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'We have chosen more arduous path to rebuild economy'

The Present State of the Economy

Mr. Speaker, an objective and frank assessment of the state of the country’s economy at the beginning of the current year is an essential and unavoidable prerequisite to the formulation of the budgetary policy for 2002.

I therefore will commence my speech by placing before this House and the people of our country, to whom every Government is accountable, the true state of Sri Lanka’s economy which the United National Front Government under the premiership of Prime Minister Ranil Wickremesinghe inherited when elected to office at the General Election to Parliament in December last.

I shall first set out the previous years economic performance followed by a brief assessment of the global economic prospects for the current year. I will then discuss key measures aimed at rejuvenating the ailing economy and promoting sustained growth through rationalisation of the fiscal system and increased private sector participation.

Our economy in 2001 plummeted with major sectors recording negative growth rates, the end-result of which has left the nation’s finances in a state of complete collapse as at December, 2001. Sri Lanka is currently in a state of economic paralysis. Economic growth which was 5.6 percent in 1994 has declined not merely to zero, but even lower down, to a negative growth of 1.3 percent for the year 2001. For the first time in our history, Sri Lanka suffered the shock and shame of negative economic growth.

The agricultural sector, with a decline in production of 2.3 percent, contributed to the sluggish economic performance in 2001. Drought conditions resulted in an output decline of our major agricultural commodities of tea, coconut and paddy. The output in the industrial sector also contracted. Industrial production contracted by about 3.7 percent during the year, largely due to a sharp decline in export oriented industries.

Inflation as measured by the Colombo Consumer Price Index rose to 14.2 percent in December 2001, placing an additional burden on the cost of living of citizens.

The dire state of our public finances leaves much to be desired. We have inherited from the previous government, an empty treasury coffer. While revenues have withered away, expenses have soared making budgetary management difficult. The end result has been a high budget deficit. The budget deficit for the year 2001 reached Rs. 152,219 million. As a percentage of GDP, the budget deficit rose to 10.8 percent in 2001. Total revenue of the government declined to 16.5 percent of GDP from 16.8 percent of GDP in 2000 while total expenditure of the government as a ratio of GDP, rose to 27.3 percent in 2001 from 26.7 percent in 2000. In spite of the increase in expenditure, public investment declined to 5.9 percent of GDP in 2001 from 6.5 percent in the previous year, impacting adversely the future productive capacity of the country. The politically motivated fiscal stimulus package introduced on the run-up to elections, also contributed to the slippage in the fiscal sector.

A negative impact of the above was that Government had no funds for public investment required to build a modem, competitive society with adequate social infrastructure. Our Prime Minister has drawn attention in his recent Policy Statement made in this House to the fact that government expenditure on education at present is 2.6 percent of the GDP. He noted that developing countries on average, spend around 3.2 to 4 percent of GDP on education. Similarly, with an ageing population in Sri Lanka, both public and private expenditures on health care will have to rise. Unless our economic situation improves, we will not be able to afford the health care that a decent society requires.

Over the next few years, this government is committed to correcting the under-funding of the social sectors. But this can only be accomplished once the government’s revenue position improves, and wasteful and unproductive expenditure is curbed.

The public debt stock of the nation stood at Rs. 1,450.6 billion in 2001, surpassing our GDP estimate for the year. As a percentage of GDP, it was 103.4 per cent. This figure taken as an average over Sri Lanka’s population of approximately 18.7 million persons means that every citizen, young and old, carries on his shoulder a liability of approximately Rs. 77,500/-, being his share of the country’s debt burden.

The unprecedented increase in the debt stock has been due to heavy and imprudent borrowings made by the government during the period 1994 to 2001 from both international and local sources. These borrowings were mainly used for unproductive but popular measures particularly at times of elections. The People’s Bank has become an unfortunate victim by reason of having to bear a major share of the debts incurred by public institutions. The Employees Provident Fund and the Employees Trust Fund were also heavily drawn upon. Despite the serious jeopardy caused by such action to the continuation of these institutions, I am alarmed to find that on 4th December, 2001, on the eve of the General Election, a Memorandum of Understanding was entered into by the People’s Bank with two other entities to construct a 20 storied "People’s Tower" with the stipulation that the Bank will occupy 50% of the floor area of the Tower. This Government is most certainly not going ahead with this project.

