Courtesy The Island

Even though it appeared as if the two partners in the government had closed ranks and resolved to carry on the unity government till 2020, new divergences of opinion appeared in the ruling coalition between the UNP and the SLFP (Sirisena faction) on the one hand and among Sirisena loyalists on the other. This was over who the candidate of the SLFP at the next presidential election was going to be. Sirisena loyalists like ministers Duminda Dissanayake, S.B.Dissanayake and Dayasiri Jayasekera want MS to be the next presidential candidate. In a suprising twist, minister Rajitha Senaratne who is also a Sirisena loyalist, has unequivocally said that the executive presidency will be abolished and there will be no presidential elections in 2020. Ajith P.Perera of the UNP has echoed much the same views. Minister Rajitha Senaratne appears to have cast his lot with the UNP and is now articulating the interests of the UNP rather than that of the SLFP (Sirisena faction).

After marking the second anniversary of Maithripala Sirisena’s victory everybody in the government now seems to be preoccupied with survival strategies for the future. Ministers like Duminda Dissanayake and S.B.Dissanayake obviously cannot think of any other option but retaining Sirisena as the presidential candidate. It does not appear to have struck them that Sirisena may not be viable candidate. His record as the president of this country has been wanting. The UNP voter who made him president last time will not make him president again because the SLFP which did nothing to make him president has got the best ministries in the government. The angst of the rank and file UNPer who can’t get anything done by the government he elected into power, is due to Sirisena’s pampering of the SLFP. While it is very unlikely that he will get the UNP vote, what proportion of the SLFP vote Sirisena can command is also open to question.

Last Friday, minister Susil Premajayanth was heard expressing the view at a meeting held in Malabe that if he had not been sacked by President Sirisena just 48 hours before the last parliamentary election, it would have been the UPFA that got the most number of seats on parliament and that such a prevention of an SLFP victory cannot happen again. He also said that there is a need to get both groups of the UPFA back together. Striking a completely contradictory line to that of President Sirisena and his closest loyalists like Mahinda Amaraweera that this government will continue till 2020, Premajayanth said openly that once a people’s movement against the government emerges, you can’t stop it and that things can change in a hitherto unanticipated manner.

Selling the family silver

Last year (2016) the government had hoped to raise a lot of money through the privatization of state owned assets. The revenue estimates in the 2016 budget had projected non-tax revenue of Rs. 378 billion as against the Rs. 126 billion raised in 2015  – an year on year increase of Rs. 252 billion. The policy announced in the 2016 budget was to form a government owned holding company similar to that of Temasek Holdings of Singapore. This public company would be operated based on sound financial principles and market economics. The shares of these enterprises will be passed onto a Public Wealth Trust, the shares of which could be traded on the stock market. There was also a proposal to set up a Special Purpose Vehicle (SPV) for the Southern Expressway and the Katunayake Expressway whereby private investors will be invited to invest in the SPV for which the government will guarantee a minimum return. The funds generated from the investments in the SPV were to be utilized to clear the national debt. Such an SPV was to be established for the Norochcholai coal power plant as well.

However none of these plans materialized in 2016. The non-tax revenue actually raised that year was just Rs. 144 billion. The increase in non-tax revenue projected for 2017 is Rs. 189 billion, a year on year increase of Rs. 45 billion. The finance minister said in his 2017 budget speech that non-strategic enterprises such as Hyatt, Grand Oriental Hotel, Waters Edge, West Coast, Manthai Salt, Hambantota Salt and Hilton would be listed during 2017 and this was expected to raise at least USD 1,000 million which was to be used to settle our debts. It is in this backdrop that the government arrived at a decision to give the Hambantota harbour on a long lease for 99 years for 1,080 million USD. A framework agreement has already been signed but the signing of the final agreement which was scheduled for January 7 ran into problems with Minister Arjuna Ranatunga (Ports and Shipping) writing that letter mentioned in this column last week.

The SLFP group in the government appears to have distanced themselves from the ceremony that was held on January 7 and only one SLFP minister represented the SLFP group. It is in this context that minister Lakshman Kiriella had said that if the Hambantota deal does not go through, taxes will have to be increased. Ven Medagoda Abhayatissa Thera had personally gone to see the president to request him not to privatize the port and the president had told the monk that the money was needed not just to pay off debts but also to meet day to day expenditure. If the privatization of the Hambantota Port takes place for 1,080 million USD, that will bring in Rs. 162 billion offsetting at least partially the shortfall in the non-tax revenue anticipated in 2016.

