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• 'Nothing much', say analysts 
• OPPOSITION SAYS.... 
• Ceramics questioned 
• Fiscal fundamentals flawed 
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Cheers amidst boos 

By Ruvini Jayasinghe 

Looking deeper, economists and financial analysts expressed mixed reactions to the budget, presented by Deputy Finance Minister last Thursday. 

"This is definitely an election budget. Can't you see the way they are pandering to the larger voter base, with incentives to farmers, increased Samurdhi benefits and benefits to public servants," said a top banker and market analyst who wanted to be unidentified. 

" This is an empty (his) budget," said the chief research analyst of a top brokerage. 

Perhaps the unobtrusive entrance of the Deputy Finance Minister through side door, carrying his red ribboned brown box was the first indication of what was not inside. 

As the Minister droned on for over three hours singing the praises of the PA's economic achievements supporting them mostly with 1997 figures, government and opposition benchers were 'caught napping.' 

"I think the government has given the maximum to everyone, but somehow the economy is not moving," said another top merchant banker. 

Dr. Karunasena Kodithuwakku, a key member of the UNP economic think tank said this was a bankrupt budget. 

"Governments play a major role in the country's economic development. Highly developed countries like USA and Japan play a key role in the development of the economy. 

They must talk of their achievements not their dreams," he said. 

Dr. Kodithuwakku also challenged the expenditure and revenue figures. Grants and privatisation proceeds are not revenue in the strict sense, although they may be used to bridge the deficit, he said.If the proposal to increase train fares by 25%, collecting an additional Rs. 300 will not be effected, there should be a downward revision in revenue estimates." 

At a post budget press conference ex finance minister Ronnie de Mel said this was the worst budgetary faux pas in the history of budget making in the world. 

"The three main features in a budget estimate, recurrent expenditure, capital expenditure and revenue were not consistent throughout the Minister's proposals, he said. The government has also introduced supplementary estimates of over Rs. 20 billion, he added. 

The Deputy Finance Ministers revenue proposals does however qualify the final deficit of Rs. 68.9 billion, as being less grants and divestiture proceeds and 6% of GDP. 

The increase of 1% in the national defence levy from 4.5% to 5.5% percent is in effect a levy of 6.18% because it is charged on top of the GST, he added. 

Sweeping liberalisation in capital markets is one of the most positive features of PA's fifth budget. 

Incentives include the removal of: a 10 per cent withholding tax on interest payments on debentures and debt securities, stamp duty on listed debt and repurchase agreements, capital gains tax on share warrants and derivatives and a waiver on capital gains tax on unquoted companies if they list before March 31, 1999 to be extended to March 31, 2000. Assistant GM Treasury, DFCC, Mr. Mangala Boyagoda, a leading mover in debt markets said that no concessions were made to promote long-term debt. 

We have to open up mortgage backed securities markets. One way of developing housing is by liberalising securitisation, he added. 

Vice President, Vanik Incorporation, Mr. Ajith Fernando another debt market specialist, also said that 'securitisation should have been looked at.' 

The intermediate steps to securitisation should be exempt from stamp duty, he said, adding that this can be even introduced outside the budget proposals. 

'Nothing much', say analysts

"Budget was reassuringly similar in tone with the previous budget and there appears to be a continued commitment to fiscal discipline," said Amal Sandaratne, Economist Jardine Fleming Research. 

"Given the deteriorating external environment there was no major expectations," Nandakumar Nair of John Keells Stockbrokers said. The impact of the Asian crisis would be more pronounced next year, so a positive budget with more austerity measures to prepare the market to face challenges in 1999 would have been better, he said. On the other hand, it's a good thing it was not a negative budget that would have been an election budget. 

Declining revenues and escalating defence expenditure left the government with limited options but to consolidate fiscal measures. The government expects the budget deficit to be below 8 per cent of GDP, a revision of the original target of 6.5 per cent stated in the 1998 budget. Though the budgetary estimates for 1999 forecasts a 6 per cent deficit, the deficit is unlikely to decline below 7.5 per cent of GDP, Head of research CT Smith Stockbrokers, Rajiv Casie Chetty said. 

