RESTRICTED Report No. SA - 24a r _I This reoort was preprired for use within the BRank alnd its rffilioted orgnnizations. They do not accept responsibility for its accuracy or completeness. The report may not he nublished nnr mayv it k nianteel nc rPre,rPcPnting their views INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENr INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC SITUATION IN rGVT E N (in two volumes) VOLUME II PTTTr.Tr VTTNANTC1' Ar.-PT.TTT.TTTRP7. ANT) TNT)TT.-TRV Apr.il 55, 1971 4TT1DD'TMhcV GYf'TTT A T 1TrPT' QJUiUi.Jg'4-J1 E.j.zv VZ.L V Ll .LL' UuvLerlcy ULL"L - J-'-n P IT - ver . 1 rL. rroior to aovui',uer 21 1 US $1.00 = Rs. 4.76 Rs. 1 .00 US $ 0.21 Rs. 1 million = US $ 210,000 After November 21, 1967 US $1.00 o Rs. 5.95 Rs. 1.00 US $ 0.17 Rs. 1 million = US $ 167,000 PREFACE Ts rar n-+ -as pe d -4 a -m - -.-.- L ~ S V ~ .'..t '-.4 -') 1'L.LiO,JLVJL L-V11Lp1.I.i.LD Lg Mr. Manfred G. Blobel (Chief of Mission), Mr. Alfr4 ' ,. CeVeLLLUa (General L orLUOU),LJ Mir. Vladimir Dragomanovic (Industrial consultant), Y1 Dr M BaJl U. ftCKVaL.vD.J.Y (GUe1,.ra.L hrwUVI"utj), Ma'ssrs. Stanley Please and Walter B. Stolber (Fiscal Econo- -.SIS) ard IMr. Tae nee Yoon_ _Ag17ou±tLuz.al E-or-wmist). The mission was in Ceylon from mid-November to early Dejcember 1970. TABLE OF CONTENTS Page No. B4SIC DATA CMAPT FRS T, PITRLTC FINANCE sA TNTRODTTnTTON 1 B = r-VFRNMFRNT SAVTNGS AND INVESTMENT 1 Co GakT-7TFRNMF,NT R FV RNT F 2 D GOVci R R.Thi'. ,R1E,T FpR'J\mTThRR 7 E. PR.OPEC PPARTVMC; AIN T14. 1970/71 RTTTrnP 1]2 L. rIjAWr'Thrri () rOF Ct-mwTMN7'T TTYPNDTTTMfE 21 G I STTf"- ADV 2' 054-aC-itl~- Mml~h1a o.r3A Av3v1c.v0QQ II. AGRICULTURE; A. INTRODUCTION 27 B. REVIEW OF OUTPUT TREND p1 C. STRATMIFM FOR AGRICULTURAL DEVELOPMENT 37 Statistical Tables III. MAN-UFACT'URING A. RECRN± STR-UCTURL CuHAhiGES ih B. STATE INDIUSTRIAL CORPOGATIONS 51 C. POLICY ISSUES 50 Statistical Tables BASIC DATA Area_: 25,332 square miles Population: (1970 estimate) 12.6 million Rate of growth ('1970 estimate) 2.55 p.a. Population density: (per sq. mile) to total area 496 to arable land (1964) 1,171 Gross National Product: (1969) Rs. 11,770 million (at, current market prices) Rat,e of growth at constant prices (1969) 5.7% Rate of growth at; constant prices (1960-1969) 4.5% Real incamne growtlh (1960-1969) 3.5% GNP per capita (lZ$ equivalent at official rate) $157 Gross Domestic Product at Factor Cost (1969) Rs. 10,925 million Of which (%): Agriculture 34.8 Manufacturing 11.7 Construction 6.0 Transport and Communication 10.0 Trade 15.7 Other Services 21.9 (Average) % of GDP at Market Prices 1969 1961-69 Gross imrestment 19 15 . Gross savings 13 13 .1 ral anoe of pay-Ments current accournt deficit 5.9 2. ' Investment income payments 0.9 0.6 Government reveriLe 21.1 21=5 Resource gap as a percent of investment 35.6 18.1 Sept. 30, 1970 Ange( Rs. million 1961-1Q70 Total money sunnIv 2?05 5.6 Time and savings deposits 933 11.9 Bark creclit to oubieo seetor (net! ? 2,576 12.0 Commercial Bank credit to private sector (gross) 1 ?32 10.1 Public Sector Operations Rev. Estimates Average Annual. 1969/70 Change (%) (Rs. million) 1960/61-1969/70 Goverrment current receipts 2,760 7.3 Goverrment current expenditure 2,576 7.1 Surplus/Deficit 184 Irregular Govermnent capital expenditure 930 6.7 Total external assistance to public sector (net) 189 Sharp decreas-;e from 19fk Rxternal Public Debt (US3$ million) December 1970 Januar 1968 Total debt outstanding (including IlMF drawings) - US$ million 574.8 304 Debt service ratio to export 1970 (est.) 1968 earnings (excluding 1MF repurchases) 15.5% 70 Short-term Debt (less than 1 year) - LJS$ million 129 2 Balance of Payments (115$ million) 1970 1969 19(8 (Provisional) Total exDorts 335 321 33: Total imports 403 446 396 Current invisibles (net) -20 -15 - Net current account balance -88 -140 -6?, Tnr-rpase -in exchnngA reserves (-) 11 6 . Conmmno1ityv ('nnrentratinn nf RXnorts 1970 1 o561066 (ProvisiLonal) Average 1ea, rubber, coconmt products 90% 93% (3 maJor exorts) TrYnhanne Reserves (Ti$ mil1llion) 1970 1969 1 9Q1 -66 (Provisional) Average Liquid Balances Abroad 4.4 2.6 14 Lr drawing"s outsRtandig 8R 10o5 29 F.)ft;ernal Tna ni Ascis Q+anntc (TTCUk mi R1;7 19 rn-i'1 1 oA 1 OA7 1 966 i o"Ao Average Total disbursements 129 81 48 76 I. PUBLIC FINANCE A * LS*.LLbivJJJ .J,. 1- NTnlViirnm T (The Main ,R nror+) has emphas_zd +the crpci choices which Ceylon has to face if it is going to achieve a better balance between its social and gro.h objectives. Th.e extern-l constraints upon the econ- omy necessitate that the rate of growth of consumption be kept below that exnerienced in the 1960's if t.he flow of resources required for undertakLin the structural changes in the economy is to be adequate. These structural cha .eleS -r= in +hair +iirn~ ac2.can+j &I if' i ri+.lin 1 nra vi-, rii4-i-ii+ i Q +rn ,.- q, cha.n.ge I ar in their turn esenia ifn the longer run output istors more rapidly thus permitting consumption levels also to increase more rapidly. 2. Central to this basic policy problem which confronts Ceylon is the bOudgetlary proble... Br aiefy Lhis - zrise fro.- the, fac' thz,4 u,-lkmo; ~ UO~ J '.JL~.&~LI A JJ L4 , . AJ.' JLIJ UJ4CLI.. ~X t U WULIG U, ULAL-" IA\~W developing countries, Ceylon began its existence as a national sovereign state Aboh with ahg h t rat an' -t4A h a_cure i .. cmitusents social policies -- particularly food subsidies and education -- which have entaild.Le g1UW.LL1n 1rUUecurrt1 expendltU.reUUI1 UUob.LgationsJ.L1. Had Cey_ULo &Pet:1.LU1JU rapid economic growth, it is possible that these expenditure commitments co-l 'd have Ueen muet and, inr aU di ULI, ULIhaU adetqUateU J.UnUd sUUU LIVou Utfldhe e mobilized for stimulating and sustaining a high rate of growth of the economy. In fLac't Ceylon hasZt exUpteriLedltJU an avtrvagt ailluaL rate Uo grUwthl Uf les;j thlanl 5 percent during the 1960's and 2.3 percent per capita. At least one :impor- tant reason for this has been that domestic resources have not been adequately mobilized for the development of the economy. When all allowances are made for the problems of the market for tea and for the structural proDlems of the Ceylonese economy, the problem remains that even if obvious growth opportu- nities were to present themselves, the internal resources required to exploit these opportunities cannot be generated so long as the growth of government expenditure continues to stimulate consumption at the expense of investment. This conclusion is particularly true in a country in which the government has explicitly undertaken the responsibility for ensuring the generation of ade- quate resources fcir financing development. The wisdom of this decision is not here in question. What is in question is the recognition by the authori- ties: of the implications of the decision, for what this decision means is that, the government cannot simply regard the budget as reflecting its naarrow fina.ncial needs. The budget and the policies it reflects must be seen as the means by which the government is ensuring, firstly, that funds for develop- ment are being mobilized and, secondly that the total call on resources is being kept within the bounds of the total resources available (including a manageable level of capital inflow). B. GOVERNMENT SAVINGS AND INVESTMENT 3. Table 1 shows in summary form the broad nature of the problem as it has developed over the past decade. Government capital expenditure after being stable at around Rs. 500 million during the first half of the 1960's has now reached a level around Rs. 1,000 million. With government investment running some Rs. 500 million higher than in the early 1960's, the current surplus being generated by the government is little, if anything, higher than previously. The surplus has fluctuated very considerably during the whole decade so that it is difficult to talk of a trend or of a change in trend or in level. The most favorable interpretation of the statistics is that the level of government savings has been rising from around Rs. 100 million to around Rs. 150 million though with a fall in the estimate for the current year to a figure of Rs. 106 million. In other words, the Rs. 500 million increase in government investment has been matched at best by a mere Rs. 50 million increase in government savings. 4. By any standards both the total level and the incremental contri- bution of government to total national savings are inadequate. A level of government savings of Rs. 150 million represents little more than one percent of GNP and 5.5 percent of government revenues. Incrementally government revenue has risen by almost Rs. 1 billion since the mid-1960's so that the marginal government savings rate has been about 5 percent. It must be recog- nized that not only are these percentages extremely small by the normal needs of developing countries but that in the case of Ceylon the needs of govern- ment saving are increased by the high level of taxation. Government saving becomes of increasing importance to the extent that private savings capacity is reduced by reductions in disposable income. Government saving also becomes of increasing importance to the extent that the transfer expenditures of government encourage private consumption rather than savings. This is extremely important in the case of Ceylon because one-half of total current expenditure is classified as transfer xpnenditure of which. once again, approximately one half is on food subsidies and much of the remaining half is on pensions, reliAef' c.rh All these elements in transfer exnenditure are likely to encourage consumption rather than private savings. C. GOVERNMENT REVENUES 5. By all standards the revenue performance of Ceylonese governments has been veryr impnressive.Thesimple governmen±t reVni,e-rATP ratio thronii h- out the 1960's has been around 22 percent with a slight upward trend. If allowance is made for Ceylon's per capita non-export income, the export ratio and the share of mining in the GNP, it comes eighth in a ranking of -thle tax effort of 50n deve-loping couLties. Li VL.au is perihaps miori impressi UIItLha tihove UV l eLv.I. .Lu pVLIU e considered in aggregate is the manner in which this has been achieved and maintained. Revenues from,] export duties in the mid-1950's contributed about one-third of total government tax revenues anLd even in 1960-61, contributed 24 percent. Thley now represent 16 percent. Th1is decline is, of course, a clear reflection of the cost and world market conditions facing the tea indus- try and other export sectors and also of the rapid gro-qth of other sources of revenue. In a mechanical sense it is also, of course, a reflection of the structure of export duties on these commodities (these are outlined in an annex). 7. Tea is by far the most important export commodity representing 56 percent of total export earnings foliowed by rubber (18 percent) and three major coconut products (13 percent). The fall in tea prices in more than recer,t years together with the fall in ruDber prices particularly affected the duty collection. Yet, this decline was more than offset by increasing export quantities, by the increase in the rupee price after the 1967 devaluation and by changes in taxation, thus increasing the yields from export duties in absolute terms elven though they fell as a percentage of GNP &nd of total revenue collections. 8. Revenue i'rom income taxes has also grown sluggishly as a combined refleiction of the slow growth of the economy, tax concessions, the incidence on profits of increased indirect taxes and arrears in the assessment and colleIction of taxes. In any case income taxes only contributed 20 percent of tota]. revenues in 1960/61 and their contribution to the growth of total revenues up to 1968/69 was Rs. 70 million out of the total increase in revenues of over Rs. 1 billion. 9. Gjiven the structural problems of the economy which have made it impossible to maintain a rate of growth of revenues from export duties and income taxes which in combination could approach the growth of the GNP or the rate of growth of government expenditure, governments have had to develop the structure of taxation imposed on both imported goods and on domestically produced goods and services in order to generate additional tax revenue. The record in achieving this has been very impressive as compared with most other deve:Loping countries. In aggregate terms the income elasticity of indirect taxes has been 1.7. In order to achieve such a high rate of growth of indirect taxation, a continuing series of tax changes have had to be introduced. These have applied both *to imported goods and to domestically produced goods and services. Furthermore, they have both increased the effective rates of' taxa- titon and widened the tax net. 10. Of particular importance in relation to the taxation of imports has been the introduction of the FEEC scheme which in effect has represented a tax on all imports other than certain excluded categories. In fact revenues from FEEC sales are now half as large again as revenues from import duties (Rs. 450 million compared with less than Rs. 300 million of import duty- reve- nues). Whilst the primary objectives of the FEEC scheme have been concerned with the management of the balance of navments and particularly the more eff'icient utilization of foreign exchange, the fiscal impact of the scheme has been enormously imnortant. In essence what the FEEG scheme does from the fiscal point of view is to syphon off into the budget the scarcity rent which is attributable to foreign exehange. Of course to the extent that this high value of foreign exchange is required to induce an increased supply of foreign exchange by stimiilating exports; it is not a rent surnlus in the economic sense. As a consequence the only surpluses which are deemed to arise under thA FRRG1 sohAmA nrA thosA whinh AnnccI ton fnreian exnhange anrninraq hv the traditional export aectors of the economy. Through the FEEC scheme the overnment mo_biJiiJqeS these qsrplu.ses instead of nAm.itting them Aither to accrue to users of foreign exchange acquired at the official rate of exchange or t+o unoffician foreignv, exchange intermeedir arineiso COMPONENTS OF GOVER N IT REVENUE Direct Custcois /2 /h Taxes to Taxes to Duties ExTc)rt Import Taxes Tax Direct Indirect Revenue Cirrent Total to Total Dut is to Duties tc Taxes per 3apita Revenue .-evenue Taxes Taxes to GNI Revenue Taxes Taxes Export Impocrts per Canita i:n 1959 ____ (Rs.mn.) (Rs.Mn.) (rs.Mn) (Rs.Mn.) % % % % % (Rs. L Prices (Rs.) 196(,/l 1454 1212 5911 531 21.7 ;33.L 47.9 60.5 . 19. 122 122 1961L/62 1507 1274 582 692 24.0 79.3 L5-7 59.6 15L. 2;3.6 125 125 19b2/63 1583 1235 5'1 o65 22.6 78.1 46.2 54.3 1. 19.7 lci8 118 1963/6b 1617 1362 53 7 22.2 36.2 0.8 552 1.7 23.7 129 129 l9oo/05 1775 1432 637 795 22.8 dO.7 44.5 51.6 16.3 20 .7 131 131 1965/6b 1806 139'7 5L9 3B8 22.5 77.0 3'93 51.8 12.- 23.1 12u 12L - Joo/b 1'70 1L8o 5L? 927 21.1 75.4 37.6 50.0 12. 5 25.2 130 125 ];t./b6 2157 1o33 6c;6 982 ?3.8 75.9 h0.0 66.9 17.L 26.L 14C' 128 196a/bo 2482 1999 '705 1290 233.6 0.5 35.3 40.0 16.0 18.6 16? 159 19o)/70 /3 2737 225? 825 103o 23.3 52.5 36.5 29.5 1o.r 10.6 184 n.a. 1970/71 /4 2'766 235? 31-4 15145 22.2 85.3 34.5 27.7 16.6 '11.2 188 n.a. /1 in,lluding FEEC s. /2 hxcluding FEEG's. /3 Rtevised Estimatie. ThiF fiFrire dif'fers from the reviseed estinate of Rs. 2,753 givern on page of Volune 'i w :-s osec rn 7o;e r-eerj ,ala. This Table has not deen amended as it. provides- the basis for the oro-lectior exercise undertar:n later tn :-secr-. 11. The following table shows that whilst the combined revenue frcm 4lrL--oVr4tA ~4 Euies and AU, FEEC L s'r 'es has rsen -,^or- 4aiiJ - thn heru- LL I3j LAU UA.L ,tt~~ . LU. om.L~II ± .ljJ.J sCW &-L .~ .J~VLI ,iiIj I '; ~ CL UIACL.l UJI± J.PU value of imports, this is not true of revenue from import duties on its own. ii -dUL )L 4-L~J -LAL~ - -- 4.LA - -- ' ULP ;V JU Li .LI.JJ ua- U.U A .~ L71J-l- -in J ILn fLact a _30 percent LL%n cLas in' uthe Irupeey v 'ue of- -ulpvrt duO AJrin -L7uu a has been associated. with a 30 percent fall in import duty revenue. This fall IMPORTS, IMPORT DUTIES AND REVENUE FROM FEEC'S (i) ,I - ( ii) /P (iii) (iv) (v) Imports - Import uutiesR- import Duties to (ii) plus (v) as per- (mill.Rs.) (mill.Rs.) Imports(in %) FEEC (iv) cent of(ii) 1961 1794 435 24.2 435 24.2 1962 1906 465 24.4 465 24.4 1963 1869 398 21.3 398 21.3 1964 1960 482 24.6 482 24.6 1965 1922 436 22.7 436 22.7 1966 2018 477 23.6 477 23.6 1967 1985 544 27.4 544 27.4 1968 2356 514 ?1.8 514 21.8 1969 2653 460 17.3 285 745 28.0 1970 2400 301 12.5 447 748 31.0 /1 Imports are derived from payments data by calendar year. 72 Including import license fees. The import duties are by fiscal year (Oct.l - Sept. 30) with the year in the table referring to the Sept. 30 date (e.g., 1961 refers to FY 1960-61). has been precipitous since 1969. The fall is partly a reflection of thel introduction of the FEEC scheme which inter alia replaced the previous import license fee which in 1967/68 had generated Ri777 million in government revenue (included in import duties). In part it also reflects the fact that the FEEC scheme replaced import duties on some iterms such as industrial raw materials. 12. More importantly still is the general impact both of foreign exchange shortage on the pattern of imports and of long-term structural changes in the economy upon this pattern. Both of these factors tend to increase the relative importance in the import bill of those commodities subject to lower rate of duty. In a period of import austerity, the less essential and more highly taxed imports tend to be the first to be squeezed. It is, furthennore, these imports which are the first to be substituted by the development of domestic productive capacity. This process of substitution is itself encouraged by the high rates of effective protection typi¢ally given to such commodities. IJnfor- tunately the detailed statistical information required to substantiate these general propositions is not available on a systematic basis. In any case both the import duty structure and the rates of duty on particular commodities have been changed on several occasions. However on examination of the rates of duty on those imports (classified in the balance of payments data NOT the trade data) which have varied most markedly during the 1960's, confirms the importance of changes in the pattern of imports in determining the fall in import duty revenues. There have been significant reductions in the value of imports of, for instance, dairy products, sugar, tobacco and. beverages and textiles, all of which carry high rates of duty whilst significant increases have occurred in imports of chemicals, fertilizer, machinery and equipment, transport equipment, etc., most of which are imported duty free or at low rates of duty. An additional complicating element in this statistical analysis has been the entry into production since 1968 of domestic oil refinery capa- city. Previously these refined products had been subject to import duties at the 100 percent rate but domestic production is now subject to turnover Uax with a consequent fall in revenue from duties on mineral products from Rs. 154 million in 1968/69 to Rs. 37 million in 1969/70. 13. Revenue from taxes on domestic production has increased from over 100 million in the early 1960's to Rs. 700 million in the current year. Most of this increase has come from an all-round increase in the major sources of excise revenues, namely, sale of arrack, duty on country-made liquor and tobacco tax. Particularly the tobacco tax revenue was extremely buoyant rising during the six-year period 1963/64 to 1968/69 at a rate of 16 percent per annum. The turnover tax which was introduced in 1963/64 is less important than excise duties but it has been continuously increased in both rates and coverage so that revenue from it has risen from around Rs. 40 million in the mid-1960's to Rs. 111 million in 1968/69. Comparison with revenues in 1969/70 and in the current year is distorted by the inclusion of receipts from oil refining (see previous paragraph). In the current year turnover tax revenue is estimated at Rs. 279 million of which about half is likely to be from oil. 14. Tt, would; of course; he wrong to conclude from this review of the tax performance of the Ceylonese authorities that nothing more can, or should, be done to incrers reveniues lAlit has undoubtedly been impressive is the extent to which successive governments have -djusted the tax system to reflect chancres in the iinrli-rl-icng starrture f t nnom', Howevne-r it+ is apnprAnt from the balance of payments problem, from the need of the government to resort to borrovgT.7, rPom, ther bankin syte and f9rom t1ih r'.ein covrnman* savings performance -- all three magnitudes being interrelated -- that revenue perlonrnance has boeen, nadeqa+_ glven th-e1 lel of governmen +vitr The question arises, therefore, of where additional taxation could be levied. IM, s~ 4-. 4 . -.- - 'I .~--. 4 Ab- ,-n--,-9 --. ,nn4- V AnnA n-f Qn ILL-L m IIdu luer .1. Ual.V.tLA up d J. ulU UUJ uAL u J_74 Uil4 LA~U LdI.iA6 . J-' F- - -' andsmatter i9Up luer ln the context otp the recent budget propo a,nd of the general policy issues. -7- D. COVERNMENT CURRENT EXPENDITURES 15. ILL .L1I~.U 4LL~U~ ~UV L4 inad4equat -r, -l - I-d-- Lancen a period i n u- ch revenue performance has been impressive clearly suggests that the major policy problemas U lit i the 1 ofU.L agg-agae carrentl expend.Lutlu -leVeL adLIU growth. This is certainly a valid judgment on the Ceylonese problem and it is by no meains a iUoVe JugweiJut. u n ri h ULIe 1c±Sry ±i a J-UugIILIet W-hl'Li is in great danger of losing its validity and power through constant repetition. Ye t whatever this danger, tihe logic o f the Ceylonese reso-urce prvblem mus t be repeated, namely, that just as none of the past revenue measures have generated any marked increase in government savings, so, likewise, no future reveilue measures will do so unless the rate of growth of current expenditures can be curtailed. Tnis is not to argue that current expenditure must be cut; only that its rate of growth cannot be sustained. 16. During thei 1960's current expenditure increased by Rs. 1.3 bil:lion which roughly equalled the increase in total government revenues and was greater 4than the increase in tax revenues of Rs. 1.1 billion. The components of this expenditure and their contributions 1 the increase over the period are given in the following table and the nature of the problem is apparent from the tablel. 17. Firstly, it is apparent that the problem does not lle with expendi- ture on economic services (agriculture, communications, fisheries, etc.). Current expenditure on these services has only accounted for around 6 percent of total current expenditure and, until 1969/70, was in fact falling as a percentage of this total. Not only oulda relatively large proportionate cut in this expenditure be a small absolute amount, but, more importantly, this expenditure is in most instances an essential complement to investment outlays. Tt is little use- -or instance, increasing investment in irrigation without adequate expenditure on extension services. 18. Social service expenditure is dominated by education with current outlays of Rs. 470 million in 1969/70. Health accounts for Rs. 240 million whilst expenditure on housing, special welfare services and community services are rminor. The hilgh ratio of recurrent to capital expenditure in the case of e(ducation is we:Ll known. The importance of teachers' salaries within the totaL recurrent expenditure can also be seen in the following table showing the percentage breakdown of education costs: Education Costs Per Cent Teacher salaries 81.2 Non-teacher salaries 1.0 Debt services 1.2 Punil Welfare Services 3. 