Export sector smothered

Interviewed by Ruvini Jayasinghe

A. The 1998 budget was aimed at tax benefits, duty concessions and investment relief for the large-scale investor. 

Q. So what's wrong with that? 

A. The UNP warned the finance minister of the threat to local small and medium (S & M) investor and agriculture sector with ad hoc import liberalization and duty reduction. 

The backbone of our economy is the exporters, S&M industry and agriculture sectors. 

But what is the government's attitude to the export sector? 

Recently Central Bank Governor, A. S. Jayawardena was quoted in a national daily saying that any export-based industry that cannot compete should close. The governor must understand that most of these local exporters and industrialists are not competitive because of inappropriate government policy. 

In 1995 when there was a worldwide deflationary situation the government failed to devalue the currency outpricing our export sector. 

With the onset of the Asian currency crisis problems are compounded. 

The government's tight money policy in 1995 was the beginning of the trouble. Interest rates sky rocketed and investor confidence fell. 

Q. But aren't exporters hit badly by the Asian currency crisis which was totally beyond government control?  

A. Economic problems were not created only by the war or the Asian crisis, but also because the PA has no proper economic policy or strategy. 

The 1998 budget targeted an accelerated investment program on thrust industry through the BOI. 

The industries were, electronic and computer assembly, ceramic/glass ware, rubber based industry, light and heavy engineering, cutting and polishing of gems and diamonds and manufacture of jewellery. But targets have not been met. 

Q. Can you prove this?  

A. Since January 1998, export performance of rubber based industry, ceramics and coconut industry has declined by 30%. 

Industries Minister C. V. Gooneratne has said that the government spent Rs. 2000 million (Rs. 2 bn) on industrial development. I would like to know on what they spent the money because just look at the 1998 industrial export performance 

In 1997 industrial exports in the 1Q grew by 13.6% 
In 1998 industrial exports in the 1Q grew by 4.9% 
In 1998 industrial exports in the 2Q grew by 2.9% 

The export sector is facing an unprecedented crisis because while the government bent over backward to encourage foreign investment and also liberalized imports on an ad hoc basis, they had no strategy to offer export industries to be competitive in the international market. 

Trade Minister Kingsley Wickramaratne in the Sunday Observer of August 23 has said of SAFTA and SAPTA, "the South Asia Free Trade Area will be like a swimming pool for us to swim and prepare ourselves so we won't get drowned". In the same interview he was asked if SAFTA by 2001 was too premature and if it would hurt our domestic industry, to which the Minister replied, " By the turn of the century protectionism will be out of the commerce dictionary." 

Trade minister voices government opinion that protectionism will be out of the commerce dictionary at a time when a host of economists reflect world thinking on protectionism. 

I will just quote two of them. 

Paul Krugman, senior economist MIT, is recommending exchange control measures to deal with the Asian crisis. 

Malaysia's Mahathir Mohamad has introduced exchange control measures and regulation to fight the crisis and rejected IMF advice. We should not blindly accept IMF prescriptions even at the cost of our local industry and export sector. 

Jeffery Sachs of Harvard University also blamed the IMF and unregulated globalization as the major cause for the Asian crisis. 

The PA believes that globalization means opening the economy without any controls to protect domestic sector. This is the crux of the problem. 

Q. Do you think protectionism is necessary in the "free market' economy? 

A. Look at the impact of SAPTA on Sri Lanka. In 1993, before SAPTA exports to South Asia rose to 40%. But in 1996 after exports South Asian exports dropped by 15%. 

In 1997 after SAPTA, India's exports to Sri Lanka were worth Rs. 33023 mn while Sri Lanka's exports to India were only RS. 2582 mn in the same period. 

While we are removing all form of projectionist tariffs, India is protecting its local industry with new tariffs. 

In the last budget the Indian government increased import duties by 8% on selected items like hot rolled steel coils, paper, paperboard and ceramics. 

In 1996 our government reduced duty on paper and paperboard and the local paper manufacturing industry collapsed putting many out of work. 

In 1995 the weighted mean average import tariff in Thailand was 41.5%. In Sri Lanka it was only 23%. How can you expect the local industrial sector to survive? 

Q. Has globalization or the unregulated opening up of our economy overall backfired? If so, what sort of regulation do you prescribe?  

A. Even in a globalized environment and free trade situation, governments have a responsible role to play. This government has complete hands off policy. 

Today world food prices have dropped. There is global deflation. But imported food prices and commodity prices remain high in Sri Lanka, pushing up the cost of living. 