While extending incentives to the construction industry and to the IT industry, the focus was on the development and the deepening of the market for listed debt securities, he said. The incentives were also hailed by the members of the National Chamber of Commerce Sri Lanka. 

The yawning deficit has forced the government to reduce public investment to 6.5 per cent down from the targetted 6.9 per cent. Given that the fiscal constraints faced by the high levels of expenditure on infrastructure have been ruled out, the public investment targets of 7.3% of GDP may come under pressure if current expenditure exceeds estimates. 

While large-scale infrastructure projects such as the Queen Elizabeth Quay, the Colombo-Matara Highway, the Katunayake–Colombo Highway have been identified for development by the private sector. However given the turbulence in the region and high cost of foreign funds, investment by the private sector is also likely to be weak, Mr. Casie Chetty said. Defence expenditure for 1998 reaching as high as Rs. 57 bn, the estimates for 1999 stand at Rs. 47 bn. It is unlikely that expenditure would decline next year, instead we could expect an increase of around Rs. 12 bn next year, Prasanna Ludwick of Forbes ABN Amro Research said. M.G 

OPPOSITION SAYS....

* During the four years of the PA regime they have not been able to get one US dollar from IMF. The UNP got US$ 500 million in ESAF of which the last two tranches totalling US$160 million have not been utilised.This is available for the PA to draw from and they are expected to get one next year - Ronnie 

Ceramics questioned

By Mel Gunasekera

The Sunday Times Business learns that the SEC has written to LCL seeking clarification on the matter. When contacted a LCL spokesperson said, "We are replying to the clarifications requested by the SEC. Any queries of interested shareholders could be brought up at the AGM", he added. 

Provisional accounts for March 31, 1998 show a Profit After Tax(PAT) and minority interest of Rs. 79 mn. 

In a letter to the Colombo Stock Exchange (CSE) dated September 10th 1998, the directors of LCL stated that: "It has now been brought to the notice of the directors that the audit of accounts under reference has revealed certain under–provisions aggregating to approximately Rs 34 mn. These relate to provision for Staff Gratuity, Bad Debts, Depreciation, Inventories, Finance Costs etc. Consequently, the consolidated profit of Rs 79 mn (reported earlier) will be reduced to Rs 45 mn." 

However, the chairman's review of October 14th 1998 in the annual report apologises for the reduction in "profits by Rs 24.74m on account of under-provisioning and other accounting errors." The audited profits of Rs 54.3 mn thus differs from that of Rs 45 mn stated in the circular dated September 10th 1998. 

The Lanka Ceramic Group provisional accounts on Extraordinary Item (EOI) of a credit was Rs 33,624,000. 

Lanka Walltile Ltd. has reported a non-operating income of Rs 33,624,000, as per note 4 of the notes to the accounts of Lanka Walltile Ltd. "Non operating income earned by the Group includes disposal of 9.8% holding of Horana Plantations Limited for Rs 33,624,000 (1997 _ Rs nil) by Ceyexxe Plantations Limited. (Ceyexxe Plantations Limited is a 51% owned subsidiary of Lanka Walltile Ltd.). The amount reported as an EOI in the Lanka Ceramic Limited Group provisional accounts shows an identical amount of Rs 33,624,000. 

However, an examination of the group structure on page 39 of their report shows that Lanka Refractories Limited, a 100% owned subsidiary of Lanka Ceramic Ltd., presently owns 9.8% of Horana Plantations Limited. 

If the 9.8% of Horana Plantations Limited was sold by Ceyexxe Plantations Limited to Lanka Refractories Limited, it is a transaction entirely within the Group. And accordingly, could not be possible for the Lanka Ceramic Group to report a gain on this transaction in its Consolidated Accounts. 

Lanka Ceramics consolidated audited accounts does not contain any EOI. 

Minority shareholders are raising queries on the following matters which arise from the above disclosures: 

*The reason for non-inclusion of EOI in the audited accounts should be reported to the shareholders as it materially affected the profitability of the provisional accounts. 

