IMF code of good practices

At its meeting on April 16, in Washington D. C. the Interim Committee of the Board of Governors of the International Monetary Fund adopted the Code of Good Practices on Fiscal Transparency-Declaration on Principles to serve as a guide for members to increase fiscal transparency, and thereby enhance the accountability and credibility of fiscal policy as a key feature of good governance.

This is stated in a communiqué of the Committee.

The Code is based around the following key objectives: roles and responsibilities in government should be clear; information on government activities should be provided to the public; budget preparation, execution, and reporting should be undertaken in an open manner; and fiscal information should be subjected to independent assurances of integrity.

The Code sets out what governments should do to meet these objectives in terms of principles and practices.

These principles and practices are distilled from the IMF's knowledge of fiscal management practices in member countries.

The code will facilitate surveillance of economic policies by country authorities, financial markets, and international institutions.

I. Clarity of roles and responsibilities

1.1 The government sector should be clearly distinguished from the rest of the economy, and policy and management roles within government should be well defined.

1.1.1 The boundary between the government sector and the rest of the economy should be clearly defined and widely understood.

The government sector should correspond to the general government, which comprises the central government and lower levels of government, including extra budgetary operations.

1.1.2 Government involvement in the rest of the economy (e.g., through regulation and equity ownership) should be conducted in an open and public manner on the basis of clear rules and procedures, which are applied in a nondiscriminatory manner.

1.1.3 The allocation of responsibilities between different levels of government, and between the executive branch, the legislative branch, and the judiciary, should be clearly defined.

1.1.4 Clear mechanisms for the co-ordination and management of budgetary and extra budgetary activities should be established, and well-defined arrangements vis-a-vis other government entities (e.g., the central bank, and state-controlled financial and non financial enterprises) should be specified.

1.2 There should be a clear legal and administrative framework for fiscal management.

1.2.1 Fiscal management should be governed by comprehensive laws and administrative rules applying to budgetary and extra budgetary activities. Any commitment or expenditure of government funds should have a legal authority.

1.2.2 Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application.

1.2.3 Ethical standards of behavior for public servants should be clear and well-publicized.

II. Public availability of information

2.1 The public should be provided with full information on the past, current, and projected fiscal activity of government.

2.1.1 The annual budget should cover all central government operations in detail and should also provide information on central government extra budgetary operations. In addition, sufficient information should be provided on the revenue and expenditure of lower levels of government to allow a consolidated financial position for the general government to be presented.

2.1.2 Information comparable to that in the annual budget should be provided for the out-turns of the two preceding fiscal years, together with forecasts of key budget aggregates for the two years following the budget.

2.1.3 Statements should be published with the annual budget giving a description of the nature and fiscal significance of contingent liabilities, tax expenditures, and quasi-fiscal activities.

2.1.4 The central government should regularly publish information on the level and composition of its debt and financial assets.

2.2 A public commitment should be made to the timely publication of fiscal information.

2.2.1 Specific commitments should be made to the publication of fiscal information (e.g., in a budget law).

2.2.2 Advance release date calendars for fiscal reporting to the public should be announced.

III. Open budget preparation, execution, and reporting

3.1 Budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks.

3.1.1 A statement of fiscal policy objectives and an assessment of sustainable fiscal policy should provide the framework for the annual budget.

3.1.2 Any fiscal rules that have been adopted (e.g., a balanced budget requirement and borrowing limits for lower levels of governments) should be clearly specified.

3.1.3 The annual budget should be presented within a comprehensive and consistent quantitative macroeconomic framework, and the economic assumptions and key parameters (e.g., effective tax rates) underlying budget estimates should be provided.

3.1.4 Existing commitments should be distinguished from new policies included in the annual budget.

3.1.5 Major risks to the annual budget should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).

3.2 Budget estimates should be classified and presented in a way that facilitates policy analysis and promotes accountability.

3.2.1 Government transactions should be on a gross basis, distinguishing revenue, expenditure and financing, and classifying expenditures on an economic and functional basis.

In addition, expenditure should be classified by administrative category. Data on extra budgetary operations should be similarly classified. Budget data should be presented in a way that allows international comparisons.

3.2.2 A .statement of objectives to be achieved by major budget programs (e.g., improvement in relevant social indicators) should be provided.

