Strengthening the tea industry 

Besides this, services too contribute significantly to our foreign exchange earnings. Interestingly during the global turbulence this year, Sri Lanka's economy was able to withstand some of the destabilising impacts due to its traditional export - tea. Tea continued to provide a stable, and indeed increasing income from its exports. Until the collapse of the Russian tea market, tea provided a useful and stable source of foreign exchange earnings to the country.

The story of tea production and export in the last few years has been a favourable one. This is in contrast to the declining state of the tea industry since about the mid-sixties. However, we should not be satisfied with the progress made. Instead, we should look to ways and means of strengthening the industry so that tea continues to be a strong contributor to export income.

In the last five years from 1993 to 1997, tea production increased by about 21 per cent. This trend has continued this year with production increasing by 4.5 per cent in the first nine months. Export incomes too increased by around the same amount. 

Once again Sri Lanka has emerged the leading tea exporter in the world and there is a noteworthy uptrend in productivity. Beneath these overall developments are significant changes that are occurring in the industry. 

First and foremost, it must be noted that the highest increase in production has been in the low-grown areas. Also low-grown teas have tended to fetch higher and higher prices owing to changing patterns in world consumption. Today small holdings contribute the bulk of Sri Lanka' s tea production - a fact hardly realised by most people in the country. 

A crop once thought to be economically cultivable only on large plantations has proved to be even more viable and productive under small holdings. In fact, in Kenya small holdings provide most of the country's tea exports. Quality teas are produced in small holdings administered by the Kenyan Tea Development Authority (KTDA).

There has also been significant improvements in the plantations. Production has increased owing to better management practices. Initially production improved after the state-owned plantations were handed over to private companies for their management. Later with the sale of the plantations to private companies and a more secure period of tenure, these companies have invested more and these have yielded results. 

The higher international prices have also enabled private companies to be financially viable and afford improvements and re-invest in the plantations. There is also evidence of long-term improvements being undertaken with financial assistance from the Asian Development Bank. All these augur well for tea production in the country.

There are several aspects of the tea industry which require to be looked into. Despite the significant contribution of the small holdings to tea production, the infrastructure available to small holders and the organisation of tea production in areas under small holdings are not adequate to ensure quality tea production. 

Although there has been some improvements owing to the construction of new tea factories, the unsatisfactory transport of green tea to these factories is one of the important reasons for a drop in quality. 

Tea small holdings also have problems in obtaining planting material. It is also unlikely that the latest and best research findings reach small holders. All these imply that like in the Kenyan case the processing tea factory should be geared to providing an integrated and comprehensive package of services to ensure higher productivity and improvements in the quality of tea. 

At a time when the long- run viability of the plantations appears to be questioned, there is an urgent need to develop an alternate structure for tea production. It is vitally important that we develop a viable and sustainable mode of tea production for the country.

There is also evidence that tea research has not played as significant a role as it had before the country's independence and in the 1950s and 1960s. The capacity of the Tea Research Institute (TRI) appears to have been weakened considerably with our best scientific personnel leaving the country to serve in tea research institutes in other countries. 

There is a vital need to re-organise the TRI by providing adequate incentives to scientists, equipping its laboratories well and ensuring that the TRI responds to the needs of the plantations and small holdings.

Another area requiring considerable attention is to see our tea industry respond to the changing needs of the international market and increase our value added teas. The colonial mode of exports in bulk form should be replaced almost entirely with packetted forms of tea. 

Bulk tea still constitutes about 50 per cent of our tea exports. Packetted teas have gained in importance but the progress in packetting requires to be accelerated. Packetted teas constitute about 40 per cent of our tea exports and the value addition of such teas is significant. 

The export of tea bags, an increasing type of tea consumption in the Western world, constitutes less than 5 per cent of our exports. This reflects the fact that our tea production has not been geared to the changing demand of tea. CTC teas are the most suitable for tea bags and the country's production of such teas is minimal. This is another area where the industry must take steps to expand.

Despite the diversification of the Sri Lankan economy, tea continues to play a significant role in terms of export earnings, domestic incomes and the employment of a large work force. There is also reason to believe that owing to tea gaining in importance as a health drink its international demand may increase. 

It is therefore vitally important that the country improves the industry and ensures that the infrastructure and incentives are such as to increase both production and productivity. 

Responding to international needs, improving plantation management efficiency, providing the infrastructure for small holdings and developing the institutional structures which enable tea production to be an economically and socially viable and sustainable mode of production, are among the issues that should be looked into to ensure that tea continues to play a leading role in the country's economy. 

IMF doesn't dictate, it only advises: says resident rep Op de Beke 

By Mel Gunasekera

The International Monetary Fund (IMF) has come under fire lately by donor countries, loan recipients and economists worldwide. The East Asian financial crisis, and the subsequent assistance given to affected member countries to support the reform process and bolster a country's commitment to adjustment and reform have made the Fund the favourite 'whipping horse' by affected governments and economists lately.

