Private sector expresses cautious optimism over PM’s policy statement

The Ceylon Chamber of Commerce welcomes the economic policy statement by the Prime Minister which provides important direction on the government’s future plans for the Sri Lankan economy. The private sector was seeking clarity on the government’s economic policy agenda and this statement has provided that. 
 

Large and persistent budget deficits have continued to be a source of macroeconomic instability in Sri Lanka for many decades and the chamber welcomes the moves to bring down the budget deficit to 3.5 percent by 2020. Tackling this must come from both revenue and expenditure sides. This will no doubt be a challenge, given that the tax to gross domestic product (GDP) ratio is currently around 10 percent. 
 

The chamber also cautions against compromising on important public investments in social infrastructure in the effort to substantially cut the deficit. The focus should be on ensuring efficiency of public spending and raising tax revenue in a way that does not hurt growth as well as equity. The indication that that the Super Gains Tax, and similar retrospective and business unfriendly taxes, will not continue in the future is encouraging, as such taxes hurt entrepreneurship and provide a negative signal to investors.
 

The proposed changes to the export policy and promotion regime are also welcome, including the creation of a new International Trade Agency. This will be critical in aggressively pushing Sri Lankan exports into current and new markets abroad. Sri Lanka has not as a robust and comprehensive trade policy strategy for some time now, while many other competitor countries have.

The chamber also welcomes the moves to manage the Employees’ Trust Fund (ETF) and Employees’ Provident Fund (EPF) independently from the Central Bank and this is an important step towards better governance of people’s pensions and ensuring higher returns to their retirement savings. 

Moreover, introducing a pension scheme for private sector workers is crucial to ensure that incentives on public sector jobs and private sector jobs are neutralized and this will contribute to some easing of labour market rigidities. However, other reforms to modernize labour legislation must also be simultaneously pursued to cater to the emerging needs of enterprises and workers. 

The focus on small entrepreneurs and regional economic development is also welcome, as there still remain significant gaps in prosperity between leading and lagging regions. The chamber strongly believes in integrating lagging regions through enterprise development.

Many of the areas of focus in the Prime Minister’s statement are those that the chamber has been advocating for some time and have been clearly articulated in the recently launched ‘10 Principles for Guiding Sri Lanka’s Economic Transformation’. They include: promoting a competitive and export-led economy, promoting high-quality foreign direct investment (FDI), good governance and an attractive business climate, innovation-led growth and rationalising state-owned enterprises (SOEs).

Overall, the chamber welcomes the government’s willingness to undertake vital next generation policy reforms to accelerate and sustain economic growth in Sri Lanka. It is now important that through budget 2016 and thereafter, the necessary legislative and administrative processes are introduced to fully implement the reform agenda and the chamber extends its fullest cooperation to the government in this regard.

 

The policy framework emphasises on rural economy development, women empowerment, uplifting of tourism, digitisation and improving the competiveness of the nation globally. The Prime Minister also pointed out he is looking forward in relooking the trade agreements and will give due focus on the efficiencies in the economy and pushing professional skills development.

Concerned we are about is the low-tax regime. However, overall the proposals are good in developing the economy. We welcome the policy statement.

Nevertheless, we stress that the implementation depends largely on the budget that the Finance Minister is going to present. If it is going to be in line with the policy framework and towards its aspiration, we are confident we will have a growth in the future. Good governance is imperative and we hope through this, most of these aspirations can be attained. 

We welcome the Prime Minister’s economy statement and the basic policy framework for the short and medium term. That has to be followed with an action plan with the budget, as well as the relevant ministry.

But for this country to go forward we have to strengthen our exports sector and that has to be given priority. It is not east to activate this sector in the short term. However, an enabling environment, coupled with the right policies will help us achieve the sought results down the line. 

We also welcome the value addition in the agriculture, particularly because of the plethora of problems the farmers are facing, increased value addition the paddy sector will help push that area forward. 

In the spice sector, if given the right enabling environment, support and budgetary allocation, we can certainly double our exports by increasing productivity and value addition. 

We note that this government is stressing a bit too much on FDIs but we would like the local investors to be confident in the same manner. While we realise the need for FDI, we would like the local entrepreneurs to also be given the same opportunities and concessions. We need technologies and effective marketing as well.

 

We believe that the Prime Minister’s policy statement lays the foundation to make Sri Lanka a vibrant and successful global citizen. However, the challenge would be to ‘walk the talk’. The government must cohesively work towards achieving that vision whilst facing the challenges it will come across during that journey.

