After the war on terrorism, it’s the economic war that is drawing the attention of the government, the opposition and the public in recent months.
With tax revenue falling, tax officers getting assaulted for ‘pushing’ taxpayers to cough out their dues under strict Finance Ministry guidelines to maintain targets and also reduce the shortfall in 2009, and Treasury bills being offered as compensation in lieu of cash to residents whose properties have been acquired; there are some serious issues in the Sri Lankan economy.
The silver lining however is the host of big-time foreign businessmen visiting Sri Lanka – which this week included India’s Mahindra & Mahindra chiefs and the Hong Kong-based Shangri-La hotels chairman – and complete with a stopover at Temple Trees implying that investors and their big bucks are coming to Sri Lanka. But like the ‘biggies’ of the likes of fund managers Mark Mobius and Jim Rogers, are these just a recce and a look-around?
The Asian Development Bank Vice President is also in town next week while an IMF mission – visiting under the usual mandate to review the economy vis-à-vis the Rs 2.6 billion credit facility – is here this time for a bigger purpose: a deeper insight into the economy and more people to interview.
Will they pick holes or come up with the usual ‘the economy is doing well but there is a need to improve revenue, trim costs, etc’? Of late, opposition pundits have expressed concern over the IMF’s seemingly whitewash of a key economic fundamental – the debt situation – which according to the fund is apparently not trouble-free but manageable because (IMF) funds are flowing in despite fundamental concerns.
The debate on debt will never end between the government, opposition and the media as borrowings rise from commercial loans like for the Hambantota harbour, airport and other infrastructure across the country and fund-raising bonds continue to be offered by the Central Bank on behalf of the government.
There is little doubt the debt situation has reached crisis levels but is it staggering as some say and perched on an economic bubble? “No doubt the debt situation is high but I don’t think it’s at a major crisis level,” one respected, independent economist said. Others say over 40% of government revenues goes to just servicing interest payments.
The debt debate will go on with mixed emotion and statements but one issue where there is no argument is that the government is desperately short of cash. Take for example the plan to offer long-term bonds or Treasury bills in lieu of cash to residents whose lands were acquired for highway development. Rupees 8 billion is not a lot of money (over several years)but the government simply doesn’t have that. Then the promised wage hike of Rs 2,500 has also been abandoned on the grounds that it was not a promise made by the President. But the reality is that the Ministry of Finance, struggling to cut government spending, had prepared estimates of this hike costing Rs 1.5 billion. It may now come in the 2011 budget.
A lot of other things don’t jel. For instance inflation is coming down according to the Central Bank then, why is a new currency denomination note, Rs 5,000 being considered? That takes the value (or worth) of the Sri Lanka currency to a new level.
The Board of Investment (BOI) also doesn’t appear to be attracting too much investment (or attention for that matter) whereas during the tenure of former BOI Chairman Dhammika Perera, almost every other day there was press releases announcing investment agreements. However it must be said that Perera’s strategy was making public, deals with investors which were ‘an intention to invest’; not the final investment. There is a huge difference between this first move and the ultimate decision to invest.
Under Jayampathi Bandaranayake’s stewardship at the BOI there have been little or no recent announcements. Much of this is also due to a direction from Treasury Secretary Dr P.B. Jayasundera to examine past agreements as to whether there have been too many tax holidays and concessions given to projects depriving the state of much needed revenue.
Another issue of concern is that private sector investment other than in tourism hasn’t taken off after the war. “Credit is not expanding even though interest rates have come down. Foreign investors are coming and going. Some come to see me and that’s it. There’s no positive growth in the private sector,” a top official from a state bank said.
Real estate developers are also grumbling. So are the construction industry people. “Apartments are not moving though everyone talks of a buoyant mood. I believe the take-off will be in a year or two. Till then I’m not selling my apartments for lower than the current rate,” one Colombo developer said.
Apart from signals on infrastructure and the occasional announcement by influential personalities like Basil Rajapaksa and P.B. Jayasundera (back to his strong, powerful and influential position after the debacle over the Supreme Court judgment on LMS), that Sri Lanka is back in business, there are no other policy guidelines and pronouncements on taxes.
Clearly the private sector is waiting for the November budget for signals on taxes – with a new tax structure coming in - and the future policy. Until then it will be a push-pull, nice-but-let’s-wait-and-see strategy rather than companies putting their money where their mouth is. Until then it will be the rush of blood and shenanigans in the stock market that will keep people occupied and guessing. |
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