Equally alarming are the debt service payments made by the government. Debt service payments in 2001 amounted to Rs. 179,096 million, accounting for 12.8 percent of GDP. Interest payments at Rs. 94,307 million account for 31 percent of current expenditure. Interest payments per household amount to about Rs. 23,000/-.

To add to the catalogue of the fiscal burdens of the Treasury, the Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and the Co-operative Wholesale Establishment (CWE), incurred unpardonable financial losses caused by ineffective business and financial management practices adopted by these institutions. Their outstanding debt to the banking system as at end 2001 was Rs. 41 billion. The Railway and Postal Departments kept company by recording losses of Rs. 2.4 billion in 2001.

In the context of the above, the private sector understandably demonstrated little or no interest in increasing its investment in the formal economy.

The global recession and the events of September 11th in the USA wreaked havoc with our economy. The demand for Sri Lankan exports plummeted. Export earnings declined to US$ 4,817 million from US$ 5,522 million in the previous year, registering a drop of 12.8 percent in dollar terms.

However, a sharp decline in imports improved our trade balance significantly. Expenditure on imports dropped by 18 percent. As the decline in imports by far outweighed the shortfall in export earnings, the trade account of the balance of payments improved in 2001. The trade deficit narrowed to US$ 1,157 million from US$ 1,797 million in 2000.

Foreign investment in Sri Lanka shied-away in view of the on-going conflict in the North and East of the country which the previous Government was unable to contain, and the prevailing unattractive fiscal position. Revenue from tourism was adversely affected by the LTTE attack on the country’s International Airport in July 2001 and the global repercussions of the events of September 11th in the United States. The attack on Sri Lanka’s International Airport resulted in the imposition of insurance surcharges on sea and air transport to Sri Lanka, further inhibiting foreign and local private sector interest in our economy.

The lack of foresight and planning in the energy sector has led to a severe power crisis, which adversely affected industrial production and added to the lack of confidence of local and foreign private investment. No effort had been made over seven years to increase production of power. The excessive and fragile dependence on hydropower showed up prominently during the drought conditions that set in at the end of last year, and still continue.

The stock market — the businessman’s barometer of investor confidence remained stagnant as a result of the above dismal financial picture.

It is thus evident that the nation’s economy is severely bruised and battered, and remains beleaguered with negative figures on all sides.

Mr. Speaker, the conglomeration of the above factors has frozen growth while making budgetary management extremely difficult.

Despite soaring international petroleum prices and a major hike in defence imports, the then government in 2000 did not respond appropriately to a deteriorating external economic environment. They slavishly defended a weak currency which ultimately triggered a widening current account deficit. This led to a serious erosion of our external reserves starting in mid-2000. By early 2001, Sri Lanka was in the midst of a balance of payments crisis, which left the government with no alternative but to place the rupee on a free float and to negotiate an emergency stand-by loan with the International Monetary Fund. Ultimately, this improvident policy of high interest rates drove the economy in to a deep recession by the third quarter of 2001.

However, Mr. Speaker, I hasten to emphasise at this point that the new Government, whilst it owes a duty to the people to make them aware of the true state of the economy as inherited from the previous regime, is not doing so with the object of making excuses and seeking to avoid the task ahead of it. Whilst we must necessarily take stock publicly of the country’s present financial predicament, we are yet committed to the task of nation-rebuilding, which we held out to the voters of this country last December, and which trust they placed in us in ample measure. We then made a solemn pledge to our people to change the face of our nation, to lead the country out of the internal conflict that has torn apart the fabric that bound all Sri Lankans together, to lead our people out of the degradation of poverty, and to revitalise the economy. This Budget represents our first step in redeeming that pledge we made to our people.