Creating one million job opportunities, ensuring increases in income and exports are definitely positive steps towards achieving sustainable development.
Whilst creating new jobs, the government must ensure that the existing jobs are protected. When making revisions, the government should study the repercussions that could arise as a result of the revisions. 

The recent increases in import levies on confectionery fats (which are not manufactured in Sri Lanka) from 60 percent to 160 percent have affected the local confectionery manufacturing industry. It will compel local industries to increase the prices of their products. This will only pave the way for cheap and inferior imports thereby draining the hard-earned foreign exchange and risking the lives of the public. We have already taken this matter up with the officials of the Finance Ministry and trust it will be rectified soon.

For the prosperity of our motherland, it is of paramount importance that we, as a nation, should increase our exports and the LCMA is happy that the government is very serious on that. For local entrepreneurs to enter the global markets the government must remove barriers and facilitate their entry, especially the SMIs. 

The import levies on confectionery ingredients in Sri Lanka are the highest in the region and the duty rebate scheme, which is now in operation, is too complicated for small and medium industries (SMIs). Further, if the government can extend this duty rebate for third party exporters then exports will increase significantly. As a priority, the government should look into this so that the SMIs can embark on exports, earning much-needed foreign exchange.

Whilst appreciating the government’s efforts in obtaining foreign investments without which we cannot achieve our goal, i.e. be a prosperous nation by 2023 as mentioned by the Prime Minister, the government should also encourage local businesses to grow so that they can further invest in their businesses, as there will be no repatriation of profits then. The government should not continue with taxes such as Super Gain Tax as such will be an impediment for investments.

Finally, we are very confident that the government can achieve this goal as it has capable people in its fold to steer it.

The economic policy statement made by the Prime Minister in Parliament was important for the indication that it provided on the policy areas that the government is likely to prioritise in the next two years. There are three points worth noting about the statement.

First, despite the vast range of issues covered, there were also some very prominent gaps. For instance, there was no reflection on the burning issues of public transport and the protection of the environment. Second, the statement was pitched at the level of aspirations and provided little in terms of specific policies. There were over 70 aspirations set out in the statement, of which less than 50 percent could be counted as policy statements indicating some concrete action. Third, some of the specific proposals were surprising because they suggested that the government had already made up its mind on issues where greater consultation and evaluation are required. For instance, the proposal to amalgamate the EPF and ETF and create a pension fund is quite similar to a proposal withdrawn under huge public protests in 2011. The government should be careful not to rush through policies without due consideration of the public interest.
 

 

The vision articulated by the Prime Minister outlines many desirable reforms for the Sri Lankan economy - most importantly the necessity to revert to a more open economy with a focus on exports, FDI and enabling competitive forces to drive innovation and quality. 

The difficult part of this narrative is the political economy challenges entailed in dismantling protective barriers for domestic industries and particularly agriculture. This would require a clear understanding of winners and losers in reform and mitigating disruptions to livelihoods.

The Prime Minister also acknowledges the changing government financing climate where Sri Lanka can no longer afford a burden of large recurrent expenditure. Important steps such as rationalizing investment incentives (though new tax incentives also mooted), a shift to more direct taxation and an institutional framework for public-private partnerships (PPPs) for public infrastructure are highlighted. 

The political economy challenge in this instance is the need to gradually reduce the size of the state machinery of 1.3 million employees and 245 business enterprises. These not only entail massive expenditure but also divert resources away from private enterprise. Reducing the size of the state machinery is politically difficult, particularly in the context of a national government with divergent economic ideologies.

Given the importance of education as a foundation for driving economic competitiveness, there could have been more details of reform priorities in this sector. The Prime Minister mentioned the need for English language education, digitalization and class size but did not touch on key areas such as curricular reform, teacher training and creating accountability and competition to drive quality in education service delivery.

 

The market was expecting clarity with the new government but there was a delay. Normally the policy framework would be put forward within weeks of the formation of the new government. Until such a time market participants were indicating they required clarity. 

The policy clarity is a must, but even with the delay, this policy framework is trying to build the sustainability of the country based on international trade. The Prime Minister has reasons to opt for this path as the previous regime there were no strong efforts in promoting exports of the country. They were relying on a domestic market.