5 Facilities and Services 2.8 Teacher education L.9 Administration 5.4 OCGMENPrS OF GOVERlMlET lIDENDITU3L 2:-.i: c-e _- * / *i - rt v;_ /3 Bccccntc _cc:al Transfers Food RAial Real Current .crren:/2 ex2erdxitf ure expena2 .av'e Governr-ten Servec=s Services Payrnents Subsidy Expenditure Jlwenditure Public Yc-.31 r:~~~caii_sre ^s:~re^- Cut tr total tc tota: con5urnptzor t urenlt to curr,!rt to C(urren t to Current irl 1959Z6 :un 1959/6 Investnent Excenditure 0G d b-renditure Ex-snditurs exrernditurc exrenditure to GN? expendiL&ire exseniitr7 Ependitcure E&q4endituxe ?rices iPrices to GMP v- ___ --C Mn) _ ' _ -zs- ). L,.) (its.Yn% _ _____ (%) ____ (_ _% ____ (% ____ )__ _40 ~ 11) 12 7(13 3 -7.5 T322 14 75.§7 2I. 136 19/l 163 '?.5!.372 16 75.7 2u.3 13.6 6.3 c2G. 29.6 645.0 27.3 838 139'2 6.8 1161/62 15'37 ;'8.83 :17? h53 76.6 23.7 13.8 6.1 (18.7) 29.1 67.5 28.4 :1937 179 7.1 .- 163. 131-. 371 3J.3 17.7 16.0 7.6 ; .3) 29.5 47.7 78.4 1883 1512 5.3 17C63/11 2315 27.6 13588 627 78.8 21.2 13.9 7.3 ( 9.7) 29.2 148.6 27.L, 015 1588 5.9 1?5 -., 2101 27.0 1656 .d1.7 78.3 21.2 114.0 6.5 (18.8) 29.F 47 .6 26.7 2101 6514 5.7 2232 23.1 ::7o: 312 77.2 22.3 16.6 5.6 (11.9) 28.9 49.5 28.0 252 70 6. 1966/'67 2.143 29-3 1836 607 75.1 2L.9 13.9 5.9 (17.5) 29.0 149.4 25.3 2358 1772 7.3 s 1-67/63 2772 0.6 20795 677 75.5 26.5 13.6 5.6 (16.2) 28.6 ' 50.2 27.3 252 1909 ?7. i j/"' 31Ž26 :29.5 23_7 817 73.9 26.1 13.3 5.4 (16.3) 28.1 '51.7 26.9 2973 2196 7.1 1'6/7'C t 15 28. 9 2575 830 75.6 26.6 12.5 6.6 (15.6) 28.6 151.2 22.9 n.a. n.a. 7.3 .-_,'71 3676?5 27'.1 2669 937 76.2 25.3 .1 6.5 (_5.7) 28.2 50.1 22.7 n.a. s. 7.5 (51.2) (24.9) _ 11 Expenditu-es have beer reclassified excert- The fiscal year 11-'d2 1Ž32/63 ri ii 3/64. Yet the reclassification does n.t change the tctal g.i_ure bascally. 77 cxol,dincr 'lovernmenrt Eer4r SfS / c ,--nuclly calculated_. 7C Figures inl brackets in lac-ie rE rnrert E : erprises. 75 'i/ced on revised "la-are. No- ficical ye-. 77 Current figares ieflated by i;puted deflat;or for Public Airi:is-ration ad _efer:s ir, atiora :nrome A2c,u-ts (Valt. Repor:: Tabies 2.1 end 2.2, 19. It is apparent that expenditure on education in particular but also ULtat on hL.eaCLUthi LIQ± V W i e VCevlyLJ e L&Id nLA th U s UL poic of.J te U v ern LLen which. will be discussed more generally in paragraph 23. In addition, expen- ditureU depends or, education' policy dec-sionrs. Of -iQ.Uportance Jin ths i-egaxd is the new Government's commitments to increase pupils' welfare measures (the rmid-day'!s meles are to be imsproved and other- w,,easresaleso con,;em,plat- ed.) Compulsory school attendance up to age 114 is to become law next Sp:-ing and in al..uLI Ullthe ne-w uuvUErllU[1U i s UcoIInslUUt' 'U reu .UIng the dlsparity between urban and rural schools and to increasing the scientific and vocational content of the second level curriculum in relation to manpower needs. This means that there will probably be an enhanced program of teaching agriculture at thLe second level and perhaps other scientific and technical subjects. it is impossible to indicate what the financial implications of these policy decisions will be and, more importantly, it is not certain that the CeyLonese authorities are aware of their financial implications. This is not to deny the probable benefits to be derived from the policy changes but to question whether, even in a general way, these benefits have been judged against the costs involvecd in implementing them. 20. The third category of expenditures -- i.e., transfer payments *-- is clearly the largest single category of current expenditures and the most rapicLy growing. It now represents over 50 percent of total current expendi- ture compared with 47 percent in 1961/62 having accounted for 55 percent of increnmental current expenditure over this period. Simply limiting the rate of growth of this expenditure to the rate of growth of total current expendi- ture's would have more than doubled government savings. 21. Transfer expenditure is dominated by the subsidy payments on rice. This has risen from around Rs. 400 million in the early 1960's to Rs. 600 milli-on in 1969/70 and an estimate for the current year of almost Rs. 700 million. Due to its preponderant importance, even relatively small increases such as those generated by the normal growth in population have a very sig- nificant impact on total expenditure. The rice ration and subsidy arrange- ments have been subject to two major changes -- one in December 1966 (effec- tive as from 1967) and the second in 1970. The change in 1966 had cut the rice ration from two measures (four pounds) to one measure (two pounds) but as partial compensation the previous price of Rs. 0.25 per measure was changed so that the single rationed measure was made available free-of-charge. In 1970 the government restored the ration to two measures of rice, the first of wihich would sti:Ll be free but for the second measure the price is to be Rs. 0.75. The budgetary gains which had been expected to result from the chaniges made in 1966 failed to materialize because they coincided with a very large jump in the world price of rice which in 1967/68 raised its aver- age landed cost in Ceylon by around 50 percent. 22. In Table 7 an estimate is made of the budgetary implications of the 1970 decision to restore the ration to two measures and the related price decision (allowing also for the effect on flour consumption). This estimate suggests that the net budgetary subsidy for rice and flour would have increas- ed s.Lightly by Rs. 10 million in 1970/71 had the ration not been doubled (from Rs. 447 million to Rs. 457 million). The fall in the world price of ri^e was more than offset by thA inc-reAsR cnnsnnmuiption resulting from an assumed 2.5 percent increase in population but this potential gain in respect of rice has been morA than o)ffset by thA higher c onf' fflonir In fact it is estimated that the net rice and flour subsidy in 1970/71 will be raised by over Rs. 90 million asaconsequence of the decision to douhble the rice ration (from Rs. 457 million to Rs. 548 million). 23. In contrast to many other developing countries, Ceylon's government expenditure growth probleme during the 1960's does not seem to have been caused either by a rapid growth in government employment or by a rapid increase in the rJl--apita paj,rments to these emp.lolyees. The foll&oSwting ta les s thaUt government employment went up on average by less than 1.5 per annum from 1963 to -196.FuAo.sr ofP 4the lnceas of 27,0 noopl o tis eid,oe 12,000 were teachers. Wage rates of all government employees including te-aach'Lers were frozen froom 31 9`8 41o 1966 anA as a consequence IDthe-A a ir re-al-w aes fell during the first half of the 1960's by about 7 percent. Wage increases granted sLince l96Uf Lhave on a-verage restoredU UL Ithe . real wag0 t UV Uto t t level which existed in the late 1950's and early 1960's and it appears that automa- UtLc adjustmLent o0f sLaies tu L ncreass ln ULte cost U Li.V.Ln1g ls accpUUted government policy despite the overall financial and balance of payments problem of tUlhe governmiient. Hev, in an at t oULIljJ UV 61 sUtr.aLI ULhe 0expentOU.LUtAeQ on wages and salaries which this implies, the government has reduced the total outl'ay on teachers uy KFdUping nuw r-ecr-uit in pupi1-UeachrL; Z:.aus Und'uult U1115 normal period. This probationary status carries a salary of Rs. 100 per month as compared with Rs. 200 per month for non-graduate teachers and Rs. 150 per month, as compared with Rs. 475 per month, for graduate teachers. GOVERNMENT PERSONNEL AND GOVERNMENT EXPENDITURE 1963 1964 1965 1966 1967 1968 1969 Government Personnel 299.9 316.2 310.1 313.3 317.2 322.3 327.4 (in 1000) (including teachers) Number of teachers* 81.1 93.8 92.0 88.7 87.8 91.0 93.4 (in 1000) Personnel Expenditure 964.6 1009.6 1028.0 1046.5 1088.2 1189.2 1361.9 (Rs. million) Government Personnel 2.82 2.90 2.78 2.74 2.71 2.69 2.67 to total population (in percent) Government Personnel 9.37 9.70 9.33 9.25 9.19 9.17 9.14 to Economically Active Population (in per- cent) -Central Bank and Ministry of Education WAGE RATE INDEX NUMBERS FOR GOVERNMENT' MPLOYEESZ-a (1952 = 100) Techmical and Clerical Minor Central Govern- Government School Employees Empoloyees ment Employees /b Teachers ,ear Wage Real Wage Real Wage Real Wage Real Rate Wage Rate Wage Rate Wage Rate Wage Index Rates Index Rates Index Rates Index Rates 19 57 ill.2 iO8..2 iU6.. ii2.O8 11i3.8 i.O.7 113.9 iiUO ' I" 1''R_£2.3 116.5 130.4 1241.3 126.7 120.7 117.4 111.8 195 122.3 116.3 130.14 124.0 L26.7 120.14 117.4 11.6 1960 122.3 118.2 130.4 126.0 126.7 122.4 117.4 113.4 1961 122.3 116.7 130.4 124.4 126.7 120.9 117.4 112.0 1962 122.3 115.0 130.4 122.6 126.7 119.2 117.4 110.14 1963 122.3 112.4 130.4 119.9 12cl.7 116.5 -117.4 107.L 1964 122.3 109.0 130.4 116.2 126.7 112.9 117.4 104.6 1965 122.3 108.7 130.4 115.9 126.7 112.6 117.4 104.14 1966 122.3 108.9 130.4 116.1 126.7 112.8 117.4 lo4.6 1967 125.4 109.2 136.2 118.6 131.3 114.4 119.4 104.o 1968 140.1 115.4 163.0 134.3 152.6 125.7 129.6 lo6.7 1969 1st. Quarter 140.1 109,.7 163.0 127.6 152.6 119.5 129.6 1(01.5 2nd Quarter 140.1 107,.9 163.0 125.5 152.6 117.5 129.6 99.8 3rd Quarter 140..1 107.5 163.0 125.0 152.6 117.0 12 9.6 99.4 4th Quarter 157.2 117.2 182.9 136.3 171.3 127.7 114.1 l05.2) Average 144.4 lo0.6 168.0 128.6 157.3 120.4 132.5 1014: /;a T>DCi ; nA !YiAl ' Ari nt nroi-z -A+-1^ A-Ings -lO. +h I., -workes wEh-v d pentI-4 on+'k ZV-KS V~~~~' t., a' t..a.J t_ VV. U t l|tCA.L.60 V1 U*AS 71SUf0 0> YVUCL..L kXsWt0-}.J-1'. VSJf UfV.,; number of days workecl, number of hours worked overtime and other payments such as b on u s es . T .0,e shar-p 4 crease in 16.7 is Le result WA tiJe paymJent -Liti . e.LUctU 11rom October 1, 1969, of consolidated salaries as recommended in the Interim Report of thle ','aaries ar.d radres A0r -"4-issi, 196t9. Courced C -entr r caler-,cal andlo ecL;ncL el,4,loytes and m,Jnor enaLUYee!. Source: Cent;ral Bank of Ce-ylon - 12 - E. PROSPECTS, PROBLEMS AND THE 1970/71 BUDGET 21). The folvouing tables present the outcome of budget projections made forI 174/75.~ rrmETPTri RPVrrAT1TT ATMTn DPrV_TOr1rPTnmQ (milio ofvw ~ Rs., selected years) RviseA lsson's Est. Projection ..L7U0±/0. 1976L4/65 19767/0 71L74/ I,) X~~~~~~~~~~~~~' _1r X 7 r n - nz z buntrm:s LU U tiUs ()7 )n U/9 z 4u Ebcport Duties 297 316 372 311 /a Imrpor 366 321 301 07 Recelpt, f rom FEEC -14147 -42O M2____ __n 4._ _A - in r0 1) L0z 1:;Ac±Os I.J1J4U.:70 ±0U7 C0 _)7 u ou u -[tnover -lax 9 9 150 4144 49' of which: Revenue from Petroleum Products (99) (i15) Profits from Food Sales 190 187 2 `2 105 Taxes on Income & Profits 288 321 453 421 of which: Income Tax 262 293 r70 _ Other Taxes .58 98 69 89 Miscellaneous Receipt 150 144 220 328 Total 1607 1775 2737 3191 Note: Projections derived from historical trends except in case of export duties (see footnote/a ). /a The export duties for 1974/75 were predicted by a regression of the export duties on the export price and the export quantity of tea and the value of other exports, using the data for the period from 1960/61 to 1968/69. The 1974/75 export price and export quantity of tea were 'IBRD (Economics Department) estimates while the value of other exports for 1974/75 were predicted from the time trend for 1960/61 to 1968/69. - 13 - CURRENiT EXPENDITuRE AND PROJECTIONS (selected years) (in millions of Rupees) Revised i ssion, s Estimate Projecti 1961/62__ 1964/65 1969/70 1974j 5Ld 1. Administrat ioI aLnd Defense 252 260 44l 48', /3 2. Social Services 430 4 5737 t 0 Education 270 371 (0 114 ;HeaLth 141 1,48 240 2', 0 ,= 3. Economic Services 90 108 166 2(( ,/( 14. Transfer s 705 791 1322 1' .. .> d (!: ros-) 421 442 5)06 1020 / nterlfest. lPiblirt' Debt 83 105 2R1 413 7 t'enlsi ons3 95 127 191 21L3 7}T Oither Tranirsfers 107 115 240 30u4 Th) ;. Unallocated fEE( Expenditure 17 3' /li 6. Jirder Expeniditure Provisions - _ 107 4 /12 Total 1479 16514 2575 3611 Li 1l/bL62 f1gures based on revised classification scneme. 2 Projection in 1970/71 prices. A 4%, growtlh rate p.a. has been derived from historical data adjusted by applying the implied Index of prices of pitulic adminirtira- tion and defense expenditure in the National Accounts for trie years 1960/61 to 19'i0/71. /4 Based orT a projection prepared by the Ministry of Education. t a this draft recurrenit expenditure for level I atnl 11 wttich ciii- prises about 75% of total expenditure on education had been estimated. 25% were added to this estimate. ,A 3 growt rate p.s. has been drrived froa' historical data ad,,uste;t by applying the- i,JplirI index of price- for ser ices. Il^:- ± 1 that the pr-ice inidex for total services may overstate the prices of the public sector. /6 Economic se!rvices derived from historical data adjiusted by the implied price index from administration and defense in Nati ttal Accounts. L7 Rice: The total rice requirement under ration in 1970/71 is estimated at 960,000 tons. Taking into account a populoti ',: increase of 2.2 percrent arintally, the total requirements of rice in ]974,'75 will be around 1,200,000 tons. The estimated pnrtduictor, of paddy in 1)74/75 Is 108 million bushels or a rice equivalent of 1.543,000 tons. Assuming that 60 percent. of this pr-untcti,on will be availabl.e under the GPS Scheme, the local purchases will be arorurd 926,000 tons. Thus the balance requirment.s of 2714.000 torns will have to be met by imports. The cost of local rice of 926,000 tons at Rs. 1,150 per ton will be aro,und 1,065 in! Llion Rupees, and the imported rlce of 274.000 tons at Rs. 693 per ton will cost arouind Rs. 190 million. Thus the total cost of r ie i scoed on ration will amount to Rs. 1,255 million. Assuming that the rice issued under the first measure and the secotnd measure will he on the ratio 5:14 respectively, the issue of rice In 1974/75 under tihe first and second measrires will be 670,000 to>ns rar d ,30,0(r) tons respectively. Thus the figuires for 1974/75 compared with 1970/71 are as follows: Revised Estimate Ftrecast 1910/71 1974/iy5 1. Subsidy to the consumer on imported rice) 2. Subsidy to the consumer arid producer or ) 6o4 810 locaLly produced rice 3. Subsidy on locally produced red u,nions 9 10 5. Rtce Subsidy Tax 3 - 6. Total Gross Subsidy (Add i to 5 - 6) 689) 1020 The assumption in this exercise that 274,000 tons will be imported in 1974/75 is likely to be revised considerably 'Dr balanlce of payment.3 reasons. In this case domestic procurement under (:PS which have to be increased above 60 percernt. If we nissume procurement of an aIditional 100,000 tonis under the scheme this would increase the net subsidy from the budget by about Rs. 45 million to Rs. 1,065 million. Complete self-sufficiency in rice would raise the subsidy by Es. 125 million tc Rs. 1,145 million. 8 Based on a-tual expenditure figur-es received up to July 1970 as reported by the Pensions Division (Rs. 179 million). The esti- mates are based on the assumptioin of existing commitmernts. /9 The assumptions are) Current flinancial liabilities less interest of repaymernts due in the next four years plus inlterest or, loan to be raised (Ra. 300 million p.m. assumed) with 9.5% that Is lis. 301 million. For short-term borrowing the maximumn bo>rrowing of lis. 2,050 milliorn Is assumed rind applying rates at 4.76% for C(ssiercial Banks and 3.2% for the Central Bank borrowing the total paymenlt is Ra. 6) mlll[on. Titerest orn loarns from external soiurces as actuially commited (Rs. 42 million). /10 A hypothetei :al figujre based irl the assirmpi.imr. that "other irai,sfers" in recent years was constantly 9% ol' total uarrent expeiumoi- ture. This is anr approximatLion restlmate. /11 No iriformaLuorl avaltlable yet, af.er the ItitroductIm)n of tIhe system one might assume that the unallocated tEEC expendliture remairns /12 A hiypotheti cal figure rswurlnng ai under-expeuditure of 2.1%. 'his figure might be overestimated since there has teen n progres- stve rediirtton In irrider-experildit ire slrice 1966/67. 'ritsI Is its approximation estimate. 25. The aggregate outcome of the projection exercise is very clear. Government savings, which both currently and throughout the 1960's have been seen to be grossly inadequate in relation to the investment financing needs and to the needs of balance of payments management, are projected to be negative by over Rs. h00 million by 197h/75. Argument about the precise basis of any component in the projection exercise should not divert attention from this major conclusion. What has to be emDhasized. furthermore. is that the need for generating savings through the budget is even greater than it was during the 1960's as a result of the changes in tax nolicv introduced bv the government in the 1970/71 budget which will be examined later in this section. These changes effectively reduce the ability and willingness of the orivate sector to save. 26. As regards the need and opportunities for increasing revenue, it is imnortant to reAognize that the 1974/75 pronections in the qhnvA tahle nlrendv imply tax policy changes which will generate increased revenues equivalent to those tax policy changes introduced during the 1960's. This is becanuse the historical experience used for the projections is a measure of revenue buoyancy (i~ e., built-in elasticity 111A the net revenue effect of autonomous t- changes) and NOT simply a measure of the built-in revenue elasticity of taxa- tion. Unfortunately it has not been poss4lbl to measure t l Iatter concept. It is apparent, however, that successive governments in Ceylon have had to introduce new tax measures especi ally in the area of indirect taxation (includ- ing FEEC's) in order to maintain the revenue buoyancy. Government over the next few -ears -d1 have, therefore, to be as act-ve as at governm-ts in order to achieve the same degree of revenue buoyancy unless it can be assumed thCat tU..Je twxn. t ut u 1str S)L4. LL'. Lts A no more in..LiCco m e=.Jel Oa st. I t i - Utha l + J.Js -u.tilon probably has some validity as a consequence, in particular, of the development of more comprehens-ive 4taxes such, as the 4turnover tax at se-1ecti4ve rat-es. How '.' 11-14 -, IULIAj.)4 U,Jl~l O.L V . .L .J UL' U L UU.L')VtJ UC. dU IJ_.L U 4.V~ 1 U , ever an annual rate of growth of revenues of 6 percent (equivalent to the ~~~~~~~~~~~~~. 4_; - A A - - X 4 S _ _ - _ 1.- - __w_nv1 __ ___v 4-n|; projected ratue ofL gro-wthl of current' expendiur)wol reqireabiti elasticity of taxation of 1.5 given a continuation of the average annual rate Of' g rvwtU h ofL' r eai national incomre of i4 percen'L during tIhe 16U 's. An e±lastLc-.L YJ this high for the period up to 1974/75 seems unrealistic in relation to a historical buoyancy of approximately unity. q n n AA ,/,-s. .. .., . 1 . 4. -me iy9U/71 budget indicates the extent to which the present government has had to go in order to ensure that for the current year revenue w-ill increase adequately to meet the growth in current expenditure (at least given the budgetary accounting used by the government). To begin with, the budget contains a series of tax measures which develop and consolidate the tax system in the same direction as similar measures which have been taken over the past decade or more. Most important in this regard are the indirect tax measures. Excise duties on cigarettes, beer and bottled toddy have been increased and so, also, have the business turnover taxes on a whole range of products (petrol, cosmetics, air conditioners, refrigerators, tableware, radios, confectionery, jewelry, non-pure cotton textiles, wines and spirits, clothing, processed foods, electrical goods, etc.). In the same category can also be placed the increased fees on motor vehicles (transfer fees, - 15 - driving licence fees and annual motor vehicle license fee). These increases in indirect taxes are expected in aggregate to raise over Rs. 70 million in extra revenues. A further Rs. 60 million in extra revenue is expected from a revision of the level and structure of import duties. This is to be derived in particular from a steep increase in the duty on beedi-leaves from 21 cts. to Rs. 51 per pound, an increase in duty on certain textile imports from 10 cts. to 25 cts. Der square vard and a 5 Dercent duty on a 1_rge num- ber of raw materials and capital goods previously allowed duty free. 2b. Undoubtedly further increase in the rates of indirect taxes on both dnmaenitc prnduetion and on imports are in principle possibh1 though as has already been emphasized, the fact that Ceylon's performance in this area of nolicr has been vAerT Jmnpriqq; 1 ;n t,he nnpas+. an comnopare !ri+.h ot+.her A5am qn- ing co)untries, shou:Ld sound a cautionary note against exaggerating the extent to which add-itional meeasures in any one year are practicable. I t - certalnly difficult to believe that the tone of emergency in which the 1970/71 budget was presented can be1 repea edoeach - a-va and yet 1+ Js p1-baly only Jn thl-s context that further major changes additional to the "normal" increase in ;,r,A; - t + 4-.+; A, r. . ; - - n t; AA WA n A 4- 0- rn+A n oh,bv .o us A d,atA-A n iLAI.. ,_ uc. in "" - 1 '' 4Cl i - U_VV VVm , L ted UO%A* VLV VV V A¼JUQ V .-7 . V . .. V U X V LI 1A which an extension of the tax base could occur would be to embrace consumer sX-Vi C -es == restau t --idrssng -r clanng etc. L_-tensi4on of -Ile QOJ.V LN..O. -- ~ UCLLJ.CLII U~, L0.~U± ~ UJ .Ld.11L,UVI UL. % LAN U _IJ.LI N.1 ULI tax base in this way is desirable but should, quite obviously, only be pushed as fast as the aLUIsuiratiVO capcityof the revenue departm,Lents per-1is. 29.ul n ae o. rvenue generation WIJich Js closely re'lated to that of indirect taxation is the generation of additional profits (or reductions of losse,s) by p-ublic sectior industries, p-ubllc utilities and public trading activities. 30. Firstly, the government has continuously made profits from cer;ain food Esales. In effect, of course, this represents an excise duty or an import duty on these foods. Most of this tax falls on sugar and to a much lessor extent on flour. From 1970/1971 onwards part of the tax will fall under revenue from FEEC's because sugar imports are to be subject to the FEEC ..ate of exchange. 3i. Secondly, government enterprises have been continuous earners of net revenue for the budget (on a cash basis). However, this has been prima- rily the outcome of the contributions of the Electricity Department and the Broadcasting Department both of which have recently been converted into public corporations. This sector now consists simply of three groups of activities: railways, ports, harbour and warehouse; and ports and tele- communications. Railways are continuously in deficit and no precise action has yet been announced to alter this situation. 32. Precise action is proposed in the budget for the other two enter- prises; viz: - 16 - Estimated Increase in Revenue in Rs. million Ports, harbour & warehouse 7 (25% increase in port charges to adjust to new exchange rate) Ports & Telecommunications 15 (increase in rates on foreign mail, telegraph charges, telephone calls and rental charges) 33. Thirdly are the Public corporations. The Budget proposes to raise the contribution of these to general revenues from an original estimate of Rs. 15 million to Rs. 60 million. The maJor contributors are to be the CWF (Rs. 15 million), the Cement Corporation (Rs. 10 million) and the Petroleum Corporation (Rs. 10 million). The details are as follows: Rs. million CWE 15 Insurance Corporation 5 m ActricGity Rnnrd National Textile Corporation 2 Cement Corporation 10 Petroleum Corporation 10 Ceramics Corporation 3 Salt Corporation 0.5 Pl1-od Co -o ratn i 3 Steel Corporation 2 Eastern Paper Mill Corporation 2 Tyre Corporation 2 -Mnr'Sands P- Paranthamr Cbe,m. Corps.0. Sri Lanka Sugar Corporation 1 FertlLizer GorporatiOn .5 Banks and Joint Stock Companies 0.75 Total (Approx.) 