Our Prime Minister held out the promise that he will bring an early end to the hostilities in the North and East. This he has succeeded in doing within the short period of 100 days of assuming office. The signing of the permanent cease-fire agreement between the Government of Sri Lanka and the LTTE has been the first and sure step on the road to national peace and economic revival. Its immediate result has been to re-win international confidence in our country and to re-inject aspiration and hope in the hearts and minds of all right thinking citizens.

WHICH PATH SHOULD WE FOLLOW?

The Government has two options to choose from in turning-around the present state of the country’s economy.

The first option is to pass the burden on to the people. This we could do by way of additional taxes, customs duties, loss recovery charges, and other short-term revenue raising measures. This would be the easiest path for the Government to tread. Yet we have decided not to do so. As a responsible Government whose first duty is to protect the interests of society and particularly the less privileged sectors of society, we consider it most unjust and unfair to make the people pay the price of the mishandling of the economy over the last few years. Furthermore, to do so will be wholly unproductive. It will freeze development and be counter productive to investor confidence in the system.

The other option is to implement well considered and well structured fiscal measures and incentives immediately to revive investor confidence, increase growth and reduce recurrent expenditure in areas which do not yield corresponding dividends. We must rationalise the fiscal system and remove bureaucratic constraints so as to attract private investment into the formal economy. We will take immediate measures to activate the rural economy and by doing so reduce unemployment. The State should be the facilitator, and the private sector the developer of the economy.

We have chosen this more arduous path because it is the honest and sure path to tread in rebuilding our economy for long-term benefits. The serious lack of liquidity the Government is faced with may inevitably cast some measure of burden on the people at the outset, but we shall endeavour to cushion this as far as it is practicably possible. The public, we have no doubt, will understand the prevailing situation and soon see the overall and ultimate benefits of our budgetary measures, and opt for these, rather than short-term temporary gain. Implementation with commitment will be the Government’s rule of conduct.

The correctness of our choice is already surfacing. The Policy Statement of the Hon. Prime Minister made in this House and the 100-day Programme of the Government have commenced a gradual revival of trade and investment. The global economic outlook for 2002 is showing signs of improvement, with the more affluent nations such as the United States of America and countries in Europe gradually emerging from the recession.

Our Budget for the current year will indicate the immediate measures necessary to revive the economy and increase productivity and employment. Nevertheless, these measures also contain in them the germ of the Government’s future plans and will be the percussor of the economic principles which will continue through 2003 and 2004. Planned and consistent development will thus be assured. It is not possible to implement all the reforms necessary at one stroke. We have done what we could in this first Budget to liberalise the economy. This Budget will lay the foundation which will be built upon and expanded in the Budget for 2003 and then onwards.

THE FOUNDATIONS

No new systems or structures can take root and grow unless the foundations are secure. The Government has closely examined and reviewed the entirety of the basic reforms necessary for establishing a growth oriented economy based on partnership with the private sector. To this end, active discussions have been held with the major business, trade and industrial chambers, civil society organisations, and also with our foreign donors. The major constraints faced by the private sector in participating more actively in developing both industrial and service oriented activities have been identified. Immediate reform has already been commenced to establish the ground situation which investors look for. These are deserving of brief summary.

• Good Governance

Planning, method, speed, and transparency are presently lacking in the conduct of government business. These are necessary pre-requisites to rapid and planned economic revival. The Ministry of Policy Development and Implementation under the Hon. Prime Minister has undertaken to spearhead this task. Project implementation by the Government will not be permitted to continue in the present haphazard and ad-hoc manner. Co- ordination and constant review of all policy decisions and their implementation have already commenced under the combined aegis of the Ministry of Policy Development and Implementation and the Ministry of Finance. This constant review will continue.

Good governance also requires transparency. No major expenditure will be permitted except after a full appraisal followed by Cabinet approval. Facts and figures will be made public. Defence expenditure has been a constant area of doubt. The office of a Controller General in the Defence Ministry will be created immediately, so as to regulate defence expenditure. This officer will function in consultation with the Ministries of Defence and Finance and an Arms Procurement Advisory Committee.