3.2.3 The overall balance of the general government should be a standard summary indicator of the government's financial position.

It should be supplemented by other fiscal indicators (e.g., operational balance, structural balance and primary balance) when economic circumstances make it inappropriate to base judgements about fiscal policy stance on the overall deficit alone.

3.2.4 The annual budget and final accounts should include a statement of the accounting basis (i.e., cash or accrual) and standards used in the preparation and presentation of budget data.

3.3 Procedures for the execution and monitoring of approved expenditures should be clearly specified.

3.3.1 A comprehensive, integrated accounting system should be established. It should provide a reliable basis for assessing payments arrears.

3.3.2 Procedures for procurement and employment should be standardized and accessible to all interested parties.

3.3.3 Budget execution should be internally audited, and audit procedures should be open to review.

3.4 Fiscal reporting should be timely, comprehensive, reliable, and identify deviations from the budget.

3.4.1 During the year, there should be regular. timely reporting of budget and extra budgetary out-turns, which should be compared with original estimates. In the absence of detailed information on lower levels of government, available indicators of their financial position (e.g., bank borrowing and bond issues) should be provided.

3 4.2 Timely, comprehensive, audited final accounts of budget operations, together with full information on extra budgetary accounts, should be presented to the legislature.

3.4.3 Results achieved relative to the objectives of major budget programs should be reported to the legislature.

IV. Independent assurances of integrity

4.1 The integrity of fiscal information should be subject to public and independent scrutiny.

4.1.1 A national audit body, or equivalent organization, should be appointed by the legislature, with the responsibility to provide timely reports to the legislature and public on the financial integrity of government accounts.

4.1.2 Macroeconomic forecasts (including underlying assumptions) should be available for scrutiny by independent experts.

4.1.3 The integrity of fiscal statistics should be enhanced by providing the national statistics office with institutional independence.

Rupee goes on falling, falling

Research report estimates a 10 percent depreciation in 1998, rupee touching 72.1 per US dollar by year-end

A depreciation of the Sri Lanka rupee by an estimated 10 percent this year, a slowdown in economic reforms in view of provincial council polls in which the ruling party is expected to win a majority of regions, and an unlikely resolution of the Tamil problem this year, are some of the key highlights in the May report of a top Sri Lankan securities firm.

SocGen-Crosby Securities Ltd's Research arm said in its report that Sri Lanka's central bank continued to depreciate the rupee through a crawling peg mechanism and the rupee has so far fallen 2.7 percent this year. The trend will continue they said adding, "We estimate a 10 percent depreciation in 1998 with the rupee touching 72.1 per US dollar by year-end."

It said strong signals from the central bank that the rupee would not be devalued prompted foreign currency earners to abandon the hoarding of US dollars and convert them into rupees.

'The stabilisation of the ASEAN currencies and the rise in inflation in these countries, especially Indonesia, have slowed the appreciation of the Real Effective Exchange Rate (REER) of the Sri Lanka rupee. This rate, which appreciated by 28 percent during July 1997 to January 1998, has dropped by seven percent since January. Nevertheless, the rupee is still overvalued by about 23 percent," the report said.

SocGen-Crosby said it expected the government's economic reform program to slow down in the next few months until the provincial council elections are over and noted that the ruling People's Alliance was expected to win a majority of the provinces. But with complaints of an opposition intimidation of their supporters, a strong contest is expected.

"The government is hoping to militarily secure the highway to Jaffna ahead of the elections to boost its popularity, but that does not seem to happen," the report, titled Sri Lanka Monthly Overview, said.

Analysing the stockmarket, the securities firm said that Sri Lanka provides exceptional long-term investment opportunities, adding: " a complete re-rating of the Sri Lankan market will depend on how quickly the Tamil issue is resolved." "It looks unlikely that a quick resolution is possible at least in 1998, despite efforts by the government to devolve power to the regions through devolution proposals," SocGen-Crosby observed.

A flurry of visits by high-level dignitaries like Bill Richardson, US ambassador to the United Nations accompanied by Karl Inderfurth, US Assistant Secretary of State for South Asian affairs, and Commonwealth Secretary-General Emeka Anyakou to Colombo in recent weeks has raised speculation that some kind of peace offering is on the cards.

All the three who met President Chandrika Bandaranaike Kumaratunga were lavish in their praise of the president, using words like "charming", and complimenting her handling of the ethnic problem.

