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“SOEs will not be privatised, but certainly the efficient private sector management will be infused, because that was one major political problem that was there. No SOEs will run at a lost in the next two years, everything will be converted into productive money-making companies.”
Illustrating the Government’s strategy to move forward with the “inherited budget deficit”, he said: “Our achievements of budgets in previous years have always been 85%-86%. So, we didn’t want to go empty because we need to be financially responsible. That was one of the questions the people had, so we at this particular moment are getting the numbers together, what we have presented to you as the budget deficit will certainly be the actual situation that is given to you all.
“Revenue is Rs. 1,532 billion at the moment, while debt servicing is Rs. 848 billion in capital Rs. 428 billion in interest payment, which makes it all Rs. 1,300 billion about 82% of revenue. The total cost is Rs. 3,520 billion.
“Now, what we have basically done is reduce certain unwanted capital costs and brought down the recurrent expenditure in the short run that we feel is important and brought in a revenue that will help to buffer as you can see. We can’t be taking too much from the recurrent areas because those are committed costs already. So, if we try to mess around with that I’m sure Dr. Coomaraswamy and others would be more determined. Hence, what we’ve done is, we’ve just scraped the unwanted ones to give you more transparency,” he added.
The Minister said the revenues at this particular moment were still very unclear. But the Government would certainly ensure that the additional revenue that had been brought into the system would help overcome initial shortcomings.
“Now debt servicing will certainly be the ‘most serious’ one of them all, and our first attempt would be to take off the high interest loans that we have taken and help to consolidate it before too long,” he stated.
Government’s way forward
Commenting on the Government’s way forward to increase its production while narrowing costs, he said that they had added on roughly around Rs. 230 billion to the costs additionally, and in the same process had reduced Rs. 188 billion costs that were there in the last year. To this the Government added revenue proposals which would bring in roughly around Rs. 80-90 billion.
“So, you could see that debt overwrites, we have a higher revenue than all the expenditure. This is the way we have managed to reduce the budget deficit.
“We’ve been very responsible in adding on the goodies that were given on the political stage, because after all we have to run the economy from now on. You can’t dwell on the past, but this is the economy we have inherited. Because if you look at the previous economic reports that were done by the Central Bank, even the Americans would have borrowed from us! So, that’s the type of environment that was shown to us,” he explained.
Super Gains Tax and Mansion Tax
Answering a query raised with regard to the new ‘Super Gains Tax’, Minister Karunanayake stated that the levy would only be applicable to taxable income for the 2013-2014 period for companies generating profits over Rs. 2 billion.
“We doing this on a very transparent basis and there is no witchunt on anybody, the tax will only apply on what has been declared. There are effectively 42 companies which this will apply to and we are just waiting on the final confirmation of accounts for 2013-2014 because we don’t want any of the entries to come out of the next taxable year which would have an impact on our administration.
“You must understand that we have inherited debts from the past 11 years. We are only using this one-off measure to clear past debt. If we could write off what the previous regime did we wouldn’t need to have this super tax you took everything sitting down for 11 years, you won’t have white vans running hereafter, so please look at the state of the economy we’re in. We are all Sri Lankans and we want to see our country moving forward so help us to go forward. Remember, people have voted this in and placed immense confidence in us and we will not breach that confidence. We are taxing the 2% for the benefit of 98%,” he said.
Commenting on the inclusion of the new Mansion Tax, Karunanayake explained that the levy was introduced to impose an element of social responsibility in situations where wealth had clearly been displayed but gave assurances that his regime would act humanely when enforcing the new tax.
Furnace oil prices reduction
Meanwhile, responding to a query on a potential reduction in furnace oil prices, the Secretary to the Ministry of Finance, Dr. D.H.S. Samarathunga said: “As you all
know the petroleum prices have come down drastically, roughly by 60% from last June. The Government has taken steps to bring down all important prices at this stage. Concerns have been raised with regards to the furnace oil prices as well but it is a matter for the Finance Minister and Energy Minister to discuss and reach an agreement as to how to bring down the furnace oil price as well. I would like to mention that since October 2014, the use of furnace oil has comedown drastically, hence it has not been a pressing concern at this time.”
Monetary policy
Commenting on issues of monetary policy, Central Bank Governor Arjuna Mahendran said: “The policy is to be as market determined as possible. We have had instances in the recent past where the way in which interest rates were set in the country has diverged from what is normally in practice in other markets. Of course we don’t want to upset that regime just ahead of the Minister presenting his budget, so we’ll persist with the earlier regime. But we will move to clean up the way rates are set.
