Pre and post-election fiscal indiscipline and way forward

27 October 2019 12:00 am - 0     - {{hitsCtrl.values.hits}}

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The next government will have to give priority to develop a production-based economy and improve agriculture sectors in the rural areas

 

According to the Election Commission chairman, the presidential election results will be officially announced only on November 18. The writer is of the view that the probable outcome would be known to the people by early hours of November 17 itself, as there seems to be a fairly clear mandate given to one of the leading presidential candidates, although 35 contenders are running, thus wasting public money. 


The amount of time, money and energy wasted is enormous – could have been used sparingly, as the majority of the voters have already decided whom to vote, except the floating voters, radical youth and few others totalling 20 percent, may refrain from voting on November 16. 


The writer is concerned about the pre- and post- election fiscal indiscipline that could cripple the economy, as the government budget deficit is closer to 6 percent of GDP and the tax revenue was only 11.9 percent of GDP, whereas the total government expenditure was 18.6 percent in 2018. 


There should be clarity in the policy pronouncements and that cannot be seen. It is in that context only the financial burden of the package of promises announced during the election campaign should be viewed. 


The following critical sectors need to be examined closely because the candidates have touched on these areas, which are sensitive to the majority of people.

 


Role of microfinance companies, micros, SMEs
Regarding the microfinance loan ‘write-offs’ in general, the microfinance institutions (MFIs) have a mechanism to enter into ground level and provide finance to small enterprises. They have the real information about the ground level and quick decision-making and therefore, they could support the small and medium enterprises (SMEs) than the
commercial banks. 


However, their interest rates are very high and unless the micro enterprises have a fair knowledge of business operations and finance literacy and access to markets, they will end up in a debt trap, leading to closure of the businesses.


There is nothing wrong in promising farmer loan write-offs (f.dú Kh lmd yEÍu). However, there is a perception that all microfinance loans are to be written-off from microfinance companies to other micro enterprises as well. If that is the case, ‘microfinance’ companies won’t be able to absorb the losses. This happened last year and most of the ‘microfinance institutions’ had to face severe difficulties because of the present finance minister’s similar decision in 2018.


My view is that there should be a comprehensive assessment of the loan portfolio and a case-by-case analysis to ascertain who the deserving cases are before any action to write off any microfinance loan. The top officials of the Treasury, Central Bank and Association of Microfinance Practitioners also share the same view. 


Initially, this could apply to five government financial institutions namely, Co-Operative Department, Regional Development Bank, Agrarian Development Department, Divinaguma and Lankaputra Bank. The above five government departments’ loan portfolio was Rs.282 billion and poor beneficiaries’ deposits in those financial institutions by end-December 2018 was Rs.382 billion. 


In addition, there are 37 microfinance/finance companies and these licensed private companies have now claimed reimbursements under the government’s debt relief schemes. This happened in 2018, partly due to the fact that the MFIs were charging very high interest rates from high-risk small businesses and due to climate change issues. 


Here, a sum of Rs.1.4 billion (only) was written-off as capital and interest, where the MFIs had to bear the interest forgone and there is a delay in getting the reimbursement of capital from the Treasury in three years. In addition, there are unlicensed MFIs. These institutions need to be properly regulated in future. 


In addition to the above microfinance operations, there is this SME sector financing, which was a massive Rs.828 billion by 17 banks in 2018, under different loan schemes, which includes ‘Enterprise Sri Lanka’ and .ïfmr


At present, the SMEs come under the Industry and Commerce Ministry. This needs to be taken out from the ministry and start from district level to support MSMEs. It is suggested to reduce the value-added tax (VAT) and introduce a new threshold level, provide support in problem-solving, labour issues, tax issues and empower MSMEs with acquiring knowledge, support to find markets, finance, etc. and more importantly, providing finance literacy. 

 

The next president-elect has to improve the economic welfare of the people, especially the families in the ‘bottom of the pyramid’, through many micro and small-level economic activities managed and operated by the educated youth of this country

 


Samurdhi and Janasaviya programmes: Why both?
The government implemented a number of welfare and social security programmes targeting the needy people in society and as per the Finance Ministry report 2018, the relevant expenditure was as high as Rs.329 billion, when compared with the Rs.310 billion revenue from income tax, including the Pay As You Earn (PAYE) and
tax on interest. 


Today, some 10 different ministries oversee over 25 social welfare programmes. A lack of digital record-keeping made the relevant authorities struggling to coordinate, monitor and evaluate their progress. Some beneficiaries remain in the programme longer than they should, while the others in need never gain access. 


In other words, it’s not targeted properly and as a result, there is a misallocation of resources. One of the presidential candidates has promised to introduce Janasaviya in addition to the current Samurdhi, which is a wasteful public expenditure that cannot be met out of limited government revenue. Already, the government budget deficit is in the region of 5-6 percent. 