De-politicisation of the Public Service and the Police Service was an important aspect of the Election Manifesto of the United National Front Government. I am proud to record that whilst the United National Party was in opposition last year, we successfully spearheaded the enactment of the 17th Amendment to the Constitution. I was happy to be actively associated in this effort. Since assuming office, we have been persistent in attempting to secure the establishment of the Constitutional Council with the collaboration of the opposition in Parliament. We shall persist in our efforts so that the Independent Public Service Commission and the National Police Commission can be established and public and police officers made free of political intermeddling.

Mr. Speaker, I must emphasise here another important aspect of good governance. It is the strengthening of parliamentary control over public finance. Our Constitution provides that the Cabinet of Ministers is collectively responsible and answerable to Parliament. It also vests absolute control over public finance in Parliament. These Constitutional requirements could not be adequately fulfilled during the periods of the last two Parliaments due to lack of the presence in this House of a cabinet minister holding the portfolio of Finance. Very often, important issues relating to public finance thus stood inadequately accounted for. The new Government desires to requite in full these Constitutional requirements I have just referred to, and accordingly the Prime Minister has appointed a Minister of Finance who is present in the House to respond adequately to questions arising in the area of public finance.

• Freeing the Economy from Excessive Bureaucratic Control

Any system hidebound by excessive administrative regulations and procedures is bound to be unattractive and static. The Ministry of Finance together with other relevant line ministries has analysed the regulatory procedures that presently exist in areas of industrial development, trade, and the fiscal system. It is clear that considerable de-regulation is a pressing necessity. These areas were further explored recently at a joint conference between the state and the private sector. Many unmeaningful administrative requirements and needless over abundance of formal documentation were identified. These will be done away with.

The Government will therefore embark upon the following main areas of deregulation by simplifying and unifying procedures:

(i) Customs and Tariffs

A Tariff Commission will be immediately established. This Commission will be responsible for the updating and simplification of the tariff system from time to time.

The Customs Department will be re-organised to enable rapid clearance of goods. A land-site in close proximity to the Colombo Harbour has been identified and a cabinet decision taken to, construct a new Customs Secretariat at a cost of Rs. 600 million, with an electronic data information system.

The Customs Ordinance, which is well-nigh over 100 years, will be repealed and replaced.

(ii) Tax Administration

Sri Lanka’s tax regime is be-devilled by complexity. Simplification and deregulation are a critical necessity. Constant ad-hoc changes and the introduction of a variety of exemptions, concessions and tax holidays have created a tax system that is distorted and failed to meet the Government’s revenue needs. Our tax system has been unable to raise taxes lawfully due. The tax system has become virtually impossible to administer.

The taxation system will be simplified, made more rational and less burdensome, commencing with this Budget. At present, the business world and taxpayers are confronted by a whole array of different taxes, proliferating administrative procedures and consuming time that could be more profitably diverted to production. My taxation proposals hereinafter contained, will be directed towards eliminating overlapping taxes, reducing tax liability whilst broadening the tax-base and providing incentives for industrial and commercial expansion.

A new Revenue Authority, will be established. The Authority will comprise personnel of experience in tax administration and representatives of private sector trade chambers. The purview of this new Authority will be enlarged to oversee and co-ordinate customs and excise taxation too.

(iii) Labour Laws

Early amendments to the Industrial Disputes Act and Termination of Employment Act will be introduced so as to establish enforceable time limits on the hearing and decision of labour disputes by tribunals and arbitration panels dealing with such disputes. A schedule of specified compensation payable on termination of services, equitable by both employer and employee, will also be enacted.

(iv) Land and Land Titles

This is another area which requires to be liberalised from stringent and archaic rules. State land, which is not required for state purposes, but is commercially viable, will be made available to the private sector at commercial prices. Vesting of absolute title (subject to constraints against fragmentation) in those presently in occupation of state land under permits, will be completed so that such land also becomes commercially transactable. A new enactment to simplify Registration of Land Titles is presently under preparation.

