expected, or so the rumour mongers said. And several insurance companies recorded brisk business for RCC (riots and civil commotion) cover that week, mostly obtained by Muslim-owned commercial houses, we hear.

Telecom giant trembles

Competing providers now want to reduce tariffs in a bid to win a larger market share in special 'promotional' offers for a limited time period. But of course, the giant will be complaining of unfair competition and running to the watchdog regulatory body for solace.

Wary of shares

Local firm in gas cylinder production

By Hiran Senewiratne

Italo Lanka Gas Cylinder Manufacturers (Pvt) Ltd. along with some Italian investment obtained Board of Investment (BOI) approval to manufacture and supply gas cylinders for the domestic market at Walpitamulla, Dewalapola in the Gampaha district. This is the first company in Sri Lanka to manufacture gas cylinders for the domestic market based on customer specifications. Plans are also afoot to export cylinders to Oman, where some export inquiries have come in.

Shell Gas monopolised the local gas market until that status ended in November 2000. New players were then seen entering the market with Laugfs Gas and some other companies making bids. But industry sources said that the Ceylon Petroleum Corporation (CPC), which earlier struck a deal with Laugfs Gas to supply gas to the local company, was now negotiating with Malaysia's Petronas Corp. by which Petronas will enter the local gas market.

The sources said Petronas had approached Italo Lanka Gas for the supply of gas cylinders. So far all the gas cylinders used by Shell Gas have been imported. The company began commercial operations in November with the idea of supplying all types of gas cylinders for prospective gas companies. It invested Rs.40 million on this project in an acre of land, starting with 18 employees and modern equipment from Italy. Raw materials are imported from India.

Company Chairman W.P.J.P. Siriwardhana told The Sunday Times Business, during a visit last week to the factory site, that the plant can produce five hundred cylinders per day per shift at full capacity. The factory is not working at full capacity at the moment but would do so once local players start entering the market. The Fiscal Incentive Committee of the Ministry of Industrial Development has approved the project as a pioneering one in Sri Lanka.

Mr. Siriwardhana said the demand for auto gas cylinders, which the company produces, has fallen as the number of motorists converting their petrol vehicles to gas has dropped due to high gas prices.

However, the company continues to concentrate, at the moment, on auto gas cylinders as demand for domestic gas cylinders are low at the moment in the absence of a proper competitor to Shell Gas, which still controls the household and industrial gas market. Mr. Siriwardhana said the company was working on obtaining the SLS as well as the ISO 9001 standard certificate in future. He anticipates actively entering export markets especially in the Middle East once the ISO 9001 standard certificate is obtained.

US Govt. rejects ban on GM food

By Faraza Farook

The ban in Sri Lanka, the first country to impose a ban on GM foods whereas most countries have implemented labell ing of GM food products in advance warnings to consumers, came into effect on May 1. It was hailed by local environmentalists but criticised by the trade.

Ruling out any serious health hazards on the use of GM Foods, U.S. agriculture experts pointed out that Sri Lanka's ban on the import or sale of GM foodstuffs was baseless and called for scientific evidence to prove it was harmful.

The U.S., one of the largest consumers of GM food products since the mid-1990s has seen no adverse effects, Counsellor from the U.S. Embassy in New Delhi, Mr. Weyland Beeghly, told reporters here last week, during a visit to Colombo.

Though only four percent of U.S. agricultural exports to Sri Lanka will be affected, the total ban is totally unwarranted, Mr. Beeghly said. The ban which came into effect on May 1 has been hailed by local environmentalists but dismayed the trade.

He said biotechnology products were regulated by three U.S. government agencies which have identified no significant or unexpected public health or environmental concerns.

Mr. Beeghly denied speculative reports that the U.S. was testing this 'very risky' technology on the poor population of developing nations adding, "More than one-third of the shelf space of any supermarket in the U.S. is occupied by foods obtained by using biotechnology."

He said the Animal and Plant Health Inspection Service (APHIS) in the U.S. regulates field testing of genetically engineered plants and certain micro-organisms, approves and licences veterinary biological substances, including animal vaccines, that may be the product of biotechnology.