*If the EOI of Rs 33,624,000 corresponds to the capital gains from the sale of shares in Horana, then the transaction has been incorrectly reported in the provisional accounts. 

This significant accounting error amounts to 42% of the profits in the provisional accounts and should have been notified immediately upon discovery to the shareholders. However of more concern is the circular dated September 10th 1998. The circular states that due to "…under-provisions aggregating to approximately Rs 34m" the profits have been reduced to Rs 45m. 

The Rs 34m corresponds with the Rs 34m (33,624,000) EOI in the provisional accounts and the strange exclusion of this item from the audited accounts. If this observation is correct, the circular dated September 10th 1998, is a gross misstatement of the actual position minority shareholders say. 

The shareholder said, the transaction had not been reported as a related party transaction in the accounts of Lanka Walltile Ltd. 

Fiscal fundamentals flawed 

The fundamental weakness of our fiscal situation is undeniable. It arises from the fact that the government is committed to expenditures which cannot be curtailed and in fact have been rising. Debt servicing, expenditure on public administration, welfare and defence swallow up nearly all government revenue. 

None of these could be curtailed. The defence expenditure is often understated to give the initial budgetary figures a more respectable look by the end of the fiscal year. 

Supplementary estimates add up to a substantial increase. For this reason the budgeted expenditure on defence is not taken seriously by anyone. The only expenditure cut that is possible would be a reduction in welfare expenditure, most of which go for the samurdi programme. 

Yet this is not politically feasible. Therefore, curtailing government expenditure remains an impracticable one. Government expenditure keeps rising. Apart from the increasing expenditure of the government, one has also to label most of such expenditures as "unproductive". 

The other significant feature of this fundamental situation is that the government has no funds for capital expenditure. This is where fiscal policies fail to give the necessary impetus to economic growth. Now that the country depends on the private sector to generate economic activities and employment, it is not the role of the government to involve itself directly in economic production. 

Yet it has to play a crucial role in providing the infrastructure to sustain more heightened economic activity. This is almost an impossible task in the given fiscal situation. 

The other aspect of the fiscal predicament is that the government is keen to keep the budget deficit within acceptable limits. This is partly no doubt due to the requirements of the multi-lateral agencies which require such fiscal discipline. It is also argued that such fiscal discipline is a pre-requisite to providing a healthy macro economic environment for economic growth. 

Price stability, in particular, is considered important and fiscal discipline is considered a pre-requisite to maintaining such price stability. 

This is a Catch 22 situation. Required capital expenditures are not possible as fiscal discipline has to be maintained while inadequate capital expenditures reduce the capacity of the economy to grow. 

Some have argued that in situations of this nature price stability is not as important as growth and that inflation is a necessary cost of economic development. But this is not a point of view shared by the government or indeed the international community. 

Had the international environment been different, the country could have benefited from capital inflows to supplement government capital expenditures. 

In the late 1970s there was a spurt in economic growth owing to large foreign funds which came into the country for the major development projects. 

It was possible to get such aid, grants and loans because the international climate was such that Western countries were willing to divert funds to countries like Sri Lanka for its development. These countries themselves benefited by such investment as some of the expenditure flowed back into their own countries and many of their unemployed skilled persons found profitable avenues of employment. 

Today Western countries are not inclined to invest funds of that magnitude in Asian countries. The recent slow down in the global economy has only accentuated this. Besides this, at the very time when there was a prospect of Asian countries investing in Sri Lanka, the collapse of their financial systems made that possibility disappear at once. 

These economic fundamentals do not augur well for the country's economic growth. It is somewhat of a miracle that in such a context our economy has been able to grow at a modest pace. 

While we can hope that the global situation will not deteriorate to such an extent that the country's economy is seriously affected, the fiscal situation in the country gives little hope for a government impetus to economic growth. 

What we can hope at best in the foreseeable future is for economic growth of around what we have experienced rather than an acceleration. Even that is optimistic. 

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