Govt. faces economic Armageddon
Posted on June 26th, 2016

Courtesy The Island

* Shocked Supreme Court cancels Rs. 60 billion coal tender
* Credit ratings downgrade by Moody’s despite IMF programme
* Traders countrywide in open revolt against VAT
* World turned topsy-turvy by Brexit vote


In a landmark judgment delivered by the Supreme Court last Friday, the country’s highest court shot down a disputed coal tender with it being said in open court that the ‘conscience of the court was shocked’ by the conduct displayed by certain individuals involved in the process. The Norochcholai power plant requires 2.25 million tonnes of coal per annum and the practice is to award tenders for a three year’s supply – the biggest tender in the country worth over Rs. 60 billion. A dispute arose about a tender floated June 2014 to procure 6.75 million tonnes of coal with one of the bidders saying that the criteria had been changed after the bids had been opened. They went to the procurements Appeal Board which held that the criteria had indeed been changed after the bids had been opened and they recommended that the tender be cancelled and fresh bids called. (A detailed description of this dispute and accusations and counter accusations made appeared in The Sunday Island of Nov 7, 2015 and in the daily Island of 10 May 2016.)

However, instead of calling for fresh bids, a cabinet paper was presented in September 2015 by the Minister of Power and Renewable Energy recommending that cabinet award the contract to a certain party overriding the ruling of the Procurements Appeal Board. One of the bidders Messrs Nobel Resources of Singapore petitioned the Supreme Court saying that its rights had been infringed. The government of Sri Lanka argued that the petitioner had no standing (locus standi) to petition the Supreme Court because it was a Singapore based company which was not incorporated in Sri Lanka. The three member bench comprising Chief Justice K Sripavan, and Justices Priyasath Dep and Upali Abeyratne wanted the petitioner and the respondents to make written submissions as to whether the court can ignore wrongdoing by a public authority due to objections raised on the basis of the locus standi of the petitioner and if there is a misuse of public funds, whether the law requires the court to protect the public interest or to ignore all that on an argument of locus standi? It was after considering these two questions that the Supreme Court gave their landmark judgment last Friday.

Traditional UNP constituency turns militant

As this columnist has been saying all along, what will decide the fate of this government will not be politics but economics. The most significant event taking place at the moment in this regard are the waves of hartals spreading from town to town all over the country. Last week, hartals were held in the Gampaha town and in all towns in the Matara district. This started first only in individual towns. The Matara hartal was a new development where all towns in the district put down their shutters on the same day. This is an unprecedented protest movement that no one has ever seen before. Our generation has read about the 1953 hartal, but that was a protest movement launched by the public over the slashing of the rice subsidy. But what we are seeing now are hartals by the small and medium business community.

The VAT increase has obviously hit certain people harder than anyone expected. The drawing in of all retail and wholesale businesses grossing over Rs 33,000 a day has affected virtually every business in the towns. The finance minister’s explanation that it won’t be every business that makes over Rs. 33,000 a day that will have to pay the VAT but only those businesses that sell Rs. 33,000 worth of VAT liable goods per day that will have to pay the tax is little cause for relief. Certain items like rice, vegetables and pharmaceuticals are exempt from VAT. But most retail establishments in the towns will be selling both VAT exempt as well as VAT liable goods. The supermarkets may have detailed electronic billing systems which will enable differentiation of VAT liable and VAT exempt goods, but ordinary retail businesses don’t operate like that.

An ordinary grocery rarely gives the customer anything more than a hastily scribbled chit with the goods bought and the prices which is for the customer. Small retail businesses rarely retain records of what comes in and what goes out – everything is most often only in the owner’s head. Such business may end up paying VAT on VAT exempt goods as well, as very few of them have the ability to differentiate. Though all pharmaceuticals are exempt from VAT most pharmacies sell a range of non-medicinal products which are liable to VAT. Besides, the tax authorities are not known for their friendly approach either. The tax authorities raid business establishments the way the police raid kasippu joints. A pharmacy owner told this writer that when the tax authorities raided his establishment one day, all the employees had been told to empty their pockets onto the counter and once official who had sat on the cashiers chair had told the frightened manageress: “We’re going to nail your boss this time!”

That’s the way the tax authorities collect money from the small businessmen. The paperwork is no less daunting. A young man barely out of his teens started a small boutique in a town in Gampaha selling rice, curd, treacle and the like transported from the south. A couple of weeks after he commenced operations, he got a letter from the Inland Revenue Department asking him to declare his profits failing which the department will file action against him under such and such laws. The young man was frightened out of his wits. It will be a daunting task for small retailers to maintain separate accounts for VAT liable and VAT exempt goods in a manner that will satisfy the tax authorities. The government may have to move fast to defuse the situation building up in the towns.

The towns in most districts have been bastions of the UNP. It does not augur well for the UNP that this wave of hartals is taking place in their traditional constituency. This is not just a protest against the VAT. It is also a protest against the increase in vehicle prices making it that much more difficult for this class of small businessman to buy a vehicle. This class has been hit hard by the policies adopted by this government and it would be politically wise not to allow the situation to continue. All this while the local government elections are being postponed because of the anxieties of the Sirisena faction of the SLFP. But after this revolt in the towns, even the UNP will be having second thoughts about going in for an election. This is their traditional constituency that is in open revolt. How inclined would this small business class be to vote for this government after things have been made harder for them than it was before?