In Sri Lanka too, the Fund has attracted a lot of criticism for its advice on stringent policy framework specially with the introduction of GST this year. In a recent interview with 'The Sunday Times Business', IMF Resident Representative Anton Op de Beke said quite to the contrary, the IMF does not prescribe anything.

"I want to get away from this terminology of prescribing, dictating, austerity, expecting. The IMF is a policy advisor, we want to be constructive, we advise even if the advice is not welcome. Because as an organisation we have a duty to advice our members and inform the rest of the membership of the policies of individual members. We are under pressure from the membership at large to become more open about what it is that we are exactly advising. So we will do that".

Excerpts from the interview………
Q: Is the IMF happy with the increased spending on welfare?

A: We certainly recognise the need for spending on healthcare, education, and poverty alleviation programmes. Current terms and capital terms, current expenditure versus capital expenditure. If you look at our recent programme with the ASEAN countries prescribed in the WEO (World Economic Outlook), social programmes are treated very prominently there. 

Here in Sri Lanka, we are not just concerned with the level of spending but the composition of spending. 

We urge the government to achieve its deficit reduction targets without compressing capital expenditure targets. To raise the share of capital expenditure as a percentage of total expenditure and also to leave room for much needed social expenditures that we have been urging the government to start with a reform of public administration. 

The reform should be by rationalisation, slimming down with a strengthening of the massive public sector to deal with the challenges that they are facing. By trimming the government payroll, there would be more money left for health programmes etc. 

It is also important to keep in mind that not all social spending is necessarily well spent. There has to be clear objectives. The government has to decide what only the government can do, or what only the governments can do better. Not all in the social sphere is best done by the governments. You need to have rational policies, constant evaluations, and corrections if necessary.

At the IMF we don't have specific expertise in this area, we depend on the World Bank's report for a detailed analysis on government spending on healthcare, and education and how they have been accomplished. 

For example the recent hiring of a large number of untrained teachers will not bring about an improvement of education. So this is not a wise expenditure. 

IPS report says that about 60% of the population receive consumption grants under the Samurdhi Programme, whereas poverty has been estimated to be around 30%. So the majority of the population receives some kind of welfare payments.

These are the key areas of targeting, finding and identified groups that are in need of support and directly help that group this way you can either achieve your target with a lot of less outlays or you could substantially increase the assistance to the group with the same amount of overall outlays. So targeting is the key word in welfare. Yes welfare on health education is also important but it needs to be critically evaluated. 

Q: Is Sri Lanka not targeting the welfare programmes effectively?

A: Your definition of poverty has to be such that not 60% of the people can claim to be poor. In this country, we may find that only 30% of the population are poor and their needs should be met. That's the group you should reach with your programme. You need to target these people and there are also ways of doing that. 

For instance education. You need to decide what type of education you need. Identify what type of education the private sector cannot provide for itself. This is something that you can keep in mind when we go into the age of information technology. Without the government actually providing the training but allowing the private sector to do so. The recent budget did address these issues.

Q: What was the outcome of the World Bank report?

A: The World Bank study was quite positive on healthcare but rather negative on education. In healthcare there has been a certain level of privatisation in this country. Big segments of healthcare provisions have been privatised over the years, and while is not wise allowing that,but that is why health has performed better than education. 

Q: Are we getting the balance tranches of US$ 80 mn each of the US$ 500 mn of ESAF, negotiated during the UNP regime?

A: In 1991, Sri Lanka entered into an ESAF support arrangement with the IMF; i.e. the IMF and Sri Lanka agreed on a three-year policy programme, consisting of monetary fiscal policy and a whole lot of structural policy measures. The total amount was SDR 336 mn or about US$ 470 mn in 1991. 

It's a rolling programme and gets evaluated by the IMF staff every six months. Disbursements are also phased and when the IMF staff finds that the loan conditions are substantially not met, and that there is no good reason for this, due to adverse development of the local economy or something the government has no control over, then the disbursement of such loans are suspended. 

That's what happened to this particular loan. Only SDR 280 mn or about US$ 390 mn was disbursed. Even though it was initially a three year loan, the IMF agreed to extend it, as the new government which came in 1994 said they needed more time to meet those criteria. It was extended but the loan conditions were not met in the end, and the loan expired in 1995.

For new disbursements, there would have to be a new loan. What Sri Lanka is doing now is repaying that previous ESAF as well as the previous SAF to the tune of about US$ 100 mn a year. 

The ESAF is a concessional facility, the interest is only around 1/2 a percentage, but the loan has to be repaid. It's not grant money.

Q: What went wrong with Sri Lanka?

A: There were slippages in all areas of monetary policy, fiscal policy as well as structural reforms. The loan documents of that period state many of the reforms like public administration reforms, state banks as part of the agenda. 