The question of course is what will happen if the UNP is forced to cancel the sale and settle for the other bidder? Last week, former president Mahinda Rajapaksa also put out a statement on the Hambantota deal saying that the other bid rejected by the government was more favourable to Sri Lanka than the one that has been accepted and as in the case of the Bond scam, there seems to be some consensus that has been built between the SLFP group in government and the Joint Opposition as regards the Hambantota deal. Even if the other bid is finally accepted, the government will still get an upfront payment of 750 million USD or Rs. 112 Billion which will provide much needed relief.

This column has pointed out on an earlier occasion that there was a massive increase in tax income from Rs.1,050 billion in 2014 to Rs.1,356 in 2015 – an increase of Rs.306 billion in just one year. But that was achieved due to the massive import of cars during 2015 which increased customs income from Rs. 557 billion in 2014 to Rs. 790 billion in 2015. The super gains tax imposed on the business community increased income tax revenue from Rs. 69 billion in 2014 to Rs. 105 billion in 2015. You can’t keep increasing revenue in that manner. Last year, taxes on vehicles were increased and there are reports to say that this caused a reduction in the import of vehicles with a concomitant reduction in tax revenue. The price of cigarettes was increased and there are reports to say that the consumption of cigarettes and the tax income there from has halved. As the government loses revenue from these sources, they have to meet the shortfall from the sale of national assets which is why there is this unseemly scramble to privatize the Hambantota harbour and alienate a further 15,000 acres of land to foreign parties.

In the meantime, the government has been crowing in triumph at being able to get the GSP+ trade concession back. It certainly came at an opportune moment and would help somewhat to offset the embarrassment suffered over the Volkswagen fiasco. A new German Ambassador has taken over in Colombo and everywhere he goes he is asked about the Volkawagen factory. He was the chief guest at a Rotary club meeting held at the Galadari last week and he said in his speech that neither the Volkswagen company or the German embassy had anything to do with whatever was started in Kuliyapitiya. Then he attended a Newsline programme at Sirasa with Faraz Shauketaly and said much the same thing and even drew attention to the other controversy that arose about the Italian rubber products manufacturer who is supposed to have set up a factory in Horana which the principals in Italy seem to be unaware of. The government badly needed the diversion that was provided by the decision of the EU to grant GSP+ to Sri Lanka again.

GSP+ over the years

At this present moment, there are eight recipients of GSP+ – Armenia, Bolivia, Cape Verde, Kyrgyzstan, Mongolia, Pakistan, Paraguay and the Philippines. When Sri Lanka is granted GSP+ we will be the ninth nation to benefit from this trade concession. At the time Sri Lanka lost the GSP+ trade concession in 2010, there were 15 beneficiaries in this programme.  Armenia, Azerbaijan, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Mongolia, Nicaragua, Peru, Paraguay and Sri Lanka. We see that nine nations have dropped out since 2010 – Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Nicaragua, Peru and four new nations have joined since 2010 – Kyrgystan, Cape Verde, Pakistan and the Philippines.

The question that all Lankans should be asking themselves is, if this is such a desirable trade concession, how is it that there is such a large turnover in the list of beneficiaries? If this is a trade concession that can alter the destiny of a nation for the better, why would any country drop out of it? The truth of the matter is that GSP+  is the most unsuccessful trade preference programme ever launched by the EU. This was started in 2005 to promote good governance in middle income countries by making them sign and adhere to 27 international conventions in exchange for getting zero duty access to the EU. The beneficiary countries would be monitored by the EU for compliance. This scheme was a flop from the beginning because very few countries want to lose their sovereignty in exchange for a trade concession.

When the GSP+ programme started in 2005, they had 16 original members Armenia, Azerbaijan, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Mongolia, Nicaragua, Peru, Paraguay, Sri Lanka and Venezuela. Of these countries, only Armenia, Azerbaijan, Georgia and Sri Lanka were genuine applicants; the other 12 nations – Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Peru, and Venezuela were nations that were put into the GSP+ programme by the EU when the World Trade Organization shot down the Special incentive scheme for drug producing countries which had been started by the EU in order to help those countries to move away from drug production into conventional economic activities.

From the very beginning, the EU had the discretion to decide whether they would pursue the implementation of the 27 international conventions or soft pedal it.

The 16 original beneficiaries of the GSP+ were not equal. The countries affected by narcotic production would have had no problems even if they violate all 27 conventions in broad daylight. The scheme of preferences they were under earlier was given to them unconditionally and it was only too plain by the manner in which all of them were simply absorbed into GSP+ when the ‘drugs programme’ had to be jettisoned; that this was a continuation of the drugs programme under a different name. However the genuine applicants for GSP+ would have come in for scrutiny if the EU did not like the government of that country – which is what happened to Sri Lanka in 2010.