60.00 3)4. oubsequently une revenue estimataes were revised uo increase thls contribution to Rs. 104 million plus an additional Rs. 10 million in respect of the railways. However even the former estimate of Rs. 60 million -wu-uid represent a rise from Rs. 22.5 million in 1969/70 (revised estimate). Furthermore, an undetermined part of the total will simply be an internal accounting transfer within the consolidated public sector because it is to represent the allocation of profits to tne account of the Central Government - 17 - GROADD r'un LUIDAVINGS (millions Of RS.) Est,imate 19>'6./66 1 96U/6u 7L)I /6VL8 L7VU107 ±7'JU 71 'J IV _L/7IV Central Government-- 97 16472 20j3 184 ].31 Local ~~~- ,/2 _ ,,-/2 -12 - Local Government/ -25 -2 /2 _ L , .a. /3 Public Corporations4 1U 20 3 6 07 n.a. smployees Provident Fund A 74 80 86 104 134 TOTAL 156 239 186 340 304 /1 Including extra-budgetary revenue and surplus of government enterprises. /2' Mission's estimate 73 Financial year April to March 31. The years 1965/66 and 1966/67 might be under- estimated due to lack of information. A Year lasting from January 1 - December 31. 15 This estimate has been raised by Rs. 35 million to reflect the increase in E.P.F. rates, coverage, etc., announced in the budget as part of the Compulsory Savings Scheme (the increase in E.P.F. contributions was estimated in the budget for a full year at Rs. 70 million). GROSS FIXED CAPITAL FORMATION IN THE PUELIC SECTOR (Rs. million) Origi.nal Er!tiinte 1965/66 1966/67 1967/68 3.968/69 1969/70 1970)/71 Central Government- 354 425 492 532 565 617o/Lm Local Government, 17 17 17 21 21- 30/ Public Corporations 210L 435 406 563 610 610'2 (incl.tr.ansfers from Central Government) (186) (230) (257) (327) (247) (274) TOTAL 578 877 915 1116 1196 1300 Lt I_nc,lu&%A.L.%1 . cLa.pi I . MULe UL goJVWeLUUILU en PJter,tises, txLrU.LLLU.1g ucqulst.U±UL1 of fxiancial assets., excluding transfers to public corporations and local governments. " JAdJus;ted by under-e-tpenditue pro-visiors. Proxi est,imate. which is asserting its right to have a prior claim on surp.uSes rather than being the residual legatee of surplus revenues. Thie remainder is to come from unspecified measures to raise prices and increase efficiency. 35. These budget proposals relating to gcvernment enterprises and public corporations are undoubtedly pointing in the correct direction. Par- ticularly in a situation in which the conventional budeet tax policies cannot be relied upon to generate an adequate flow of funds for financing the in- vestment outlays of the autonomous or semi-autonomous public enterDrises. these enterprises must become more self-financing on capital accournt. "The fnllowing tables show. for instance, that out of total- canital exnendi tur hvynih- lic corporations of Rs. 610 million, only R9. 57 million was financed internal- I y (T-[ should hb enmhasi7.ad that this latter figiure is very tientqti ve anrd that in general much more statistical knowledge of the financing of the public co-rporaionsn i desirabls.) A higher level of self-financing is particuarly necessary in the case of those enterprises producing consumer goods and servlces. For some of these, furthermiore, this requires in the first place that they become self-financing on current account. Outstanding in this con- nection J s the Geyxrlnn rTi-nznn rt+ Pv,nrd *.Ai ch is currently ml.-ing a 10 r-of Rs. 35 million and whose level of charges is low not only in relation to cos-ts but also in relation tc changes in real and mnoney incomnes over recent year3. There are clear signs that the government recognizes the need in principle to m.-, e the CTB and, m ct -, h er p,u,b 1 cor - o ratio more s ,- nr A n , b,ut spcific action has still to be taken. 36. In addition to these tax increases in relation to import duties, excise duties, tunover 4t- -r. 4uli coprtos tegvr-,.n a s ex .LL UU U.l 5 i0, uU Lu V c" Cul. a P.LU. jJU_±.L UULj u. L du.l4JL ULLIO r VOW1V n JI~JU LLas d...L3U introduced three emergency "once-and-for-all" measures, the revenue from which is buugeted to be much lar-ger than that fr-om the more conventional teix U ,ea- r t .- They are expected to generate Rs. 220 million of revenue in 1970/71 as com- pared with Rs. 171 million fr rom the tax measures. Trhe three rmeasures are: Rs. million a. Tax Revenue from demonetization 100 b. The Capital Levy 5 c. The Compulsory Savings Scheme 11- 220 Tax Revenue from Demonetization 37. The estimate of Rs. 100 million appeared originally to be largely guesswork and a figure of Rs. 20 million for 1970/71 was thought to be a more realistic estimate.l/ However, the demonetization itself has been successful (Rs. 785 million out of Rs. 792 million of currency issue in Rs. 50 and Rs. 100 notes having been surrendered). 1/ The Miniuister of Finance is reported as having stated in Parliament !hat the revenue fromn demonetization was already Rs. 101 million (Source: Sun, 8 March 1971). 38. The revenue to be derived from this measure is clearly of a once- ancL=tfor=l-C12 na+ur_e except to t+he extent thnat it indi;-^ctl,y deters furuturv t 00C.x evasion. However, the budget admits that settlement of tax liability will Ite A sr 1, 1--h -r 4- - the f - 1 ` so t ar 4_ 4- 1, 4- -; - - - -4 vp - 4-ws_An LiO -LI L.A W E O UL±0.L.L ULAV - VL U01 %4 LX . a. 0.X 0 0J ULIU UUIL.O 2lUAlLOJ 1U3 a V0, L U U -LD more likely to encourage than to discourage future tax evasion. Certainly Ile, lopes 'Wch w.ere exp,ressed atu tULhe U.LMO Uo the WzLIt,neie Uof 196l4/6') aUn 196,5/66 give little grounds for optimism in this connection. 39. There are arguments for accounting this revenue as a capital] item. It clearly does not qualify under the administrative heading "recurrent" revenue. At the same time, from the economist point of view, there are, pre- sumably, reasons to believe that a significant proportion oI tnese notes were being held as financial assets. Ideally, of course, this proportion should go in capital receipts and the balance in current receipts. In the absence of this information and because of its non-recurring nature it should be classified as a capital item rather than being accounted in such a way that it appears to represent an increase in the ability and willingness of govern- ment to generate savings. The Capital Levy 40. This is estimated to raise Rs. 5 million in total. The ratE's are to rise progressively from 3 percent on the first Rs. 200,000 of leviable capital to 25 percent on leviable capital holdings over Rs. 800,000. It is possible that the levy will be paid out of income at the bottom end of the scale. For instance, at this end of the scale, if a 10 percent rate cf return on capital is assumed, the levy amounts to an additional 30 percent tax on income which at the level of income (i.e., Rs. 30,000) would be subject to a marg-inal tax rate of 30 percent but an average rate of only about 13 percent. For larger capital holders the situation is marke(ly different. For instance, at the Rs. 1 million level of assessable capital, and an assumed 10 percent inoDme of Rs. 100,000 the marginal capital levy will be 25 percent ancl the average will be about 12 percent which is, of course, in excess of the assumed income. This pre-tax income will already have been subject to an effective rate of tax of about 62 percent. 41. Arrangements are contemplated by which liability can be met both by installments and by transfer of property to the government though not by the "takeover of properties which are in good production and in efficient condi- tion."1 Furthermore, the arrangements made for assessing the levy suggest that there will be considerable scope for delaying payment. Despite these arrangements it seems inevitable either that capital wil1 have to be realized (probably at a considerable discount compared with the valuation of 31st March 197(C, thus increasing the effective rates of the levy) or there will have to be mortgaging. or borrowing from the banking system. Thus the revenue effect of the levy would appear to be far less important than its effect on monetary and financial markets and, of course, on the distribution of property. - 20 - '!he (,ompulso-y- SavingsShm 4LC IL* iS a U progressVO levy oL persons and companies. F'or persnusU earnings between Rs. 6,000 and Rs. 12,000 the rate will be 2 percent of t;otal .Lnome (coll das a sur-charge in respect of E.P.F. contr-iuu'iors) r.ising to 20 percent on total income for incomes over Rs. 140),000. For companies, it j3 _50 percentu of profits, after deduc'tions O'L irncorme tax antd divldends, u-nless declared dividend is over 12 percent in whiich case the compulsory saving lavy is lGC; percent o,r the excess. Interest on compLu-sory saviugs is to be 5 pen euL. Whilst there is rio provision for repayment it is understood that the Governi- ment hopes to convert these compulsory savings into non-fnarkeTaole lu-year bonds (or othe:r maturities at di.J.ff.ering interest rates) during the course of the next three or four years. 43. it is expected that in a full year almost Rs. 175 mill.cin w111 be derived in revenue from the Scheme (Rs. 115 million in 1970/71). T'his comn- prises Rs. 35 million under the EPF portion of tahe Scheme and an asslumed Ps. 80 milli.on under the non-EPF portion. The Scheme is conceived as a once-and-- for-all emergency measure. As such, it may be met cut ol consumption or out of discretionary savings. However, if it were to be repeated oser several years it would also be likely to recduce contractual saving as well. 2lrther- rnore, the Government has undertaken a debt service obligation on the levy which, once again, means that it should be treated as a capital receipt. 14a. These three budgetary rneasures predominantly represent, therefore, a transfer of private savings to the government. The increase in the payments to be made by the public corporations to the government are also) as the budget itself points out, in part a transfer of savings to the goverrnment in this case from other parts of the public sector. In general the overwhelm- ing emphasis in the budget (including the revised. interest rate policy) is on the transfer of existing savings flows into the government budget rather than the mobilization of additional savings. This is very understandable in the context of a country in which existing tax levels are high. As already emphasized, there are limits to the rate at which tax levels can be increased. 7'hese 1imits derive both from administratlive cons-derationis and from the difficulties stemming from the nature of thie structural changes which are taking place in the economy -- particularly the problems stemming from the changes in the traditional export sectors and in the level and pattern of imports. There are, in addition, needless to say, the political limitations to increased taxation. in fact it is imrportant to recognize that the level of taxation is not a simple function of political determinat-ion, but also of bn.sic constrAints stamming from the economin st-iictilre of a countrv and from the need for an effective assessment and collection apparatus of administra- Hinn- This emrpha.sis in the budget on the transfer of savings rather than on the generation of additional savings must be seen not only in terms of its revenue implications and its aggre ative impact on the economy in 1970/71 tihough these considerations are of great importance. It must also be seen in terms of the impact which these measures to transfer private savings to the budget will have on -the ability Can 11-"" -11 ofu i d - cm nies to save in the medium and longer term. In the case of the capital levy, for instance, notu only is thle abI,414yf ofP peop-le 4to save reduced-, Iby the reduction in the flow of income they receive from their assets, but it is dLLf.JLCUlU Uo belleve lihau uLir W-L[±gLingness to bu.L.L up ULLjdLLU.LUULW..L assets W±±.. be unaffected by the levy -- or, more specifically, by the expectations of future levies -wh11ch are thereby created. h1-eoretically the wealth-effect could more than offset this but it is hard to believe that this would be a reali.stic assumptilon tO make. Likewise the compulsory le-vy on cumpanleso whlrch effectively sets a ceiling of 12 percent on their dividend distributions seems certain to deter corporate savings generation in the ionger run through the discouragement it provides to greater efficiency and general cost consciousness. 46. It seems reasonable to conclude, therefore, that these once-and- for-all emergency measures were taken for a combination of two reasons. Firstly, for meeting the immediate budget needs and, secondly, for distribu- tional reasons. No quarrel can be had with these two objectives providing their implications are realized. Their implication in fact is that the need for mnobilizing resources through the budget for financing investment is ln- creased as a consequence of the impact of the measures on private savings. Furthermore, resor-b cannot by definition be made to once-and-for-all emergency measures regularly each year. If, furthermore, the limits to additionaL tax revenue generation have been approached if not reached in the 1970/71 budget, then of necessity the government must examine both the level and rate of growth of ir.s current expenditure obligations under existing policies. F. IKNANCING OF GOVERNMENT EXPENDITURE 47. The diminishing current surplus has presented the government with an increasingly urgent problem of financing its investment expenditure. The sharp increase in expansionary financing which occurred in 1969/70 is expect- ed to be reversed in 1970/71 when an increased level of capital expenditure is expected to be financed by an increase in both net foreign loans and, grant;s of Rs. 338 million and, more particularly, in non-bank borrowing of Rs. 441 million. The latter increase is expected to result both from adidi- tional government bonds to be bought by the Provident Fund and a further Rs. 80 million from the non-EPF portion of the compulsory savings plan.l/ Borrowing from the Ce)ntral Bajnk and commercial banks was originally estimated to be Rs. 597 million but the revised estimates show that the government's current account is likely to be in surplus by only Rs. 13 million and therefore the expansionary financing is likely to rise to at least Rs. 225 million. 48. The following table shows how heavily dependent the governmen; is on outside sources -- from capital inflow, parafiscal funds and the private sector -- for the financing of its investment. Government savings in 1969/70 contributed only very little to the overall capital formation and its share is expected to diminish further if no correcting policy measures are intro- duced. 1/ Rs. 105 million are included in the orieinal estimate but only about 75 percent of this amount will be collected in the fiscal year. - 22 - FINANCING GOVERNNEENT CAklITAL EXPENDITUTRE IEVTSITTED (millio n Rs) ?ievi'sd () ri ginal T?c vi_e d Est. Est. fl.t. 1968/69 1 9f9 /70) 1970/71 ] (D)//71 Canital 9i7 9R0 o)r), 1(117 T. Mon-expansionarv financing 78) 965 792 (a.) Domestic sourcest J0) 251 4~71 5 (current surplus) (143) (23)/i (131) (±iS)/2 (administrative borrow- -n) 52 = (b) Ioeg souce ).or 087Ll° II. -asln civ Finanin 1R )O4,i 1% _____________________ '~~~T)-I p-4 Il4/-- / - .L LAJ. LIOIU QLA.LHJ.U.J U.44 1.,UAUJ .~LLU CILA.-U LAL!U iLLO* ±UL4 II14-.L-L-L-UII) IILLLIUO CLU.V:L1UU, P Y z11~ (net Rs. 161 million). In the original estimate the effect of the advance account wjas assumedA to be neu4tral:". /2 Public savings (Rs. 106 million) minus advance payments (net) Rs. 93 million. /1 To fin.a.npe t.hi gop. the Trens-ory intends t,o borrow about, Rs. hlCO mi-lion from bank soiurces nnd to obtanin Rs. ]2N million in trnde credits onr 1--m V!''. The problem which is highlighted for 1970/71 in the above table can :1so be exmned in anlonger-tnemn context. Thte fIlm.-rn ng t.Ah e anssmi-es tfht. government capital expenditure increases by 15.5 percent annunlly up to YQ71.n/5 ..,-,A 4-1ho .-~+ +l,,z, F ',,v,A e +cnrcorille ,nr1 ;>vnonA;-Fn crr; ; cc : on co 1 2 C-.abo Jt1 It; _Ive .f .. or the y A, 17 ' 0 e >4 r s|W>8 wzav n above .for the year 3197b/75 can be used to interpol]te for the intervening , ears. The base 'oar Ais take a s -- ,,47 so thnatI ti I I,7r/7 f. rt Ares dn nrt roinci de wi.th the estimates for this year. (1nT=WrKfflvrTrP'1Q DPlRr' CTh P, TuTDCI7Q (AD 1 096 /70l 1 970 /71 1 071 /79 1079 /73 19 73 /I71, 1071. /75 Reve7u I /1 2737 28220 2°9 300r) 3°94 3191 ' soJUVCLIUVlJ JL vv 30 30 Iu "W- 30, n.-...,.. ,.- --3 4.... 90 f74 V? 4 o )1 l 9'9990fl 7fl1. TiOl' uurrent- U £i.AVLA"U±U U±V /J C . L) ifI) LC- J.)k L-74VU )J41_4 )) ( Currenin Surplus -+19u +f 9 _9 - 4 -25 -390 Total Capital Expeinditure /3 930 1074 1240 11432 1654 1910 Advance Payments (Net) /'4 LOU - - - - - Net Cash Deficit 900 978 1249 5.56 1904 2300 /1 mfe revenue and. current expenditure projections for tne years 197u/ l' to 1973/74 have been derived as straight line interpolations of the 1974/75 projections presented earlier (see pages 12 to 13). /2 surplus of Government Enterprises and Extra-Budgetary Revenue. InstEsad of calculating the historic trend which would give a wrong picture a constant is given which seems to be a more realistic estLmate. /3 A 15.5 percent increase per annum had been assurned. 7; Advance payments are assumed to be neutral. 50. The resource problem raised in this table is very clear. If a reason- able (say, 15.5 percent) rate of increase in government investment is required in order to increase the growth of the economy, andc if capital imports must be severely limited for debt-servicing reasons, the resource deficit implicit in present policies very rapidly grows. This growth cannot be met by non-Bank borrowing and it is certainly unlikely that the present revised estimate of Rs. 441 million will be achieved. This estimate is almost double the amount raised in 1969/70. Nevertheless the government should develop financial poli- cies., institutions and instruments both for more effectively generating and mobi:Lizing private savings. To this end the government has proposed the creation of a National Savinigs Bank which will consolidate and develop the operations SAVINGS DEPOSITS AND SAVINGS CERTIFICATES (in Rs.million) Change Change Dec. Dec. Dec. Dec.67/ Dec.58/ 1967 1968 1969 Dec.68 Dec.S9 Post Office Savings Bank 450.6 473.3 489.7* + 22.7 + 16.4 Ceylon Savings Bank 93.2 100.3 98.8 * + 7.1 - 1L.5 Commeircial Banks (Time and Savings DeDosits) 686.6 801.2 969.3 + 1th.6 + I_ 1 S vings Certificate's Outstanding 78.7 91.3 86.60* +12.6 - 4,.7 TOTAL 1309.1 1466.1 1644.4* + 157.0 + 1785.3* Source: Central Bank of Ceylon *FProvisional ,Th - 2L4 - of existing small savings institutions particularly in their operations in rural areas. ile Peop'le!s Bank is 'L 9 intenL ng uo stiep up its saviLgs- oriented activities especially in rural areas. 51. Of central importance in these efforts to mobilize private savings iS, of course, £uuJebst raue policy. Central Bank pUlicy has beUt tllh LImore concerned with regulating the demand side for commercial bank fundsV/ than promoting the supply side. Increases in interest rates offered to depositors have been marginal and in general these rates represent almost a zero real rates -- e.g., time deposits (3-12 months) carry an interest rate of 4 percent and savings deposits 3.75 percent as compared with an average annual increase in the Colombo cost of living index of 3.5 percent during the 1960's. There are now signs that the government recognizes the significance of interest rate policy for savings mobilization. Interest on Post Office Savings Bank deposits has been doubled from 3.6 percent to 7.2 percent and the rate on 5-and 7-year government bonds has been raised fromn 6 to 9 percent. 52. Whilst the relevance of interest rate policy to savings policy must be emphasized, it must also be emphasized that the servici;ng of the public debt raises its own budgetary problems for the future."/ It would clearly be shortsighted for the government to postpone dealing with a current weak budgetary situation by creating an aggravated budgetary situation for future years. Interest on the public debt has been the fastest growing current expenditure item during the 1960's and its undisciplined increase in the future would simply delay and aggravate the need to take budgetary action. If a rational interest rate policy is to be pursued which ensures that interest rates are used for mobilizing and efficiently utilizing private savings, then it can only be pursued in the context of a disciplined budgetary situation. In this regard, interest rate policy is analogous to government wage and salary policy which is commented upon below. G. SUMMARY 53. Inevitably, therefore, the logic of the Ceylonese resource problem comes back to the current expenditure growth problem. The precise choices to be made in this regard can clearly only be decided by the government itself in the light of its own priorities. There are, however, constraints on its choices particularly in the short run. For instance, expenditure on economic services is already inadeQuate and in any case represents only 6 percent of total expenditure and an even smaller proportion of incremental current expenditure up to 1974/75. Pensions and interest on debt are contractual obligations which cannot be repudiated though as was emphasized in paragraph 52 above the rate of growth of interest navments denends on how much and how 1/ For instance, the ceiling imposed in October 1968 and its revision in June 1969 sought to limit the expansion of credit by the commercial banks to the private sactor by 8 percent and 7 percent. respectivelv. of the base data chosen. Credits exempted from the ceiling among others are export bills. loans under the agricultural credit scheme. tea factoryv modernization loans. 2/ Tn ten yevars npuhlic debt charges increased from Rs. 83 million to Rs. 309 million. It comprises interest on rupee loans, treasury bills, tax reserve certifi'ates, temn-oraryr hornri.ng from dom.estic resources, national devel- opment bonds and borrowing from foreign sources. -2~ rapidly the budget is brought under control. 54. The table on page 13 shows that at least l( percent of the project- ed increase in current expenditure between 1969/70 and 1974/75 will arise from the increase in the gross food subsidy. This represents an increasei of over 11 percent per year for an iten of expenditure which already accounts for almost a quarter of government current expenditure and which is expected to account for 30 percent by 1974/75. The reintroduction of the second rice ration by the government in 1970 has raised the annual expenditure on the rice subsidy by about Rs. 100 million. 