Q: The government has been negotiating for an ESAF loan for a while. Any progress so far?

A: The government has, expressed its interest in a new ESAF and the IMF Executive Board does welcome this interest. The combination of problems Sri Lanka has like macro management problems, large fiscal deficits, inflation rate not in single digits, plus a whole host of problems, Sri Lanka is a good candidate for an ESAF loan. 

But we have to make sure two things. One that the programme is sufficiently ambitious to warrant support of our ESAF facility, as these are our concessional funds. Two we also must be sure that the programme is likely to be implemented. 

Because the programme that goes off track leaves a bad impression; it may backfire as well. Our talks continue as to what would constitute a sufficient ambitious programme. 

Our recent PIN (Public Information Notice) summerises what we require. It says more needs to be done on the fiscal front. On the structural reforms, the government had to move from the design phase to the implementation phase, like the state banks, pension reforms, labour reforms, privatisation etc. 

The first three are important financial sector, civil administration and pension reforms. For these three areas, in particular, the government needs to come out with an action programme. 

We realise the restraints on the government at present, not only with rising defence, but expenditure itself (which makes it hard to proceed with the fiscal consolidation strategy), but also the diversion the war creates for policy makers. 

Controversial economic reforms are not likely to be undertaken by the government under these conditions. So we realise that and we are prepared to give them all sorts of support through our regular advice, through our office here and through technical assistance. In order to provide a loan we have to ask for more.

Q: Is Sri Lanka anywhere near receiving an ESAF loan?

A: The recent budget has not brought Sri Lanka any closer to an ESAF. The fiscal results of 1998 are disappointing, the consolidation put forward for 1999 is not altogether realistic and there is very little in this budget about structural reforms. It's a setback.

Q: What are the IMF's reactions to the 1999 budget?

A: Expectations is not the right word. We see our role as advisors from an economic point of view-what we would think would be the right direction and now what's happened 'disappointment' is a strong word.

We gave the government quite good marks for achieving results in 1997 on the macro front, and so this year we had to be equally honest and express our disappointment at the achievements in 1998. In 1997, the government made quite an inroad to the deficit and it got good marks for it. Inflation was also reduced.

1998 was the year of marking time both in the area of fiscal concern, as far as inflation is concerned; there too the government did not achieve its objectives to reduce it to a single digit. 

Q: Is the IMF happy with the on - going privatisation programme?

A: We are quite positive about the programme over the last couple of years. What looked impossible during the 1980's was the plantation privatisation,the number of people working, the sentimental attachment to the land. People at that time thought it would be nearly impossible to privatise it. But it has been accomplished now and there are successes to show for. 

Not only privatisation but also the coporatisation of minority divestiture of management control and so on and so forth. I think the AirLanka and Telecom divestiture was also quite successful. 

We are pleased with what has happened with the area of privatisation. We are very interested in what the new agenda would be. 

Interestingly, if you look at the things that have been privatised so far, these for the most part were activities that were previously private and became nationalised and then privatised again. So it was a question of past policy mistakes and these were activities that most governments around the world would not call traditional government activities, but those are being privatised. 

Q: Is the IMF recommending further privatisation to bridge the deficit. If so are you looking at specific industries?

A: There is a long list. There is a lot left to do, like tourism, construction but I think now we have to look beyond this and look at activities that were traditionally done by governments that would be suitable for privatisation like ports, railroads, utilities, even part of public administration. You can have a government pension system but the administration should be outsourced. To get inspiration of how privatisation is best practised, you just have to look at Australia, New Zealand, and USA. 

Two things that stand out in the financial sector are the banking and insurance sectors. These are the only sections left in the economy where state institutions dominate, obviously this is where privatisation needs to proceed. 

Q: You once called for more transparency in the tax system here. What are your comments in the light of more and more companies being eligible for BOI status?

A: As a policy we favour uniformity/transparency i.e. broadbased so that you can have low rates. We prefer that to selective policies. 

In all of these schemes certain criteria have to be met, a car can be imported duty free but it has to be useful for a particular purpose, by a particular person. So in principle, all these must be checked and that is just too costly.

Some of these special facilities probably cost more to administer than the benefit they can bring to the recipients. 

Fortunately this budget contained lot less concessions than last year's. More and more companies are getting BOI status. It's probably good to level the playing field and remove this distortion that exists between BOI and non-BOI companies by bringing everybody into a BOI type environment regime. 

So we can sympathise with that. If you do that you keep lowering import tax for certain sectors and you get duty free privileges and if you keep doing that you have to make up to the revenue shortfalls somewhere else. Otherwise, you are getting what the experience over here has been over the last three years of steady reduction in tax revenues as a share of GDP, but the buoyancy of the tax system has been lost. 

So that is where the GST comes in. Because the GST is a tax that is nearly as distortionary as the BTT because the cascading effect has been removed and that can be given a pretty broadbase so that GST can offset the tax cuts that have been given. 

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