Sweeteners on offer, but political mood is sour

http://www.asianaffairs.in: It was the mother of all Budget speeches. Finance Minister Ravi Karunanayake had already spent almost five hours presenting the Consensus Government’s first Budget since it came to power three months earlier. And he was still on his feet despite the fact that the soporifically-inclined on all sides of the House had preferred slumberland to the Minister’s stumbling performance, or had already quit the chamber for a refreshing cup of tea or in search of something more inebriating.

Even Speaker Karu Jayasuriya’s gentle suggestion that the Minister might think of a five-minute break appeared to fall on deaf ears. Had the Minister realised that hours before, several MPs had already abandoned efforts to follow his meandering rendition and more deaf ears had already been turned in his direction, he might have accepted the Speaker’s attempts to revive general interest in the November 20 Budget speech, surely the longest in living memory.

With time certainly running out, the minister decided to table some of the budget proposals and asked that they be included in Hansard, lest a restive audience desert him en masse and enjoy the traditional tea party to which President Maithripala Sirisena had apparently already retired. His predecessor Mahinda Rajapaksa seemed to have left parliament altogether with no tea and even less sympathy for a populist budget that had outdone his own.

Despite media photographs of closed-eyed MPs of different ideological hues (which could, of course, have suggested they were intensely absorbed in the unfolding economic resurrection of a heavily indebted nation), Minister Karunanayake went on like Lord Tennyson’s brook, handing out premature Christmas goodies (the minister is a Catholic, though the vast majority of Sri Lankans are not) to an eager public anxiously waiting to hear whether they have been hit in the stomach or some other part of the anatomy.

As it happened, the Minister was overly generous, reciting his offers-reduced commodity prices, more housing for all classes, subsidies and price guarantees, among others.

As a result, expenditure rose from 19% of GDP to 22%. On the other hand, revenue was expected to rise from 13% of GDP to 16%. The budgeted fiscal deficit remained high at 5.9% of GDP and fiscal consolidation unrealised, economist Dr. Nimal Sanderatne said in his weekly column two days after the budget was announced.

“This budget too was seeking political popularity rather than facing up to the serious fiscal situation the country is in,” he wrote.

Government economic strategy

The first Budget of the Consensus Government, along with the Economic Policy Statement (EPS) announced in Parliament by Prime Minister Ranil Wickremesinghe in early November, provides the framework of the economic strategy the Government hopes to follow over the next five years.

Among the key areas announced are higher reliance on foreign and private investment, a cutback on mega physical infrastructure, cutting down on wasteful expenditure, higher investment in health and education and better management of state enterprises.

For instance, the 100% tax on the leasing of property by foreigners has been withdrawn and tourism and the hospitality industry have been given a boost to attract more foreign investment to the country.

The Government seems to be moving along the same track of foreign investment and a liberalised economy introduced by the first executive president Junius Richard Jayewardene when he returned to Parliament with a thumping 5/6 majority in 1977.

What Uncle Jayewardene set in motion then is being followed in principle by his nephew Ranil Wickremesinghe.

“Budget 2016 has shown a commitment to enhancing private sector participation in the economy through PPPs, begin to rationalise state expenditure, undertake some much needed reforms in pensions, subsidies and welfare and renew focus on the competitiveness of agriculture and small enterprises,” the Ceylon Chamber of Commerce said.

It sees reasonable congruence between the policy statement by the Prime Minister on 5 November and this Budget, indicating a consistent economic vision for the country. The Chamber also observes that the revenue targets contained in this budget are ambitious, and achieving them will be critical to building confidence in the fiscal consolidation effort.

The Chamber acknowledges that many of the areas that the Chamber has advocated for through its recently launched ‘Ten Principles’ are indicated in this Budget.

One of the key features of Budget 2016, which the Chamber sees as a positive step, is the greater involvement of the private sector across a range of economic activities. This includes inviting private sector participation in railway services for goods and tourism; a role for private investment in infrastructure projects; private management of Export Processing Zones (EPZs); and private investment in tertiary education and vocational training.

These will open up new spaces for firms and bring in greater efficiencies to the economy, without burdening the State.

Some critical areas impacting the investment climate, which the Chamber had been advocating for some time, have also been resolved in this Budget. Most notably, the removal of the tax on land leases by foreign nationals and allowing freehold if certain investment criteria are met will encourage FDI. On the latter, however, careful attention must be paid to not allow discretion in granting of the freehold rights, as discretion on the part of public officials on the size and type of investment could open up opportunities for rent-seeking.

Budget, EPS discrepancies

But some economists argue that the 2016 Budget at times varies significantly from the Prime Minister’s Economic Policy Statement.

W.A. Wijewardena, a former deputy governor of the Central Bank, said that the EPS envisages changing the tax structure with more emphasis on income taxes. It has even set a quantitative target of attaining 40% of the tax revenue from income taxes by 2020, as against the historical average of 20% on that count. This requires policies to reduce the share of indirect taxes from the present 80% to 60% over the years.