55. Expenditure on public administration, defence, education and health is particularly sensitive to changes in wage and salary payments. Attention has already been drawn (see para. 23 above) to the major problem in this connection. This is that the termination of the wage and salary freeze in 1966 has led to a restoration of real wage rates in the government sector but at the cost of a more rapid riLe in government expenditure than was desir- able in the light of the fiscal and balance of payments situation. A previous Bank Economic Report regretted the fact that "the Sal]aries Commission empha- sized the cost of living element while in the Commission's terms of reference this criterion ranked second to the cardinal Doint of the financial resources available to the government. " It appears that a morel or less automatic adiustment of wages fo the cost of living wi-ll take place in the future. Tn addition it seems likely that the restraint on total teacher salaries through the device of extndling pupil-teacher statusj hbvnnd the normnl period, e .n- not be maintained indefinitely. There are, of course, strong reasons of equity and of economics for ensuring that public sector wages and snlaries do not lag behind, oIr too far behind, those in the private sector, just as there are str ng reasons for ensuring that interest rates in the orga.nized financial sector and specifically on the public debt do not lag too far behind their "free mrket" levels. At the same time there are strong reasons of equity and of economics for ensuring that inflation resulting from a too- ~VT~Y~~1(~f ~WT iwiAOf + YnPli1 Cr ~~ .wry-i AoA ~n- i-i 'rv ,,n f +Inn T.Yirca (nf' ~-yrniqi expn.n.sionar ¼' buge polic are ¼ avode and 1f~ one¼ of.4.4¼L. the. LI&' ofL a.oldn these is by restraining governrnent sector wages and salaries, this might on b _nce_ be desirable. The question must at least be faced _wheter " " I public employees (and public debt holders -- including post office depositors, pen sioners, etc. ) through constreint on their earning5s i9a- les eq -ltabl or has a less distorting effect on the labour (capital) market than an in: la- tion "tax" or a l'ower ratue of ,conoLIOI4L, ;i . gro¼w-h. ,1~~ . LJ.LLAa..LLJ., JLJW .LtiQU.LU UU . IJL LId. L ±~JU.± WVIAJA41, . ~LO4U.L.LU U.LIAF1CLOa4~.4LA..r,~ that the budget procedure is heavily biased towards a requirements approach. | lIV [AVWil C; s aJ.L E IIVJ WJ ajJVLAU..L16 LJ3jJd. tJIIIDL UAUD WL.LL4L UUI. L.A J.6D..L U1 U 1 U1 tJl ne the final budget allocation. The emphasis in this procedure is the elimination ofL ex ur a vag a Ac a r atheIIar th 'ian a we i ghLiILng ofL --' te r nativ ae ex p endi"'tu -re p 0 L LcieE. I. Even the introduction of a Planning-Programming-Budgeting System (PPBS) in 1969/70 on an experiMental basis for ninetieen selectUed depart11ents -under the Ministries of Education and Cultural Affairs, Health zand Land and Irrigation and P'owisr, can onULy be effvective in irpr ving the effUciency of eApenditurLe within these Departments. PPBS can operate effective].y in relation to the - 26 - policy issues raised in this Report only if it comprises the total budget so that the expenditure implications of different courses of government action can be spelled out. It is also clear from experience that, despite the shortcomings of the present budgeting system, governments have at times seen the need and have had the power to take important expenditure decisioria. Fiscal Statistics No. 1 Summar'." of Government Accounts 2 Financing of the Deficit 3 Government Revenue )-I Current Expendituire of the Government 1961/62 to 1970/71 5. Capital Expenditure 6 Government Net Food Subsidy 6 a Rice annd Flour Consumption and Subsidies under Vzrious Assumption 7 Public Expenditures on Hlealth and Education 8 Government Enterpri-ses 9 Interest Rates on Central Government Domestic Borrowing Table 1: StUMMARY OF GOVERNMENT ACCOUNTS (Rs. million) (Revised (Original (Revised Estimate) Estimate) Estimate) 1960/61 o 161/62 19D2/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69) 1969/70 1970/71 1970/71 Financial Year Oct. 1 - Sept,, 30 1. Revenue i1454 1607 1583 1617 1775 18014 1970 2157 2482 2737 3 2766 2796 2. Current; Expenditure 1392 1479 1512 1588 1654 1741 1836 2095 2309 2576 3 2689 2745 3. Surplus of Government Enterprises j -19 -12 -12 -3 -2 1 4 -1() 7 -4 14 14 4. Extra-budgetary Revenue Li 27 20 20 31 32 33 26 20 23 27 40 4o 5. Current Surplus (1+3+4-2) 71 136 30 57 151 9, 164 7 2 203 184 131 106 6. Total Capita.l Expenditure 519 573 489 518 5'74 634 734 817 937 /3 930 /3 1062 a 1017 7. Advance Payments (net) 1 14 19 -18 -1 6 23 33 -29 54 161 - 93 8. Net Cash Def'icit (6+7-5) 462 456 391 _46o 430 562 607 716 788 908 931 ioo4 L- Total capital expenditur,e in Item 6 includes outlays from extra-budgetary fuinds. Hence extra-budgetary funds have 'been included as revenue under 3 and 4. 2 Advance Payments (net) as in Table II(F)3, Central Bank Annual Report (1968) and Table II(F)4 Report 1969 plus Advance Payments on behalf' of the Food Commissior.er. These figures differ slightly from those giver in Volume I because of availabilitv )f m7re recent infornatinn. NOTE: Current expenditures have been reclassified until 1964/65 which increased public expenditures by about Fs. 10 million per annmzr. Due to rounding the individual figures may not precisely add up to tne totals. Additional information has; been made available which allows for an aijustment of 1961/62 as well. Table 2: FINANCING OF THE DEFICIT (Rs,, mill:Lon) (Revised kOriginal (Revised Estimate) Estimate) Estimate) 1960/61 1961/62 1962/63 1i963/64 1964/65 1965/66 1966/6 l7 1967/68 1968/69 1969/70 1970/71 1970/71 Financial Year Oct. I - Sept. 30 I ) Non -Expansionary 1. Administrative Borrowing 29 105 -34 -2 50 112 72 10 52 - - 2. Net Foreign Loarns and Grants 27 56 93 95 100 98 190 l90 354 1,89 491 338 3. Non-Bank Bcrrowirng 165 109) 154 208 2143 256 297 248 203 228 343 441 Sub-Total 2'21 270 213 301 393 466 559 448 609 L17 834 779 7-r) Expansionary 1. Borrowing f'rom Central Bank S4 Commercial Banks 242 226D 178 115 18 162 51 304 68 491 97 225 2. Decline in Cash Balance 2 -40 1 45 :20 -47 22 -48 63 - 3. Decline in Commoclity Aid Counterpart Funds - - - - - -35 -44 12) 48 - 4. Decline in U.S. Aid Counterpart Funds - - - - _2C 19 _ ) __ Sub-Tota L 242 18 179 160 38 100 48 268 179 9197 225 TOTAL 463 45D 392 461 431 566 607 716 788 90O8 931 1004 Due to roanding the indiviclual f-igures may not precisely add up to the totals. Table 3: GOVERNtEhNT RE'VENUE (Rs. million) (Revised (Original Estiniate) Estimate) 1960/61 1961/62 1962/63 1963/64 1i64/65 1965/66 1966/6,7 1967/6, 1968/69 1969/70 1970/71 Financial Year Oct. 1 - Sept. 30 I. Customs Duties (733)- c60 579 6i4 637 609 603 701 669 673 661 Export Duties 298 294 281 280 316 259 233 322 347 372 373 Import Duties (435) L2 366 2?98 394 321 350 370 379 322 301 288 of which: License Fees - - 8 10 13 13 34 67 7 (6 8 II. Receipts from FEEC' Sales - - - - - - - 77 285 44'7 457 III. Excise Duties 136 !69 211 218 239 279 283 315 371 381 434 IV. Turnover Tax - - - 16 35 39 72 79 111 242' L3 279 /3 V. Revenue from Petroleum Products n.a. 99 100 88 115 127 174 135 138 n.a. n.a. VI. Profits from Food Sales 132 '90 200 84 187 216 265 274 283 252 140 VII. Taxes on Income & Profits 283 288 290 303 321 290 326 334 358 453 441 of which: Income Tax 259 262 259 285 293 277 312 316 343 44o 425 VIII. Other Taxes 60 58 64 73 98 66 62 64 74 69 95 IX. Miscellaneous Receaipts 110 150 127 160 144 220 184 223 232 220) 250 TOTAL REVENUE 1454 1614 1569 1616 1755 1848 1970 2203 2521 2737 2766 C. B. Adjustment Li __ -7 15 1 - -44 - -46 -39 -_ ADJUSTIE TOTAL REVENUE 1454 1607 1583 1617 1775 1804 1970 2157 2482 2737 2766 Due to rourding the indiividual figures rLay not; precisely add up to the totals. /1 A few items; in the revienue figures in the Government Accounts do not reflect resources available to the Governiment for spending. These are omitted in the adjustments rmade by the Central Bank to the figures in the Government Accounts. Also, revenue from the National Development Tax, which is excluded in the Government Accounts, is included by the Central Bank. (See Table 32 in Annual Report 1969 of the Central Bank of Ceylon.,) /2 Including revenue from imports of refined petr-oleum products. FDr all the -other years (1961/62-1963/69), reveniues from petroSa. imports havre been excluded from Customs duties. They are listed under V. /3 Tnclurling revenue from the btusiness turnover tax levied on the products of the Refinery and the B3ending Plant which substituted for the elimination of imports of' refined petroleum products. Source' Estimates of the Revenue and Expenditure of the Government of Ceylon. Tabile_4a: CUFRENrT EX-11911LTUPF 01' THP CGGUPFN7tEIIT TO1621 191,0/71 1 969/70 1970/r71 19_61. /62 _ 19-641/65 1965/66 1966/67 1967/653 1968/169 11ev. Eat. Orig. eat. Items Amo un t Amounrt Amount Amount Amrount Amount Amount Amount P s mr) . Rs.m:-,. Rs.mn. Fs,.mn e Ps.mn. % Es. mn. Rs.emn. % Rs.mn. % Financial Year Oct. 1 -SePt. 30 1. Administration 252.2 17.0 260.1 15.7 275.9 15.5 28".8 15.7 325.)4 15.7 393 141.7 11110.7 17.1 1127.2 15.9 Civil 181.0 12.2 199.1 12.0 210.9 12.1 221.1 12.3 252.0 12.0 256.6 11.1 338.2 13.1 330.2 12.2 Defense 71.2 11.5 61.0 3.7 65.o 3.7 66.7 3.7 76.41 3.7 82.7 3.6 102.5 11.0 97.0 3.6 2. SocialI Servjices 1130.5 29.1 11911.8 29.9 503.0 28.3 530.9 29.0 598.3 28.6 6117.5 28.1 737.2 28.6 757.9 28.2 Education 270.11 161.2 327.7 19.8 325.5 18.9 340.11 18.5 396.6 18.0 1115.2 18.0 1171.0 15.3 1190.7 18.,3 hleels 1111.5 9.5 148.5 5.9 156.11 9.0 i68. 4 9.2 175.1 8.5 2110.0 9.1 2110.11 9.3 2110.1 8.9,~ Housing 1.1 .0 1.2 0.1 1.3 0.1 1..4 0.1 -i.e6 0.1 1.5 0.1 1.9 0.1 2.3 0.1 Special WelfaLre Services 11.0 .7 11.1 0.7( 11.1 0.6 11.9 0.7 :2.5 0.6 12.9 0.6 15.0 0.6 15.3 0.6 Coermnenity Services 6.5 .1 6.3 0.3 5.7 0.3 5.8 0.5 9.2 0.41 7.9 0.3 8.9 0.3 9.5 0.14 3. Economic Services 90.11 6.i 107.6 6.5 97.1 5.6 1 0".?7 5.9 112.5 5.11 123.9 5.4 065.7 6.4 115.0 6.s5 Agrioulture and Irrigation 111.0 2.9 53.9 3.2 111.6 2.11 51.3 2.8 51.8 2.5 57.0 2.5 79.6 3.1 92.11 3. s Fis.heries 2.1 I1 2.1 0'1 1,5 0.1 1. 7 0.1 2.9 0.1 1.9 0.1 2.5 0. 1 5.6 0.2 Maniufacture anid IMininig 11.1 .7 11.7 0).7 11.7 0.7 114.3 0.8 13.7 0.7 17.7 0.3 22.5 0.5 24.7 0.9~ T rad e 13.7 .9 15.6 0.9 16.3 0.9 16.3 0.9 17.5 o.8 17.0 0.7 27.1 1.0 20.6 0. 3 Coerimuni cationi 19.5 1.3 24113 1.114 26.0 1.5 211.1 1.3 27.6 1.3 30.3 1.3 311.0 i.3 31.7 1. 2 t1. Una-llocated FEEO Expenditure - ). 0, nil - nil - nail - nail - nil - 16.3 1. 6 39.5 1. 4 5. Intra Governmental Payments 3.1 0.2 3.5 0.2 3.5 0.2 3. 7 0.2 3.9 0.2 4.o 0.2 11.0 0.2 11.5 0.2 6. TransCers Payments 702.5 117.5 788.1 117.6 861.2 4n,.5 906.3 119.11 1052.1 50.2 11911.0 51.7 1318.0 51.2 3118.3 50.1 To Private Current Accounts 650.8 111.0 735.7 111.5 802,11 46.1 839.9 115.7 979.6 46.a 110o6.9 117.9 1211.8 47.0 12311.1 115.3 Feud Subsidies 1120.6 25.11 4111.8 26.7 4157,1 28.0 1165.2 25.3 572.7 27.3 620. 1 26.9 592.5 22.9 610.4 22.7T Interest oni Public Debt 83.2 5.6 105.9 6.11 123.2 7.1 1113.5 7.8 166.5 8.0 2,06.2 8.9 281.-3 10.9 309.0 11.5 Pensions 95.3 6.11 126.9 7.7 125.1 7.2 128.7 7,.0 1511.9 7.11 161.1 7.9 190.8 7.4 186.3 7.0 Dtrect Relief' 0.2 .0 9.6 0.6 12.1 0.7 1L.5 2.1 8.8 0.4 2.7 0.1 16.6 0.6 . Other 51.5 3.11 51.1 3.1 511.9 3.2 100.7 5.5 76.7 3.7 116.8 5.1 130.6 5.0 127.6 11.5 Other Transfers 51.7 3.5 52.8 3.2 58.8 3.11 66.11 3.6 72.5 3.5 87.1 3.8 106.1 11.1 -1111.2 11.2 To Local Authtlorities 35.2 2.5 38.5 2.3 113.5 2.5 112.o 2.3 50.5 2.4 60.7 2.6 67.5 2.6 59.6 2.2- To Public Corporations 1.2 .0 - - 1.0 0.1 11.5 0.2 6.6 0.3 12.11 0.5 12.5 0.5 23.9 0.9) To Other Institutions 10.2 .6 12.7 3.8 12.11 0.7 15.5 0.8 12.5 o.6 10.11 0.5 16.6 0. 25.8 0.9? Ab ro,ad 2.1 .1. 1.6 1.1 1.9 0).1 11.4 0.2 2.9 0.1 3.6 0.2 9.6 0.11 11.9 0.2 7. Under-expenditure Plrovision 10.0-,. 4.2 63.0 2.3 B. Total Current ExpenLditure 11178.7 100.0 1654.1 101.0 17110. 100.0 i536.4 100.0 2395.2 100.0 2-306.7 100.0 2575.11 100.0 2689.11 100.0 Source: Cenitral Bank of Ceylon Table 5': CAPITAL EXPRIDITURE 0P. - il4ion (Revised (Original Estimate) Estimate) 1961/62 1_ 4 1965/6'S 1966/67 1967/68 1968/69 19691/70 1970/7l1 Financial Year Oct.l-Sept..30 1. Civil Administration 6 7 8 12 13 L7 25 19 2. Soc:ial Services 85 7L4 56 80 94 113 147 203 Education 317 7-3 -~ Education 27 ~~ ~ ~~ ~ ~~ ~ ~~~31. 22 2; 33 :32 627i Health 21 18 16 21 25 37 46 47 Hous ing 32 1 11 26 31 36 38 50 Special Welfare Services 3 3 3 2 2 3 3 3 Community Serviceas 2 3 3 4 3 5 8 34 3. Economic Services 149 169 209 227 271 301 425 469 Agriculture r Irrigation /1 97 l0T 12 7 EU 1 25 2& Fisheries 1 1 14 - - - 2 18 Manufacture & Mining 6 1( 10 8 24 5 1.1 17 TradLe 7 3 3 2 3 .14 9 34 Communication 38 5( 68 30 84 92 149 111 4. Acquisition of Real Assets (1+2+3) 240 2550 273 318 379 143 597 691 5. Capital Transfers 130 16L, 198 2144 271 3143 316 350 6. Acquisition of Financial Assets 87 33 41 45 27 44 144 52 7. Under-E)xpenditure Provision - - - - - 15 9 170 8. Total Capital Expenditure (14+5+6-7) 458 447 512 607 677 817 830 //2 937 /2 7; InclUdeS ext-r-buUdgetary eXpendi;turel 7:' To-tals for 1969/70 and 1970/71 include unallocated FEEC experLditure a:mounting to LUs.3L mil.lion and Rs.14 mi.ilion respe ctively. Source: Central Bank of Ceylon Table 6: GOV3EEHMPNT NET FOOD SUBSIDY (Rs. millionl) (Actual (Original (Revised (Original (Revised P:rovisional) Estimate) Estimate) Estimate) Estiisate /6) I t em s 1965/66 1966/67 1967/68 1968/69 1969/ 70 1969/70 1970/71 11970/71 1. Subsidy to the consumer on imported rice 180,8 /L 218.5 279.9 276.1 237.2 26-3.9 524.8 /2 6o4.o 2. Subsidy to the producer and consumer on local rice 269.9 206.1 250.3 269.2 319.6 252.5 3. Subsidy on locally produced. red onions 5.3 6.3 6.8 6.8 8.0 8.0 8.5 8.5 4. Distribution expenses and other charges 31.4 34.6 37.2 51.8 48.5 63.1 79.9 79.9 5. Value of rice ration coupons surrenderedin repayment of loans issued by Co-operative! Societies - - 0.4 11.1 - 1(.0 - 6. Rice Subsidy Tax 0.3 0.3 1.9 3.1 2.0 3.0 3.0 3.0 7. Total Gross Subsidy (1 to 5 - 6) 487.1 465.2 572.7 611.9 611.3 592.5 610.2 689.4 8. Profit on sale of sugar 204.1 /1 224.8 239.5 254.6 210.6 222.6 120.1 a3 124.8 S. Profit on sale of flour 0.5 35.8 41.0 33.9 49.1 j4 33.0 32.2 37.4 1C. Profit on sale of other goods /5 4.8 L1 2.7 1L -4.1 -5.4 -8.2 -3.6 -1.2 -1.2 11. Total (8 - L0) 209.7 263.3 276.4 283.1 251.5 252.0 151.1 161.1 12. Bet, Food Subsidy 277.4 201.8 /1 296.3 328.58 359.8 340.5 459.1 528.4 NCTE: The NNet food Subsidy" figures given irn this Table will differ from toose published in the Government Accounts on account of the f-act that collections from Rice Subsidy Tax are netted against the food subsidy. /1 These figures will differ from those published in Table II(F)5 of 1968 and II(F)7 of 1969 of the Central Bank Antnual Report because of certain subsequent adjustments. /2 It is not possible tco provide a reliable estimate of issues (imported and local) under the first and second, measuares. llence items 1 and 2 are not computed. L Net of a sum of Rs. 86.1 m;illion being cost of FEICs on imports of sugar. /4 Includes rebate on import of floor under U.S. .P480 amounting to Rs. 20.S million. /5 Includes lentils, maldive fish, red onions and whole wheat. L Figures not officially announced yet. Source: Food Commissioner. Table 6a: RICE AND FLOUR w NSUMPIION AND SUlBS1DIES UNI)5EŽ VAROUSu5 ASS-UNYION 1969/70 1970/71 one measure one measure (000 tons) (000 tons) Consumption Rice: 532 545 Ration Requirement OPS purchase 297 304 Import 235 241 Flour: 425 436 Subsidy in 1969/70 prices (Rs. m) (Rs. m) Rice: 528.41 541.53 GPS purchase L163 Rs/t 345.11 353.55 import 780 Rs/t 183.30 187.98 Flour: 570 Rs/t 242.25 248.52 Total 770.96 790.05 Flour: 762 Rs/t 323.85 332.23 Net Subsidy 447.11 1457.82 Subsidy in 1970/71 prices Ilice: 508.26 5256 OPS purchase 1163 Rs/t 345.11 353.55 Import 693 Rs/t 162.85 167.01 F'lour: 615 Rs/t 261.34 268.14 .,7 . C788 .078 Receipt Flour: 762 Rs/t 323.85 332.23 Net Subosidy465 Consumption 1970/71 two measures (000 tons) Rice: 965 1 measure 545 2 measures 420 FLour: 325 Sub3idy in 1970/71Prce (000 tons) Measure: 950.774 OPDS 1162 RsA/ 600 07 A67 Import 693 Rs/t 365 252.94 Flour: 615 Rs/t 3 197.85, 575 Rs/t 57 615 Rs/t 35 'I T sotial ii48.49 Receipt Meiasure Rs. 75 per two pounds/week 352.80 Flour: 762 Rs/t 325 247.65 Total 600.45 Net Subsidvl 548.04 *A substitution effect between the consumption of rice and flour has been assumed. NOTE: No attempt is made to reconcile the value figures used in the above exercise with the budgetary data given in Table 6 .. It should be emphasized that the latter table covers all food subsidies not just rice and flour. Furthermore the budget figures in Table 6 are on a cash basis not on accrual basis. Moreover the above exercise was undertaken to estimate the change in the rice and flour subsidy consequent to the doubling of the rice ration in 1970, and not specificalLy tc estimate the absolute level of the subsidy. Table 7: PUJBLIC EXPENDITUHE&i 01'I HEALTH AND EDUCATION (1963/64 - 1970/71) (Rs. m:illion) H E: A 1 T H E D U CAT 1 0 Retcurrent Capiltal Total Per Capita Recurrent Capital Total Per Capitla Fiscal Year Oct.1-bept.,30 15)63/6h4 147.S5 11.15 159.4 14.6:2 3059.3 48.5 357.8 32.83 1c64/6d5 ]L535 9.3 162.8 14.58 329.0 4o.9 369.9 33.13 15)65,/c,6 159.6 11.2 170.8 14.93 331.6 31.0 362.6 31.70 19s66,/67 1L70.2' 17.6S 187.8 16.05 347-7 35.1 382.8 32.72 1c967/68 1L94.4 20.6 215.0 17.97 397.6 0O.4 438.,o 36.61 1968/69 2>10.0 37.3 247.3 20.17 41',.2 31.8 447-.0 36.45 1969/70 (Revised) 2ho0.L 16.3 286.7 22.88 471.0 52.2 523.2 Li.75 1970/7'1 (Original) 240.1 47.3 287,14 22.414 490.7 68.2 553.,8 43.24 Source: Central Bank of Ceylon Table 8: GOVE&NTIENT ENTERPRISES (Rs. million) (Revised (Original Estimate) Estimate) 1961/62 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 I. Railway Revenue 88 97 100 102 107 110 111 112 Recurrent Expenditure 117 125 128 125 130 141 134 153 SurPlus -29 -28 -28 -23 -23 -31 -23 -41 Capital Expenditure 30 31 22 23 26 29 31 47 II. Electrical Department /1 Revenue 12 314 49 54 66 70 86 8 - Recurrent Expenditure /3 21 27 31 29 38 44 11 - Surplus 13 22 23 37 32 42 -3 - Capital Expenditure /4 144 26 41 57 68 52 7 - III. Port, Harbor, Warehouse Revenue 28 29 3 3I4 36 In L48 52 Recurrent Expenditure 22 22 22 24 23 27 31 33 Surplus 6 7 12 10 13 14 6 19 Capital Expenditure 8 11 1 15 13 12 16 21 IV. Post and Telecommunications Revenue 1.7 50 55 57 65 71 78 96 Recurrent Expenditure 65 70 73 78 80 91 98 108 Surplus -18 -20 -18 -21 -15 -20 -20 -14 Canit.l FxpenHi;nJrt I. 1 5 o 6 o 17 21 V. Broadcasting & Information /5 Revenue 9 9 8 2 Recurrent Expenditure 5 6 7 3 - - _ Surplus 4 3 1 -1 - - - - Capital Expendit--.- - - - - TOTALT Revenue 206 236 250 261 278 308 245 258 Recurrent Expenditure /6 230 250 261 259 271 303 273 294 Ad-usted C -rrent E.xpenditure /7 218 236 269 257 288 301 259 250 Under-expenditure Provision - - - - - - 9 7 Adjusted surplus/deficit /8 -12 -2 1 4 -10 7 -4 14 Capital Expenditure 86 72 81 107 113 102 71 89 Under-expenditure Provision - - - - - - 14 16 Adjusted Capital Expenditure /7 116 127 121 127 140 131 100 113 Due toU roundlng the ilndLvdual figures ri,ay not prece±y ely add up to the totals. /1 Commercialized and non-commercialized activities. In the course of 1969/70 the Electric Department was converted into a Government Corporation. /2 Net revenue plus capital expenditure out of RERF in that year. 7l Exclusive of annuities. /7 includes expenditure out of Reserve, Extensions and Renewais Fund. 7 In the course of 1966/67, Broadcasting was converted from a Government enterprise into a Government corporation, as from 1967/68 expendituresof the Department of Information are included in Civil Administration expenditures. /6 This is the total recurrent expenditure under Votes 1,2,4 and 6 of the Government enterprises; these figures do not include depreciation allowances. /7 Adjusted current expenditure excludes sinking fund contributions and direct repayments, while expenditure under recurrent votes but of a capital nature is included under adjusted expenditure. Extra-budgetary capital outlays from the Electrical Department's Reserve, Extension and Renewals are included. /8 Revenue minus adjusted current expenditure. Source: Estimates of the Revenue and Expenditure of the Government of Ceylon. Table 92 INTEREST RATES CN CENTRAL GOVERN1NMT DC1(ESTIC BORROIG 1965/66 1966/67 1967/68 1968/69 1969/70 A. Rupee Loans 1) 21 - 25 years bonds M 04( 5 (5 r( 7/ ('Lt' 2) 12 - 15 years bonds 3t 3 6-3 3) 5 -7 years bondio - - 6% B. TreaEsury Bills (3 months) 3% 3% 3% to 3.64% 3.61j% to 3.64i b.76% C. Tax Reserve Certificates 1 1 1½% to 2% 2% & 3% 2% D. Central Bank Advances --Interest Free-- I/April, 1968. ?/January, 1970. I/March, 1970. Sources Central Bank of Ceylon. A NmTV Y Page 1 TAXES ON TEA AND THE TEA EXPORT DUTY REBATE SCHEME J. axe s 'l. At4 presentu tea exported 4n b-ul 'i s subJ Iec- 1;o ar ex-ortu dutUy of J. XL u uJ ~Ud Z4'. LU iI UULI'. L~ UUJU 1, A 21 Z.JJ . ) 39 cts. per pound. The export duty on packeted tea is 24 cts. per pound. Further an ad-valorem sales tax is imposed. Under this scheme I.) I ...- t .t n. , Dr' - -. - .J- .L.. fl2.-.t_-)--- r71 all teas whlch fetch a2. price oUf over- REs. L.U_5 a poUWIU atU Athe oULor1LbV mea auctions pay an ad-valorem tax of half the excess over Rs. 1.85 subject to a XJnluxIFT[R of 70 c s. per pULnu. The ad--valorem tax onrL teas solu at Ulle London tea auctions is also levied on a similar basis after deduction from the London price of ex-port duty, freight, etc. The ad--valorem tax is also leviecd on teas allowed for export under private sales. In addition to the export duty and the ad-valorem sales tax cesses under the Tea Control Act, the Tea Subsidy Act, the Medical wants Ordinance, the Tea Research Ordinance and the Tea Propaganda Ordinance amounting to As. 10.30 per 100 lbs. are also levied on teas exported. The yield from these cesses, however, don't accrue to Government Revenue. Tea Export Duty Rebate Scheme 2. In view of the fall in tea prices in recent years, in January 19568 the Government decided to pay a rebate on the export duty, on a sliding scale. Under this scheme a rebate of 20 cts. a pound is paid on all first-hand teas of the iMedium and Low-Grown variety fetching Rs. 1 to Rs. 1.09 a pound. Thereafter, for every 10 cts. increase in price up the price level of Rs. 1.49 and for every 5 cts. increase from Rs. 1.50 up to the price level of Rts. 1.99, the rebate was reduced by one cent a pound. The rebate on teas fetchinmg Ks. 2.00 and over was fixed at 5 cts. a pound. For high-grown teas a rebate of 5 cts. per pound is given. The qualifying lower limit for all factories is Rs. 1.00 a pound. EXPORT DUTY ON RUBBER 3. With effect from 27th November 1961, the Goverrmient abolished the then existi n- flat rate of eprort duty on rubber and replaced it wi th a sliding scale of export duties. The advantages of a sliding scale of duties for a cosunodity like rubber, which is noted for its price fluctua- tions are obvious. The sliding scale provides automatic relief to rubber prncers Wlhen -there i-s a sharp fal] l n r nbber p c while Iovn +he- o+thr hand, if the price of rubber rises, as i-t often does suddenly and sharply, the~-' State, as well as the rubber producer iroud 4 ial share in the prosperity of the indutstry. When the price rises to a very high level, then4 --Q ]+-4- Qrexe rw -+ o_ be si 4hn^"ej off -In+^ +_.hQ Q+n_T-Tc onff'Arc c¾tJIU.Jf 1t~. CfltI.t±o- t tb Ubt.'>& 1'^~ asuv r.av. v A. . . v v K)J v _,_ . The si - -ding scale of bber duties provides for vaiation of duties from week to week. The duty applicable to each week (comnencing ;nidniih Sndqy,U,ndy is 1,-sed on the averag pric of R.S.S. Cr"ade T J.LA .JJ.p L U AUU& J'.7 fl' 5J-C. . JO.a K fL u.. , ±'& f7- - .KV -S1 -L *L .) . Lii '4.-.- I rubber in the London Market during the previous week. From the London price, estJ.LRaULe , L' O. FO .P . kCo ]LomL.L)b1o pric J)e 4. S ca culated by -L-'. ee rtai fixed deductions for freight, insurance, etc. The sliding scale of duties in -- base on the prie ofP nubber in -h 1-Tondon Market and not- -- theric I aOVU n kL lo,LL Markei Utoi Uf I L LJ- JJ IJ A preven usrpls e fro mipulating in theF rolombo Market to prevent unscrupulous exporters from manipulating ANNEX Paute 2 the duty _ by arii -,al ersi h rubt;e pi-4 i. the. Clr,; ; Mar e'- L4 . UL) LJJ .Y C L. IU.LJ.L .