The US and the Commonwealth offer of help to resolve the crisis - if sought by the Sri Lankan government-has led some political analysts to believe that outside third-party mediation may be a reality, although the government has consistently shot down such speculation in the past. There was a sharp rise in stockmarket revenues last week, with some analysts hinting that the visit of these dignitaries had boosted confidence in the market.

SocGen-Crosby noted that the fall in net forex reserves will exert downward pressure on the exchange rate. Reserves, which showed a downtrend in first-half 1997, were boosted in July 1997 by the Sri Lanka Telecom privatisation which added US 225 million to government coffers.

"Despite this sharp one-off rise, reserves have not shown an improvement since then. In fact the downtrend observed in first-half 1997 has continued and accelerated in January. This means the overall balance of payments is deteriorating despite securing a surplus balance of US 400 million last year," it said. The securities firm expects inflation to reach 14 percent by end-1998, compared to single digit levels for most of last year.

The report noted that preparatory work with regard to the EPF, the country's largest pension fund which has US 2 billion under management, and the NSB (National Savings Bank) which has US 3 billion, investing in equity has been completed, in terms of a promise made in the last budget. "_ these institutions should start investing in early-second quarter 1998," it said. SocGen-Crosby expects higher interest rates to prevail in 1998 as the central bank would want to mitigate any speculative attacks on the rupee and also because inflation is on the rise. One-year treasury bills are expected to be around 13-14 percent by year-end. In the hotels sector, tourist arrivals during the winter were very high.

The need for integrated development planning

By Asif Hussein

A leading Development Planner recently made a strong case for integrated urban and rural development planning using advanced aerial surveying methods.

Development Planner and former Director of Planning, Mahaweli, A. Denis N. Fernando, who recently presented the first ever integrated development plan for Negombo in association with Development Consultant Ashley de Vos, contends that the success of any real development project today would largely depend on the study of the landscape as an integrated whole where the maximum utilization of its resources with minimum disturbance to the natural environment and important cultural artefacts has been taken into due consideration.

He noted that aerial surveys depict a systhesis of factors such as rainfall, forests, soils, geology, ground water etc. which any specialist can differentiate and map out.

Often the information required could be easily obtained from the photograph, though in some cases a certain amount of field verification will be necessary.

Mr. Fernando observes that aerial surveying is capable of providing the required information accurately in about one-twentieth of the time and about one-tenth the cost of the old survey methods.

He pointed out that while the use of air surveys for development purposes is standard procedure in many countries, its tremendous value and potential have been grossly underestimated in Sri Lanka, much to the detriment of the nation's progress.

This is not to say that aerial surveys were unknown to Sri Lanka before this, but rather that the technique has not been given its due place in development planning.

The integrated development approach was employed in connection with the preliminary work for the Mahaweli programme beginning from 1956.

This was due to the initiative taken by the former Dutch premier Prof. W. Schermerhorn and the Canadian aerospace surveyor P.G. Mott who were responsible for promoting the use of aerial surveys in Sri Lanka.

Aerial photography has enabled us to discover ground water, geological structures such as faults and joints, geological phenomena like changes in the river course and archaeological ruins such as abandoned cities, says Mr. Fernando who was responsible for discovering the old course of the Mahaweli river and the ancient city of Vijithapura using air survey methods.

During the mid 1960s, an Israeli geological team which had been commissioned with surveying the country's ground water resources had maintained the position that ground water was available only in the miocane limestone belt.

Sri Lankan Geologists too had maintained a similar position.

However in 1968, Mr. Fernando, who was closely associated with the Mahaweli programme at the time, was able to locate ground water in the hard rock areas using aerial pictures.

In fact he was able to show in a lecture entitled 'Hydrogeology of Ceylon' (1968) presented before the Sri Lanka Association for the Advancement of Science (SLAAS) that there was more ground water in the hard rock areas than in the limestone belt for the simple reason that more rainfall was retained in hard rock which ensured greater recharge.

This finding had vast implications for rural development planning and enabled cultivators and rural folk to make optimum use of the ground water by installing low-cost tube wells.

In 1978, Mr. Fernando was commissioned by the Ministry of Irrigation, Power and Highways to prepare a report on an integrated plan for the development of the Nuwara Eliya district.