The Food and Drug Administration (FDA) ensures the safety and nutritional issues of biotech food products for human consumption and those used as animal feed.

The Environmental Protection Agency (EPA) is responsible for public health and environmental protection and looks into the pesticides component.

Thus, the regulatory system ensures that products that are commercially grown, sold, processed and consumed are safe.

Launch of two banks

Banking sources said the NDB Housing Bank in which India's HDFC, one of the biggest housing banks in India, has a stake, would be launched on Wednesday while the giant Ceylinco Group will be inaugurating the Ceylinco Savings Bank at a ceremony on the same day.

On the previous day, Nextventures Ltd., the fund management company of the People's Venture Investment Co. (Pvt) Ltd. (PVIC) will be launched at a gala cocktail at the Trans Asia hotel.

The increasing debt burden

The enormity of the public debt can be gauged by the fact that the public debt, which was about 95 percent of the Gross Domestic Product (GDP) in 1999, increased to nearly the value of the GDP for 2000. The public debt was 97 percent of the country's GDP.

The domestic debt component of the public debt is higher than the foreign debt component. About 55 percent of the national debt is domestic and about 45 percent of the debt is foreign. Both components of the debt have to be serviced from the budget. In fact about one third of government revenue for the year goes for servicing the debt. It is most likely that the debt servicing cost will be much higher this year owing to the increase in the accumulated debt, higher current borrowing both at home and abroad, higher interest costs due to increased interest rates and a higher rupee cost of the foreign debt owing to the large depreciation of the rupee.

In the case of the foreign debt, there is another indicator that must be kept in mind. This is the foreign debt service ratio that indicates the extent to which the foreign debt servicing is a burden on the balance of payments. This ratio is the annual foreign debt servicing costs as a proportion of the annual export income. In some developing countries, which have borrowed heavily and at high rates of interest, this ratio is a very high proportion of export earnings. Consequently the foreign debt serving becomes a persistent strain on the balance of payments of the country. Fortunately, Sri Lanka has a low foreign debt service ratio. It was only about 12 percent in 2000.

This low foreign debt service ratio is because as much as 98.5 percent of foreign loans had been secured on concessionary terms. Therefore the proportion of foreign exchange earnings that go to service the foreign debt is a modest proportion of the foreign exchange earnings of the country. The total debt servicing ratio (the cost of servicing the foreign debt as well as the domestic debt) of the country is, however, high.

As indicated earlier, it absorbs one-third of government revenue. This is a heavy burden on the public finances of the country. The fact that about one-third of the annual revenue has to be set apart for repayment of capital and interest on the public debt means that the amount of money available for other expenditures is restricted. When about one-third of revenue goes to service the debt, only two-thirds of revenue are available to meet the other current expenditure.

No doubt the war expenditure is one of the factors accounting for the large public debt. It is, however, not the only one. The costs of the administration, pensions and welfare expenditure too have increased. Particularly significant has been the escalating welfare expenditure. This expenditure has resulted in large budget deficits.

The public debt is a cumulative one. In the 1980s the main reason for deficits and the increase in the debt was the large expenditure on development projects. 

The large defence expenditure has been mainly responsible for the recent increase in government borrowing.

The public finances of the country have been subjected to a vicious cycle. Large defence expenditure and other expenditure have been responsible for the increased deficits. These deficits in turn necessitates government borrowing. This leads to a further increase in the public debt and servicing costs. Therefore it is a vicious cycle with defence expenditure increasing the public debt and the debt servicing costs adding to the fiscal deficit. Large government borrowing also has increased interest rates and thereby increased the debt servicing costs. The large current expenditure implies a lack of funds for capital expenditure, such as the development of infrastructure so vital for economic growth.

The large public debt is therefore an underlying factor in the poor state of our public finances. Unfortunately the public debt and its servicing burden are likely to continue increasing this year. Privatisation proceeds helped in some years, but this is a palliative rather than a cure for the fundamental and underlying fiscal imbalance. The bad news is that both the domestic and foreign debts are likely to increase further this year and weaken the public finances further.

More Business

Return to Business Contents