~_.LJ UK7Jlt eO,i-i1 ., UIC L A1~ UUL'LI~ 1.1 Luu 1 -I Ullt ' _~L~JU"'rL in particular weeks and shipping out large quantities ol' rubber during Oi s period when duty was lUow. 'T: *t;l duties I UiLLujt:. WIHer Ulie sliding scale are presented at Table below: Where the estimated f.o.u. -value per lb. of R.S.S. Grade I rLubber as est-Urki,uted by the Principal UUELtet; .UV 01 ClUb tUuif1m. Rs. cts. Hs. cts. Rs. cts. is Ue_._UW is 0.94 . - 0.01 is not less tanr 0.95 and not more than 0.96 0.G2 0.97 . . 0.98 0.03 U0.9 -L . . .UU U .ULI 1.01 . . 1.02 0.05 1.03 1.04 o.o6 U 1.05 " 1.06 0.07 1.07 . . 1.06 0.08 1.09 . 1.1o0 0.09 ti 1.11 ii . . i~~ ~ ~~~~.l2 o.io 1.13 . . 1.16 0.13 wi ~~~~1.15 ii.. 1.16 O. 1 2 1.17 " . 1.18 0.13 1.19 . . 1.23 0.14 1.2h " . . 1.28 0.17 1.29 i . . 1.33 0.20 1.3)4 . * 1.38 0.23 1.39 . . 1.43 0.26 "1.4h 4 . . .1j8 0.29 1.49 " . . 1.53 0.32 1.54 " * 1.58 0.35 1.59 " * 1.63 0.38 II 1.64 ' . . 1.68 o.41 1.69 . . 1.73 0.L45 1.74 " ' 1.78 0.119 1.79 . . 1.83 0.53 1.84 . . 1.88 0.57 If 1.89 . . 1.93 0.61 1.94 . . 1.98 0.65 1.99 2.03 o.69 2.04 2.08 0.73 2.09 . . 2.13 0.77 "T 2.14 . . 2.18 0.81 2.19 " . . 2.23 0.85 " 2.24 " . . 2.28 0.89 2.29 2.33 0.93 2.34 . . 2.38 0.97 2.39 . 2.43 1.01 2-L4 -t . . 1.05 ANNEX Page 3 5. Consequent on the devaluation of the Ceylon Rupee in November 23, 1967; a flat rate of I c3nts ner pound was levied on all rubber exnorts in addition to the duty payable under the sliding scale. In addition to the Pexnorl du]tv mentionnRd abovp the following reqqs are also levipd on all export's of rubber. i) under the Rubber Control Act - 23 cents per 100 pounds. ii i' winder +the P4iWhbr' Research 0 nnr-rn. - PR<, 1 npe 100 noiini'z iii) under the Medical Wants Ordinance - 75 cents per 100 pounds. EXPORT DUTIES ON COPRA, COCONUT OIL, DESICCATED OOCONTT 0TD FRESH, nnnNMTTS 6. IThe Up4oV)LJ, dUUtiLes5 Von COJCOJIlUt, prodUUtUs I6 UaLre baLs o. aLs.LLdin scale. The duty applicable for each week (commencing midnight Sunday/ MondLaC1y) is blasedu ax- thel four weekl -,on vrg riceofPip-e copra in the London market during the previous week. From the London price the e St--4-,:ae .o.b CoorXb pric 'L. ar--e at_ by r,kuge-aXfie 1415 U.ULCUILd. L,S L .V.U. 'OUIU. JJLVPl.L;: ±j CU.vv.LVeU C IU Uy MI1d.F.Ult L- UJ 1,~j1 -L A U deductions for freight and insurance. The table below gives further details: EXPORT DUTIES ON COCONUT PRODUCTS 7. The details of the minimum and maximum duties payable are given below:- Where the average London c.i.f. The export duty payable on The exDort duty price of rnilippine copra as es- a ton of payab]e on fresn timated and notified by the Prin- coconut per 1000 cipal Collector of Customs. nuts shall be Copra Coconut uesiccated coconut Rs. cts. Rs. cts. Rs.cts. Rs.cts. Rs.cts. Its. cts. is below 620.00 - 115.00 nil nil 28-75 is 620.00 115.00 nil nil 28.75 is more than 620.00 but not more than 630.00 117.-93 4.76 4.04 29.48 is more but not more than than 1750.00 L760.o0 680.54 918.91 780.56 169,95 '17 II. AGRICULTIRE N. INTRODUCTION 57. The agricultural sector in Ceylon, employs more than 50 percent of the labor Porce an.d contributes approd matelyv- )ir nercent to GDP. rlrer Q9 percent of the nation's exports originate from agriculture. Thus, the agri- cultural sector contitutes the main source of Ceylon's economnr strength.h This strength,however, has been eroded considerably since the mid 1950's by ~. ~I'~,+ - ., -~ .1 , e, n+A " rn1r11c A V' in+a-- + i - V +hn a ti- nrVr+ rA- rr ~.c -f',- + a .n nari a sub" antial and con-i-lous deterioation in teepr akt o e r rubber, the two principal exports. The price of tea declined by 23 percent betwee;n the m d-190ffO's and 1965 arnd by a furh 20 percent J t-e1- perlo 1965-1]970, that of rubber by 25 and 12 percent, respectively. As a resu'Lt - a n -th --e ibec oY a 0de t e rmineddiet lo flyhegohptnia .1 JJ.L Li Iut ~ Li- 4 U; L 5 LjLu U A.L. VIU LAJ ~-&JJJJ.L I 4 ULtA LJ UALLU r4. %) W 011 JJU 0-ZLkL.,LO~ of agri cultural exports and to develop new exports which might to some extent hlave miti gatAeud thle e ffect ofL these shi'arp pr'Lce declines - eAVruI u C-i nIlgo first stagnated and then,in the latter half of the 1960's, fell absolute:Ly. "E aAe tn c 4~~_~ - _- .L 4.. 4. Ib tU Is arr- t.[ie, efLo.UFt were dLrecteU Wi. LL ±iC-"a0.LIIg .LLLU"ElMi.Ly ctU di_-LL domestic production of food so as to reduce food imports which were absorbing about. half of' total ex.cia11gU etrLngs. SignfUTicant progress in that direct iOnl was made, but not fast enough to offset the failing fortunes of export agri- culrure. The resulting squeeze on non-food imports has made the structural transformation of agriculture the central development problem of Ceylon. 58. Ceylon is endowed with favorable natural conditions for diversi- fied agricultural production. From an agro-climatic point of view the coun- try can be divided into two parts, the wet zone and dry zone. The wet zone recelves 75 to 200 inches annual rainfall which usually remits year- round agricultural production. This zone accounts for about 33 percent of the latd area and over 65 percent of the cropped area. It is almost exclu- sively devoted to the production of the three major export crops: tea, rubber and coconuts; and rice. The dry zone receives 60 to 75 inches annual rain- fall and covers about two-thirds of the island. The bulk of its rainfall is concentrated in the tIaha season (Northeast monsoon between September and March) while the Yala season (April to August) is dry. Sixty percent of this reglnn is forest; and 15 percent is used for shifting agriculture. Twenty percent is used for sett]ed agriculture, mainly with irrigation. About h4i percent of the cultivated dry area is used for rice production. 59. A useful division of Ceylonese agriculture woulid be export agri.- culture and domestic: agriculture. The export sector includes tea, rubber, coconut and minor export crops and the domestic sector consists of rice, :live- Stock and subsidiary crops. A significant portion of the export sector's plantation crops, particularly tea, is foreign-owned and employs Indian Ttmil :Labor. The area devoted to the three export crops: tea, rubber and coconut, is approximately 55 percent of the cultivated land. The most important domestic crop is rice, occupying about 33 percent of the cultivated area. Approximtately two-thirds of the rice comes from irrigated land. Although the productior, of suhsiLdiary crops has been increasing in recent years, the absolute volume is still small. -28- B. REVIEW OF OUTPUT TRENDS IN THE SECTOR 60. During the first half of the 1960's the agricultural sector ex- perinceda lo r-ae of gro-1h, contr-buting lo genera' econo,,mic st,-ignation. This was largely due to: (a) the predominance of tea and rubber in the export sector during a period of contlnuous deterioratioln in wor].d tea and; rubber pri ces; (b) the government's exchange and fiscal policies which provided inadequate export, price incentives for major export crops, relative to the heavy tax burden imposed on these items; (c) the low productivity in domestic agriculture resulting from the emphasis on providing employment and income for the rural population without sufficient corresponding emphasis on productivity. 61. In the second half of the decade, this sector has experienced more rapid growth. This achievement is attributable to the expansion of domestic agriculture, namely, increased rice production stimulated by sunsdales, favorable price incentives provided through expansion of the open market, and improved organization of the rice production drive. The changes in domes- tic and export agricultural output si nce 1965 are presented in Table I: Table I VALUE OF MAJOR AGRICULTURAL OUTPUT kRs. million) 1965 1966 1967 1968 1969. i965 i966 1967 1968, i?6'; Constant Prices Current. Prices Tea 951.5 926.8 920.8 937.8 915.8 92h.7 837.7 701.7 915.6 818.)b Rubber 279.2 309.6 307.6 319.5 3214.0 21t2.7 260.6 234.7 256.9 281.6 Coconut 267.2 2143.0 235.1 213.6 231.3 347.3 327.6 317.8 424.1 1437.0 Minor Export Crops 42.2 43.5 42.4 48.1 57.3 46.6 1,5.8 143.5 53.5 66.7 Rice 465.9 470.0 565.3 6614.3 677.3 376.6 475.9 663.0 890.1 900.2 Other Food Crops 368.9 376.7 397.3 137.8 450.0 405.8 4214.3 459.0 540.2 573.5 Livestock 186.6 189.6 211.8 219.2 219.8 193.5 198.9 223.0 25h.7 258.5 Fish 136.7 141.4 15h.7 169.0 180.5 118.0 161.0 187.1 224.7 2145.5 -29- 62. Between 1966 and 1968, the Government of Ceylon introduced a series of important measures, aimed at stimulating economic growth by fostering market forces. These included: (a) price incentive measures - rises in the free market price through reductions in the subsidized ration for rice, chillies, and other foods, and a ban on potato imports; guaranteed price schemes; and devaluation and other exchange reform measures; (b) agricultural i nput subsidies on fertilizer, planting material, farn machinery and credit; and (c) an expansion in the government's admiristrative, agricultural extension and other serrices. 63. The imnpct of the above mpnmirps on nroduction of rice and several other crops has continued through the 1969/70 Maha crop season. The rapid exDansion of outmit and hi 7hpr nm^rhrptrr nricA for theqR imnort-subst itUtinW crops have resulted in increased levels of agricultural income. Domestic Agriculture 6l4. Paddy production, which accounts for approximately hO percent of domesti c ag- cultural outputh ha b +eern Itaiy e sing duH ng the past decade, but at a much more rapid rate in the last few years. As mentioned above, a rnuber of factors undoubtedly contributed to this achievelment. One Or the most significant has been the government' s successful organization of the naddyJ prduction drive, va.lich w8s reflected in +lte increased a,d mor timely provi-sion of various agricultural inputs and the expansion of the market syst n which accompanied the reZUctiLn in the r,c rat"in. Pro= duction in 1968/69 was affected by a drought in the 1969 Yala season. wn thllie basis ofL Ulle la.st M'Ua h'a-ves't, 1969/70 paddly proAu'c'tion is exp,ect-eu to reach 73.3 million bushels - about 72 percent of self-sufficiencJ. ]3e- 7tween 16]9, Lth ar-ea unduer Iirrgation ± ncreased by 8 Weti J . - e as shown in Table II, the recent increase in paddy production is mainly UV riUUtab'e u1tohghYer per acre yi7eUl A s. Maha Yal.Totail Maha Yala Total Maha Ya.la Total Maha Yala Tot,al Acre age lai-vese 633 389 1,022 916 LU73 1,38Y 979 39 1371 YL4Q 501 ±Sl(IJ- (looD acres) Yietld Perr Acre 31X.6 37.3 35.6 h7.5 h1.6 h6. 17.9 b8.2 1b8.o 52.2 h7.5 W().6 Prodlu ction ( mlli a DU 9h- 21.L.X 4.) 5>36.144 3.) 2. i 6 4.646 9 18. 9 6 5. o LrU9 69.0 (5, 5 els) -30- Se1f-sufficiency in rice production appears feasibl. within 1 to r years, provided no major changes take place in paddy production policy. lhe govern- Ment' s rice prodction plans, whlich aim to nachite self-sufficiency byr 1975 and a surplus thereafter, are presented in Table 7.12 of the Stqt.istic_al PannonAl 65ThegveE.e+ha ecnl rest-ed the secor.d measure of rice to the ration, which had been recduced to one measure in 1966. It was a1'.s announced +atI- + ihe g,rrnment would as s as,n- praA rcablre becomc the sole purchaser of paddy, at Rs. lb per bushel through the G.P.S. (Cuaran- tee PA'Lc '' %c n -u A_1 J -u ^Tll se A measu _ of rato , +;c ^ 5;es J-- At -If7 NiJUI..L * X ±I[ WV aIolt>0 * *10 fG 1 d i .aaou £0 '. . A aw 1 4 Vll ;. . '.'> 4.0 4. 0 CII I CI.J , IU cents. The first measure is free. About 80% of the people are thought to Ile taking up Ile second mmeasu e. Although! there is noofio 4--L, Lli .1UUJ~ 1 Atl'.AJIAu LIVIO 51.J., I.'1 10U L± 1.11-0 £0 4.0 11'. 144 4.4. i..I tl _LL U available, this change is belie:%ced to have lowered the average open market -t.LI LJ auIJ Ii r_ L1 ~ JJ 1II uUL . 11 UL1 iJ ..LL.U.ULl 144 WlOL JC rikce pr ce ly about 20 cents per meas-are. .e :plicalions ol Ile new rice ration policy and paddy purchasing system, for production, the go- vernmentUlI UULAUUV v ILlU lU1-1=cLJl t=AU1CALLJrt 1-C-U.L.Lr 2IMMUIO lIIve UVVII est-1.01CA Vut but their impact is somewhat uncertain at this stage. Since the G.P.S. prlce is considere t,o pr,oviue suficlentI incentive to the proucIer-, .h level of rice production is not expected to be affected, assuming the ar- rang,e.,,entiUs unlder "e propose' schemie, such.1I as V± _) p144 _of U ae t ware- housing and increasing points of purchase, work satisfactorily. D6. Production of SUDSidiary food crops nas increased substantially in recent years owing mainly to attractive free market prices and measures mentioned earlier. The 1967 ban on potato imports led to a remarkable expansion of domestic potato production in the suceeding years, which enabled self-sufficiency to be achieved though at a higher price and a lower per capita consumption level. Production of chillies has increased considerably but two-thirds of consumption is still imported. Table III shows production trends for selected subsidiary crops in Ceylon between 1967 and 1969. Table III PRODUCTION OF SELECTED SUBSIDIARY CROPS Crops Unit 1966/67 1967/68 1968/69 Chillies Cwt 33,25o 58,856 121,981L Red Onions Cwt 507,500 655,h47 8L3,061 Potatoes Tons 8,500 24,803 35,127 Maize Cwt 76,600 180,Lho 2L9,607 Groundnut Cwt N.A. 55,939 96,895 -31- in ri,he case of1 Bnombay oniLons, UexsppL' UUe tl he L [ore'gn exchange burden, Cey'lon continues to depend on large amounts of imports, because agronomic diffi- culties in domestic prVduction have not yet been solvred. 67. One Of the most disappointing features oI Ceylon's agriculture has been sugarcane production. Despite the large foreign exchange bill, and the existence of the basic agro-climatic conditions for domestic cul- tivation of sugarcane, Ceylon so far has not been able to achieve a sub- stantial level of domestic production. As shown in Table Nv, continuous- ly increasing sugar consumption in Ceylon has been almost entirely met by imports. Table rv SOURCES OF SUGAR SIUPW'LlS (thousand tons) 1965 1966 1967 1968 1969 Imports 218 233 226 220 308 (Costsin Rs. millions) (72) (105) (74) (97) (115) Domestic Production 10 4 7 8 9 68. It is difficult to obtain reliable statistics on the livestock sector in Ceylon. Nevertheless, the data in Table 7.8 of the Statistical Appendix provide some indication of general trends. An increasing number of slaughtered cattle and buffalo accompanied by a declining livestock population indicates a long-run problem in the beef industry. Meat pro- duction in Ceylon, except for pork, is considered insufficient and this is reflected in the recent meat price rises. A comparison of 1969 and 1970 open market meat prices indicates considerable jumps except for pork. In spite of recent attention given to the dairy industry, large imports of milk and milk products continue. 6;9. Although the volume of fishery output in Ceylon has expanded, the absolute level of catch is still low, and the large amount of foreign exchange! devoted to fish imports shows no reduction. The Fisheries Corporation, which has received substantial government assistance, has continually operated at a loss. The Government of Ceylon is becoming aware of the need and of the potential for improving the fisheries sector. This has led to the creation of an independent Fisheries Minis- try and the assistance of an A.D.B. fisheries consultant team which is currently looking into the Fisheries Corporation management as well as the overall fisheries resources of Ceylon. -32- Export Agriculture 70. The tea industry, the biggest sector in the Ceylonese economy, con- tributes 1 percent of national income and employs aoproximatelv 800,000 workers. This leading industry, which provided 55 percent of foreign ex- change earnings in 1969, has been declining for many vears. Although the volume of tea production did not fall drastically in these years, the exnort revenue has been declining sharnlyv a a result of the deterioration in the international tea price. Consequently, the contribution of the tea industry to total export earnings has behen dec-easing. Table V shows the trends in the tea industry since 1965: Table V THE TEA INDUSTRY Registered Exports Unit Value of T-n (Cusctomsm Toea FornnYts Ta E.xnnortse Acreage Production Entries) (FOB Price) as % of Year (acres) (million lb) (m.illion lb) a US T e ^mnts+ Total R-.nno-F 1966 596,tb46 h90 !tX1 2. 33 JO 60 1967 598 ,Al) L87 b77 2.22 L)6 63 1O4cO EfO7 enn LA I. I...1 3 Lc 71. ±In view of tILe rXeieUin yeairs pJUVo raVte Vof fLtiLiLzer apLiL.ation and the future reduction of tea land in production because of replanting, Ceylon's tea production is not likely to Alse mrruch in the short run. Al- though Ceylon and India have not reached final agreement as to how the joint tea quota oI 928 million lb under tne Mauritius Interim Agreement of 1969 would be shared, Ceylon is currently working on the basis of 510 million lD p'roduction and 470 million lb exporz (4u million lb domestlc consumption). Production and exports in 1970 fell belaw these limits. Because of this shortage and due to a similar trend in the Indian tea exports, the 1970 world tea export quota of 1,311 million lb seened unlikely to be met. Tne 1970 tea prices on the London auctions averaged 6 - 8 pence per pound higher than in 1969. 72. Based on the long-term prospects for tea export and in order to meet the immediate need to maintain international competitiveness, a fun- damental restructuring of the industry by replanting with higher-yielding -33- clones and Aiversif^ o4fJ su lu.ta -l- A I t --.o.-+-A 4 -be ult 4r,4a tIe about 350,000 - 400,000 acres) is necessary. This requires the economic -se of the resources to b-e released from, the tea inusr Int- er.r keting area Ceylon, as one of the major tea exporters, has had to under- @a\. 1. _CU.L1 I _JL ±5:1 4. _ _4 A _L O ' _ 4 4 _LA I_ J. _It.L.IO. 'A'IL 4 _ ALI~ dJ.IU d receiving an international tea agreement. Both of these objectives have p.rouced LJ.LI.ieu re sultL's so Lar. 73. The Tea eplantumrg OuUbx-uy ul,,Iem ,n 170 j Wa expected to rt in tot:al payments of Rs. 25 million compared to Rs. 21.1 million in 1969. The Crop 1.versifcaction SubsLdy Scheme continued to operate through 1970, and the government provided some technical guidance for replanting as well as Lo- diversificat:.On. In auudidri uo uihe replanting subsidy oI Rs. 3,750 per acre, a fuirther replanting incentive loan scheme has been in- stituted since i969, under -whiCh ioans of up to Rs. 2,000 per acre are granted by the Central Mortgage Bank at low interest rates. Other schemes which have been in effect include the Tea Factory Development Subsidy Scheme and the Tea Fertilizer Subsidy Scheme to smallholders. The tea indu st.ry believes tLat tax burdens are excessive particulr-ly Jn the face of the short-run financial difficulties associated with accelerated tea replanting and expected increases in production costs with the union- ization of tea induEttry labor. Another factor which might be contributing to the! slow replanting rate is the uncertainty of the private tea industry in the face of greater public control of economic activities in general. In 1969, approximately 6,500 acres of tea land were replanted, against the origiral target of 5,000 acres. It was expected that the lower replanting target of 5,800 acres in 1970 would be achieved. The government is now discouraging the replanting of marginal tea land, because of unsatisfactory results. The past replanting records show that the private estates have been replanting at a faster rate than the smallholders. 74. There is no clear performance criterion for replanting because the "Optimum rate" of replanting tea in Ceylon has not been established. How- ever. the current replanting rate may not be high enough, given the urgency of restructuring the tea industry in Ceylon. The comprehensive tea poli-- cies and accelerated replanting and diversification schedules recommended in the previous Bank Economic Mission Report have not yet been formulate(d. A UNDP group is now studying diversification problems, but its results will not be made available early enough for the formulation of comprehensive plans, particularly concerning the short-term uses of the tea land being released. As to -the tea agreement, the present government intends to honor the Mau- ritius Interim Tea Agreement, but its objective is to reach a long-term tea agreement covering a period of 10 years, with a review point after 5 years. The last meeting of the Consultative Committee on Tea was held in New De:Lhi during November-December 1970. During the Meeting, the decisicn to maintain the 1971 global black tea quota at the 1970 level was made. Another meeting was planned for early 1971. -34- 75- Although its absolute magnitude is still sMall, remarkabl]e progress has been achieved in the production of instant tea. Primarily stimulated by the abolition of the export duty and7r-d-'benion of the FEEC system, exports of instant tea have shown a sharp increase as is indicatedl in Table VI: Table VI EXPORTS OF INSTANT TEA - (POUNDS) 1965 1966 1967 1968 1969 1970(Tareet) 26,305 71.923 90,312 281,197 300,000 500,000 76. The rubber industry is an imnortant sector in Ceylon and emplovs about 200,000 workers. Approximately 95 percent of rubber production is exnorted. contributing 1'-18 npercent of exnorh revenues. In contrast to tea, the rubber industry faces no domestic or external demand constraints .-lnce doestic rbber consumption iS -xne.ted to rise and Ceylon's share in the world rubber market is only 5-6 percent. Although the rubber nrice has declined considerAhlv in the nast. the current and nroiected natural rubber price along with the potential for redicing production costs see. f.Qvorqhle enonugh for Ceylon to an.c r_n-qsi A-Irhlle expnnsion in this sector. Rubber production in Ceylon has hppwn substantial an- nual incra_^ao tn +.h_ 15Q+ 4'xr years Thesen 4nr"ease are mainlyr axt- tributable to replanting from 1953, under the Rubber Replanting Subsidy Schem.e Th.e average yield per tapped acre has sho-. a substantial in- crease and yields on replanted areas are double those on old areas. Table VII shows statistics on rubber production and _prOtS since 1965: 9 U1-1E TT £ J.t v. ...... DTI1DD1'D 1DrnTTTO'PTr'MjAb T RT LV nI- Production -4rio r l Year (m lb) Exports U5-Te9) 1965 261 267 2A.O t966 289 275 23.8 ].967 315 299 20.b 1968 328 319 17.0 1.969 332 316 23.0 1.970 356 316 21.8 (E,stimated) -35- 77. Although the government has continued to subsidize rubber replanting since 1953, the annual replanting rate has fallen from about 20,000 acres ten years ago to 10,000-12,000 acres in the past 5 years. This performance is below the current annual replanting target of 15,000. There has been little research into the reasons for this slowdown, but inadequate inceritives to smalIholders is probably the main cause. The 1962 Agricultural Survey revealed that approximately 100,000 acres of marginal land out of the 675,000 acres registered as rubber land had been abandoned. In addition, anothEr 75,000 acres were considered unsuitable for replanting, leaving 500,000 acres to be replanted. The 15,000 acre annual replanting target was based on a 33-year cycle (or 3 percent per annum). Through coordinated activities of the Rubber Research Institute and the Rubber Control Department, it is hoped to accelerate! rubber replanting in order to meet the above target,, Although the goverrnment does not consider it a priority area, a subsidy progra'm for diversifying uneconmic rubber land into other crops has beeni included in the Crop Diversification Scheme. Some permits for new planting of rubber have been issued, but it is not encouraged and is not subsidiz;ed under the Replantiing Subsidy Scheme. However, there is a fertilizer subsidy program for the clonal and budded rubber planted under the Replanting Scheme or new planting permits, for smallholdings and small estates. In the manufacturing area, Ceylon is beginning to give more thought to the new processed rubber known as "block rubber", in addition to the conventional sheet rubber. The government is now considering establishing a factory for new processed rubber for smallholders. 