GSP+ is not an incentive given to the garment producers at the Sri Lankan end. It is a concession given to the importer at the European end so that the importer will not have to pay duty when importing garments from Sri Lanka which will motivate the importer to import more from Sri Lanka which now has this trade concession which is supposed to work for the benefit of the recipient. So we have to realize that Sri Lankan garment factories may not get anything more than they are now getting per piece of clothing after GSP+ is restored. The volume of clothing ordered may increase but without a significant change in the price per piece that the local producer gets. Someone may argue that it is not just the garment industry that benefits from GSP+ and that tea, coconut products, other items like?fish, cut flowers, vegetables, fruits and ceramics can be exported duty free to the EU if GSP+ is restored. GSP+ will no doubt help the exporters of such items especially because exporters of produce like cut flowers and vegetables will not be hamstrung by rules of origin issues. But how much can SL export of these items? Fish, vegetables and fruit cannot be exported in quantities that will starve the local market.

The EU has stringent ‘rules of origin’ criteria to prove that the goods originate in the GSP+ recipient nation. Goods produced with raw materials imported into a GSP+ recipient country can qualify for the duty concession if it can be proved that the raw material has been sufficiently worked or processed to qualify as an item produced in that country. In the garment industry for example, for an item to qualify, it is not sufficient for the garment to be sewn in the recipient country. It has to be preceded by at least two or three other processes such as the weaving of the fabric, printing, bleaching, shrink resistance processing etcetera. Besides, there is the condition that the value of the unprinted fabric should not exceed 47.5% of the ex-factory price of the finished product. So it’s not easy to qualify for duty free status in the EU. The EU’s regulations allow for raw material originating in the South Asian region in countries such as Bangladesh, Bhutan, India, Maldives, Nepal and Pakistan to be considered to have originated in Sri Lanka.

Why we should aim for LDC status

The Sri Lankan garment industry did not fall when the GSP+ concession was removed.  Quite to the contrary, the industry continued to grow at around 6% to 7% annually even after the GSP+ was removed in 2010. The Sri Lankan garment industry was doing well before GSP+ was obtained in 2005 and it continued to do well after 2010 when the GSP+ concession was withdrawn. So the question is why do we need this concession? We will in reality be putting our sovereignty on the line for very little. Besides, the principle on which the GSP+ concession is based is in itself a perversion of the original philosophy behind the Generalized System of Preferences that was mooted by UNCTAD in the late 1960s. The idea then was to give the least developed countries duty free access to the EU and as a country develops, it would move up to paying a concessionary import duty and at the final stage, the usual import tax would be charged once the country is a developed nation.

When the garment industry first began in this country, we were at the first stage of receiving duty free access as one of the least developed countries. Now we are on the second tier – the ordinary GSP scheme paying a concessionary import tax when our goods enter the EU market. That is the normal progression. If you have an export industry that is unable to make it through this natural progression and is perpetually dependent on zero duty access to foreign markets, that is not a sign of progress. This again is another reason why none of the great exporting nations in Asia have applied for GSP+ because it can condemn a nation to perpetual dependency on concessions which can unilaterally be withdrawn by the EU at any time. Even at present, the EU guarantees the continuation of the GSP+ scheme only until 2023.

If at that time the EU decides that it cannot continue with these trade concessions, we will be left high and dry after becoming dependent on exports to the EU. Zero duty access even after a country reaches middle income status breeds dependency. Sri Lanka provides a striking case study in that respect. Before receiving GSP+ in January 2006, this country was exporting to the EU under the concessionary rate of duty applicable to the Standard GSP scheme and exports were growing year by year. Then for five years from 2006 to 2010 we enjoyed zero duty concessions under the GSP+ scheme.  From the time GSP+ was withdrawn in 2010, we have been hearing a chorus of voices saying that the economy is going to go belly up unless we get GSP+ back. What we see here is a country that was doing just fine without GSP+ prior to 2005 reduced to the level of a supplicant for duty free access after just five years of GSP+.

This is obviously why no major exporting nation has ever applied for GSP+.  It would ruin the existing levels of competitiveness and spawn industries which are unable to survive without special concessions. The biggest success for the GSP+ scheme up to now is in managing to rope in the Philippines, the most successful exporting nation they have among their beneficiaries. But this seems more a political move during the presidency of Benigno Aquino III than anything else. The roping in of Pakistan is not really an achievement because they were originally one of the countries in the ‘drugs programme’.

This writer has suggested previously in this column that if Sri Lanka wants to enjoy duty free access to the EU without any conditions, the way to do that would be to once again become one of the least developed nations.  Another way of getting duty free access to the EU with no conditions is to become a narcotics producing country and getting GSP+ on a platter. But because of the difference in the rules of origin conditions between the programme for the least developed nations and GSP+, it’s not worth our while to get GSP+. We should aim for least developed country status because that comes with much less stringent rules of origin criteria.