August was not a good month for the Government – private sector relationship

By Charindra Chandrasena

In August, while the Government celebrated its third anniversary and touted its achievements in reforms and fiscal consolidation, the LMD magazine showed that business confidence had plummeted to its lowest in nearly 6 years.

The LMD-Nielsen Business Confidence Index (BCI) for August, released on Friday (7th), had fallen below the psychologically important 100 mark at 95, which is below the index’s 12 month and all-time averages of 110 and 129 respectively.

The last time the index was this low was June 2012 was when Sri Lanka was grappling with the United Nations Human Rights Council’s (UNHRC) resolution in March that year alleging war abuses.

Nielsen’s Managing Director Sharang Pant noted that despite exports growing by 9% in the first four months of 2018 and tourist arrivals and earnings rising by a healthy 15% in the first six months, businesses are yet to witness an uptick in demand. He added that consumer wallets remain under pressure from new personal income taxes that came into effect in April and two rounds of fuel price increases, which have pushed the National Consumer Price Index (NCPI) upwards.

However, the BCI was not an isolated indictment of the Government in August in terms of the private sector. At the much talked about ‘Fireside Chat’ held at the end of the month, many of the private sector’s frustrations with the present situation were vocalised by six of Sri Lanka’s most powerful businessmen.

At this forum, Access Engineering Chairman Sumal Perera asked for a business friendly policy environment, or “policy patronage”, instead of policy inconsistency and rude shocks to the private sector, particularly in terms of tax policy changes. Dilmah founder Merrill J. Fernando lamented the level of corruption in public sector administration, and asked how private sector recommendations can be trusted to be implemented by the administrators. Dhammika Perera, arguably Sri Lanka’s richest man, noted that Sri Lanka has slipped to 111th in the World Bank’s Ease of Doing Business index and noted that significant foreign direct investments would not be forthcoming until the ranking is improved.

Referring to the frequent trade union actions and protests, including the railway strike in August which resulted in a loss of more than Rs. 70 million to the Railways Department, business tycoon Harry Jayawardena said that the “curse” of Sri Lanka is its lack of discipline. Softlogic Chairman Ashok Pathirage went as far as to say that Sri Lanka needs “a dictator”, as there is a lack of strong and decisive leadership in the country.

Beyond the LMD index and the Fireside Chat, Susantha Ratnayake, Chairman of Sri Lanka’s largest listed conglomerate, said that its subsidiary Ceylon Cold Stores (CCS) witnessed a 16 per cent decline in volume partly due to “the significant price increases taken to mitigate the introduction of an excise duty imposed on the sugar content of carbonated soft drinks in November 2017”. He made these remarks in CCS’ quarterly report which was released in August, and added that the sudden introduction of regulatory action in this regard in the absence of a systematic approach towards engagement with the industry resulted in a negative impact on CCS.

Also in August, corporate giant Hayleys PLC Chairman/Chief Executive, Mohan Pandithage revealed that the company has put on hold plans for the World Export Centre, a twin tower project with 55 floors each, due to a lack of government concessions which have been offered to other similar projects.

Global real-estate consulting agency Jones Lang LaSalle (JLL) said that there is confusion following the announcement of amendments to the Value Added Tax Act certified by the Speaker on 16th August. The confusion is about the effective date of termination of the exemption of VAT, as per the amendments, on the supply of residential accommodation, other than lease or rent.

It said that while it would appear that all sales of condominium properties in Sri Lanka over Rs 15 million now attract VAT at 15% of the sale price, in addition to Stamp Duty and NBT, the industry is currently rife with speculation that further government announcements may clarify the effective date of imposition as 1 April 2019.

“This only adds to confusion over government policy and fuels industry wide gloom, compounded by a lack of clarity and consistency from policy makers. While it is difficult to find anyone who welcomes the removal of the exemption and therefore imposition of VAT on residential sales with immediate effect, history tells us that a fake ‘gold rush’ of sales to beat the deadline, if 1 April is confirmed, followed by a dramatic fall off afterwards is just as unwelcome,” the report noted.

From the Government’s end, it gazetted a series of amendments to the Finance Act in August to give effect to several revenue proposals in Budget 2018. These included taxes on cellular towers, luxury motor vehicles, and vehicle entitlement and carbon emissions. Furthermore, taxes have been slapped on the annual renewal of company registrations while all financial institutions have been called to pay a Debt Repayment Levy in a bid to reduce the country’s debt burden. For a private sector already burdened with taxes, and affected by underwhelming consumer spending, this would not have been thrilling news.

In response to the railway strike, President Maithripala Sirisena appointed a commission to revise state sector salaries and eliminate anomalies, another measure that may eventually add to the tax burden on the private sector.

The President also appointed an independent committee of prominent economists to study and compile a report on the Singapore – Sri Lanka FTA, which has been met with fierce criticism from the opposition politicians and industry bodies. While it is debatable whether the private sector wants the Singapore FTA in the first place, it still throws further doubt on the Government’s decisiveness, strength and implementation capabilities.

It must also be remembered that in late August the Joint Opposition (JO) threatened to bring Colombo to a standstill on 4th September with over 200,000 supporters converging on the city in a massive show of force. While the actual rally turned out to be a PR disaster for the JO, the threat at the time was very real considering the previous rallies of the party and its stunning performance at the Local Government elections, and may have forced the private sector to worry about renewed political instability.

To exacerbate the private sector’s loss of confidence in the Government, the Rupee hit an all-time low in August, and while this was mainly down to international developments stemming from the US, the private sector would have been affected nonetheless.

However, addressing the inaugural Sri Lanka’s Most Admired Companies awards yesterday (9th), Prime Minister Ranil Wickremesinghe said that debt servicing necessitated collecting higher revenues and that the Government is now in discussion with the private sector on necessary changes.

“They (the taxes) are results of discussions with the IMF but we realised there were going to be problems and we said let the first year go by and then make adjustments. Already, we are in discussions with the private sector on what amendments have to be made and those have been fruitful discussions.”

He said that the Government is bringing out a new paper on trade adjustment and how to help Sri Lankan companies over the next five to 10 years as Sri Lanka adjusts to a more global economy.

“This paper has been approved in principle by the Cabinet and has been put forward for discussion with the private sector.”

These are encouraging signs for the relationship between the Government and the private sector, and if the Government genuinely engages with businesses the LMD Business Confidence index may see a spike in September.