Take for example international sugar prices, which have dropped. Sugar at retail level can be sold at Rs. 24/- but is sold at R. 32/-. What is the CWE doing? What are all the franchise holders doing? 

In 1997 the government imported rice from abroad. When the Maha crop came into the market shortly after, there was an oversupply pushing down the prices for the farmer. 

Q.Why in your opinion has the PA failed in their economic policies? 

A. Inexperience and lack of coordination. During the UNP regime food prices were kept down by a coordinated effort by joint ministries. A committee comprising trade, agriculture and finance ministers met every Friday to discus essential food prices, shortages etc. 

Q. Can you comment on the GST's first year of performance?  

A. The GST system is a good one. It does not have the cascading effect of the earlier turnover tax. But there are implementational problems here. They did not even give it a dry run. In one of the most advanced countries in the world the USA, Vat system is not used for tax collection. 

Q. But was not the GST or the VAT as it is known worldwide an UNP idea? 

A. Yes, it was. 

Q. So what difference would you have made in implementing the GST? 

A.We would have most definitely given it a dry run. That is implemented it on one sector to begin with. We would have trained and employed a new set of tax officials because the VAT or the GST collection system is complicated. 

Q. Since the government gave more incentives to FDI and large scale industry there should have been more new investment in 1998? 

A. Though the government talks of prudent fiscal policies a development of the current account is not apparent. An EIU forecast puts the current account deficit for next financial year at $450 million. 

While this is happening the government tells us that BOI signed 81 new agreements totaling Rs. 12.9 billion in the first five months of 1998. 

But this figure includes a US project to operate three cargo ships to the Middle East. The value of the ship is estimated at Rs. 5.5, which has also been included in the total investment figure! The value of ships does not qualify for FDI. Of the other investments a Rs. 1.2 billion project for Amul milk of India is government sponsored. Moreover 41 of these 81 projects signed are local ventures with joint foreign. 

Q. What is the UNP formula for better economic management?  

A. 1. Introducing sound strategy for Unemployment is one. We want to introduce a new education system including university education, which is more market oriented. 

2.Protecting and developing exports is another. Hong Kong development was linked to China. Similarly Singapore was linked to Malaysia. 

Out export led economic development could be meaningfully linked to India. 

3.Identifying and dividing the country into five economic zones for development. The zonal improvements are in addition the revitalization of the S&M industry and agriculture sector. 

4. A comprehensive marketing plan for essential food items, so that wastes and prices could be controlled. 

New UK accounting standards

Some companies, says Keely, manipulate results by setting aside money in the accounts to cover future costs "boosting profits later when some or all of the cash is not needed". 

'The Board is concerned about the rise in share prices after provisions are made on the assumption that the money will be used to add shareholder value. The new standard will be an important step, says Keely, in the Board's plans to define liabilities and assets in balance sheets much more strictly than in the past. 

Companies can make provision only when a clear obligation exists and can be measured - so says Keely "a simple decision by the company's board to restructure the company, for example is not enough to justify setting aside money". 

Keely adds that the new rules will also limit companies from providing for future operating costs such as getting their computer system ready for 2000 or the introduction of the Euro. 

Budget Countdown

Brokers take the hot seat 

It's extremely necessary that a stable interest rate environment is established for the development of the debt market. 

The interest rates have fluctuated quite significantly in the past 3-4 years. 

The movement in the ratios will impede the development of the long-term corporate debt market. 

The longer-term government securities market lacks depth and liquidity. 

It is important that steps be taken to ensure the yields on these securities are market- determined and transacted within an efficient system. 

A meaningful yield curve will materialise only if the securities are market driven. 

The corporate debt market needs a shot in the arm. Despite securities/debentures being listed, trading of those securities is non-existent. Ability to repo and re-use repo on these securities needs to be introduced. 

Steps should be taken to promote securitisation especially in the housing mortgage sector. Tenancy laws and debt recovery laws should facilitate this process. The government could extend guarantees on housing mortgage pools in order to increase the credit quality of assets. 

Capital market development measures should focus on the development of the debt securities market as well as enhancing the depth of the equity market. 

Depth and liquidity of the equity market should include: 

i Aggressive, structural management of government funds 

ii Relaxation of Insurance Company Law enabling investment in stocks 

iii Private pension funds 

iv Development of the unit trust industry. The unit trusts have been given a number of incentives, since they have suffered from the misfortunes of the market. This remains possibly the only method of channeling savings to the equity market, which also provides professional management. 

Overview 

There has been much talk about the over-valuation of the Sri Lankan rupee. While this is true, it is important to consider the social cost prior to devaluation. Unfortunately, imports into Sri Lanka constitute approximately 40% of GDP compared with exports, which constitute approximately 32%. 