The next president-elect has to improve the economic welfare of the people, especially the families in the ‘bottom of the pyramid’, through many micro and small-level economic activities managed and operated by the educated youth of this country. Therefore, proper policies need to be developed in order to transform the ‘rural low-income family work’ into more productive, income-generating work and surplus money will go to their individual savings accounts. 


We need ‘big data analytics’ to review whether these Samurdhi and Janasaviya programmes are/were in fact achieve/d ‘poverty reduction’ or act as poverty ‘aggravating’ programmes. 
In China, Alibaba has introduced programmes and models to end poverty across counties in China, with its ‘Internet + Poverty Reduction’ model, offering its expertise and technology to help the rural poor to use the Internet to improve their lives. We are of the opinion that the changes are necessary to Sri Lanka’s poverty alleviation programmes (social protection system) to address these challenges. 

 


Plantation worker salaries
As for the plantation sector policy review discussions at the campaign, the presidential candidates have already mentioned at the election rallies that the plantation worker wages will have to be increased – one candidate has indicated a Rs.1,000 increase and another candidate has promised a sum of Rs.1,500 per day. 


Since 1995, the plantation worker wage negotiations are through a ‘collective bargaining process’ between the trade unions and plantation companies facilitated by the Employers’ Federation of Ceylon. The land is owned by the government and leased out to the 22 Regional Plantation Companies (RPCs) on a long lease with a clear power of attorney and hence, the government is an important stakeholder.


The plantation companies have to be mindful to the fact that the sector is interwoven with the socio-political fabric of society and need to look after the human resource for sustainable development. However, as per the collective agreement entered into between the parties, the next wage increase is due only by
December 2020. 


At present, the RPCs are in the process of working out a ‘revenue-sharing’ remuneration package to be presented to the trade unions in terms of the collective agreement signed last January 2019. Rs.1,000 is a reasonable wage considering both parties’ views, although it does not contain a productivity component or revenue-sharing basis.

 


Cash flow situation is in bad shape
As can be seen above, the banking and financial systems are in bad shape. Non-performing loans (NPLs) declared are not real. The real NPLs are much higher. The tax system is so complicated even with rate increases. The tax revenue was decreased to 11.9 percent of GDP in 2018. The revenue collection from income tax was only Rs.310 billion, whereas revenue from VAT was Rs.462 billion (indirect tax), which should be the other way around.


The exchange rate appreciation as suggested by some experts should not be artificially handled in order to bring the present rate below Rs.160 per US dollar, which will adversely affect the import of unnecessary goods and may affect export income as well. The Central Bank would have to allow the REER formula to automatically adjust the rupee exchange rate in a flexible exchange rate regime. As for infrastructure projects, the focus should be on the following:

 

  • The ‘National physical master plan’ developed by the experts must be respected and everything has to flow from the above planning document. 
  • There should be no large-scale infrastructure projects for the next two years.
  • Infrastructure for all to live comfortably, not mega infra projects, only gap filling infrastructure should be done.
  • To make it easy to work, some of the bottlenecks should be removed.
  • Set targets for the above and get the professionals/experts to plan and deliver.

 


Uplift agriculture sector and regional-based industrialisation
As can be seen from the vital statistics and surveys, Sri Lankan economy and businesses are slowly but steadily moving away from our production-based economy to a begging nation depending on few foreign countries to provide food and shelter to our 21 people. It goes without saying we need to increase production and productivity, focussing on the integrated quality of the final product. 


The next government will have to give priority to develop a production-based economy and improve agriculture sectors in the rural areas. There must be a clear policy intervention to uplift the agriculture sector and regional-based industrialisation. The positive feature is paddy cultivation and production have come back to near self-sufficiency in 2018, despite the government had to spend some US $ 300 million on import of rice in 2017. It is imperative to protect the farmers’ inventions and traditional knowledge using intellectual property rights. There is a need to establish a separate division within the Agriculture Ministry to monitor and document the existing knowledge of farmers to protect farmers’ traditional knowledge. 


‘Organic farming only’, which cannot feed the nation, needs to be properly understood. The concept of ‘work towards organic farming’ and let it be sustained on its own as an enterprise within the overall plan taking into account food security. Introduce mechanisation with
worker participation. 


Under smart agriculture strategy, there shall be tax exceptions, financial assistance schemes to support modern agriculture technologies and farm mechanisation, in addition to introducing high-quality rice varieties, ensuring sustainable rice-based cropping systems. The target should be to increase the national average yield up to 5,000 kilos/hectare from
present 4,500 kilos.


Our policy intervention should address land use plan reforms, agricultural best practices, focus on the entire value chain for the produce to enable them to export fruit and vegetable and other minor export agriculture and value-added products and increase the incomes of the farmers, which constitute 28 percent of the
working population. 


It is important to implement a comprehensive programme to reduce flour imports and consumption and promote rice-based ‘value-added’ products by adjusting the flour import duty. The proposal to give fertiliser to farmers free of charge – the current subsidised rate of Rs.500 per ‘50-kilo’ bag – could be for a limited period of one year, should be viewed from
that perspective. 


