Business

20th January 2002

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Filling empty Treasury coffers

Sri Lanka's new Finance Minister is meticulous in anything he does and that probably comes from being one of the country's best-known lawyers. K.N. Choksy is not an economist. Neither is he a flamboyant politician. But friends and colleagues say his thorough preparation of court cases would help him handle the state's most important job. The minister talks of a new tax system, negotiations with the IMF and economic reforms in this exclusive interview with The Sunday Times Business.

 On the state of the country's finances:

The country was left by the previous government in a state of economic paralysis. The economic growth rate is below zero. Inflation is running at around 15 percent. Last year the budget deficit was 11 percent, the highest in the past ten years.

The exchange rate is not stable. The government's operational expenditure has been in excess of revenues. The outstanding public debt is Rs. 1,414 billion. This debt when compared with Sri Lanka's entire population means than every citizen of this country carries a debt of Rs. 76,000.

A turnaround in the economy has to be done and will be achieved. However, it cannot be an immediate process because the government is keen to ensure there won't be any increases in the cost of living, which would further burden consumers.

The peace process if successful will have two immediate beneficial results. Firstly, defence expenditure will be saved. Secondly, foreign investment will certainly show an immediate increase. The people must appreciate that unless the reforms are phased out, they will once again be the sufferers.

The first budget will therefore spell out an overall plan for rectification of various sectors of the economy. The immediate target is to increase the growth rate by drawing the private sector to invest more capital in development. This will also increase employment.

Destructive
I find that our tax system is in a sense self-destructive. My objective is to decrease taxes as an incentive to industrial and commercial growth. There is much scope to simplify the tax system by doing away with overlapping taxes.

The best tax system is one that would apply the lowest possible rate on the broadest tax base. However, to achieve this and bring down taxation it will be necessary to rationalise some of the numerous tax exemptions that presently exist.

The customs tariffs system is also complicated. A uniform and simple tariff structure is being worked out.

On the continuation of the GST and NSL:

We are looking at these taxes in a manner suggested by the IMF.

Is there a time frame by which the economy can be turned around from the present crisis?

My response to this flows from what I said earlier. We are targeting the first year to introduce the reforms I have referred to above. This should result in positive economic growth in the first year. The second year should show beneficial results particularly in regard to an increase in employment opportunities.

The Ministry of Rural Economic Development has been established in order to also take the economic base into rural areas from urban cities. Small scale and medium scale industries in the rural areas will be given priority. We have already obtained a loan of US $ 60.6 million from the ADB to develop such industries in rural areas and provide them with managerial know-how. Self-employment opportunities will thus increase.

The new government has been cautious in its approach on reviving the economy, saying it would take longer than first anticipated. Any comments?

Let us take our minds back to 1977. President J.R. Jayawardene and his finance minister inherited an economy that was deflated due to the public sector being too heavily involved in commercial and industrial activity through public corporations. The economy was also burdened with subsidies.

The UNP at that stage introduced the open market system which brought about a financial and economic revolution. I find that the PA government has in the last seven years taken the country back once again to the pre-1977 situation. Rectification and re-establishment, removal of subsidies and increase of capital investment cannot be achieved in under two years but a start will be made on a sure footing in the first budget.

Pricing
On price fixing:

We don't like to resort to price fixing of essential consumer items. We want the country once again to settle down to accepting an inevitable hallmark of the open market economy. This means that we have to get used to world market prices in items such as wheat flour, household gas and petroleum products.

On subsidies:

In regard to wheat flour, the immediate removal of the subsidy is not contemplated due to hardships to consumers.

But we are rectifying the situation by renegotiating the agreement with Prima so as to remove certain constraints on the liberalisation of the free import of wheat flour by the private sector. The Indian line of credit is also being activated to import wheat from India at prices lower than wheat imported from western countries.

With regard to petroleum products, the CPC is carrying a liability of Rs. 21 billion. The government sees no objection to opening up petroleum imports to international suppliers. They will import and distribute petroleum products in competition with each other.

This will act as an automatic brake on arbitrary increases in prices. It will also save the government from having to invest colossal sums of money to import crude oil. However, in regard to diesel and kerosene I foresee that any increase in the selling price would result in increases in prices of consumer items such as vegetables and other foodstuffs which are transported by road. A price structure will therefore be introduced with regard to these two items.

On defence spending:

A new procurement system is being worked out by the Policy Planning Ministry which in itself would reduce defence expenditure. The extension of the ceasefire if it materialises will also reduce defence spending.

 Budget:

The budget will be presented in mid-March while a vote on account upto April 30 would be presented before that.

On the IMF:

An IMF team is due in the first week of February. The IMF has expressed disappointment that the previous government did not fulfill the conditions of the standby agreement entered into in April last year.

As a consequence, only US $ 100 million out of the US $ 253 million made available under this facility was utilised.

We will present concrete proposals to the IMF to rectify the previous government's defaults under the standby agreement.

I also intend negotiating with the IMF a facility under the Poverty Reduction and Growth Fund which the IMF grants at very concessionary rates of interest.


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