• Revitalising the Rural Economy

Agriculture and its products have been the life-blood of the greater portion of Sri Lanka’s population. In the last decade, the agricultural sector’s growth was around 2 percent per annum. Measures have been devised to strengthen the farming community. These form part of the budget proposals to follow. A sustained thrust will also be made to develop small scale and medium enterprises in rural areas. The Government along with the private sector has begun implementation of donor supported programmes. We will help generate self employment opportunities for rural youth by making available capital goods required for this purpose. Additionally, they will be provided with training in management, so as to enable them to successfully sustain their vocation.

• Infrastructure Development

Infrastructure development in all parts of the country has been static since 1994. The development of our roads, railways ‘and harbours is a must for macro-economic programmes. Over the last three months, the Government has successfully had intensive discussions with our donor agencies and countries to finance these infrastructure projects. The upgrading of rural schools and hospitals is one such item in our agenda in this respect.

With the cease-fire, the uplifting of hospitals, schools and transport has already commenced actively in the North and East. Donor projects have established sub offices in these parts of the country and work has commenced on an active basis in collaboration with the relevant line ministries.

• Private Sector Participation

Effective competition is the surest path to progress and development. And so, an important underlying theme of this Budget and the new Government’s successive budgets is to provide a framework within which the private sector can operate without unmeaningful restrictions and excessive taxation. Many of the proposals contained in the Budget are directed towards this end. But in doing so, the Government has not been unmindful of the necessity of ensuring that the benefits accorded to the private sector to develop themselves, and thus the economy, are not enjoyed by a privileged few. Its benefits must also reach the less privileged sections of our society. The private sector undoubtedly recalls the youth unrest that swept our country on two occasions since independence. Its recurrence will retard progress. The private sector must therefore be mindful of this important factor both in its own interests, and that of the country. Social stability is essential for economic growth. The Government will therefore be providing incentives for private sector growth, subject to certain schemes whereby some part of the benefits derived by the private sector from such incentives will be channelled either individually, or collectively by corporate entities, into training educated youth in job oriented spheres. I shall deal with this more fully when making my taxation proposals.

• Employment Opportunities for Youth

This is a high priority area of the Government. As I have just said, the private sector will be co-opted into this vital area of the country’s march towards economic and social equanimity. The on-going Samurdhi Scheme will be reoriented so as to ensure that only those justly entitled to participate will be the beneficiaries.

The National Youth-Corp envisaged in the Election Manifesto of the United National Front will be commenced with this Budget. The core of this scheme is not merely to provide a dole for consumption expenditure. Instead, deserving and educated youth will be provided with an allowance and given a job-oriented vocational training under the guidance of the State, and thereafter provided with the working capital required to set themselves up, particularly in self-employment.

Fully subsidised education since Independence has earned for our country a reputation for high literacy and educated human resources. The expenditure over the last 50 years on education cannot be allowed to result in youth disappointment and frustration. Poverty and unemployment are the twin-foes of democracy. The benefits of our education system must therefore be channelled into the development stream.

• Medium and Long-term Development

The objectives and proposals spelt out in this first Budget will be carried forward further in our successive Budgets. The Government is formulating a three-year strategic programme to revitalise the economy and to reduce poverty. The Strategy, which is to be completed and presented at the Development Forum in May, is a comprehensive approach designed to place Sri Lanka on a path of sustained growth and development. Detailed implementation plans of the strategy will be available by August-September of this year. Raising the rate of economic growth is at the heart of that strategy.

The main policy initiatives could be summarised as follows:

• To turn the negative growth of last year to a growth figure of 3.5% to 4% in the current year

• To reduce the Budget deficit of 10.8% to 8.5% of GDP.

• To stem the increasing tide of the current public debt.

• To reduce inflation from the existing 14.2% to at least 9%.

• To curtail recurrent expenditure. This has already commenced through the Appropriation Bill.

• To increase capital expenditure over the medium term.