Devaluation would result in immense pressure on a greater segment of the population. Hence, we have to think in terms of import substitution, prior to any substantial devaluation. We have to attract investors to get into the manufacturing sectors. Unfortunately, this might be difficult, given the security situation due to the war. 

In addition, we also have to reduce dependence on tea and garment exports. 

Some of the areas where we probably could focus on are, value addition of rubber, e.g.; tyre manufacture, value addition in the graphite and other mineral sectors etc. 

There is still confusion on the recently introduced GST. While revenue was expected to increase due to more people falling into the GST net, one wonders whether this has been a reality. The business community and the masses have to be educated further on this system so as to increase its effectiveness. 

Stock market 

The downturn in the Colombo market after the Asian crisis clearly indicates that we should increase domestic participation in the market. Our dependence on foreign investor participation is high at 45% of total turnover. This should be compared with 3% foreign participation in India. 

As a result, even in a downturn due to external factors, the Indian market was least affected with regard to turnover levels. Last year's budget brought out a proposal for allowing the creation of private provident funds, which would in turn increase investments in the market. But I am told that this has not been gazetted as yet. This should be done fast. In addition, increased investments from institutions like the EPF/ETF, insurance companies etc., are a prerequisite to increase market activity. 

Poor liquidity levels  

Rather than attracting companies to seek a listing, we must try to increase the liquidity of companies that are already quoted. Even though we boast of 243 listed companies, not even 50 trade on a regular basis. Last year's budget presented a 5% tax bonus for companies which had at least 25% of shares in the hands of the public. 

I think this tax bonus should be taken to 10%, but the prerequisite increased to 40%. However, in order to promote listings, the re-introduction of a 5% tax bonus for quoted companies would be beneficial. 

In addition, it would also be beneficial to have different classes of shares for quoted companies. A "Class A" share for example should have at least 40% of its shares in the hands of the public, in addition to other factors like profitability, high trading volumes etc. 

The All Share Index should be computed only on Class A shares. In order to promote companies to fall into the Class A category, certain other incentives could be offered. Ideally, you should have upto 75 counters in the Class A category. A company which has less than 10% of its shares in the hands of the public should be de-listed. 

The liquidity situation should be addressed fast since post-Asian crisis investors are bound to be extremely risk-averse. An illiquid market like Sri Lanka could be ignored as a result. 

Transaction costs 

Transaction costs should be reduced to increase trading volumes. Due to high transaction costs investors are forced to hold on to stocks for longer periods, reducing trading volumes. Reduction in transaction costs would increase investor participation, which should act as an impetus for a higher turnover. Transaction costs in Sri Lanka are considered to be relatively high compared with most other markets. 

The government has a tough task to undo the fiscal slippage in 1998. Last month, the government admitted that its targeted 6.5 per cent fiscal deficit could be higher than 7.5 per cent due to revenue underperformance and expenditure overruns. 

There would be focus on privatisation and indirect taxes to boost revenues. We expect the following revenue enhancement measure in the budget to contain: 

i Indirect taxes, which account for 88 per cent of total revenue, should see a reduction in exemption. Due to the switch to GST, collections will fall from 26.2 per cent of total taxes in 1997 to 24 per cent in 1998. To reverse this, GST exemptions granted in 35 sectors, such as petroleum fuel, cement, school fees, healthcare services and public transport could be removed. 

ii The defence levy, currently at 4.5 per cent of turnover, could be increased by 0.5 per cent. The levy has been progressively raised since it was introduced at 2 per cent in 1992 due to revenue constraints. 

iii Acceleration of the privatisation process. A large inflow of privatisation proceeds in 1997 helped lower the budget deficit by 1.5 per cent to 7.9 per cent of GDP, while a slowing in 1998 is likely to result in the deficit climbing to 7.5 per cent (target 6.5 per cent). 

Lower revenues and expenditure overruns 

The revenue shortfalls this year are mainly due to the introduction of GST, which replaces the turnover tax (TT) at a lower rate of 12.5 per cent despite IMF's preferred 16 per cent. GST revenue in April to July was only Rs. 9.6 bn compared to Rs. 14.7 bn brought in by TT in Jan-February. Tax revenues are estimated to fall to 16 per cent of GDP from 17 per cent. Lower privatisation income (Rs. 5 bn vs. Rs. 8 bn target) and heavy defence expenditure compounded the fiscal imbalance. The initial defence budget of Rs. 44 bn was augmented by Rs. 12.2 bn in September, bringing the total to Rs. 56.2 bn. 

