A distortion of facts says former Deputy Finance Minister
[July 16, 2002 - 10.30 GMT]

Former Deputy Finance Minister Mangala Samaraweera said recent statements that the economy was grossly mismanaged by the former regime were incorrect and are a distortion of facts.

Mr. Samaraweera who is now the Chief Opposition whip in Parliament today issued a detailed report to the press.

Peoples Alliance Press Release

The Peoples Alliance has noted the recent statements on the economy made by the Prime Minister and the Minister of Finance. Both statements contain factual inaccuracies and material misrepresentations, which contribute to distorting the truth. Accordingly we believe it important to issue the following response in the public interest.

Moreover the UNP government having achieved a near zero percent growth in the first six months of 2002 and unable to contain let alone reduce the cost of living are seeking to rather disingenuously blame the previous government for its own demonstrated lack of ability and performance.  

The UNP prior track record in economic management is unimpressive. There was no long term plans for the economy, foreign aid was denied due to government corruption and the absence of a solution to the ethnic problem. The macro economic indicators in terms of the fiscal deficit, interest rates, inflation and unemployment were all higher than that of the past seven years of the PA government. 

• Average economic growth from 1983 to 1993 was only 4.7% per annum. 
• In contrast the average economic growth from 1994 to 2000, under the PA Government was 5.2 %

    (Source - Central Bank of Sri Lanka)

When the PA took office in 1994, it detailed a long-term vision for the economy and more recently articulated Vision 21 and detailed the same in Vision 2010. 

• This vision led to the creation of strong macro economic fundamentals, through reductions in inflation, interest rates, unemployment and the fiscal deficit. There were increases in investment and domestic savings. Significant public sector reforms were implemented and the private sector were made participants in areas hitherto kept as state monopolies such as steel, gas, airlines, telecommunications and the ports. 

• All time highs in foreign direct investments especially in infrastructure such as telecommunications and the port occurred. 

Independent and objective observers of the economy concur with this opinion for the World Bank states thus in its year 2000 country report on Sri Lanka.

“Despite the acceleration of the civil conflict in the 1990’s economic growth has been healthy due to good macro economic management and progress in trade liberalisation, privatisation and financial sector reform. Sri Lanka is today South Asia’s most open economy and has relatively well developed capital market infrastructure. Its per capita income of (US$820) remains the highest in the region after Maldives. Unemployment and inflation has fallen to historical lows, the external current affairs account has been strengthened, exports have diversified and expanded and foreign direct investment has risen” (World Bank Country Report – Sri Lanka, May 2000, Executive Summery page i) Accordingly the oft repeated charge of economic mismanagement by the Peoples Alliance Government is totally unsupported by the facts and merely politically inspired lies.

Further with regards the economic recession of 2001 there are allegations that it was due to economic mismanagement by Her Excellency the President as Finance Minister, but the MOU signed between Mr.K.N.Choksy and the IMF dated 1^st April 2002 and available on their web site on www.imf.org states thus.

• “Sri Lanka’s economic performance in 2001 has been severely affected by the adverse effects of the global economic slowdown and severe drought. Moreover political turmoil that occurred in the second half of 2001 hampered the previous government’s ability to adopt appropriate corrective policies and this together with the airport attack and events of September 11 reduced market confidence and exacerbated the slowdown”. (IMF, Sri Lanka MOU, April 2002, page 1, # 2)
• “Thus although external and monetary policies were on track, macro economic performance was disappointing”. (IMF, Sri Lanka MOU, April 2002, page 1)
• The economic program for 2001 has yielded positive results in terms of halting reserve losses and achieving external adjustment and financial stability. At end December 2001, net international reserves were over $250 million higher than at end May 2001. (IMF, Sri Lanka-MEFP, Section 11, # 2)
• “The Central Bank of Sri Lanka maintained a broadly prudent monetary stance in 2001, reducing interest rates cautiously” (IMF, Sri Lanka-MEFP, Section 11, # 3)
• However macroeconomic performance was mixed. Real GDP is estimated to have fallen by 1 ¼ percent in 2001, compared with a projected 4 ¼ percent under the program. This reversal reflects weak external demand, severe drought, the July airport attack and the events of September 11”. (IMF, Sri Lanka-MEFP, Section 11, # 4) Neither Mr.Choksy nor the IMF claims that it was mismanagement that caused a recession. 
• “The pace of fiscal consolidation was the weakest policy areas during 2001. The revenue shortfall was in large part due to the severe economic slowdown. However the political turmoil also precluded corrective measures”. (IMF, Sri Lanka-MEFP, Section 11, # 5) It wasn’t the PA government that caused political turmoil or engaged in destabilising conspiracies to topple an elected government.

Sections # 2 and # # from the IMF’s supplementary Memorandum of Economic and Financial Policies (MEFP), signed by Mr.K.N.Choksy as Minister of Finance demonstrate quite clearly that the PA government did not mismanage the economy, while sections #4 and # 5 gives the real reasons for the economic recession of 2001. 

It is also necessary to specifically respond to the statements made by the Finance Minister.

1. Firstly as to his contention that that there is no money for salaries, pensions, Samurdhi and fertiliser subsidy etc is wrong since a budget was passed with these expenses included. If there is now no money, then the government’s maiden budget is wrong. Further compared with Government revenue of Rs.278 Billion, the interest component is Rs.117 Billion. Capital repayment of Rs.209 Billion is to retire debt, which is then once again is available for future use on different terms. This is only a cheap political trick to justify the sale of public and strategic assets such as the Railways, the Petroleum Corporation, the CEB, the Insurance Corporation and the two state banks to political cronies of the Government without following any due procedures.