78 Coconut cultivation occupies the largest acreages (1.15 million acres) amone plantation crops and is socially the most broad-based of the planitation crops. Statistics on coconut production are not reliable, but Inroduction in 1970 was expected to reach roughly 2,800 million nuts. compared to 2,600 million nuts in 1969, a year which was affected by hbad weather. Althoueh coconut is traditionally considered an export crop, more than 50 percent of total production is now domestically consumed. Groonuiit eports contribute about 16 percent to the foreign exchange eaznings. Production in the past five years was substantially below the level esti- materi in the Agrieultural Develonment Pronosals 1966-70. 79. The notential and need for expansion of this crop on the one hand, and the basic institutional problems associated with organizing smallholders for the nocnnnt expnansion drive on the other, are well recognized. One of the difficulties is reflected in the government 's unsuccessful effort to iAncrease fertAi H r applicAtion bv smnailholders- FRVrn iinnpr t.he 50.-_o cost sharing arrangement and despite the demonstrated profitability of fertilizer- use the, actual fertilizer nnpli-ratAnn fell far helow t.he esti- mated optimnui level. Plthough the absolute level of fertilizer consumption for cocrnui+ts has* inr-reaed biv approximntely 50 nercent in the past fiue years, it is still only slightly higher than one-third of the level con- sidered op.timur-. In addition to fertilizer, the government provides subsidized high quality coconut seedlings through the Coconut Research -36- Institute. An important coconut production expat'sion scheme, under which a government subsidy for the rehabilitatif`n df 'thbe x'iXting coconut land as well as planting on new land was plafteTd, did not material,ize in 1970, as scheduled. The scheme is now undet- refiew by the new government. 80. Expansion of the ,minor agriculiuta l P1ttA have not been signifi- cant in absolute volume. Table 7.10 of the St*tistical Appendix shows the past three year's tread for these expoftbs. The 'isbbt 'no'table minor export item which registered go!'th has been cinnomon pVoducts. The goverement plans to give more emphasis to *ihor agricultural eXpoYt crops by creating a special unit for subsidiary crops and mino -e#pbort crops in the Ministry of Plantation Industries. -37- C STRATEGI. FO nc Ar un R *f Uli l uTf11JTv ri rAIA I 81. Ceylon nas undergone a brarxu- a ,.a uii p-ublicLu pulLuy areas sinct bhe change of government in 1970. Many of the measures recently undertaken seem to reflect the present government's policy shift toward greater public con- trol of economic activities and a higher priority on social and redistr-Lbutive goals relative to the objective of growth. However, the agricultural poliCy revealed so far seems to be fairly consistent with that of the previous go- vernment. This is reflected in the new government;s implicit recognition of the recent achievements in agricultural production, as well as its accep- tance of the last government's Draft Agricultural Development Plan for :L971- 1977 as an initial basis for agricultural plans. In addition to this plan, the government has initiated an ambitious employment program in order to create 100,000 additional jobs for which Rs. 200 million has been provided in this year's budget. This program concentrates heavily on agricultural development. 82. The program as proposed suggests that the government is seekin-g to create permanent employment to increase output rather than "make-wor1c". The eissential elements of the agricultural part of the new employment pro- gram include: 1/ (a) a coconut program aimed at more intensive use of coconut lands with inter-cropping, pasture and dairy farming, greater use of fertilizer, replanting of old plantations, etc.; (b) cultivation of cashews on marginal lands; (c) cultivation of mulberries and development of the silk industry; (d) rehabilitation of the existing cocoa plantations and establish- ment of new cocoa plantations; (e) increasing production of fruit and vegetables and cultivation of fLowers by utilizing unused homesteads and gardens; (f) cultivation of subsidiary food crops including Bombay onions, chillies, and pulses; and (g) intensification of livestock farming and acceleration of the fisheries program. 83. In 1970, Ceylon completed the Draft of the Agricultural Development Plan for the period 1971-1977. This is now under review by the government. It isl understood that the Plan is generally accepted as a framework for agri- cultural development programs, although the budgetary constraints during the implementation stage might alter the picture. This plan is essentially an extension of Cevlon's Agricultural Development Proposals 1966-1970, which 1/ As the program wtas drafted in a short time, its elements may well change considenablv as concrete schemes are Drenared for execution. -38- concentrated on import substitution largely througrh the rice production drive. However, the new plan i.s more ambitious and comprehensive than the previous proposal as it contains additional diniersion ainu er1pMaLiIS, in - cluding: (a) encouragement of crop diversification in paddy fields 1through more systematic and intensive land use without reducirng the area for paddy production, primarily as a means of' providinrlf supplemental farm income; (b) development of a more diversified farming system for individual farm holdings, particularly in the major Colonuzation Schemes; (c) regional specialization i.n agriculture; and (d) greater recognition of the importance of optimum physical and Institutional inputs in agriculture. 04- Given the structure and the current position of Ceylon's economy, the agricultural policies pursued will constitute one of the major determinants of the country's future. Obviously the sectoral policies and priorities must serve national economic objectives. The stated economic objectives of the government are: accelerating economic growth, reducing unemployment, maintaining price stability, improving the balance of payment position, and promoting redistributive justice through greater social control of economic activities. The government has already undertaken a number of measures to achieve some of these objectives, particularly in the areas of employment and distribution policies. The most critical immediate problem Ceylon faces is the balance of payments problem and the shortage of resources for invest- ment. Ceylon's capacity to maintain an adequate level of imports is a necessary condition for maintaining reasonable price stability and an acceptable rate of growth. Since agriculture dominates both Ceylon's exports and imports, and given the poor prospects for an immediate and rapid growth in industrial exports, whatever improvement can be achieved in the balance of trade must be through the agriculture sector. Therefore, the strategy should be geared to the twin objectives of increasing agricultural export revenue and reducing the food import bill by increasing import substitute crops. The difficulty in implementing this policy is that it requires a current consumption to be kept lightly in check, a task which successive governments have so far been unable to accomplish. 85. Since progress in import substitution largely depends on domestic policy variables, whereas increase in export earnings is a function of both domestic productive capacity and external market conditions, Ceylon must fully exploit the potential for expansion of import substitution in the short and medium term. In the long run, the emphasis will have to be shifted toward export expansion if Ceylon is to realize and maintain a high growth rate. Rven in the short run, however, there are some positive -39- measures which should be taken in the export sector. A coconut exoort drive should be implemented by increasing production through more intensive fertilizer application and providing price incentives for exports. The possib:ility o:F increasing rubber production and minor export crops should be fully explored. As to the tea industry, Ceylon shou].d try to m.ximize her external revenue within the iimit of the annual tea export quota. hnis would require tea replanting to be based on a carefully determined long-run replanting rate which would maximize income from tea exports during the replan-ting period. 86. Understandably, the reduction of food imports has been a sensitive issue i.n Ceylon because of its political repercussions. However, Ceylon must critical:ly examine cutting some of the major food import items on the basis of nutritionsl value, substitutability and technical and economic feasibility for domestic production. Table VIII shows the value of annual food imports by major categories: Table VIII Imports of Ma.jor Food Items 1965-69 (Rs million) .26 1966 1967 126 1-969 All Exports 1949 1700 1690 2035 1916 All Iniports 1474 2028 1738 2173 2543 All. Food Imports 602 954 781 987 972 Rice 1.44 367 211 341 257 Flour 98 113 229 250 255 Sugar 72 105 74 97 115 Milk & Milk Products 77 77 66 74 52 Meat & Fish 61 101 56 70 87 Potatoes 18 24 7 - - Grams and Pulses 39 64 53 56 78 Onions 21 20 19 1]7 17 Dried Chillies 30 43 29 34 26 Others 42 40 37 48 85 'rhe returns to the import substitution drive have already been demonstrated by the success stories of potatoes, rice, chi-llies and other crops. Whi'le a rapid increase in domestic crop production may be difficult to achieve in the short run, curtailing the imports of these items wou:ld provide an immediate and direct improvement in the balance of payments situation, and the resulting price effect would provide an incentive for domestic production or consumption substitution. Although there has been remarkable progress in paddy production, it may be possible to do more, even in the short run, largely by more efficient water management and optimal use of agricultural inputs, particularly fertilizers. Preventing the apparent waste of water in the Mr4ha to increase water availability in the Yala season should he encouraged. More intensive application of fertilizer in the Maha, particularly in the dry zone, should also increase paddy production. Possible short-run gains t'rom labor-intensive drainage improvement and minor irrigation should be fully exploited. The resources a]location for minor irrigation has been arbitrarily determined at a certain percentage of the total irrigation sector budget. But a social cost/benefit analysis might reveal that resources could be more efficiently allocated to labor-intensive minor irrigation sclhemes than to large-scale irrigation works. Every step should be taken to ensure the successful operation of the GPS so that price incentives to paddy farms will continue. Considering the fact that 50 percent of the total food import bill consists of rice and flour, the government should not relax its emphasis on paddy production both in the short run and for many years to come. The long-term rice Dolicv bevond the self-sufficiencv level and the long-term land use program in general, require a critical examination of the two alternative emphases with resnect to irrivation: imnrovement of existing irrigation vs new irrigation. The pressure of population expansion mvy lead to supporting new large-scale irrigation expansion, committing large sums of investable resources which may have better alternative uses. The 7-year rirce nroriyition plan of levlon- which aims to- achieve 108 percenl. self-sufficiency by 1976-77, assumes farming of: (a) 126,000 acres to be hpbnefit.-td bhv irrigation irnnrovementi unrier the Mahaweli ProietS.te 2en ofI Phase 1; (b) 103,000 acres new irrigation under the Mahaweli Project, Step 2 nf ' ePh ]; (c) part of the 21-000 aeres of new lani to he made availnhbe under the Uda WJlawe Development Scheme - a colonization scheme for rice and other crops; and (d) 20,000 additional acres each year uinder the normal irrigation expansion program. In the final year of the 7-year plan, it is es_ti-;rte-d that the total area under padrdv prmoduction and 4the pe-r acre ,;ld will have increased by 16 percent and 45 percent, respectively, from the 1969-70 lee V CA 0 On tuhCle 4 asis of current yields, Vth e m of t-he 7-yea pl-- seems reasonable, assuming appropriate policies are followed. 87. The long-run policy issues on the subsidiary crops are basically thle sa,f,e as DlLiose iUn tihUe shUlortu run. A continuous effort Uto reduuce imports must be accompanied ':?y a reasonable level of domestic production incentives. Tils also applies to o"u-i food ±impor-t it s 11 sugar, L fih Udairy products, chillies and onions. Ceylon should seek the fullest economic exploitation of the fact that domestic production of mOst major import items is technically feasible. Considering their large import bills, part;icular emphasis should be given to the problems of fisheries and sugar production. The problems of water supply and price incentives for domestic production of sugarcane are largely matters of government de- termination. The high per capita sugar consumption rate and the generally held view of the unsubstitutability of imported fish may deserve a care- ful re-examination. Ceylon's fishery resources have not yet been clearly identified. The ADB study results, due sometime in 1971, may provide a useful basis for determining the long-term relative prospects for coastal and deep water fishing. In any event, the programs for mechanization of fishing boats and improvement of marketing systems will have to be con- tinued for some time to come. Expansion of the livestock industry would also be a desirable objective in the long run. This will require a plan for increased supply of pasture as well as increasing feedgrains. One approach to this sector's growth might be more efficient use of dry zone lands. 88. A number of long-run development policies for agricultural exTorts, were outlined in last year's Economic Mission Report. The expansion of cocon1ut products exports not only deserves short-run attention but could be a key long-run program. Basically, there are two problems to be solved in this sector: increasing the total output of coconuts and exporting a grea-ter proportion of the total output by restraining domestic consumption. Coconut production can be substantially increased by more intensive use of fertilizer, particularly on smallholdings and small estates which oc- cupy some two-thirds of the total coconut land area. Extension services which are inadequate at present, should be stepped up and an additional effort should be made to demonstrate the profitability of more intensive use of fertilizers. Further investigation would be necessary to identify the reasons for the low rate of fertilizer use in the: past, in spite of the government's cost sharing arrangements. If necessary, the government must be willing to increase incentives for fertilizer use. Plans for increasing the land use efficiency of some 1.1 million acres registered as coconut fnrms should be formulated. Determination of the replantable area and of the replanting rate, the extent of diversification (though it is con- sidered oi lower priority), identification of bottlenecks in replanting and rehabilitation such as the shortages of new seedlings at the Coconlt Research Institute, should be included as part of this plan. Possibili- ties for livestock and intercropping on the coconut farms should also be fully explored. It is understood that some of these approaches are now being considered by the government and the UNDP crop diversification study team. 89. In view of Ceylon's bal]ance of trade deficit and the market con- straint the tea industry is faced with, the Government of Ceylon should give far more attention to rubber exports than in the past. Considering the relatively favorable long-term prolection of natural rubber demand and prices, and the potentia.l for increasing the, per acre yield and for re- ducing costs by replanting rubber with improved clones, Ceylon shoul.d accelerate the current rate of replanting and explore the possibility of expanding rubber land. In order for Ceylon to maintain a competitive position with other natural rubber-producing countries, this reduction of production costs is a necessary step. Any accelerated rep]anting program must be carefully planned and some new land should be planted in order to avoid jeopardising production levels. The government should consider subsidizing new planting and increasing the replanting subsidy, if this is necessary to accelerate the pace. The 33-year replanting cycle should be re-examined to determine the optimum rate of replanting. This optimum rate should be determined on the basis of both technical information and a. reasonable assumption of Ceylon's ability to implement an accelerated replanting cycle after identifying she causes cG2 the poor replanting performance in recent years. The increasing attention now given by the government to "?block rubber" manufacturing is an encouraging sign. A more vigorous plan is desirable in this area, and in this connection Ceylon's current target of 30,000 tons of block rubber production by 1977 should be re-examined. Above all, it is important to assure sufficient price incentives to the rubber producers, if Ceylon is to exploit fully the foreign exchange earning potential of the rubber industry. 90. Although prosDects for expansion are poor, tea export earnings will continue to be Ceylonts main source of foreign exchange within the foreseeable future. A basic long-term tea policy oblective should be to maintain and possibly expand the current level of tea export revenue. Ceylon must maintain the current level of nroduction with less resource commitment by replanting with high yielding clones, and restructuring the tea industry in such a way aS to realize the most Aconomi G use of the surplus resaurces which will be released from the tea industry. In the nrevious Economic. Report, it. was reo.ommended that the (Government of Ceylon formulate and announce a comprehensive tea policy and detailed replanting and diversirqification qrhAehths diring 1970n The report also nointed out that Ceylon needs to work toward: (a) reaching a long-term tea agreement woi rhent+ rin +g tero"w+h If deAmannd for% tea in I owe-r inrcome cou,nti s;-i Pq (b) promoting tea consumption in the countries where coffee consumption -;! M a-ri * A ( ,&\ fr ,n+l-t r. ,,r1, ,,fP+ +.m r irl ,-t Pv41.h ls~~~I' high and (c) fuFe pr8.oessin of.8 ta ln GeylonJ . Pavl ....to the change of government and.partly due to lack of detailed agro-economic 4- r - + - -- - _ A4_er 4-r; _+ - (-------7S 1- n -n+1--A hk- +h1 TEnTP ,- lVIt.d . Ll La VlAtLl 1-I. LLVJ AV ± C _CLUtiJI }J ~O~ LAU.> . - D ..A 50 VLZJ J . t . -_ team), Ceylon has not yet been able to formulate a comprehensive tea policy includi ng replanti- ng andu diversificatio. YLPVJwstr h ai Xbe. of the tea industry and the policy implications seem to be generally re- cognizelu andU are cuIrL-enIt,L.y- under - aciv 4onsidaion b-y t4he goVe n The formulation and announcement of the long-term plans and policies re- garding the tea industry and clarification of the government's position on importiant issues such as intended degree of government control of the in- dustry, are strongly urged, An explicitly announced long-term tea policy will help stimulate the adjustment process of the tea industry by clearing away some of the concerns and uncertainties shared by the private tea estates in recent months. Since recent fiscal policy changes relating to taxation, price incentives and the FEEC system have resulted in a favorable net effect on danestic crops relative to export crops, and considering the heavy tax burden on the tea industry,a thorough review of policies in relation to tea industry should be undertaken. This would provide an opportunity tc analyze what has been termed the "financial crisis of the tea industry in Ceylon", and to assess its current profit position. No private sector in- dustry can be expected to survive in the long run without a reasonable re- turn on investments. Agricultuiral Statistics No. 7.1 Value of Pgricultural (utput: At Current Market Prices: 1963-1969 7..2 Value of Agriculturql Outpuit: At Constant (1963) Market "rices: 1-963-1.969 7. -1 VnViue of Minor Crops at CDrrent Prices 7., - broducerst Prices for °rincipal Agricultural Products 7,,5 Retnail Market, Prices for SeIected t.gricultural products 7.6 P.Rce-: asic Statistics 7.,7 Tea: TThsic .ta.tistics 7?,,P, Ch,nges in T,ivestock l'opulation and Production 7,0 Major 'iport, Crops: Producti.on and Yields 7.10 Exports of Minor Agricultural Products 7,. ]1 Ferti.I.izer Consumption in Ceylon: 1965-1969 7,, 12 Plan for 3elf-Sufficiency in Rice (1971-77) Table 7.1 VALUE OF AGRICULTURAL OUTPUT - 1963 - 1969 kT CURRENT MARKET PRICES (Rs. Millions) Crop or Product 1963 196L 1965 1966 1967 1968 1969 * Tea 916.7 910.L 92Ih.7 837.7 791.1 915.6 818.J Rubbeer 225.6 22h.7 2L2.7 260.6 234.7 256.9 381 6 Coconut 2q-)1t A)7. 1i7.1 3?7.6 317.8 ht21.1 ),37.0 Minor export. erons 38n0 50=6 .6.6 L5.8 3 [5 53 66 7 Riee r506-n 0 20 A 376= )L75 9 6630 890 1* 900 2 Ot.her fnod rpnnsa AQ 7 ),nL0 b05n.8R 1Lv1. _, 5 9Q n SOn 5731 15 Tobacco 17.7 1R.1 23.R 2A.7 27.5 29.b 3b.1 Bete! &A I A 'O A A)* 3. 29 7 29. 0 3I1, M4 scellIeaneous agricltura products 18.5 20.3 20.3 21.2 22.3 27.0 28.2 Livestock 181.7 192.1 193.5 198.9 223.0 25b.7 258.5 Firewood & Forestry 88.6 95.7 102.3 103.0 109.9 123.2 151.2 Fish 130.5 127.1 148.o 16b.0 187.[ 22b.7 2L55.5 Total: 2783.7 2905.6 2861.0 2913.1J 3108.9 3769.6 3929.5 Source: Ministry of P]lanning and Employment, Departrment of Cw3nsus & Statistics. " rruov± snoria. Table 7.2 VALUb OF A(ISRICUIi.AM, uUITPUT -126J - 1969 AT COuNSTANT (1963) MARKET PRICLu Crop or Product 1963 1964 1965 1966 1967 1968 Ji9( y Tea 916.7 911.2 951.5 926.8 920.8 937.8 915.8 Rubber 225.6 263.6 279.2 309.6 307.6 319.5 3?2i-. Coconuts 255.4 284.3 267.2 243.0 235.1 203.6 231i.3 Minor export crops 38.0 49.1 42.2 43.5 42.2 148.1 57.3 Rice 506.0 519.4 165.9 470.0 565.3 6614.3 677.3 Other food crops 369.7 389.4 368.9 376.7 397.3 437.8 140.0 Tobacco 17.7 16.8 22.9 22.8 21.0 24.7 28.7 Betel & Areconuts 35.3 36.2 37.1 37.9 39.1 39.6 39.9 Misc. Agricultural rroducts 18.5 20.3 20.3 21.2 22.3 27.0 28.2 Livestocks 181.7 185.5 186.6 189.6 211.8 219.2 219.8 Firewood & Forestry 88.6 95.4 103.4 105.1 111.7 102.8 108.3 Fish 130.5 121.3 136.7 141.4 1.7 0 180.5 Total: 2783.7 2895.5 2881.9 2887.6 3031.9 3233.4 3264.1 SourGe- : nMinitrv of Planning and Enployment. Department of Census & Statistics. * Provisional. T)-Ia 7 ' 11iTTM AV IfTfID fMflO A tnrpty my T n(T I / V u vrLLU £ JL 1 rFL 'L1v LlA.JJLO Jl U UIUVg ± U1..V A.) S/ Gro g2 °° 1.;-H _ _ H Kurakkan 6.5 7.2 9.0 7.5 y.y Maize 4.1 4.7 5.0 6.5 9.3 Green Gram 2.7 1.6 1.8 2.4 2.9 Cow Pea 1.4 1.6 1.6 1.5 2.0 Gingelly 6.1 4.4 5.8 8.8 7.9 Ground Nuts 1.8 1.3 2.2 5.5 4.1 ManLoc 41.3 41.7 65.3 89.4 87.5 Sweet Potatoes 8.6 11.6 19.3 22.5 18.6 Potatoes 1.3 2.8 7.9 26.7 32.4 Musl;ard 2.6 2.4 1.6 2.0 2.2 Pepper 33.5 33.7 30.7 31.5 41.1 ChiLlies Dried 1.0 1.5 5.7 8.9 10.3 Red Onions 16.6 19.2 19.9 22.7 Totsl: 127.2 133.8 1 75.1 233.1 250.9 Source: Ministry of Planning and Diployment, Departnent of Census & St,atistics. j EXcluding meneri, sorgham, ginger, tumeric, green chillies and coff'ee. F/ovisio nal. T.qh1A 71Ji PRpnTjI1rRS' PRTfl4N FIR. PRTNflTPAT. AfIRTMIT.'TTRhT. P3rnDUTTP'I' !nmnnt.ei1 tv TTni + IQK 1 QCA 1 Q6J 1 QOA 1 OcF 1O7 loAA 1 o1o* Tea; TLb. 1-.89 1.82 1.81 1.76 1.67 1.54i 1.80 1.68 Rihher ThLb. *96 .7)4 .70 .71 .71 .71 .72 .73 Cocorm.ts Per' I r _in 1 A .0 1 14. 