Total government revenue of Rs 94.2 bn in January-July was only higher by 4.3 per cent YoY (Jan.-Jul. '97 was Rs. 90.3 bn). Compared to full year target of Rs. 188.4 bn, Jan-July collection amounted to 50 per cent, while in 1997, it was 53 per cent. 

Meanwhile, expenditure during the period was Rs. 149.9 bn, up 13 per cent from last year and amounting to 60 per cent of the full year target (vs. 56 per cent last year). This resulted in a Rs. 55.7 bn deficit (full year target Rs. 58.7 bn or 6.5 per cent of GDP) - we expect it to exceed 8 per cent for the full year. 

Increase exposure of government funds in the equity market. 

Set minimal levels of exposure and a clearer policy regarding investment i.e. the EPF, which began investing in the market earlier this year, did not have adequate fund management expertise. 

Impose a minimum free float.  

About 25% is recommended for all listed companies to boost liquidity. 

Most global equity markets have such minimum levels. Thus major shareholders with higher stakes of over 90% would need to liquidate shareholding thereby increasing the liquidity of these companies.Incentives to retailers to participate in the secondary equity market i.e. a percentage of investments made in the market and held for a given period of time is available to set off against taxable income. 

Policies detailing more timely and detailed disclosure of macro indicators i.e. imports, exports, government finance etc. Further indicators such as industrial production indices; trade value and volume indices, which would give useful signals on economic activity. 

Create a more dynamic active secondary market for TB trading on the CSE. This would improve accessibility and participation of the general public thereby increasing avenues for investment. The fact the CSE now has the infrastructure and technology strengthens our argument. 

A clear interest rate and currency depreciation policy. The present government's currency policy is not clear. It is more a wait and see policy rather than a planned pro-active policy in line with other economic activities. 

Further the interest rate structure currently in place is almost extinct in the global arena i.e. Government borrowings are perceived to be more risky than commercial bank deposits. This structure needs to be addressed with a clear government policy on interest rates. 

Allied Phillips Securities 

Stock market 

i Allow state institutions to invest within given limits, which will facilitate independent asset allocation rather than focussing on TBills, bonds and rupee loans. 

ii Encourage more public quoted companies by expanding tax rate differences. 

iii Make IPO's of state owned enterprises while holding control stake. This will make the enterprise more efficient as well as transparent. 

Debt market 

i Allow foreign investor participation 

ii Encourage even state institutions and other non-quoted established companies to participate. 

iii Government securities such as TBills, Treasury Bonds and rupee loans to be listed on the stock exchange. 

iv Reduce transaction costs both in stocks and debts. 

v Make interest income from quoted debenture tax-free for one or two years. 

Export competitiveness 

i Incentives to the export industry 

ii More focus on value added export than raw form of export, differentiate these companies by different tax rates or incentives. 

iii Special government assistance to technological exports such as software. 

GST 

i Don't abolish but increase the exemption list and zero rate list. 

ii Increase the GST rate of non-essential and luxury transactions. 

iii Abolish existing provincial council turnover tax of 1 per cent. 

Government expenditure 

i More focus on capital expenditure with a focus on infrastructure. 

ii Commence a few large development projects such as roads, ports. 

iii Encourage private sector participation. 

Incentives and tax concessions 

There is a likelihood of a consolidation of existing incentives to exporters and a possibility of rationalisation of tax incentives. Exporters are feeling the pinch of the regional devaluations with most categories of exports falling and profit margins being squeezed. Since this sector has been favoured in the last few budgets there is very little that the government can really offer. Similarly though the government is keen to encourage more foreign investment the potential to offer more incentives is limited as the current packages are already far reaching. It would be interesting to see if the government will offer concessions to local industries facing cheap import competition. It is also worthwhile to see if there is any shift in strategy from favouring exports being the engine of growth, to support for domestic industry. 

Sin taxes and luxury Goods 

Indirect taxes may be raised on luxury goods, liquor and tobacco to meet the spending commitments. 

Corporate Debt Market 

There is a likelihood of further incentives being given to encourage the local debt securities market. 

GST shortfall 

GST revenue is reported to be much less than initially hoped for. The tax has been subject to criticism and given the likelihood of elections, there have been expectations of an easing of GST with a wider category of items being exempted from it. 

Petroleum prices 

There has also been talk of a possible reduction in fuel prices. Given the bleak revenue picture this is unlikely. Furthermore as the Ceylon Petroleum Corporation is likely to be a government's privatisation gold mine, we believe that any cut in fuel prices is unlikely. 