• Output based budgeting or allocating funds to governmental agencies based on their actual performance will be the criteria for future budgeting.

• To increase growth of the rural economy through agriculture and development of small and medium enterprises.

• To exit the State from loss making public utility services.

• A series of fiscal measures have been included in the Budget proposals to enhance incentives (including tax reductions) to expand existing businesses and promote start-ups.

• Private enterprises will be encouraged to invest, not only in the Western Province, but also throughout the country. We plan to create five Economic Zones out of the 25 Administrative Districts and set up an Economic Commission for each. Within these Commissions, we will establish business promotion authorities to encourage the private sector to develop industries, tourism, and agriculture in a planned manner. A new BOI law will be passed, which will include the establishment of BOI investment promotion offices in these five regions of the nation.

• New Tourism Development Zones will be established in selected tourist areas, where currency and other restrictions will not operate in respect of companies registered with the Tourist Board.

• State lands will be released in Greater Colombo, Moratuwa and Kotte Municipal areas for property and other development purposes to private enterprises.

• Capital markets will be developed by eliminating the tax on capital gains, reducing dividend taxation, facilitating private pensions and introducing new capital market instruments.

• A new Central Bank Law, Banking Law, Company Law, Law on Intellectual Property and Securities Law will be passed to strengthen the soundness of the banking system and to ensure that commercial transactions take place on a proper legal footing. A new Exchange Management Law will replace and improve upon the Exchange Control Act to make Sri Lanka more attractive to investors.

• Restrictions on the sale, lease and transfer on rural lands will be removed. Through this process, some 1.2 million freehold land titles will be issued by Government, covering an extent of 2 million acres of land.

• In the sphere of power and energy, an Energy Supply Committee has been established and emergency measures are being taken to expand energy generating capacity in 2002 and 2003. Another 150 MW of capacity has been installed and will be fully operable in a few months time. Public sector will implement the Upper Kotmale Hydro-power project. All future power generation projects will be undertaken by the private sector. Tax incentives are being provided. The establishment of the 2 X 150 MW combined cycle power plant at Kerawalapitiya will be accelerated to avert a possible power crisis in the year 2004.

• Construction of the Southern Highway will begin this year and will signal the start of a multi-year effort to construct a modern expressway network. A National Expressway Authority will be established to provide high level professional management and to ensure that the social concerns of resettlement are adequately addressed.

• A new Telecommunication Sector Policy will underpin the independence and authority of the telecommunications Regulator. International voice telephony and fixed wire line services will be liberalised. This will promote competition and help lower costs, especially for the Internet and other value-added services.

• A national IT road map will be developed. The private sector will be encouraged to establish viable rural tele-centers, including cyber kiosks. Wherever possible, Government facilities will be automated to improve the quality of services provided to the public.

• The quality of basic education will be improved by upgrading teacher training and establishing school management boards.

• The Government will focus health efforts in building the necessary infrastructure and improving the quality of health resources in districts where there is a critical mass of technical manpower, so that health services can be provided more efficiently at those levels rather than concentrate on central provision of services.

• A new Social Welfare Benefit Law will be passed to establish the legislative base to target social assistance to eligible persons without politicisation. Clear eligibility and exit criteria will be established to limit the programme to the truly needy. I shall deal with this further later on.

• To ensure that women’s concerns are better reflected in our political system, the Government will consider making specific provision for women representation in elected bodies when the amendments to the existing electoral systems are discussed by political parties.

• The press will play a vital role as a neutral watchdog, reporting on the way in which Sri Lanka’s scarce public funds are utilised. There are several laws in place that hinder the freedom of the media. We will rescind most of these laws this year including the criminal defamation law. Our policy is to ensure that the state media will act impartially and that our citizens are made aware of how their public finances are used. In this connection, measures will be taken to bring down the cost of newsprint.

• Public enterprises will adjust their prices upwards or downwards in accordance with current costs of production or services.

• Available loan and aid assistance has been grossly under-utilised. Measures to rectify this and take greater advantage of the goodwill of our donors have already been put in place.


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