The Dutch were evidently impressed and provided Rs. 50 million by way of financial assistance for the project.

This was the first ever integrated development plan for any district in the country.

More recently, Mr. Fernando has devoted his energies to the development of his hometown Negombo, which could be cited as a good case example of integrated urban development planning.

His preliminary report on integrated development for Negombo published late last year envisages developing Negombo to such an extent as to be twinned with the city Uden in Holland.

The plan has laid emphasis on the conservation of old Dutch landmarks besides environmental development.

A Non-Governmental Organisation known as the Uden Development Enterprise Negombo (UDEN) has been formed to put the plan into action.

Uden has, in consultation with the citizens of Negombo identified a number of activities for the development of the town.

This includes the development of a fisheries harbour, development and upgrading of community centres and educational institutions, environmental development of the lagoon and sea beach area and the restoration of the old Dutch fort and the canal connection between Negombo and the Maha Oya.

Mr. Fernando's report proposes a methodology for the restoration of the Dutch period architecture of the fort and environs, the beach, the restoration of the northern section of the canal between Negombo and the Maha Oya, the introduction of customs stations and the proposed fisheries harbour.

Fernando is highly critical of the previous development activities that have taken place in Negombo and its environs, especially the haphazard development of the tourist industry.

He noted that due to the uncontrolled development of hotels and restaurants further south especially in the Kudapaduwa area, fishing craft and the dried fish industry have been driven into the Negombo town with the result that the only promenade beach left for recreation has been seriously affected.

He observed that the Negombo lagoon has also been severely affected by sewerage and wastes which find their way into it via the numerous canals and outlets.

Besides, the free flowing water from the canal and the streams never find their way into the sea through the mouth of the lagoon due to the fact that the flow of water is impeded and the tidal flow restricted by various obstacles.

He proposes that all openings to the sea be rehabilitated to enable the tidal flow to flush the silt and other pollutants in the lagoon out to the sea.

He also pointed out that the improvement of the lagoon's eco-system will ensure a better habitat for the numerous life forms that live in it.

As for the restoration of the canal, Mr. Fernando noted that as evident from aerial photographs, the dumping of debris and the collection of silt have created islands in the canal basin, encouraging the growth of trees and marsh plants.

He however noted that the two ends of the canal, namely, the Negombo lagoon end and the Kamaltota section near the Maha Oya are free of salvinia general debris and other aquatic plants mainly due to the limited movement of water entering these parts.

He observed that if these two ends are totally cleaned and kept free of debris, there will be a free flow of fresh water along the canal from the Maya Oya to the Negombo lagoon.

Mr. Fernando also proposes opening the old mouth of the lagoon between Duwa and Pitipana which will increase access to the sea and enable the creation of harbour facilities for fishing craft.

The other development activities envisaged in his plan are the exploitation of the tourist potential of the Negombo Fort and environs and the establishment of a Maritime museum for the collection, study and display of traditional craft and traditional boat-building technology.

Lanka Payphone replies

Lanka Payphones Ltd has responded to our story last week on GST.

The company said: "Three important events which affect the Payphone industry took place in April 1998. These were the introduction of GST, imposition of a national security levy of 4.5 per cent on telecommunication services and the increase in call charges by Sri Lanka Telecom.

After having studied these factors the company decided to pass on the GST to the users and refrained from passing down the increase in SLT's call charges which amount to a 43 per cent increase during peak hours.

Our tariffs of local and STD remain unchanged and we have revised our IDD tariffs downwards in keeping with the new SLT rates.

Contrary to the views expressed in the said article Lanka Payphone/Metro Card combination does not constitute a monopoly as there are other Payphone operators such as SLT, Supercard and Tritel.

Our reply

Lanka Payphones views were sought before the article was written.

Though the company official who spoke to us did not choose to explain in detail, we did take into account the fact that a 4.5 per cent defence levy was imposed.

We also noted that there could be a cost increase (due to SLT raising charges) despite the fact that this was somewhat irrelevant due to the timing of the price increase by Lanka Payphones.

Lanka Payphones did not increase the card prices on April 15 when the new SLT charges came into effect but on April 01 - a full two weeks before the SLT increased their charges.