2. Secondly the Finance Minister stated that in 1994, there was a surplus in the Budget. This is factually incorrect. The budget deficit in 1994 was 10.5% of GDP. Total debt was 95% of GDP. The UNP never handed over a surplus budget to the PA in 1994. However the PA succeeded in reducing this to a deficit of 7.5% of GDP by 1999 and the public debt was reduced to 85% of GDP in the same year, thereby significantly reducing the government’s borrowing requirement and hence interest rates.

3. Thirdly the Finance Minister stated some statistics from 2001 to contend that the PA mismanaged the economy. However the year 2001 was an exceptionally bad year not only for Sri Lanka but globally. Not only did it follow an exception good year for Sri Lanka with a 6% growth in 2000 but faced the external pressures of a worldwide recession coupled with high crude oil prices and the internal pressures of a drought and the terrorist attacks on the airport. Japan, Singapore and Taiwan also suffered negative growth rates in 2001, amounting to –0.4%, -2.2% and –1.9% respectively. The Central Bank annual report for 2001 comprehensively analyses the exceptional and once in a lifetime combination of adverse circumstances of 2001.

4. Fourthly the Finance Minister spoke of economic collapse, but no such thing has occurred. In fact the major state owned institutions such as, the Bank of Ceylon, Peoples’ Bank, Sri Lanka Insurance Corporation, Employers’ Provident Fund, National Savings Bank, have all made profits in 2001.  In fact it was the UNP’s former President D. B. Wijetunge who is 1993 contended that the state banks were bankrupt, having previously directed that large loans without collateral be granted to cronies amounting up to Rupees ten billion (Rs.10 billion) each from the Bank of Ceylon and the Peoples Bank. Additionally a sum of Rupees ten billion from each of the two state banks were granted for the highly corrupt bus deal, all of which were investigated by the Commission on Irregularities in Government.  The Sri Lanka Insurance Corporation recorded a profit of Rs. 1.2 billion as a result of the restructuring programme under the PA government.

5. The Finance Minister contended that the EPF and the ETF are bankrupt due to miss management.  On the contrary the ETF was recently able to declare 11% dividend due to its superior performance in the prior year under the PA government. More over the EPF was significantly improved and developed from 1994 to 2001.  In fact the income of the EPF increased from Rs. 11 billion in 1994 to Rs. 30.4 billion in 2001.  

6. There were alarmists’ noises made by the Finance Minister on account of the national debt. What he did not state was that a significant proportion of the foreign debts were raised prior to 1985 by the UNP mainly to complete the Mahaweli project and repayment has commenced only now.  Of  the domestic debt of Rs. 816 billion, only Rs. 278 billion is short term.  In the balance Rs. 537 billion is payable over a ten year period on a staggered basis.  As per capita income increases in the future debt servicing becomes easier.  Per capita income increased from Rs. 28,843/- in 1994 to Rs. 74.760/- in 2001.  The misinformation regarding the EPF and the ETF is a cheap political ploy to justify the handing of the management of these funds to the private sector without any security or safeguards.  

7. Most importantly the government has totally failed to contain let alone reduce the cost of living.  The Finance Minister attributes this in part to conditions associated with the Enhanced Structural Adjustment Facility agreement (ESAF) entered into by the Peoples’ Alliance Government.  However, the memorandum dated March 19, 2001 entered into by Her Excellency the President as Minister of Finance contain no such conditions on the contrary such conditions are contained in the memorandum dated April 01, 2001 entered into by Mr. K. N. Choksy as Minister of Finance.  Both memoranda are public documents and are available on the International Monetary Fund (IMF) website www.imf.org.  Further the Finance Minister has agreed with the IMF to reduce the fertilizer subsidy to farmers introduce VAT at 20% and freezing of public service salaries for two years.  In contrast when the IMF insisted on 18% GST Her Excellency the president fixed the GST rate at only 12.5% to contain the tax incident on the public.  

8. The UNP government in general and its Finance Minister in particular have demonstrated their gross inefficiency and incompetence by their total mishandling of the introduction of the proposed Value Added Tax (VAT).  First due in July 2002 and now due in August, no preparatory work for the introduction of this tax has been done. Moreover, the government expects to raise extra revenue of Rs. 8.5 billion from VAT.  They propose to do so by getting commodities exempt under GST such as onions, chillies, lentils, powdered milk, dry fish, sugar LP gas and fertilizer to be liable for VAT at 10% leading to price increases in the cost of these items further increasing the cost of living.  

9. Further it is obvious that the Government cannot keep to its targeted budget deficit of 8.5% of GDP. Already revenue is Rs.8 Billion below its budget target. VAT has been postponed due to lack of preparation; the port levy proposed in the budget has been withdrawn. This year’s budget deficit according to latest estimates will be around ten percent (10%) of GDP.

10. Most insidiously this most inefficient government has heaped serious burdens on the common man. Electricity rates have been increased as have bus fares. Moreover the Government intends to practice a hiring and wage freeze in the public service, reducing real incomes and employment opportunities in the State sector. Further the VAT once introduced will impose a 10% levy on currently zero-rated and GST exempted items and all other items at 20% compared to the current combined NSL & GST, which is 19%.

When the PA handed over the reigns of government to the UNP in December last year its Treasury Secretary did not need to flee the country on an unpaid first class air ticket to London to only return as the Prime Minister’s Advisor after the UNP regained power with no interest to pursue the corruption of its prior period in office.

Accordingly this statement should receive the widest possible coverage in the public interest.

Mangala Samaraweera M.P.
Chief Opposition Whip & Former Deputy Minister of Finance
July 16^th 2002

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Last Updated Date: July 16, 2002  - 10.30 GMT.