14 5a.t 5. ° * rv) I * S on. r J . 2ri Pi ce WAMe0-km 717- 97 .72 76 7A .1 1 .V 0 rvl Other C=_PB .a.Ur 'Tkan >sA 1 '7 O if) 1A0.8 0 977 0 .54. I 0.2 128 A 14.0 5 17-1 I *-J . O%_ 7.,,I 7 .J4 I Wo L7 I r-7v I4.'J ULl .. I U ti II 1 CAl 130 0 cSf1 r1 Q i oo I Lre I'I 4L~ Ii L'-3 i. ne I IaizeJ I Wj 7_J3 I9.56V I' C-.65J) I2.6 14. 14.14- IL4.3) G..reen,.r. ram e) ' rvA 20. ZO .' 5 19.98 1 7. -34. 2.29 2n 7.17 29.87 UJ.~~~~VLk UJOili ~ ~ ~ ~ ~ ~ ,, r- 74 * v U_, 17.Yu I f.)~4 cc r- I.- I ( Cyt.of i-ngelly "9.80 22.17 25.56 2538 189 2256 2754 22.58 M'J .7 I.o 2 '7~ .7 l~ -i IL .71-7.r713 .7 I1 74 94 00 1 f'L . a lrr o -i %O fi 4 4 .'"' aI I 0 4.. a in 4-. .f *t ,-. I 1 f Sweet Potatoes 10.9 11.75' Y.4y 8.>Y2 9.o2 13.38 15.04 14.2( Mustard n 1uo.30 95.20 105.28 1 4.24 110.42 75.05 67.20 92.50 Pepper '129.40 4 122.64 118.64 193.76 172.084 140.0 140.00 160.00 Chillies Dried " 94.29 95.85 102.74 103.01 152.65 252.00 268.85 228.15 Red unions n28.!5 26f.49 32.21 26.38 31.11 30.40 29.0W 30.75 Cow Pea - 15.96 17.64 17.90 19.01 16.51 17.00 17.43 Ground Nats - 14.73 14.13 14.36 12.51 16.33 19.51 18.66 Potatoes n- - - - - 52.16 74.20 61.15 Fish n 66.61 72.49 75.98 78.47 84.05 87.82 96.38 98.57 Source: Ministry of Planning and Employment, Department of Cenus & Statistics * Provisional Table 7.5 RETAIL KARKEI PRICES FOR SELECTED AGRICULTURJL PRODUJCTS (Rupees) 1965 1966 1967 15968 1969 1970 Jan.-Oct. C.- l.X -O.MA'- C. QpM. C. C ).M. C.. O0.H. C. O.M. C. O.M. Rice (raw & parboiled) (per neasure of 2 lbs.) .85 .82 1.11 1,.19 1.20 1.21 Dried Chillies (per' lb.) 1.26 1.41 1.47 1.9 0 1.63 3.27 1.60 4.00 1.60 3. 02 1.60 3.86, Red Onions (per lb.) .30 .35 .28 .29 .28 .34 .28 .42 .28 .35 .28 .41 Bomlbay Onions (per lb.) .25 .28 .26 .259 .26 .32 ,.31 ,141 .27 .31 =32 .37' Potatoes (per lb.) .25 .32 .26 .32 .47 .71 .. 1.01 .65 .86 .76 .85, 1/ C. - Corrtrolled price; a regulated price as at co-oplerative stores, etc.. 2/ O.M. = Qpen narket price Source: Ministry of Planing and Employment, Department, of CenEsus &c Statistics,, Colombo, Ceylon. Table 7.6 RICE: BASIC STATISTICS Rice Production ]Net Acreag.iarveBted 1/ Avera Yiedl Per Nei; (niS~ ~ ~~~~~~~~~~~7- Slr;inni¢hii IL ";arAeistedi (bushels) Year Maha yala Total maha Yala Total Hkaha Yala 1959 21.9 14.5 36.4 64)j.1 39B.7 1,043.8 34.1 36.14 19,60 26.3 16.7I 43.0 7285.5 455.5 1,18h4.o 36.1 36i.8 1961 27.1 16.c) 43O1 7514.14 111.4 1,195.8 3:5.9 36.5 1962 30.3 17.8E 48.1 795.9 472.6 1,268.5 3,8.o 37. 7 19,63 31.6 17.6 149.2 8314.5 462.1 1,296.6 317.8 3E8.0 196S4 32.1 18,.14 50.P5 832 .8 1471.7 1,3014.5 3e.6 3c8 .9 19,65 23.1 13.2 3603 6765.3 379.9 1,056.2 31h.1 31,.7 19656 30.7 15.c) 15.7 856.o 4219.5 1,285.5 3 5.9 35.0 1967 34i.9 20.1 55.0 85%.14 4765.5 1,331.9 140.9 142.0 19658 143.5 21.1 614.6 9165.2 1472.8 1,389.0 147.5 44U.6 196$9 46.9 1b.59 65.8 916.7 46,0.9 1,308,512 51.2 148.2 1970 49.5 23.8 - 73J3 * 947.9141 501.057 * 1,448,998 52.2 '7.55 * 1971 ** 53.91 25.56 79.47 992.590 5114.556 1,507, 146 514.31 149.68 17 The net acreage! harvested i.s estirmuted tolbe 85% of the gross area planted. Sources: Annu.al FR t 19568 Central lank of Ceylon; Statistical Abstract of Ceylon. Ministry of Agriculture and Food. * Provisional ** Targe ts Table 7.7 BASIC STATISI1ICS - TEA ) (ii) _____iii) (iv) _ () J) _ (vii) Seedling Area in Bearing Clonal Area in Bearing Year 7otal Acreage Acreage of tea (a) (b) (c) (a) (b) Total registered uprooted and in bearing nield Acreage Output-lbs. Acreage Output - lbs. Output tea acreage inznture tea (clonal and per acre lbs. seedling) lbs. 1765 .. 5!,308 19,008 575,3C0 872 572,943 5oo,T43,339 '2,357 3,031,000 503o,1 74,339 1566 .. 5!6, U5 21,61B 574,827 8448 569,950 483,385,925 L4,877 6,729,5(0 490,115,4~25 15167 .. 598,814 25,68o 573,134 839 565,854 475,(81,35D 7,280 11,571,0G0 486,652,350 1968 *- 597,490 26,261 571,229 851 560,3554 4L7,356,782 10,375 18,248,500 495,605,282 15769 .. 597,500 27,958 569,512 824 555,8,54 457,752,464 13,688 26,,469,500 48b,221,!64 1970* .. 597,500 28,189 569,311 n.a. 550,354 n.a. 18,957 n.a. L476 ,o,C )CO Estinated Source: Ministry of Plantation Industriesi, OffiLce of Tea Control. Ta'ble 7.8 CHAN'GE'S Ih LI-JJS¶DCK POPULATIOIN AND PRODUCTION Popula.tionr Year Cat tle Buff alo Poul trv Pi Sheep 19c'65 1.903,576 1,0)51,09 6,089,933 116,9-15 31,586 1966 1,715,7559 832,36b ',500,219 122,069 29,930 1967 1,659,226 76L,5h3 6,255,77h 128,189 2b,593 1968 1,659,6'03 '783,228 6,701,873 124,377 214,819 196J9 1,584,,,j62 '76 5,;j37 6,578,032 108,313 28,260 Plroduc:tioon TFnumbexs slaughtered) Sheep Mutton Milk YeaLr Cattle Buff alo Poultry PiXs Goat (mil. bottles) 196c5 189,756 17,B 78 2,152,22) 13,735 1o40,166 223.0 l966 22h4,617 18,500 2,3L°2,92Lb 17,162 139,282 2313.2 196' 7 221,9 4 21,000 2,258,708 19,790 160,228 2L5.L 1968 227,082 23,500 2,109,938 18,926 16o,622 257.8 1969 236,735 211,623 2,369,062 1s,5142 125,203 27O. Source : Yinistry Of Planning and Employmret, Dapartment of Census and Statisti cs. Table 7.9 MAJOR EXPORT CROPS: PRODUCTION AND YIELDS EST. 1965 1966 1967 1968 1969 1970 Proluction Tea (m. lbs.) 503 490 487 496 484 476 Rubber (in. lbs.) 261 289 316 328 332 356 Coconut (m. nuts) 2,841 2,630 2,589 2,778 2,616 2,800 Yields Tea (lbs. per acre) 872 848 839 851 824 n.a. Rubber (lbs. per acre) 590 618 643 6'71 n.a. n.a. Souxce: Minrstry of Plantation Industries. Table 7.10 EXPORTS OF MINOR AGRICULTURAL PRODUCTS 1967 68 1969 1. Coir fiber mattress ('000 cwt.) 1,065 1,260 1,180 2. Coir fiber bristle ('300 owt.) 538 564 507 3. Tobacco, unmfg. ('2)00 lbs.) 942 1,340 709 4. Citronella oil ('000 lbs.) 338 298 403 5. Cinnamon oil ('000 lbs.) 45.0 80.6 95.1 6. Cinnamon quills ('000 cwt.) 52.8 61.8 65.9 7. Cocoa beans ('000 cwt.) 23.2 34.8 25.4 8. Cinnamon chips ('000 cwt.) 7.9 16.6 21.6 9. Pepper ('000 cwt.) 2.0 16.2 17.9 10. Leather ('000 cwt.) 10.2 13.4 11.9 11. Coir yarn ('000 cwt.) 7.0 5.7 8.9 12. Cloves ('000 cwt.) 0.85 0.95 4.6 13. Chocolate & cocoa preps. ('000 lbs.) 0.49 4.6 n.a. 14. Fruit, tinned or bottled ('000 cwt.) 0.8 4.5 3.7 15. Cardamoms ('000 cwt.) 2,4 2.5 3.2 16. Fish ('000 cwt.) 3.7 3.1 2.6 17. Nutmeg ('000 cwt.) 0.76 2.1 2.5 Source: Ceylon CustomB Returns and Annual Reports of the Central Bank of Ceylon for 1968 and 1969. Ta;ble 7.1 1 FELILZSt OONSUTION 1T2 CEYLWN: 1965 - 1569 erLirunr N'atrientA -___ < ___ J prodwsE) _ toas) _ - siav <>r~ - Cn k j- -£- t ia_ Urea Pct+4sh Others !I 1I20 1. Tea 19;5 o17,605, 125 22,054 27,332 4k,M6 22.2 6.1 15.0 1966 102,562' 135 18,728 26,555 10,631 21.1 5.1 14.6 1967 106, ii 625 16,689 20,824 5,244 21.9 4.6 11.4 i >68 95 ,n0'43 6,31 s lh' 99'8 2v,529 9,752 22,5 4.1 11.3 i {ist 711,75575 10,209 -13,727 18,545 7,493 19.3 3.8 10.2 2. Rabbez_ 1965; 7,96L. 3 7,959 2,646 3,2 1 1.7 2.2 1.4 1 9m 8, 405 i 8,291 2,927 3,088 1t7 2.3 1.6 1i967 &,7l1 15 8,204 3,154 3,t 12 1.8 2.3 1.8 1I68S 8,65 _ 6,h22 3,183 2, 7Th 1.0 1.8 1.7 195169 8,160 15 8a,84 3,784 2, 716 1 7 2.2 2.1 3. CoconLt 19f65i 16,t4;1 16,142 16,142 - 3.3 4.4 8.9 17,497 17A98 17,497 3.6 4.8 9.6 196,7 16,529t 16,529 16,529 3.4 4.5 9.1 1968 29,849 16,547 16,568 5 6.1 .-5 9.1 1969 29,85C0 14,950 14,929 6.2 4.1 8.2 4. Pad 196,5 17,5259 5,38 10,825 4,690 710 6.1 3.0 2.5 1966 19,181 8,780 10,3369 6,094 1,379 8.0 2.8 3.3 1*6 26, 155 15,691 18,118 12,213 4.327 12.6 5.0 627 26m701 25,684 11,250 8, 1 06 15,790 17.3 3.1 4.5 197659 23.28W 26,223 7,71 9498 1, ,513 16. 2.1 5.2 5. Otherz. ,965rA V,2, 20 7,311 3,746 11,568 2.L4 2.0 2.0 1966 13,085 20 10,015 4,881 9,791 2.7 2.8 2.6 196r 16,874 9,381 8,031 7,223 3.5 2.6 4.4 1 966 17,168 676 14,808, 8,157 11,099 3-5 4.1 . 5 19659 18,6574 1,112 118,278 7,403 10,515 4.3 5.0 4.1 6. Total 1965; 160,962 5,686 64,291 541,556 19,558 35.8 17.7 30.0 1966 160. 73(1 8 1 S i9 M.. gm 57,. 92 59 2 31.0 1967 174,463 16,J338 68,921 60,751 20,4o6 ,3-4 19.0 33.4 1968 177,406 32,706 64,025 56,543 39,420 5T.3 17.6 31.1 1965 151,690 37,559 62,823 54,109 39,235 48.4 17.2 22.6 Soure: MiListiry of Plantation Industry. Table 7.12 PLAN FOR SEI?-SUDFICIENZYE IN RIC.E. (1971-7!r)1/ ,.Net Area Harvested Yield per Production Demand Self- Dif'ference 11-12 Acre f for sufficiency Population Area laid Kaha 'Yala Total _ _ Maha Yala Iotal Paddy Pa-Hr Ric out for MIaha Yala paddy M.i' on 2illion cultivation kAres Acres Acres Million Bushels Bus ie.s Bushe's To-s Acres Bushels Year Millions 2 3 5 6 7 8 9 10 11 12 13 1' 15 '?f7-6-,' 12,^72 1,3_?,056 916,175 h7:2,842 1,389,017 4 7'. 9 4h.59 43.51 21.08 64.59 99.3 65.0i -34.71 -L92,619 '9$'-j3 12,3'i1 1,386,709 916,760 391,752 1,308,512 51.23 h8.2L L6.96 18.89 65.85 99.9 65.8,5 -3'.14 -L&h,s3: '-s$3-70 12,616 1,336,753 9M7,9L1 501,057* 1,Uh8,998* 52.21 h7.55* h9.h9 23.82* 73.31* 102.22 71.71 -25.91 _ :,, 19' :-71 12,896 1,h09,753 992,590* 514, 556* 1, 57,16a* 54.31* h9.68* 53.91* 25.56* 75. 7* tDL.51 ?6.:' -2^.1' -355,373 7'i-72 13,185 1,5 29,753 1,540,373 56.71 87.35 106.83 81.'76 -19.5a -27?, 6: 1972-73 13,550 1,550,253 1,563,373 60.58 95.00 109.23 86.57 -15.23 -221,95 1,,3-7? 13,758 1,569,253 1,5Q2,373 6h.33 102.53 111.58 91.8l, - 9.05 -125,_- 1 71-75 1L,043 1,L87,253 1,621,953 68.25 11'1.67 113.73 97.;26 - 3.11 - L-,13Z 1975-76 1l,334 1,504,253 1,653,853 72.38 119-70 116.'_ 103.36 * 3.56 + S;,'2- 1976-77 15,630 1.5'1h,253 1,686,503 75-59 127.57 118.54 107. 53 * 8.93 * 126,73 j/ This table has been updated wherever necessary but in regard to iolur.s 4,5,7,8,9 and 10 the figures are not f=nishod eenaratelv for the -wo seaso.-s for the yeaz 1971 to a1s no Droiections aLre available seasonvise. However, the average figures for bcth seasons are shown. * ]rovisional. Sour.ze: Ministry of Agriculture and Lands. III. MANUFACTURING A. 1ECENT STRUCTURAL CHANGES 91. In the decade 1960-69, Ceylon's industry was growing faster than most other economic sectors, its average annual growth rate being 5.9% as compared with h.7% for GDP (at constant prices). The contribution of the manuf'acturing sector to the increase of GDP amounted, in the. same period, to 1i:.h%. At the same time, its share in GDP increased from 11.5% to 1'%. The pace of industrial growth has been slightly higher in the second ha'Lf of the decade. In 1965-69, the output of industry, at constant prices rose by 30.3% as compared to 23.7% in 1960-6h. This was due to easier procurement of imported materials under the Open General License scheme introduced in May 1968, as well as structural changes within the sector. 92. The analysis of structural shifts within industry is not an easy task given the absence or inadequacy of statistical information. Existing statistics understate the level of manufacturing to some extent since they do not inc:Lude primary processing of rice and, more important, of tea and rubber. These items would amount, according to the est-imate for 1968, -to 5% of GDP, and one percent more,should be ascribed to handloom textiles and other cottage industries. On the other hand, the proportion of man-da- facturing to total output is overstated in part because of under-evaluation of subsistence agriculture. 93. In addition. the major series of industrial statistics of Ceylon are confined to gross value of production figures at current prices. Be2rLng in mind that the import component of industrial outnut is nuite high, and that the prices of imported materials have been steadily in- creaqing, it is clear that the picture of changes in relative imnortance of inidividual industries may be distorted if based on non-value added fi a're only 1/ Tn spn1ite of theqs gaps, certain viable, if not. alwavs auantifiable, conclusions on structural changes can be drawn even from the elxist1 ngp statistical sources. (a) Althouah the baRic nattern of industrv remained the sRme throughout the period 1965-69, certain important modifications became ap- nn t. t.ownard thP + n.h ofn thA nprord. Fir.t.- qvArnl new industries were established, such as a 72,000 ton iron and steel plant, a tire plant, a rmfinprv. manuf2e.tuiire of glass nroduets. mqahinerv. and some chemical and wood products. The value of output by units which began producing In 1967 or later, amiounte in 1969 to Rs.178 million or 11% of tota'l industrial production. Second, apart from new industries, the re- latlye weight+ of serer21 other industr1es rose sh rnl v The share of this 1/ Between 1965 and 1969 industrial production increased by 92% in terms of gross value at current prices, andby 0t% in terms of GnP at constant prices, the increases being differently distributed among the industries. rapid grwoth group (food preparations and beverages, ceramics, cement, ilmenite, electrical machinery and appliances, and manufactures n.e.s.) increased from 22% to 30%, while the aggregate share of the slower growing industries (vege- table oils and fats, food confectionary, wearing apparel, leather products. rubber products other than tires, industrial and other chemicals) declined from h7% to 29%. Third, while the preponderant weight of food processing and textiles has gradually been reduced from 66.4% in 1965 to 53.5% in 1969, fabricated metal products and simple machinery (particularly machinery for tea and rubber processing, and sewing machines) and equipment, have eme!rged as a growing segment of industry (16% in 1969 as compared with 7% in ic,65). More generally, a distinct shift in the pattern of industry towards some- what more sophisticated lines of industrial activity, has become identi- fiable. 1/ By the same token, the share of investment goods almost doubled (from 9%-to 17%) at the expense of both consumer goods (from 54% to 525,) and intermediate goods (from 37% to 31%). It is largely awing to these trends that the share of industries other than those engaged in tea, co- conut and rubber processing, has for the first time become predominant in the second half of the sixties. (b) These! general trends have been reflected in changes in the size of firms and the distribution of work force within industry. This is shown in Table I below. 1/ ]For instance, out of 667 manufacturing units approved in 1965-67, about 250 were concerned with the manufacture of metal products, machinery and transport equipment. Table I DISTRIBUTION OF FIRMS AND EMPLOYEES, 1965 AND 1969 1 Ir ~ '.±n prcerntj Number o Fiirms Number of -pioyees 1965 1969 1965 1969 Total Number 1,381 1,962 56,835 103,726 Percentage Distribution: Manufacture of Food, Beverages and Tobacco 52.7 33.3 36.4 30.7 Textiles, Wearing Apparel, and Leather InaustrLes l6.> 27.4 31.9 PM. Manufacture of Wood and Wood Products 0.1 0.7 1.1 3.3 Manufacture of Paper and Paper Products 4.3 4.8 4.1 4.7 Manufacture of Chemicals, Petroleum, Coal, Rubber and Plastic Products 13.8 1h.1 13.6 12.0 Manufacture of Non-Metallic Mineral Products (except Petroleum and Coal) 1.0 3.8 3.9 7.5 Manufacture of Metal Products, Machinery and Equipment 9.0 14.5 7.9 16.4 Manufactured Products n.e.s. 2.6 1.4 1.1 0.8 Source: Central Bank of Ceylon, Annual Reports for 1965 and 1969. Between 1965 and 1969, the tQtal number of employees in the manufacturing sector almost doubled, and the number of enterprises rose substantially as well. 1/ The average size of a firm, measured by the number of employees, reached 5g employees, as compared with 1l at the beginning of the period. Also important are some changes in sectoral distribution of firms and em- ployees, as indicated by the above table. Among them, three different trends are noticeable: (i) A group of industries can be identified, whose weight in terms of firm, employment and production figures, rose consider- ably. This applies to manufacture of metal products, machinery and equip- ment, non-metallic mineral products (other than petroleum and coal products), 1/ The Department of Census and Statistics has identified some 21,000 industrial units, in both manufacturing and primarv processing sectors. The statis- tics of the Ministry of Industries and Scientific Affaires include some 2.600 enternri_es. of which about 75 nercent. accounting for nearly all manufacturing output, have been covered by statistical surveys. papeer and wood products. The share of these industries in total employment rose from 17% to 42%, much faster than in terms of firms (from lh% to 29%) and vralue of output (from 16% to 28%). These figures imply that the trend towards concentrat:ion has not been matched by a corresponding increase in productivity; (ii) The share of food processing and textile industries has clearly declined in all categories under consideration, except for the number of textile firms. This last phenomenon can be ascribed both to the expansion of the number of very small production units and to increased statistical coverage. A condensed picture of the changes in size distribution of manu- facturing firms is given in Table II below. Table II DISTRIB'UTION BY SIZE OF MANUFACTURING FIRMS, 1965 AND 1969 1965-i 1969 / % f % - o.f _ o % of firms Output/ firms Output/ Wage 'Pill WageP Bkill By value of output Less than Rs. o.25 Mn. 69 8 72 6 Rs. o mn - RPa. M 24 26 20 16 More than Rs. 2 Mn. 7 66 8 78 By wage bill Less than Rs. 50,000 78 16 72 10 fl.. &' ( IACN - D_, eAtn flt~Cn I 71. RLs. ,0,000VV - Rs.0 'OOv 19 37 29 More than Rs. 500,000 3 17 4 61 1/ 14LA11berUof fi.,a c-I v ered:-" 782. 2/Number of firms covered: 1,537 for output value, and 1,347 for wage bill di st,i -,>tI-on. UJ.UL U.L.JU.iW~LA i l,ources r%ent ral" 1Bank% Of nCeyAlon, Ann-ual Repor-ts 1for 196,5 and 1n769.9 JL.eLjJvJIri falling intLo thLlJe caiegores of output of IRs, 2 MEJ±.Lion andia auo-ve (in the case of output) and wage bills of Rs. 0.5 million and above, are gories (those below Rs. 250,000 and Rs. 50,000 respectively) would have been mIjLuchi grea.ter had the co-verag=e of proUuctive units been more complete. (Ce) Antro,,ner outSInaning fea.ure Uo Cleylons indusi,rial development has been its heavy and growing reliance on imported raw materials (not to speak of imported machinery, equipment, spare parts, accessories, and fuel). Table III offers som.e insight into this matter. Table TTT IMPOPRTVD RAW MA"4TERIATL i 1qvn TM NT STqPTAT PPRODTUrTIONT 19A65 AMY) 1040 (as % Of total raw material usage) 1965 1969 Manufacture of Food, Beverages, and Tobacco 35 47 Textiles, Wearing -Apparel and Lther T-A,.+-ie- 79 72 Manufacture of Wood and Wood Products 15 13 mnulacture of 1Paper .and Paper Products L70 68 Manufacture of Chemicals, Petroleum, Coal, DRubber and PIDlastic~ v~ Poucts~ _3 Manufacture of Non-metallic Mineral Products ( excepti, I Pet'1'.leeu andU CUoal)86 Basic Metal Products 9L Manufacture of Fabricated Metal Products, Machinery and Equipment 71 79 ,-1Mnufacture" IIo--Au-c-ts n.e.s. uf UQ I 1a.5 700 Source: Central Bank of Ceylon, Annual Reports for 1965 and 1969. Although the abave figures are neither very accurate V nor strictly com- parable , they provide an indication of the basic orders oI- magnitude. First of all, import content in raw material usage is less than 50% in only two sectors - food processing and manufacture of wood and wood pro- ducts. Other industries were in 1965 in the range between 50 and 90 percent, and in 1969 between 60 and 95 percent. Several new industries which encompass the bulk of relatively sophisticated products, fall into the group with hignest import content. As for the sharp decline in the import content of non-metallic mineral products, it can be explained by the ex- pansion of cement production which has been increasingly based on local materials. Finally, since raw materials account for almost half of the total value of prohiction (49% in 1965 and 47% in 1969), the import con- tent of industrial production has attained the remarkable level of nearly one third of the value. 1/ The actual share of imported raw materials is greater, since many firms classify only raw materials directly imported by them as being of foreign origin. '/ The number of reporting firms in food processing industry was 184 and 57) in 1969 and 1965, respectively, while in textiles it was 511 and 187, respectively. The difference in total firm coverage, however, was not beyond limits (1,385 firms in 1969, and 1,076 in 1965). - ) - (d) As can be seen in Table 8.5 in the Statistical Appendix, the value of industrial exports virtually doubled in the years 1965 - 69. Given the tiny base however this still leaves their total very low. With an unchanged level of total exports the share of industrial products in tota] ex)orts rose from 0.7% to 1.b%. At the same time the export component of total industrial production has hardly changed. The portion of indus- trial production sold abroad accounted for 1.7% in 1969, as compared with 1.6% in 1.965. The bulk of exported industrial goods consists of' semi- manufactures-. Kapok fibre, hides and leathers, glycerol, alcohol phenol, glycerine and fatty acids, graphite, ilmenite and mica, accounted in 1961$ for Rs. 12.h million or 92% of total industrial exports and in 1969 for Rs. 19.1 million or 71% of total industrial exports. The group of non-metal- lic mineral products (graphite, ilmenite, mica) is responsible for about a half of the countrv's industrial exDorts. On the other hand. the value of manufacture exported (total industrial exports minus exports of semi- manufactures)V/rose between 1965 and 1969 from Rs. 1.1 million to Rs. 7.9 million. Their share in total industrial production reached 0.5% in 1969, as comnared with O.1% in 1965. They still comnrise less than e nercent of total exports. (e) Ceylon's statistics lack systematic inl'ormation on both the suiiYn1v andi demnnd asnpects of the mqrket for manufactured products. Never- theless, some attempt can be made to assess the dimensions and dynamics of fthis ma rket.- An nnnrnximqtion is shown in t.he com-mit.tion In Tablp TV below. Table TV MARKET FOR MANUFACTURED PRODUCTS (Rs. - ilo - at4 Curen f,---- 'ces) LO LI] L I. U JUl 1 JU Manuf'acturing output 847 1,627 Manuf'actured imports 853 1,50O Manuf'actured expor s lh 27 Imported inputs ,276 504 Balance 1,h10 2,636 1/ Princdipa] .,-fc- e exported sre: r canned or bottled, 1_ -u-. + I4 L M.U-J4a.L ia 115- 1kC1 . D4 ?C ' CCit ,? .- -1 - ~ -J C?fl -IJ' 1J 41 - - - ----4~41..IV4., and other food processed; cotton made articles; clothing, footwear various al 4are te mr m l e as,n- -driers, part; select rsi o p l rate s various metal waire; tea machinery driers, parts; electrical aparatus, batte-i'es . Th. In four years. the domestic market for manufactures increased from Rs. 1,h1O million to Rs. 2,636 million or by 87%.I' It is interesting to note that the anounts of manufactured imports and output remain com- parable. While on the one hand this would suggest that the results of the Thno nir.