“The currency itself is subject to what goes on around us. We’ve seen some incredible moves in recent months with the Swiss Franc and Singapore Dollar; these are pillars of the global economy and they move so dramatically. It will impact us in one way or another and this is where we will have to be extremely cautious and take a measured response. First of all we want to emphasis stability. Stabilisation is our biggest priority, we don’t want to upset the markets and remember we have a huge flow of remittances from our expats Sri Lankans overseas which has helped this economy for several decades and continues to do so. So, we don’t want them losing too much money either in the currency situation.”
Debt management
Speaking on the topic of debt management, he said that the idea was to avoid increasing the net stock of debt, which has already been taken up by creditors in order to keep the total amount of debt at a standstill.
“As the Minister said, debt is a problem, servicing these debts eats up lot of our revenues. So, whenever these repayments are due we will seek to borrow from the market to keep that debt at a stable level and gradually reduce it over time,” Mahendran revealed.
Sovereign bond issue
Commenting on whether the Central Bank would look to a sovereign bond issue during the year, he stated: “Whenever payments on our earlier commitments fall due, we will come to the market to borrow. Whether it’ll be a sovereign bond or whether it will be private placement
or issue of treasury bills will determined by the market conditions. I can’t really commit to the answer that we’ll go for a sovereign bond, which will be decided as and when the need arises.”
The Governor stated it was not all about regulator buying shares of EPF as there were also issues of consolidation: “Trying to become big enough to be able to tap international bond markets is again something I personally feel is ill-thought-out. Even if you merge these banks, they are not big enough to make an impact in the international bond markets. I would rather merge the Bank of Ceylon and National Savings Bank rather than merging private banks. All these things I think have to be thought out properly.
“Now the Government holds these shares, which it shouldn’t, but unravelling them via institutions like the Securities and Exchange Commission (SEC) has to be looked at. Now that Dr. Thilak Karunaratne is in the saddle, I’m sure he’ll do an excellent job of unravelling what went on behind the scenes. I don’t want to jump the gun and divest these immediately. I think we have to have more liquidity in these public markets.”
Tax compliance
The Governor also said that only 150,000 people were paying taxes, which clearly showed it was a question of tax administration and also backs up the point that the further you simplify taxes, the easier it becomes for people to pay.
“I think compliance will increase and that’s been the experience in other countries; I see no reason why it wouldn’t work in Sri Lanka. I think the real issue here is that the taxes are far too complicated in Sri Lanka for people to understand and of course we have to understand that we have to make it easier to pay taxes via the internet. I’m fairly optimistic that the number will increase.
“I’m giving Sri Lanka three years to achieve rationalisation of taxation. In this audience alone, we understand that we need to simplify our taxes. The Minister being a Charted Accountant knows it better than anybody and more importantly he has the political clout to sell this to the country. That is critical, which we didn’t have in the recent past. We didn’t have Ministers who could sell these concepts in a practical way with the support of Harsha, Eran and everybody else who’s involved in the economic process. This is a ‘dream team’ that we have on the political side driving the economy. I’m optimistic it will happen,” Mahendran asserted.
Development
Meanwhile, Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva pointed out that development was going to continue, h
owever it was not necessary to spend so much to build what we’ve been building. “Perhaps we can do more with a lesser spend,” he noted. “Just because we cut costs in infrastructure expenditure, it doesn’t mean that development goals will not be met.”
EPF
He also said that when the EPF started buying stakes in commercial banks, they raised the red flag. “Why is this? What is the objective? First of all, there were issues with the code of conduct; should the regulator be trading shares of regulated companies? We thought not and according to 2.6.2.2 of the Code of Conduct of the EPF and the Central Bank, they should not be trading in bank shares. I don’t want to get into greater detail on that.
“On the other hand, what was the purpose in purchasing shares of private commercial banks? Was it to get board seats to appoint chairpersons? And then down the road, direct lending towards projects that the Government would like funded, which otherwise may not be funded? Those are the real issues we need to address – not whether we divest from these shares. We are going to adopt a policy in line with the stance of the Finance Minister, the Central Bank Governor and Prime Minister himself.”
Central Bank independence
Noting that this was the first step in giving the Central Bank independence, Dr. de Silva added: “We are not going to be answering questions on interest rates and ex
change rates as it has happened in the past because it should be the prerogative of the Governor and his team. The Central Bank should not get involved in the political cycle. In the long run what this means for the Pension Fund and how it will be managed must be looked at because the objectives of these funds must really be met. That’s a complex question we will deal with over time,” he noted.
Meanwhile, Ceylon Chamber of Commerce President Suresh Shah sharing the stance of the chamber said that there were a number of points they intended to discuss with the Government and especially the Finance Minister.
“I do feel that the space for discussion and consultation has opened up significantly and that gives space for us to get our point of view across. We, as a private sector chamber, believe very strongly that the business of business should remain with businesses and Government should keep to the regulatory side.”
Pix by Lasantha Kumara