Appointments

Industrial Relations Forum

Go slow is considered as an act of misconduct justifying dismissal in India and Sri Lanka. 

In Bharat Sugar Mills Vs Fai Singh the Supreme Court of India observed that "Go Slow is an act of deliberately delaying of production and an act of dishonesty". In Sri Lanka in Hayleys Vs De Silva, the Supreme Court held that dismissal of 23 workers for having participated in a concerted slowing down of work was misconduct justifying dismissal. 

It has also been held in Tea, Rubber, Coconut & General Products workers' union Vs A. F. Jones & Co. Ltd. that the employer is entitled to select ring leaders and punish only such leaders for go slow provided that he acts in good faith. 

Q2: I have a printing press employing 15 workers. Two years ago I had to dismiss two workers for abusing the Manager of the printing press. They went before the L.T and the L.T ordered re-instatement with backwages, stating that their dismissal was unfair. If I take them back I will not be able to maintain discipline. Can I appeal against the L.T order? 

You can appeal against the order of the L.T on a question of law, to provincial High Court and thereafter to the Supreme Court. However before making your appeal, you are required to deposit, the total amount of back wages and one year's salary of each person (in lieu of re-instatement) at the Labour Tribunal. 

If your appeal is allowed the deposit will be repaid to you with the interest and in case your appeal is rejected, the money will be paid to the dismissed employees with interest. 

Q3: I am an owner of a small bakery employing 5 workers. What is the overtime rate applicable to them? 

If your employees are employed on the weekly holiday, they should be paid 1/25th of the minimum monthly rate and for any work done beyond normal working hours he must be paid twice times the minimum monthly rate ascertained by dividing the minimum monthly rate by 200. Overtime rate for normal working days is 1-time the hourly rate (dividing the monthly salary by 200). 

Q4: An employee working in our company has a very poor attendance record. Very often he keeps away from work without notice. He has failed to report for work continuously for ten days without notice during this month. Can we treat him as having vacated the post? 

To establish a case of vacation of post, you should be able to establish that he was physically absent and in addition to that he had an intention to vacate or not to report for work. 

Therefore it is advisable to write to him giving a reasonable time to report for duty and also inform him that if he fails to report for work he will be treated as having vacated the post. 

If he still fails to report for work or inform of his inability to report for work, you can conclude that he is having the intention to not report for duty and treat him as having vacated the post. 

Q5: Is there a specific rule compelling the employer to pay salaries to his employees on a particular day? The employees are monthly paid. 

If your employees are monthly paid employees, their salary should be paid within 10 days of the expiry of the wage period (i.e. the salary for Oct 1998 should be paid before the 10th of November 1998) 

Q6: We are using the services of sales representatives to sell our plastic products. These sales representatives are not paid a salary, but given a commission from sales at the end of each month. Is it necessary for us to contribute to the Employees Provident fund on behalf of their sales representatives? 

According to the provisions of the Employee's Provident Fund Act only the employees who have entered into a contract of employment are included for contribution to the fund. 

It appears from the information provided in your letter that your sales representatives are not employees and they can be called independent Contractors. 

However, if such sales representatives are not given a free hand to act independently they may become employees under the definition or employee of workman. For example if your sales representatives are precluded from engaging in any other venture or from performing services in a business of their own, they cannot be considered independent contractors but employees. Further if you exercise controls over them (attendance, leave, disciplinary controls etc) they will become your own employees. 

That means in such a situation, an Employer-Employee relationship will come into existence requiring you to treat them as your employees and make contributions to EPF & ETF. 

In similar circumstance in the case between Ceylinco Insurance Co Ltd. Vs Commissioner of Labour and others, the Court of Appeal held that 16 insurance agents/sales representatives of Ceylinco Insurance Co Ltd. are employees entitled to provident fund benefits (C.A. application No. 398/95 decided on 10/4/96). A similar order has also been made in Y. H. De Silva Vs Associated Newspapers Ltd. (1978-79 2 Sri Lanka law reports 173) concluding that a district correspondent attached to the Newspaper's office was an employee and not an independent contractor. 

Seminar on "Labour Law in Sri Lanka" 

The matters scheduled for discussion at this seminar include the following: 

1 Types of Contracts of Employment (casual employees, temporary and fixed term contracts, Trainees, Contract Labour, Probationers and Independent Contractors) 

2. Provisions made in Shop and Office Employees Act and Wages Board Ordinance 

3. Employees' Provident Fund Act, Employees' Trust Fund Act and Payment of Gratuity Act. 

4. Factory Ordinance and Workmen's Compensation Ordinance 

For more details please contact FCCSL . 

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