Global crisis still echoes in Sri Lanka:

Latest positive factors bound to offset impact

by Gamini WARUSHAMANA

The impact of the global economic crisis still reverberating, the New Year would be a challenging one, said the Deputy Finance Minister Ranjith Siyambalapitiya in an exclusive interview with the Sunday Observer. However, the new economic opportunities open with the liberation of the North and East provinces will offset these negative impacts, he said.

Q: How do you assess the achievements of the government during 2008?

A: It was a year with tough internal and external conditions and therefore the year that had passed was extremely challenging. It was the third year in the implementation of Mahinda Chintana policies. From the beginning, the implementation was a challenging task.

However, we are happy that we have achieved our targets. By the end of 2008, we have achieved victories in the military campaign against terrorism which we will complete during this year.

On the development front, a large number of mega development projects were being implemented. In the rural sector while a large number of development projects are under way and we had invested a lot of money on rural infrastructure development.

Q: According to the doom forecasts backed by the worsening global economic crisis, the New Year will be more challenging. What are the plans of the government to face such a situation?

A: Early 2008 we had to face the worst situation of the oil crisis, during the middle of the year it was the food crisis and again the impact of the global economic crisis. Already all our major export sectors are experiencing the negative impact.

Apparel, tea and rubber sectors are already affected and even the rural people, the growers and smallholders of tea and rubber are in a crisis. Since this is a global scenario and all the countries including major economies are equally affected we do not have isolated solutions.

The sectors will recover with the recovery of the major economies together with the restoration of global demand for those commodities.

However, the government offered relief packages for the industries which include waiving off loans, banning the import of natural rubber, fixed green tea leaves and rubber prices. All major economies including China have slashed their growth forecast for 2009. There may be a slow down in the economic growth than expected.

However, there are positive factors. Our policies have started providing benefits to the local economy. We are 90 percent self sufficient in rice production. Subsidies provided to the agricultural sector such as fertiliser subsidy even under difficult fiscal situation, have created a boom in the agricultural sector.

Most importantly the Northern and Eastern provinces will contribute in a major way to the growth of the local economy after decades. We have extensive plans to develop these areas and the economic activities will improve in the region. Also the domestic demand too will increase once peace is established in the area.

There are lots of abandoned, untapped natural and human resources in the area. Agriculture and fisheries sectors have great potential to develop. Also peace will help rejuvenate the tourism industry in the country. These positive factors would offset the negative impact of the global financial and economic crisis.

Q: In the last few months there were crises after crises in the financial institutions posing a threat to the banking system in the country. Who is responsible for this situation?

A: The Central Bank has intervened on time and there is no threat at all to the banking system. The Central Bank can only educate the people on the risks in investing with unregistered financial institutions but cannot name such institutions.

Therefore people have a responsibility to compare the high returns as well as the safety of their investments.

Q: This is a very popular issue. But how does the government escape from its responsibility at a time even when prestigious commercial banks paint a dubious picture?

A: The Government does not escape from its responsibilities. New legislations are required. We will bring amendments to the relevant financial regulations. But the reality is that the informal financial sector in the country is very large.

It includes not only Sakvithi and the Golden Key but includes various instruments such as “SEETTU” in the villages where people save money totally based on trust among the groups involved. We can’t regulate this huge system.

Q: Is this the mechanism used by authorities to facilitate the black economy and money-laundering?

A: No. We don’t allow black economy or money laundering. There are countries that facilitate the black economy and had achieved success. As a signatory to the international conventions against money laundering we never allow such institutions. We will probe the depositors, their tax compliance and the way they earned the money.

Q: Government’s tax policy is under heavy criticism and critics say that the government is imposing unfair taxes. As the Minister of State Revenue, what is your view?

A: Our tax policy is very clear and there are three objectives: generate revenue, manage revenue and minimise income inequality. This argument is based on the high tax we charge on petrol.

In taxation charging higher tax from price inelastic goods is a common practice. That is the rationale behind the high tax on alcohol, cigarettes and petrol. We charge a high tax on petrol to earn the income. It is also used to manage the revenue. We charge low tax from diesel and kerosene.

Also we have introduced subsidised petrol price for three wheelers. Encouraging people to use public transport is another objective. On the other hand it is used to minimise income inequality. Most of the petrol vehicle users are rich.

The issue with the tax policy is high indirect taxes that do not contribute to minimise the income inequality. We have to change the tax structure.

Q: Opposition accuses that the government is wasting public funds and they point out various controversial deals such as hedging agreement and Mihin Air.

A: The issue of the hedging agreement is with the Supreme Court and I can’t comment on it. The deal was entered into at a time when the crude oil prices were skyrocketing and if the trend had continued the country would have benefitted in the long run. However, the trend reversed, unexpectedly.

There was a need for a budget airline for the country because the migrant employees working in the Middle East and the pilgrims to India and Mecca cannot afford the rates of other commercial airlines.

During the short period of time the Mihin Air carried over 200,000 passengers to these destinations. The first attempt, of the venture unfortunately failed. But now we know the existing demand and the viability of the venture and we have relaunched it.

Last year, globally the aviation industry faced a difficult situation and not only Mihin Air but reputed airlines too were affected. In the transport sector we maintain the CTB and Railway without a profit and on Treasury funds because transportation is crucial for the smooth functioning of the economy. However, Mihin Air will be successful and will show profits.

Q: But you spend this money during a difficult fiscal situation where the government has to depend on foreign commercial loans.

A: Economic priorities of a government is based on its overall economic policy and these criticisms are based on the re-gaining Sri Lanka policies.

We work according to Mahinda Chintana policies. In our policies there is no revenues from selling State properties. Rural people, expatriate Sri Lankan workers are on our priority list and therefore our priorities are different from those of our critics but in line with our policies.

As Sri Lanka is classified as a middle income country today we have less concessional finance and therefore we have to depend on commercial borrowings.

Also we are not ready to get conditional loans that force us to follow reforms that go against our economic policies.