Policy inconsistencies and communication gaps in presidential election campaign - 1


by Jayampathy Molligoda

According to Chairman, Election Commission, 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 17th itself as there seems to be that a fairly clear mandate will be given to one of the leading presidential candidates, though 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 voters have by now already decided whom to vote for, except the floating voters, radical youth and a few others, totaling 20%, may refrain from voting on the 16th November. 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% of the GDP and the tax revenue was only 11.9% of the GDP, whereas the total government expenditure was 18.6% 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 majority of people.

Role of Micro finance companies and micros & SMEs:

Re: micro finance loan ‘write-offs’, in general the micro finance institutions (MFIs) have a mechanism to enter in to 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 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. However, there is a perception that all micro finance loans are to be written off from ‘Micro finance’ companies to other micro enterprises as well. If that is the case ‘Micro finance’ companies won't be able to absorb the losses. This has already happened last year and most of the ‘micro finance’ had to face severe difficulties, because of Minister, Mangala Samaraweera’s similar decision in 2018.

My view is that there should be a comprehensive assessment of the loan portfolio and case by case analysis to ascertain who the deserving cases are before any action to write off any micro finance loan is taken. The top officials of treasury, Central Bank and Association of Micro finance practitioners also share the same view. Initially this could apply to five government financial institutions, namely co-operative department, RDB, Agrarian development department, Divinaguma and Lankaputra bank. The above five government departments' loan portfolio was Rs 282 billion and poor beneficiaries’ deposits by end Dec. 2018 was Rs. 382 Billion. In addition, there are 37 Micro finance/finance companies and these licenced private companies have now claimed reimbursements under the government’s debt relief schemes. This has happened in 2018 partly due to the fact that MFIs have been charging very high interest rates from high risk small businesses. Here, a sum of Rs 1.4 Billion (only) was written off as capital and interest, where MFI had to bear the interest forgone and there is a delay in getting reimbursement of capital from treasury in three years. In addition, there are unlicensed MFIs. These institutions need to be properly regulated in future. In addition to the above micro finance operations, there is this SME sector financing, which is a massive Rs 828 Billion by 17 banks in 2018 under different loan schemes, which includes 'Enterprise Sri Lanka' and ------ළිය. This was financed under a credit line of UD $ 175 million from ADB and other credit lines.

The possible solutions would include: Government to arrange, in future a low interest line of credit finance to Micro finance institutions. These MFIs need to be properly supervised by the Central Bank. In addition, there is a need to establish a ‘MSME secretariat’, a regulatory body for SMEs and Micros. At present the SMEs come under the Ministry of Industry and Commerce. This needs to be taken out from the Ministry and start from the district level to support MSMEs. It is suggested to reduce VAT and introduce a new threshold level, provide support in problem solving, Labor issues, Tax issues and empower MSMEs with acquiring knowledge, support to find markets, finance. etc., and more importantly providing finance literacy.

‘Samurdhi’ and ‘Janasaviya’ programmes; Why both?

The government implemented a number of welfare and social security programmes targeting the needy people in the society and as per Finance Ministry report 2018, the relevant expenditure was as high as Rs 329 Billion, when compared with Rs 310 Billion revenue from income tax including 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 others in need never gain access. In other words, it’s not targeted properly and as a result there is a mis allocation 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 %.

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 educated youth of this country. Therefore, proper policies need to be developed in order to transform ‘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, what Alibaba did was that Alibaba has introduced programmes and models to end poverty across counties in China. With its "Internet + Poverty Reduction" model, offer 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, the presidential candidates have already mentioned at the election rallies that the plantation worker salaries would have to be increased– one has indicated Rs 1,000 increase and another candidate has promised a sum of Rs 1,500 increase per day. Since 1995, the plantation worker wage negotiations are through a collective bargaining process between the trade unions and the plantation companies facilitated by the Employee 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 companies also have to be mindful to the fact that the sector is interwoven with the socio-political fabric of the society. However, as per the collective agreement entered into between the parties, the next wage increase is due only by December 2020.

Cash flow situation is in bad shape:

As can be seen above, the Banking and the financial systems are in bad shape, NPLs declared are not real, real NPLs are much higher. The tax system is so complicated even with rate increases, the tax revenue was decreased to 11.9% of GDP in 2018. The revenue collection from Income Tax was only Rs 310 Billion, whereas revenue from VAT was Rs 462 Billion (in-direct tax) which should be other way around. The exchange rate appreciation as suggested by experts should not be artificially handled in order to bring the present rate below Rs 160 per US $, 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

(to be concluded)

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