‘However, Budget 2016 has planned to raise an even bigger share of income from indirect taxes. Accordingly, the share of the indirect taxes has shot up to 86%, while that of income taxes has fallen to 14%. Worse, it has made the income taxes regressive by applying a uniform rate of 15% on everyone earning over the threshold limit of Rs. 2.4 million.

“Thus, Budget 2016 has made both the indirect taxes and the direct taxes regressive, which the EPS had sought to avoid.

“Similarly, the budget deficit which the EPS is planning to reduce to 3.5% of GDP by 2020 has been raised to 6% in Budget 2016,” wrote Wijewardena in the Daily Financial Times of Sri Lanka.

While economists and trade chambers might differ on what the budget would achieve and whether some ambitious targets would be met, there are other problems facing the ‘good governance’ Government that has failed to keep the pledges Maithripala Sirisena and his diverse backers made in the campaign leading up to the presidential election of January this year.

One of the major criticisms of the previous Mahinda Rajapaksa administration was that it had packed relatives of the First Family who had neither the requisite qualifications nor basic education into high positions at home and in diplomatic missions abroad.

Sirisena and his underlings pledged to wipe out nepotism, among other things, and bring clean governance to the country. But hardly had Sirisena occupied the presidential seat than his sincerity and integrity were tested. He broke a cardinal principle of his stated pledges by appointing one of his many siblings as chairman of Sri Lanka Telecom, the state-run communications provider.

It might have been a minor manoeuvre in the light of the significant political changes envisaged but it was a giant step for the younger Sirisena, who was previously the general manager of the state-owned Timber Corporation.

That apparently is not the end of the story. Sirisena Jnr proposed to increase his salary to Rs. 1 million a month, which was opposed by some board members. The media recently reported that President Sirisena had reconstituted the board of SLT, removing those who had opposed the salary increase.

The media also reported that chairman Sirisena and others were trying to buy up some ailing communications provider for a sum which is way above “double some claim” the true value of the company.

Whether this is factual or not, I do not know. But until I left Colombo the day after the budget, no contradictions appeared.

Returning to nepotism and cronyism

That started the rot in this new Government which promised to eschew the bad practices of the Rajapaksa regime. But the two-man committee of president and prime minister which was to monitor high appointments never seems to have left the starting blocks.

Former students of Ranil Wickremesinghe’s alma mater found themselves in lucrative and influential positions. Some claimed that Finance Minister Ravi Karunanayake planted his ex-police sergeant brother-in-law as chief executive officer of the Insurance Corporation, although he had no qualifications for the job and there was already a managing director.

According to news reports, Karunanayake’s relative has locked his office, preventing a person appointed to replace him from assuming duties.

Sri Lanka’s World Cup winning cricket captain Arjuna Ranatunge, who was vociferous about Rajapaksa’s nepotistic rule, appointed one of his brothers as chairman of the Port Authority, which comes under Minister Arjuna Ranatunge. The man has hardly any qualifications which would enable him to manage such a large enterprise, unless of course his failure as a cricketer (he played two matches for Sri Lanka) was considered the right requirement to manage the port.

There are so many other instances of friends and relatives being given jobs, while Rajapaksa loyalists from both the business and state sectors have wormed their way into the good governance Government.

During the one month I spent in Sri Lanka, disillusioned supporters of Sirisena’s ‘yahapalanaya’ (good governance) Government who had worked vigorously to bring a new administration into power were complaining bitterly that they had been cheated. And the criticism is growing.

Ven. Maduluwawe Sobitha Thero, a highly respected Buddhist monk who led a group of civil society organisations in support of cleaning up politics and restoring respect to politics that had been badly tainted with corruption, bribery and the emptying of state coffers for personal use, passed away in mid-November from a heart attack.

It is said it Colombo that the venerable monk died a disillusioned person for he felt let down with the promised reforms left unachieved, despite solemn promises.

Bickering and in-fighting, not only in the Government but within the cabinet, have turned the much promised ‘clean’ administration into a laughing stock, as those who emptied state coffers and led the way in sustaining a corrupt system under Rajapaksa still have their hands in the till. Already accusations of corruption against some ministers and lesser politicians are appearing in the media or doing the rounds among Colombo’s chattering classes.

Just last month the Minister for Law and Order, Tilak Marapana, a former attorney-general, resigned after he made an inappropriate speech in parliament concerning a highly controversial issue involving a company named Avant Garde, a floating armoury that provides security through on-board sea marshals to ships and firms plying their goods in the west Indian Ocean.

The Minister did the honourable thing by this rare act of hara-kiri in Sri Lankan politics. Unfortunately, some others who might be involved in the Avant Garde deal, where millions in cash and other perks are on offer, will continue to cling to office, tarnishing the name of the new Government.

Even sledgehammers are unlikely to prise them out.