At least a part of the vehemence of the reaction is obviously due to the fact that that many of the protestors feel that they brought all this upon themselves by voting this government into power. This government has even more horrors in store for this particular class of people in the form of the capital gains tax which will seriously affect the provincial businessman class as they do quite a lot of buying and selling of property. The UNP should watch out lest this should result in a permanent change in the voting patterns. Before 1977, the left movement had a very significant presence in Colombo. This is why Bernard Soysa and Peiter Keunaman kept winning in the Colombo city electorates and why Kusala Abeywardene won the Borella electorate in 1970. But the government of 1970-77 caused a permanent shift in voting patterns with the left parties wiped out from the urban areas and the UNP establishing an overwhelming dominance in Colombo that has lasted to this day. The UNP should take care lest this process should be reversed.

It is not easy for the government to roll back the tax increases. It claims to have already exempted parts of the private medical care service from VAT when it comes to specialist consultations and medical tests and the like. Now if they are forced to abolish the VAT on the retail sector, the worries expressed by the credit ratings agencies about the IMF targets not being met will come true. Adding to the woes of the government, the Supreme Court has given leave to proceed in a fundamental rights case filed challenging the legality of the VAT increase because the government has not yet passed the sanctioning legislation. As of now it is being implemented administratively.

If the government keeps retreating on the VAT by issuing more and more exemptions, the IMF programme revenue targets will not be met and we may get shut out of the programme anyway. Then again, if the government tries to compensate for the retreat on VAT by increasing direct taxes such as income taxes and a new capital gains tax, once again they will be antagonising a community that has traditionally been UNP – talk of being in between a rock and a hard place!

Moody’s gives SL a negative outlook

This column has been closely following the unfolding economic situation in the country. In February the credit rating agency Moody’s gave Sri Lanka a B1 rating and a stable outlook categorisation. In doing so they explained that Sri Lanka had applied for an IMF loan and they expected the conditions in the IMF programme to restore financial stability to Sri Lanka. Thereafter Fitch ratings published their ratings for Sri Lanka, and gave Sri Lanka a negative outlook categorisation. They noted that even though Sri Lanka was to enter into a programme with the IMF, the foreign debts the government had taken on which were coming due before the end of this year would place an unbearable strain on foreign reserves. Standard and Poor’s was the last to publish their ratings for Sri Lanka and they too followed the lead set by Fitch.

Several weeks after that the IMF confirmed that they would be giving Sri Lanka a loan. Fitch and Moody’s responded immediately saying that they were not changing their rating because they were sceptical about the IMF’s programme for Sri Lanka given the ‘patchy’ implementation record of the government. Sometime laster, the IMF’s executive board approved the loan to Sri Lanka and the first tranche of 168 million USD came in. After all this happened, Moody’s which had been holding back, gave Sri Lanka a negative outlook categorisation. An experienced banker who wishes to remain anonymous told this writer that he had never heard of an instance where a country was given a negative outlook categorisation after entering into an IMF programme.

The reasons cited by Moody’s for giving SL an outlook negative categorisation, was firstly the expectation that the government’s debt burden will increase further. Following close upon this was the fear that the revenue collection measures of the government may not produce the expected income. Furthermore, Moody’s did not expect the IMF programme to go according to plan and they were convinced that the targets set by the IMF to reduce the Budget deficit would not be met. The government’s anti-Rajapaksa rhetoric has also done its part to earn this result. The yahapalana leaders’ oft-repeated claim that the Rajapaksas had concealed a mountain of liabilities running into billions and trillions has obviously frightened even the ratings agencies. Among hidden liabilities mentioned was 3.5 billion USD relating to Sri Lankan Airlines.

An industry expert told this writer that there was absolutely no way that the total liabilities of Sri:ankan Airlines even came close to 3.5 billion USD. However Moody’s has to go by the information available from Sri Lanka and when the Prime Minister of the country says that Srilankan Airlines has liabilities amounting to 3.5 billion USD, Moody’s has taken into account the serious situation where the liabilities of one state owned enterprise alone amount to 4% of the GDP! Moody’s has also observed that with economic growth expected to slow down, the persistent budget deficits would raise the government’s debt burden. In the circumstances they expected the government’s debt to GDP ratio to rise to 80% in a situation where the Central Bank report said that the debt to GDP ratio had risen from 71% at the end of 2014 to 76% by the end of 2015.

Moody’s has also warned that unsettled global economic conditions could further queer the pitch for Sri Lanka. Another very significant warning issued by the ratings agency is that foreign reserves only partially covers external debt due over the rest of the year and that funding from the IMF and other international agencies will not fully meet the needs of the country. They have also warned that foreign exchange reserves could fall further and balance of payment pressures would heighten. Furthermore Moody’s did not envisage any prospect of meeting the revenue collection targets set by the IMF. They are particularly concerned about the government’s constant wavering on the issue of taxes. They warned that if foreign reserves fell further and the markets became nervous, a further downgrade was possible.