The new policy framework is a departure from that. The Prime Minister has said that he wants to have a market for Sri Lanka and more, which means the global market.This particular statement is a synopsis; it is not detailed. So every sentence in this has to be developed into a more detailed study and a comprehensive plan. For example, in pushing innovation, it has to be detailed as to how this will be executed. My opinion is that more work has to be done to convert these statements into a workable and operating economic plan. That has to happen in the next few weeks. The budget and the policy, both have to aim at moving toward one direction. The Finance Minister will have to do a miraculous job to align the objective and the structure of the budget to the policy statement announced. 

The budget should actually be the foundation for the economic policy which will be pursued by the government in the next five-year period. This means that the Finance Minister will have to make a number of painful adjustments in the budget, else the nation will not be able to generate a surplus.

​Overall, the policy statement is focused on medium to long-term sustainable growth plans. There is no doubt if successfully executed, this will benefit the economy. However, on all top of that to make it success, the present government needs to stay in power. 

Absence of national economic policy is a major the country is experiencing at present for the development and certainty. Lack of clarity on the government’s short-term policy plan is a major weakness in the policy statement. They should give priority to address the short-term expectations of the people to secure power.

Also, there should be a better understanding between government authorities. Short-term policy is uncertain due to lack of understanding between government authorities, for instance, the recent confusion in loan-to-value (LTV) ratio for leasing. 

Due to uncertain policy and political situation still investors are taking a wait and see stance. Expansion plans are stalled. Therefore, the government should give an equal priority on addressing the short-term plans while having an effective medium to long-term strategies. Finally, just to make a note that any medium to long-term plan will not be viable if the government fails in the short term. 

It is certainly pleasing to note that the Prime Minister in his policy statement to Parliament has clearly laid out the vision and way forward for Sri Lanka’s next phase of growth. The statement also lists various structural reforms such as revisiting the exchange rate management, setting up of a national pensions’ office, a trade development agency, etc., to infuse professionalism and focus on implementation.  The proposed new vehicle to oversee both the EPF and ETF has the potential to stimulate our capital market to play a greater role in wealth creation. Lack of adequate liquidity and the availability of sufficient ‘free float’ in listed equities have kept many a serious foreign institutional investor away from Sri Lanka. We now have a unique opportunity to improve liquidity and encourage the stimulus of the Colombo Stock Exchange (CSE). 

The key, however, is execution, setting time-based targets and accountability via regular information to the common citizen of economic performance against targets. Overall, a positive move to be welcomed.

Broadly there are many positives for the capital market in the policy statement. If you look at the measures such as the restructuring of the SOEs and the proposed plan in bring them under one umbrella and getting the holding company to be listed in the future will add liquidity to the market.

The plans of divesting some of the government holdings will also contribute to this.  Good governance that the government has been taking and announcing, have helped boost confidence. 

Foreign investor perspective is important and good governance is one area that they look at now. Sri Lanka, having that right, will help us attract investors and help us get into Morgan Stanley emerging market index. We are trying to move from a frontier market status to an emerging market status and these measures will help us reach that goal.

Looking at the market activity on Friday (6), the high activity in terms of value and volumes indicate that the market endorses this policy statement.

The communication void with respect to economic plans of the UNFGG government was partially arrested with Prime Minister’s recent speech in Parliament. It was a move in the right direction addressing the uncertainty prevailing within the participants of the economy. 

The speech was a mission statement and took a more visionary approach considering the next two years and five years. Fiscal consolidation, export expansion and education, were emphasized while providing a realistic target to narrow the government deficit to 3.5 percent of GDP by 2020. The creation of one million private sector jobs seemed more like a mission sans a strategic plan, though the forthcoming budget proposals may lay the foundation for achieving the same. 

Planned housing projects to create three million housing units while partially using state lands seems a positive initiative given this initiative would not burden the state coffers due to the structured loan scheme. The same projects could boost the construction sector, create jobs and also provide an avenue to launch REITs if tax advantages for investors are provided. 

Increasing tax revenues from around 11 percent to 20 percent of GDP is a great plan and the increasing the contribution from income tax from the current 20 percent to 40 percent is also positive. However, the mechanisms to make these plans a reality are still unknown. 

To increase tax revenue in a sustainable basis much is needed to be done: revamping IT platforms, preferential treatment or special recognition of tax payers, online tax declarations and tax filings, electronic scanners at ports, addressing concerns of bribery and corruption at all state institutions responsible for revenue collection, cessation of tax permits for all vehicle imports, etc., are some of the operational measures which are required to make the revenue collection targets a reality.