However a Lanka Payphones official told The Sunday Times later that even after the SLT price increase they have not reduced their call unit durations to pass down the whole increase of SLT. Despite the SLT charging peak minutes at 60 seconds (down from 86), Payphones gives its customers a 46 second unit.

Lanka Payphones revenue was earlier taxed at 8 per cent (not 18 per cent). Under the new pricing scheme retail prices have gone up by an extra Rs 12.50. This results in an increase in the retail price of a card of slightly under Rs 8 after deducting GST. But about a half of this goes for defence levy. The balance constitutes an industry price increase.

Also the company cannot charge GST at the retail stage because that stage is exempt.

A top company official confirmed that there was in fact an industry price increase as well.

However he also said costs have been rising since early 1997 when prices were last increased.

Companies are quite entitled to raise prices of their products from time to time but when industry price increases are made it should be clearly stated. Otherwise the public would be misled.

As to the question of having monopoly power Lanka Payphones and Metrocard combination was the largest single operation within a cardphone market of 2500 according to the Telecommunications Regulatory Commission. SLT also has a 1000 coin operated phones.

Business Diary

GST for Agri Business

May 14: A special seminar has been organized by the Sri Lanka Food Processors Association (SLFPA) and the National Horticultural Association of Sri Lanka (NHASL) to provide a clear understanding of how Goods & Services Tax is implemented in the Agri Business Sector.

The seminar, which is scheduled to be held at the Taj Samudra Hotel, Colombo, is designed and funded by the USAID agro Enterprise Development Project - Agent.

Speakers will be from the Inland Revenue Department and KPMG Ford Rhodes, Thornton & Co.

This seminar will also offer opportunities of Agri Business sector to address any issues and problems faced in implementing GST during the panel discussion/ questions and answers session at the end of the programme.

Telecom reforms offer model for Asia

Sri Lanka's telecommunication reforms and the independent regulatory agency have been hailed as the role model for the Asian region.

Sri Lanka launched its telecom reforms in the 1980s and established a regulatory agency as early as 1991. Such regulatory agencies have been or are being set up by other countries in the region. For instance, the Nepal Telecom Regulatory Agency was established in this year.

"Competition and regulation go hand in hand in the telecommunications sector. Hence an independent regulatory commission is needed to ensure a level playing field and fair rules are properly enforced, Post and Telecommunications Minister Mangala Samaraweera said delivering the keynote address at the inaugural South Asian Telecommunications Regulators' Council last week in Colombo.

"But we are confident that the certainty and stability provided by regulation are an indispensable element of our telecommunications policies," he added.

Regulation also provides safeguards for consumers in an environment marked by market power and information asymmetries.

"For the first time in Sri Lanka, the recently privatised Sri Lanka Telecom (SLT) will automatically compensate customers whose faults are not connected within seven days, with the objective being to ensure quick correction of faults rather than the refunding of rentals.

"The Telecommunication Regulatory Commission (TRC) and carriers are currently engaged in the difficult task of improving the price signals given to subscribers through the monthly telephone bill. The regulator and the operators have also found common ground in improving quality of service," the minister said.

In March, TRC did not approve price increases requested by SLT. It also denied lower connection charges in built-up areas and introduced penalties for poor service. But the SLT was still able to achieve its overall goal of 'tariff re-balancing' by bringing down international call charges by some 15 per cent and shifting that cost to domestic subscribers.

At present, Sri Lanka has three fixed access telecommunication providers, four cellular companies, six facilities-based data communication carriers, five paging companies, two internet service providers and one each of specialised infrastructure providers and mobile trunking operators.

"Most sub-sectors have more than one provider. There are only two formal monopolies remaining — for international telephone service and for local wireline telephony. But even they are time limited," Mr. Samaraweera said.

The vibrant competition between four cellular providers has given Sri Lanka an extremely high ratio of cellular-to-fixed-access telephones. For every three fixed-access telephones, there is one cellular phone in Sri Lanka.

It took 106 years for Sri Lanka's first 100,000 telephones to be connected to the national network.

The fourth 100,000 connections to the national network, now a network of networks, took less than one year.

One out of four fixed telephones and almost one out of three mobile telephones in the country at the beginning of 1998 are less than one year old.

"There has been a burst of data communication activity last year. The growth rates in 1998 appear to promise yet another record-setting year that will bring the dream of telephones on demand closer to realisation," he added.

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