The Moody’s negative outlook categorisation comes at a very inconvenient moment for the government just when they were trying to capitalise on the IMF programme and raise a huge syndicated loan. Now, that becomes that much more difficult and expensive with the negative outlook given by Moody’s.

Ranjan’s suggestion

It is very difficult for any intelligent individual to relate to a person like Ranjan Ramanayake. We have had other actors like Vijaya Kumaratunga, who also made it to the silver screen due to his good looks, but Vijaya had far greater depth than his kinsman Ranjan. In the early days before he entered politics, Vijaya had been like Ranjan, clad in tight-fitting T-shirts and sunglasses – there being little difference in appearance between the on-screen and off-screen Vijaya. But after he came into politics, Vijaya became a different person and he could convince even people like Colvin R. De Silva and Bernard Soysa to select him as the de facto leader of the left alliance which was in its incipient stages when he was assassinated. Ranjan never evolved and appears quite incapable of utilising the advantage of being a film star to do something constructive in politics. His antics since the yahapalana government came into power have been an embarrassment even to his own party. Though it is difficult to relate to an individual like Ramanayake, he has to be commended for being one of the few ministers who has not been using taxpayers money to led an ostentatious life. Though a showman by profession, he has not used public money to lead a showy life.

A very creditworthy suggestion made by Ranjan in a letter to the President and Prime Minister is to import identical vehicles for all ministers and MPs so that this race to outdo one another by ordering the most expensive and impressive looking limousine at taxpayers’ expense will cease. That is how it used to be in the old days. After the 1977 election, the newly elected MPs were all given the same red and white Mitsubishi jeep. A fleet of identical vehicles is much easier to maintain than a whole lot of different models. Ranjan’s suggestion was that the yahapalana government should follow the example of the newly elected Philippine president by getting down a fleet of reasonably priced vehicles for the use of people’s representatives. This is a suggestion that should be taken up if not by the present government, then by anyone who has any idea of forming a government in the future.

The people’s tolerance for the profligacy of people’s representatives has just about reached its limit. This writer feels that the present wave of hartals spreading from town to town countrywide was motivated at least in part by the sight of ministers getting supplementary estimates passed in parliament to buy super luxury vehicles for themselves while increasing the tax burden on the people. In fact in the anti-VAT demonstrations during the hartal in the Matara district, one of the shogans shouted by the shopkeepers was “Sepa wahana pasuwa ganna.” That ill-timed supplementary estimate and the flippant Marie Anotoinette like justifications trotted out by the ministers of this government have definitely touched a raw nerve among the public.

Politicians using taxpayers money for ostentatious transport not only makes for an ugly spectacle but also creates a mindset among people’s representatives that public money can be spent on living the high life. From there it is only one step forward to actually putting their hands into the till to enable them to live the same kind of life when they are no longer in politics.

Brexit: A new beginning for Britain

Britain has voted to exit the EU. Though the campaign to leave was clearly in the lead in the final weeks of the campaign, what gave the remain campaign a fillip at the eleventh hour was the murder of a pro-EU Labour Party MP Jo Cox by a man who is said to be a mentally deranged nationalist. This gave a nasty flavour to the leave campaign and precipitated a swing to the remain campaign. However when the results came in, the Brexit camp had won convincingly. The leaders of the two main political parties in Britain, the Conservatives and Labour have had their snouts rubbed on the ground as has Nick Clegg the leader of the third party the Social Democrats. Nigel Farage the leader of the UK Independence Party which has only one seat in parliament but which got over three million votes, is undoubtedly the man of the match.

The vote to leave does not mean that there will be an automatic divorce. The British government now has to start the process of leaving the EU which will take some time. But the concerns that motivated the British public to vote to leave Britain resonates well with the Sri Lankan public as well. Just as the British public wanted freedom from Brussels, our people seek freedom from certain foreign powers that dictate terms to our government. Just as the British public wants more control over their borders and immigration we too want to prevent our country being overrun by Indians under a comprehensive economic partnership style agreement which allows the movement of natural persons. To the British these were more important issues than the fears of an economic setback which was the main argument of all those who wanted to remain within the EU.

The economic argument may not have gained much traction because each Briton would have felt that if this marriage with the EU continued he would have been out of a job anyway due to uncontrolled immigration. People feared most for the futures of their children if these trends continued. The other parallel with Sri Lanka is of course that the Conservative Party, the Labour Party and the Social Democrats where all shown up to be quite out of sync with the mood of the British public. In Sri Lanka too the UNP, the Sirisena-controlled SLFP and the JVP are losing support while an opposition force that does not even have a name yet, is gaining ground. A silent revolution is sweeping the world.

One Response to “Govt. faces economic Armageddon”

  1. Christie Says:

    We have to stand up to the Indian Empire and Indian colonial parasites. UKIP headed the Brexit and won. The leade Nigel Farage said 23 June is the new Independence Day. The Indian colonists in UK lead by Indian MPs voted to remain. They thought Indian block vote will help win Remain.

    In our case Indian block vote won and brought in Sirisena and Ranil.

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