The creation of a Public Wealth Trust is a progressive initiative. However, to be effective and properly accountable, none of the trustees of the funds should be political appointees, if not the purpose would be lost.

Restructuring the Board of Investment (BoI), Export Development Board (EDB) and the Tourism Authority is also a positive and the timeline of three years is understandable though cohesive work could only start thereafter. Therefore, preference would have been if the timeline was shortened while concurrently working with the Agency for Development. 

The government exiting its investments in operating hotels and private hospitals is a positive and a move in the correct direction, which would be viewed positively by both domestic and overseas investors. Also, this keeps doors open for the possibility of diluting state ownership in many other government-owned institutions. 

The merger of both the EPF and ETF is a sensible move and independence for the planned merged fund seems to be given special attention which would be a clear positive. If going ahead, the government should attempt to further improve transparency of the merged fund making it mandatory for the fund to disclose all their holdings on a quarterly basis, given the fact the contributions are mandatory with the contributor’s funds been locked for nearly 35 years. 

A Central Procurement Secretariat is a favourable initiative, though the policymakers need to ensure it does not become just another bureaucratic administration centre answerable to a few sans parliamentary oversight. An Electronic Procurement system similar or better to that of South Korea could be the solution rather than boosting administrative units. 

More clarity is required on the UNFGG government’s currency policy, since a “competitive foreign exchange policy” could be misinterpreted. Currency management is to be removed from the Central Bank, but is to be managed by the Treasury? Management of foreign currency could indicate continuous intervention. So instead of a free float or a pegged currency, does this mean the local currency would be devalued on a periodic basis to ensure exports remain competitive in the global markets? If this is the case it would be a negative for the broad economy. We should not try to artificially boost exports by making the same extra cheap for overseas consumers through currency management, instead improve the manufacture and service quality of the exports.

Competitive advantage for exports can only be derived from the product or service been better than competition. Devalued currency would only provide a very short-term advantage for exports but could have long-drawn negative effects for the country by eroding its capital base and making the population poorer. 

In conclusion, the Prime Minister managed to communicate the medium-term economic plan and ease the prevailing tensions amongst the business and investment circles. However, this does not mean all is good and uncertainty has been addressed. To enact the proposed economic policies, the government should be stable and garner public support, which unfortunately seems to be waning. 

If history is to provide any lesson, parallels could be drawn with the 2002-2004 UNP government. So in order to implement the five-year economic plan, firstly the UNFGG government would have to deliver on the election promises on governance, become an exemplary and display its sincerity to the public, which would become the foundation for an automatic and sustained revival of the economy.
 

 

The stock market welcomed with optimism the Prime Minister’s speech made on Thursday, November 5on Sri Lanka’s upcoming economic policy framework to be proposed via budget 2016. ASPI jumped up by considerable 42.09 points to close the day at 7,059.48 whilst S&P SL20 surged up 30.51 points to close the day at 3,824.62.

It is encouraging to see the Prime Minister’s thinking on economic reforms to be put in place, hoping to create a lawful economic environment that will set the stage for sustainable development. In this context, he has highlighted key focus areas such as export competitiveness, new taxation framework, promoting investments, creating a wide and a strong middle class. 

Further, the proposed policy framework appears to be commendable and it requires bold leadership, political stability and professionals to realize the results. Therefore, it would require a strong commitment to bring about a dynamic change in the current administrative framework to reap the expected benefits. 


Export competitiveness would be a key priority – Great news
Given the global economic realities of slow growth, Sri Lanka’s deficiency in the balance of payments must be closely scrutinized. Therefore, it is great to see the Prime Minsiter has emphasized that a necessity of adapting a competitive foreign exchange policy, which will encourage and empower exports. In this backdrop, Sri Lanka may enlarge export markets towards India and China, entering into more trade agreements. Further, the regaining of GSP+ concession in European market will drive the country’s exports into new direction. 



PM’s proactive thinking on Trans-Pacific Partnership Agreement (TPP), key threat to Sri Lanka’s apparel exports
The TPP is an important development that took place for free trade between 12 countries including, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA and Vietnam. Vietnam is a big beneficiary of the TPP from the Sri Lanka’s textile export competitor’s point of view. The TPP will remove import duties to Vietnam’s biggest export market, which is the US, and this will have a big boost on the country’s exports (especially garment exports) going forward. Therefore, it is a timely move to assess the negative impact of the TPP on Sri Lanka’s exports and take corrective action. 