At present, the fertiliser subsidy is costing Rs.29 billion per year and the additional expenditure would be only Rs.3.5 billion, when compared with the 16 ‘loss-making state-owned enterprises (SOEs)’, incurring a total sum of Rs.155 billion loss in 2018, as per the Finance Ministry report. Same should apply to developing dairy farming and sugarcane production. 
Public sector reforms are inevitable together with a strategy for developing institutions under SOEs. Mindset change programmes will have to be conducted in order to change the blame culture to become a productive and responsible nation.


With increased incomes and savings, these agricultural workers should be encouraged to save money in the banking system. The primary goal of the government here is to increase the purchasing power of the predominantly rural agricultural workers.


Second, use the surplus labour and savings in the rural areas to create simple industries that produce light consumer and basic industrial goods, including wood-based manufacturing products, aluminium steel fabrications, concrete railway sleepers and electrical poles, etc. 


The government must set up a ‘mixed form’ of ownership under the Township and Village Enterprises (TVEs) system as adopted in China. These were collectively owned and controlled by local governments. The increased ‘per capita farm income’ will lead to savings that will promote ‘proto’ industrialisation through the banking system and government facilitation. 


The government should intervene to provide the know-how, help with importing the machinery and create markets domestically. The government intervention is in providing financial literacy and access to finance, finding export markets, thus ensuring that domestic companies will be competitive in international markets. The more promising ventures that have export potential should be subsidised but assistance should only be based on the increased exports as a criterion.

 


Knowledge-based and intellectually-competent society
The Sri Lankan external sector performance – balance of trade – remains a critical issue. This is mainly due to a steady deterioration in the ‘competitiveness of the exports’, coupled with low productivity and lack of consistent policies and implementation snags, red tapes, etc. The trade deficit was US $ 10,343 million in 2018. The external debt as a percent of GDP in 1977 was only 21 percent and now it’s 60 percent. The government ‘budget deficit’ has become a recurrent feature.


In order to improve the production capacity, the workers know-how and skill levels will have to be upgraded to take on the next level of industrial production. The talented youth, especially ICT-savvy guys nurtured and supported by the government under the knowledge-based economy, could find more foreign markets for their ‘ICT/BPM back office work’, such as accounting, financial restructuring, etc.


Already the foreign exchange income exceeds US $ 1.3 billion compared to tea US $ 1.5 billion per year. Furthermore, substantial markets will be created for consumer goods, machine tools, infrastructure and energy because of the increasing purchasing power due to the increase in worker’s incomes in the rural agricultural sector. 

 


Inclusive governance model, risk-taking, decision-making
As we know, the necessary prerequisite for economic development is the political stability. Strong political leadership, having an effective and efficient ‘executive presidential system’ could establish this stability. This allows the correct economic policies to be implemented in a disciplined manner for an extended period of time without disruption.  


The next president has a daunting task of improving the economic welfare of the people through efficient and effective governance system. This is where the necessity of having a proper governance model together with a visionary political leadership comes. 


Also, an efficient and effective administrative system must be put in place to have a proper recruitment and selection method and human resource development strategy together with the use of ICT, such as ‘e-governance’. 


Ministers are frightened to take proper policy decisions because they fear loss of power at the next election. They don’t take the risk of even well thought of actions because of this fear. The trouble is their desire to remain in power for ever because if they are rejected at the next election, they will not be able to find a suitable source of income to live with. Not only do they not take risks while in power but also resort to unlawful acquisition of wealth, both to face the next election and also as a safety net when they are out. 


What is needed is to take calculated risks and make proper decisions when it is possible after having discussions and consultations with professionals and subject-specific experts. 
Further, a proper system should be in place to monitor and review the implementation of the government authority, after obtaining a negative feedback from the people and professionals grouped in ‘think tanks’, in a more structured and transparent manner.

 


Transparent governance to arrest corruption 
It should be emphasised that any progress on economic development is not possible till we crackdown on corruption from society. Meritocracy must take precedence to cronyism, which is the practice of awarding jobs and other advantages to friends or trusted colleagues, especially in politics. 


For instance, cronyism includes appointing ‘cronies’ to positions of authority, regardless of their qualifications. A true theory of meritocracy would acknowledge that we all have multiple talents and motivations and that all administrators, academics and professionals should be able to learn and improve in most of the roles in which
they are placed. 


A learning organisational culture must be in place for government administrative machinery. A public-private partnership must be respected together with a modern version of ABC. Above all, there must be inclusive economic and political institutions to improve the social and economic welfare of the people. 


(Jayampathy Molligoda is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka. He has obtained his MBA from the Postgraduate Institute of Management and has also successfully completed an Executive Strategy Programme at Victoria University Melbourne, Australia. He counts over 37 years of executive experience in the fields of financial management, strategic planning and human resource development.


At present he serves as Non-Executive Deputy Chairman of a leading
public quoted company)

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