Financial Times

UPFA begins receiving budget proposals
Members of the public and some institutions have begun sending proposals to a group of UPFA parliamentarians including JVP spokesman Wimal Weerawansa after the group called for public representation to formulate the budget.
Here are extracts of a proposal sent by W.C.Dheerasekera, a former Secretary at the Ministry of Industrial Development, a copy of which was sent to The Sunday Times FT:

Cooperatives
Budgetary provisions should be made to implement the recommendations made in the Presidential Commission on Cooperatives so that the cooperative sector can play a vital role in the economic development of Sri Lanka.

The role played by NGOs is underestimated and these groups are treated as social service organizations not partners of economic development. Accordingly the registration of NGOs is undertaken by the Commissioner of Social Services. But NGOs like Sarvodaya or Dambadeniya Development Foundation engage in business development services. The Institute of Intermediate Technology deals with technology transfer. The registration of NGOs should be undertaken therefore by a separate Authority established under an act of Parliament to establish its identity as a unique not-for-profit organization.

Budgetary provisions should be made to create a new department for the registration of NGOs and a Registrar of NGOs with similar functions assigned to the Registrar of Companies, be appointed.

The role played by public enterprises for economic development also has been downgraded and presently these are treated as economic liabilities. This is mainly due to political interference. China, India and Singapore effectively use public enterprises for economic development. Having realized the economic importance of public enterprise, the following reforms were undertaken recently in China:

* Giving greater decision-making power to the state-owned enterprises, including greater financial authority and control over financial resources;
* Replacing the surrender by the enterprise of their profits to the government by the levy of an income tax, after-tax profit being divided into special funds to be managed and used by the enterprises themselves; and
* Giving greater financial authority and financial resources to the local governments.

I would suggest we follow the Chinese example and that ownership and management of public sector cluster bus companies be handed over to the respective Provincial Councils.
Innovative policy measures
* Establishment of Exim Bank
* Culturing of Seaweeds for Export market
Exim Bank
A proposal to set up an Export-Import Bank of Sri Lanka was sent to Jeyaraj Fernandopulle Minister of Trade, Commerce and Consumer Affairs by me on May 10, 2004.
This would accelerate export growth.
Culturing of seaweed
I sent a proposal to Chandresena Wijesinghe, Minister of Fisheries & Aquatic Resources to culture seaweed in Sri Lanka for the export markets and use the same to manufacture jelly drinks for the domestic market.

Pension liabilities of banks - turning a threat into an opportunity
Recent letters in your columns on the subject of pension liabilities of banks gives the impression that only private banks are facing risks of going bust over their pension liabilities. State banks are in an even worse plight.
In the 1970's state banks had 65 current employees for each pensioner, a ratio of 65.1. I understand this important ratio has come down to 1.51, a level not sustainable. It will only weaken the whole state-banking sector and reduce the ability to pay even present employees, leave alone pensioners.
Therefore state banks are not on a better footing than private banks when it comes to meeting pension obligations specially because the implicit guarantee enjoyed by state banks will not be extended to pension liabilities even though it may continue to cover deposit liabilities.

Impact
Most private banks and all state banks will be technically bankrupt if the full extent of their pension liabilities are factored in. This is not at all a good predicament to be in.
With capital tied up in pension liabilities and provisions for bad debts, the lending capacity of most local banks have declined sharply. BIS Capital Adequacy rules have made matters worse.
Reduced lending means a lesser appetite for deposits. The low rates of interest currently being offered by local banks for depositors basically stem from this.

The need to pay both, present and past employees, have driven up intermediation costs of banks to unacceptably dangerous levels leading to higher lending rates in all sectors.
State and private banks will get a chance of overcoming the crippling disability that had been undermining their capital strengths and once again commence aggressive efforts to mobilize deposits and lend to customers. Banks can voluntarily retire unproductive staff that often find their skills and training incompatible with current needs but still earn high salaries due to their seniority.

Banks could then recruit younger staff more attuned with the needs at a far lesser cost. With the new found capital strengths banks would be able to get higher credit ratings enabling them to raise long term finance locally and overseas at much finer rates.
This in turn would enable lending at much lower rates bringing down intermediation costs sharply.

With higher lending, the appetite for savings deposits would grow once again driving up interest rates for retail and small time deposits. Higher profits generated can then be invested in upgrading front line technology, which is badly needed particularly at state banks.

Customer
Customers would be able to obtain much lower rates of interest on advances and higher rates on their savings deposits together with a faster service without being subject to the higher charges of foreign bank branches.

Economy
The economy and the GDP will get a major boost through higher level of financial intermediation and its attendant benefits percolating through the economy to the lowest level.

SME sector that has been wavering in their investment decisions, not knowing whether the much needed credit facilities would be available, can go ahead with greater confidence. With high economic activity the nation's tax coffers are going to benefit tremendously.

Once tax rates on VRS and pension buy backs are reduced, more and more are expected to avail of such benefits attracted by the large one off amounts coming to them. Even with a lower rate of taxation, the unlocking of VRS and pension liabilities and disposing of these would give sizable tax revenue to the government.

The most important windfall would be the massive number of new jobs that would be created in the new SME ventures and in the banks itself when they replace the retirees with new recruits.

The government should consider these options seriously when presenting the first budget of the new government and grant necessary tax concessions to the banks and employees accepting VRS in agreeing to opt out of pensionable services. Such incentives will undoubtedly enhance the acceptable of the schemes and help banks to gradually come out of the pension time bomb with the full support of the employees and their trade unions.

Dr. L S Randeniya
Kandy.

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