Tax revenue to be rationalized – New taxation framework to soften income disparity 
Minimizing the regressive tax contribution to the government revenue whilst increasing the progressive tax element through increasing direct taxes would be the priority of the government, dragging down the direct to indirect tax ratio from current 80 percent:20 percent to 60 percent:40 percent. 

As an immediate measure, the Prime Minister hinted that the government may remove all tax holidays and benefits in order to increase the direct tax revenue component. Therefore, we believe the majority of businesses may lose or reduce tax holidays, which are currently enjoying, while hampering their profitability in short to medium term. The removal and reduction of all tax concessions have been justified amidst a backdrop of a non-existent of war, low interest rates, setting of reduced petrol, diesel and energy charges. 

In our view, one primary reason for the income disparity to persist in countries such as Sri Lanka would be the existence of heavy regressive taxes which place a burden on people in the low-income category. Therefore, the reduction in consumption-based taxes may narrow the income disparity via generating a strong middle class.

On the other hand, we do not expect a sharp rise in corporate tax rates and other direct tax rates as they focus more on broad-basing direct tax net since the Prime Minister has pointed out his commitment to maintain a low-tax regime. 

On removing of retrospective taxation, the Super Gain Tax would be the most welcome move from the CSE front. This may take black clouds away from big players in the CSE including JKH, HHL, DIAL, PLC, LLUB, etc. Therefore, investors may feel fresh expectations on those company’s new investments, dividend payout and overall business growth, etc. 


Government will offer protection for local and global investors
We expect the investor community’s confidence could be further boosted through the Prime Minister’s decision of revitalization of ‘Revival of Underperforming Enterprises and Underutilized Assets Act’, which has been one of the painful policy decisions in terms of investor confidence under previous regime. Therefore, we believe the fate of Pelwatte Sugar PLC and Hotel Developers PLC will be resolved with this move. 

Further, from FDI front, that will be encouraging news, since it creates stable business environment.  



Middle-class housing projects to be promoted – Urban and semi urban land prices under pressure 
It is likely to see more middle class-targeted housing schemes in urban and semi urban areas, increasing the house ownership of the country. These housing projects will not be built in isolation but will be based on a sustainable plan that will see neighbourhoods created with hospitals, schools and shopping centres among other common amenities. Hence, the government may introduce low interest-based loan scheme for government servants. Further, the state land and tax concessions are granted for parties who will fund these ventures. In our view, this may create a downward pressure on the urban and semi urban land prices.

The policy statement is quite clear and comprehensive. It gives us, the private sector a guideline and a framework as to what to expect in the next few years. It seems very positive.

As a large local investor, we are confident having seen this. We await the budget proposal which should be according to this policy framework.

It was clear on the parameters on how the government balance sheet would be balanced, the budget deficit and the exchange rate. As the progress on managing that element was highlighted, there could be greater predictability that gives us confidence.

On the other side, the processes that will be implemented to get government to move out of non-core businesses and the existing business to run professionally also auger well. 

There is clear focus on tourism, foreign direct investment and private investment to drive the economy is also well appreciated. We don’t see any downsides in this framework. In the last seven to eight months, this is a good policy framework, one that creates a platform for us as to what we can expect.

The comments on the tourism sector spelt out in the policy framework are valid. Wanting to uplift the sector via zonal development is a highly necessary. The government must be the one to provide the direction. I fully agree with the statement here.

The framework on environmental tourist was spot on, since Sri Lanka is a small country with a lot of resources and diversity and we should not under any circumstances damage that. There is keenness in ensuring that tourism will protect it, rather than damaging it. 

The development of the SME sector is key, as it is a vital component. The majority has the impression that they should be formalized. They should, but not in a sense that will kill their creativity. It must be acknowledged that these SMEs have opened up a whole new segment for tourism in Sri Lanka. It is encouraging to see that they will not be stifled.

Looking to bring in air services was another area that augurs well for the tourism landscape as air connectivity is imperative. In that, it will be good if the option of having a proper internal air service could be explored. A regular airline, that is affordable, will certainly help boost tourism in all parts of the nation.

This all means that the sector can look forward to a proper, clear marketing plan, which the industry has lacked. We need not get excited and rush as currently we are going well. However, now is the time to map where the industry should go next. We need to sort out the mix for the industry so we can effectively cater.