-ned imnort. substitution nolicv have not been imnressive. the aiggregnte data do not take into account the increasing sophistication of the newer nroducts nroduced and shifts in the sector comnosition of -l1tput as rising incomes create demand for items wi.th a relatively higher imnort, content- I/ Here again, the reservations deriving from combined effects of changes in domestic prices and terms of trade should be taken into account. B. STATE INDUSTRIAL CORPORATIONS General Qt C% Ceylon's first large scale industries were set up by the state in nreindependence days. Several factories, under the then Department of Industries, were involved In manufacturing rolling steel, coir yvrn, acetic acid, quinine and other drugs, paper, plywood, leather, glass ,nd ceramics. By 1950, most of them had incurred considerable losses and were closed down; the last four listed survived. Subsequently, the! government establi.shed new industries: textiles, cement, vegetable oils, caustic soda and, again, paper. In l955 all state factories were converted into state cornorations. At the same time, a policy statement delineated the areas reserved for public and private sectors. Iron and steel, cement, chemicals, fertilizers, salt, mineral sands, sugar and rayon were reserved for the public sector, while some 82 commodities (mostly consumer goods, but also some others like car assenbly, pesticides, nuts and bolts) were earmarked for the rrivate sector. Some important industries, like textiles, paper, plywood, tiles, bicycles, leather products, ceramics and glassware, were declared open to both sectors. fl6. Today there are 26 public corporations established under the State Industr.al Corporations Act. In the period under consideration (1965-1970), one public corporation - Ceylon Hardboard - was wound up (February 1966). For various reasons, six of them will not be dealt with in this report. State Engineering Corporation is engaged in construction, State Timber Corp. deals with timber extracting, not with its processing, Ceylon Fertilizer Corporation only mixes and sells imported materials. Industrial Estates Corporation has been little engaged in manufactuiring, and the Industrial Developiment Board is in the course of being transformed into a small industry promotional agency. Out of twenty remaining corporations, thirteen were founded before 1965. These are: Ceylon Cement, Ceylon Plvwoods, National Textile, National Small Industries, Ceylon Oils and Fats, National Milk Board, Ceylon Ceramics, Paranthan Chemicals, State Hardware, Ceylon Leather 7'roducts, Ceylon Mineral Sands, Eastern Paper Mills and Ceylon Fisheries Corp. Four corporations have begun to operate more recently: Ceylon Steel and Ceylon Tyre in 1967, Ceylon State Flour in 1968, and Ceylon Petroleum Corp. in 1969. Three more corporations have been founded since 1965, to take over operations from other public corporations or government bodie(s: National Salt and Sri Lanka. Sugar in 1966, and Ceylon Ayurvedic Drugs in 1969. Output trends 97. In 1969/70, the output of public corporations reached Rg. 561.7 million, as compared with Rs. 100.h million in l96r,/60. The larger nart of the total increase derives from four new public corporations, whose output amounted to 1969 /70 to Rs. 288.6 million or more than a half of total output in public industrial. sector. Output of the sixteen "old" corporations rose in the same period to Rs. 273.1 mill.ion or 2.7 times. The share of public corporations in the total value of Ceylon's industrial outnut increased from 11.9% in 1.965/66 to 3h.5%: in 1969/70. The share would fall to 20.1h% if the four newly established public corporations are omitted. In the same period. the number of employees in the public sector more than doubled, increasing from 11,315 to 22,81Th. 98. It is very difficult to assess the performance of public corpo- rat.ions with any nrec-isi on Tn addition to general reseqrvations w th which any quantification of production in value terms must be nnproached, diifferenc.es in pricing nnolicies; whinh are verv pronounced in some cases, have to be considered. One approach would be to group them into a few cat.egories on the hasis of trends in the neriodt 1J9Q7/6P-1969-70. The first group would then include corporations which have experienced a sub- stantInf1ial inerease in nrodrhition - that. is -r whose outniit rose bv more than 50n in two years. These are: Textile, Cement, Tyre, Milk, Minera.l. Sands, Salt and Fisheles. TIn the fi-rst. four r'ncQ th.e increase has ri:r1v been due to the expansion of capacities or their coming into regular oneraon; ynin the remainina rcs, a lo wnr sA ina point or sea.ona1 variations proved to be of importance. In the second group are: Ceramics, Steel, Paper, Leather, HardwToare, Oilns and Ft+, anrn PlItonr Thecs hanve shown a low or moderate increase in production which in some cases, if com.tsnn,4 n v i 'n rel te s,m may, be nnnon= exisan+. F.naly, Cm-fl 1 TInst re+,, . Chemicals and Sugar are in the group, showing a distinct decrease in Vt'J.U 'I-U~JLAq Q() I - 1 ..Tn the -eAr_ 10'70 hoevrssoe n o-rs I^.s A A 0om _ L11 UAIK-, ,YUs:Ls _7 J ,X L:IJ, VOLE . *v v'. -M paring physical output in 1970 and 1969, only the Cement, Tyre, Hardware, *,lal Inust-.esan d Paratha Cher,.cals 1have h-ad a c-lear-cut prodhuction Ldd..L .LiU U~ iU.. b LU I d L I] LJCIJ vI~iJJUdJ IIV IE' 1 Ld UU H 1~L~U'I increase. For cement, the increase was 1%V, tyres 16.5%, tubes l?A%, caustic soua L40 ,al. e Lss aldit) chILVo--L;te .LU . )k. -in th case o- Paper and Steel, the increase has been less than 5%. For six other corpo-uati-On sU d-uin-ing thier-, some oJ.f th'IUe IostVj L, ^u q)IJ,aII U , V 1, u fel. 1 II I oLnU.,, -l-V. The outnut of the Textile Corporation was lower in spinning by 1J0 and in weaving by ?uf. Slt tput declined by D ta.nned leather by 1l2J, dried fish by h5%, wet fish by 19.2%, cattle feed by 16.52, and ceramic-ware hy ] %. 1(00 The overall view of state industrial corporations' perform-nnce in 10,7 wouid be, oi course, iess unfavorabie if some new manufacturing items were tnken into account (cast iron, some chemicals and, pa.rticularly, petroleum products). On the other hand, it does not seem that Milk, Oils and Fa?ts, and the Sugar Cornoration, if they were available, would iumrove the general picture. 101. As Ga n ben sen from Tsble 8 - the comnosition of the nublie industrial] sector has changed considerably in the last two years. Petroleum refining and cnpment now acornunt for )45 of' thhe publicr sector'.. output, the share of the former being substantial. Of other corporations onlyr t.he n1 NF; nv>,'_l .(e< onnr r¢v+ 1 n x rt>.;nn: hnau0 mnM ntn nnAr\l increased their share in public sector output. On the other hand the output of the Sugar, Hardware and SmalTi industries on d n a.bsolute terms, reducing their combined share in public sector's output fr- m .1 t'%i 1047/4, to 'J'J tin J140/70. It iS interestin to note t]la these three corporations account for almost one fourth (23%) of t.he tot.11 rlaJ l 1rorce in -the p)ublA-..c lndLu-s-t.laUl* sector. More r.r y , the t.en ,.ost labor intensive ent,erprises account for 5)i% of the total labor force and: I71 ,414 4f -'Io' -outpul;---P-1 of -h 1,1bi sectr -Xl is -5 - -on4e,enc I). U ,AI-L 'U U DJ 01. VIi; jluuLIL C O K U *- LJI-LC -LI t' I l ~ Ul of the Petroleum Corporation's position within the sector (35% of total IJU I jj.I ---IiI - .~ JJ" . -4Ud -' I - -IJ9L yI lib /4 . 4pu. I d ki UUL±Z,d,±J-/ WL ,ULLr11jUY1:tL ou --tyu utn on .y I-) of toaIm l-,.,n -It p' utilizat1 --- i 2 . - _V41 - - it revle- ofI UIthe capai Uy UtLii 6Lza Iti o LJ insALxteen r,ubiT L.C c '-,J 0re L.Jj[! rs for the year 1969/70 is' shown in Table 8.1. Five out of ]J6 cornorations have operated at close to f-ull capacity: Salt Corporatiou a over IC ., Paper 99%, Small Industries 98%, Cement 90-9b8d, and Leather at 82-97%. 1/ In th-ree more enterprises the a-verage degree of capacity utilization has attained 75% or more: in Flour illi.ng 82%, Ceramics 6)4-91% and Ply.ood 61% to over 1001. The performance of the other hnlf ol the corporations, however, lagged far behind. For the Textile Corporation it has been ir the ~~~~~~~I _ r - d _ .. . - I _ A .. _I . - ..o - A. - range o:f 31-7081%, Chemical.s 3o-7/2%o, Mineral Sands 1 i%, OlS an Fats 7-082. In four remaining firms the degree of capacity utilisation has been wel1 below 'O%b - in the case of Steel Corporation 35-4Ll, Fisheries l6-55%, Tyre 16-29% and Hardware l-21L%. Cnpqcity utilization of the Sugar Corporation has been below 20%. . n 1z _. . . .. - .103/. There are many causes of low cApacity utiJl.Jat!on in Ueylon's publl .c industrial enterprises. Of particular weight seem to be: the high degree of absenteeism, labor unrest, scarcity of skills, inefficient management, competition of imports and private industries, lack of markets, irregularity in raw materials procurement 1/ Installed capacity Is based on 3-shift operations. and powrr supply, and some r7-truct,ral and locnt,ional deficiencrim. These phenomeria are, of course, not, llritod to the publi1c sector nlone. Most of them appear to be much more pronounced in thir,; sector, however. Performance and efficiency compari sons between publir and privn,hr! lnduntrri#- ire substantially in the latter's favor. Thnt, is exemplifIe d in T,able V, containing a comparison in terns of value addedl per worker for the vea.r '..68 . Tabl-e V VALUE ADDED PER EMPLOYEE TN STATE AND PRIVATE INDUSTRIES,V968 (in Rs. 1000) State Industries Private Industries No. of esta- Value No. of eRtn- Value bli.shments added blilshmentF! added per worker per worker Food processing 14 3.0 115 7.] Reverage 1 7.5 1.6 VI. 7 Textiles 1 3.7 86 5.6 Leather Foot-wear 1 6.2 112 6.1 Wood and cork products I 14.6 3 11.2 Paper and its products 1. 2.3 68 7.? Non-metal.]ic mineral products 14 3.9 37 7.3 Industria.l chemicals 1 1.3 10 14.7 Fohricated metal nroducts 1 l.5 95 6.3 Source: Department of Census and Statistics, Survev of Industri al Production 1968 nl0l The above table is indicative only, Mueh better data and a good dp,l more qnalys.s wonl w di be repni_red to aceurately compare value added ner worker of state and private industries. Yet it is somewhat surprising that i.n all hutt two canteporipec (leather footwear and wood nroducts) the indicated value added per employee seems to be substantially higher in the private sector. M.ost private fiim,Q in Ceylon are s-mall and relative]y lThor intensive whereas, the publi.c corporations are generally mnuch larger and rnor',V +eit ln -t enslve.Q? Labor and management problems. 105. It is in the field of labor and management and their inter- relationships that the main constraints on public corporations' perror- mance are to be sought. The incidence of absenteeism is perhaps the mo:st striking single constraint of this type. There are two sorts of absen- teeism to be dealt with: the authorized and unauthorized. Apart from l1i days annual leave and 7 days casual leave, which employees are entitled to, they can claim additional leave of up to 21 days on the basis of easy--to-get medica:L certificates. In reality, what has been a possibility soon became a system. The average "authorized" leave approaches 1h2 days or about 11)% of a working year. Another 25-50 days of unauthorized lea:ve have become a common practice all over the industry, particularly in the public sector. If allowance is made for recognized vacation and casual leave, the number of absentee-days amounts to 15-25% of the total man- days. In some cases these percentages are even higher (Hardware, Plywoods, Tvre. Textile Corp..). Thev are understandablv hieher in the months of holidays, harvest, festivals and after paydays. 10f6. The consequencesof absenteeism, naturally, go beyond the per- rentages indi cated above- Being sub1ect to sharn seasonal variations. absenteeism causes bottlenecks and expenses for overtime hiring. What is p:rhaps more important. it rontributes i_memnse1r to A general lack of d-iscipline and affects all kinds of operational programs of enter- p''riS_ Repeated fanlures of efforts to overcmine the proble.m within the existing framework have led to a feeling of resignation rather than to npta-ive+Aj a+.snt toF handle it+ TIn order tor. f-ill the aan Pcpipat bhV arWitirar leaves, the public corporation managers have in most cases resorted to hiring excess nabo In, a peManeent basils. Because of- seasonal 4otlnck, h number of workers additionally hired usually exceeds the average number, of absentees. Overepoyment in the range fr-^. ne f^" ti to o +h+rd of the total employment figure has become a recognized institution in C-yl-n' bli^04 seutor 1n7- bor dl sputes and stvkes are the second m.aor reason for the low capacity utilization. There are no statistics on strikes in public: coporatons. Tere is no question however, that mnost of th corporations have suffered sizable losses because of strikes and prolonged labor un- i '.Ln otJ,IL.er cases, £ LU * utra vbXwLJ UdlUdS up whLUen tt COJ -LpbOr Xa tiOn X-LJS to keep its production running at the level of the existinX work force. £Labuor- unrest iLn thAAe Stk£atett luard-WU..le dJ. .LU fo LJritanc1e, .U_LtiPEl.U Wh1etn the corporation tound itself forced to release 6b0 workers for many months after ha-ving rucn linto serious miarklet 'l- troub l e s. J.1Te dUaIteei1 lJabo UnresU , -lack Vof d-isU! pliJne and lo I ro- ductivity of labor, are problems that cannot be solved only within and by the corporations themselves. Neither can they be solved through some isolated, across-the-board governmental: measures. But so far, nothing like serious effort has ever been made to deal with these problems. In this; connec- tion, two points of particular interest should be stressed. First. the wnvt' ':l-tonl is uniform for the entire public sector. Any change in the wage or nalary scheme has to be approved by the Ministry. The same aipplies to the hir ng regul,tions and incentive schemes. As a matter of fact, in Ceylon's public corporations there are no production and labor incentives of any significance. Existing bonus schemes have mostly been converted into a recognized additional monthly payment. Attendance incentives do not exist beyond these bonus schemes, and their effects are hardly felt. Production incentives are extremely rare. Secondly, the managers of the public corporations have been put into a pre- carious position. Their responsibility is, in principle, split between the enterprise and the Ministry. Whenever a conflict between these two arises, it is usually settled in favor of the latter. Such situations sre inevitable in a system where state industrial, firms are asked to serve purposes in addition to their original commercial and economic functions. Managers who are able and anxious to introduce Drogressive reforms into the svstem are gPnArnlv not permitted to do so. It is consistent with the system that, for instance, a general manager in a successful public corporation receives the same salarvy as the manager in a very inefficient one. 1/ Market and profit considerations I)Q. In 1969/70, the gross profit figure of eleven public corporations increrseA hv 23h to Rs-i77 7million- At the same time, the aggreante loss figure of five other corporations virtually doubled, reaching Rs. 7.8 million. Thus the aggregate gross profit increased by 1v, nc cniintrv became independent 23 years ago. A new, important manufAct.uri.n7 sector has -._rgedA Tr +1 1- lw.l of A nUfactnfn+i;ncr oruntpt + ae r'- ,-n - iS +--n 1 measRUre of industri.al develnpment, Ceylon ranks aronind the average arong the Io;;tlj - E.' ist 'isLan cc,untr,.res. I n a.ldAdAU tiU o n e r, -L in i.lr,tant c,ane th structure of manufacturing sector are on the way. The factory-type of -1 nU ' 5u- U t Id L a JL pr .-)U UI L U L OtI I IdCL -L LI. 1id. 1,-.,y UU 1, t7,Lr,1LI'U Wit-, [~u~~J J U- I UId L]- Ui)J uIIriidJ export. crons and cottage industries. A number of new industries have emrerged. sifit ., rig uth Ubalanju 11.n fdvor U.) imoU-e ophistiUuec p,tojUUcUt. Cey10 UI UII IH3s becomre or is on the way to becoming selfsufficient in many food and related processirig industries, and produces much of its cornsur,17rtlon of textuIle and footwear; tyres, plywood and paper; cement and other building materi.al', rletroieum iducts, some chemfical.s and rlastic pr).-oductLs; and soMe agriLcultural imnlements and other metal. products. 11f?. Volume T of thi.s report concludes that a major structura1 trannsform.51tion of Ceylonis economy is renuired over the next several years if she is to emerge with an economic base cnpable of sustaining growth at an accentatle pace. To accomplish this the fi.rst and crucial renuirement is establishment of a policy framework for economic and social. development which, although placing strong emphasis on agricul.tural- devel.opment, should also provide a short. and longer-term strategy for the industrial sector. Over the immediate future the central question regarding the sector is the availability of resources to operate exi.sting canaci.ties and, in view of the resource constraint.. whcl, plants should be onerated and at what capacities, whether some plants should he closed down and what new industrial investment should be undertaken, given the large cdemands for imnorts associated with it. 11 '. Development of a strategy for the indiustria]. sector is thus essenti.a hut, it is even more essential t.hat this be accomplished within the cnntext of strategies for the economy as a whole, for other sectors and within a :f-ramework of assumptions regarding the growth of publi.c a.nd private, savings. consiumption. nublic expenditures, exchange resources. etc. 1 P. Gr.iven the sharp fal.] ot prdvate investment in 1970, the likelihood that, it. 9nl. continue in 1971. and, particularly the overall resource constrai.nt, therre is little porssibility that publ-ic and private industrial investment will reach the 1.969 level. IJnder these circumstances it must be emphasised that Ceylon needs rapid investment in areas which have a significant impnct on the exchnnge situati on and help achieve a structural balance in the economy. This suggests that resource allocations to manufacturing should be aimed in large part at expanding exports from existing capqcities. 1.-l. Some of the issues mentioned above have been g-iven a certnin amouint. of attention since the new Government took office. A numher of policy chnnfge'; have been made, but this has mainly been done within l short-teni cont,ext and regardless of their interdependence. For the time heing, a few sin4l.e issues have become the prime concern of the Government in the induatri;ll sector. These are: strengthening the public sector while controlling the private sector, development of the cottage industries, reorganization o.f the institutional set-up at the national and local leve]s, pri.ce controls and taking over the import and wholesale trade connected with manufacturing. Public versus private sector issue 122. From the economic poi.nt of view, there is very little substance i.n what has become the major policy issue in the manufacturing .sector. But to the extent to which the public-private controversy - a typical institutional problem - is fogging the real issues of industrial growth. it mav have, and is having, adverse conseauences upon the structure and pace of thnt growth. 1?3. Important changes in the function of the public sector are implied by present policies. Earlier, its role was to provide infrastructure for private industry, to prevent bottlenecks and to establish linkFs between the industries. Now it is intended to take over responsibility for the developnent of the entire industrial sector. Thi; imolies a fundamental shift in the balance between the public and private sectors. "Heavv, basic and essential industry shall be under state management, if not ynder direct state ownership. That sector of industrv, which for reasons of scale, technology and policy does not make state ownership vital in the national interest wil.l. be left for private enterprise but i-ill be subject to regulation by the State." (Ridget speech 1970-71). 12L,. What does this i.n practice mean? State monppol.i.es have already been estahlished for manufacturing oaper, pl.vwood, steel rolling, tyres, basic chemicals, petroleum, fertilizer, cement, mineral sands, ceramics. sugar, salt and flour. State corporations face competition from the private sector mainlv in textiles, leather, timber, furpiture; drugs, hardware, bricks and tiles, oils and fats and milk products. Private firms have been the onlv ,roducers in several food processing sectors; beer, carbonated beverages. tonbcro. garments, some chemical nroducts. plasti.c nroducts and some machinery and equipment. Although statements by officials suggest that new private invest.ment. may be confined to the 'nall(er siz.e firms. the C.overnmant thns far h.-s 'I defined *.pecif;ically t.he res,pective roles of puiblir and private &!ter.ri se. Thiq h-.s contributed ronsniernbly to the genpral stat.e of uncert.ainty and to the sharp d3rop in private investment. 125. A potentially important device for transferring private property into 1-ratc oasnersth e is lhe Bu s piness nrtatvkings (Tch Gt;on) At ,iy whicoh has c already passed the House of Representatives. The Government may be given the power- to take over, hb, riinisteriql order, any private business undertakinq a' if, migfht deem Y) Ippropri½te". In t.ke arime manner, ''any movable or ir-flmoTahle nroperty" may T-. vested in the Government, i-f deemed necessiru- for the purposes of a.ny bus.iness iind-ertnking al.ready taken over by the (Thvve-nment. A st,inulati on speci CyinFg the cases when the Act coulid be a,?l i. ed, which was re-quested by the Chambers r)f Co:nmerce srnd Indust-i. r-. not, been included. Earch take-over is subject tn the n posteriori prprov-il, of the Parliament. 126. The Government has given assurances thnt the Pct is onl.y intend4, to be ir-ed where major offens.es have heen committed against basic na,ti.ona.l i ntre re,ts. Ho-ioever, until the Act his been nassed and tested, it adds to t.he genera:l uncertainty prevailing in the private indiustrial communitv. !Peverpl other measures which effectively limrit the activities of thc priv.a-?te sector have been appr.->d through industrial. 1icencing, r'ricr cont rol and forpiqn exchanne noli.cies. I?7. Under the ci reuistances prevqiling; in Ceylon, the consenuences of these pressures ha?ve beguin to be fel;t almost immediately. 1/ Many privnte investors and -ndustri.aliJats are reluctant to ilndertake new ventures or' to eYxPand existi.ng ones. Altholuigh dsta for 1970 is not yet ivailable, it c. n be safely assumed that private investment dropped by more than ?5'. in thiat. year. 2/ Under nresent circumstances, it is imposs2hle to see how 'I o 71]. tanret for private investment can be achieved. That target (Rs.l,2r0h milli.on) which is 10 lower than the 1.969 figure is reranrded ;F the level necessary to maintain the minimum acceptable rate of grotr.h of domestic nroduction and emnslyvment. ]2P. If the notent,;nl contrihtution of private sector industrv to ancceler- ating economi..c growth is doubt.fuil, nothing very different can be s abd cibout the immediate prosn-ect(.s f.o the public sector. Both proiect.ed and nctual investment figures in the public sector were lower in 1970 than in the nreceding year. Net investment figlures in state industrial eornnrat.i ons dropped from Rs. 255 million in .968 /09 to Rs. i68 million in 1960/70.. Thit. had the trend been the onposit.e it would still he necessary t.o quiestion the viabil.ity of the expansion of the public sector withotit L/ In the second half of 1970, no single new investment application was ppn roved, ',)/ Actual private sector investments in 1970 were well below the projecte,d relate t.o private investment in all sectors. -62- smmultaneously improving its efficiency. In sny case, if the function of public sector industries remains that of providing employment rnd subsidized consumer goods, its contribution to the rievelopment effort might be nuestioned as well. Pr. ce Co,.+r^vl The offi44cially A-1-Ala re rpuose of +he p-rie on+--' extensions under- taken by the new Government is to "combat the cost of living", but from the lis of17 ,,aufactured products under pr-ce contro',lt sAfi tt discern the rationale for the selection. 1/ Price controls are not, of course, cofie t o th-ose 17 items on'ly. Even- --o-- tw,o+n r if., rce controls n1J ULe -J4v V -i. I 4 " VLLL * .4 A Li IL'V .1JFJIi9 .1L.'1JAU a -I e 4. -AL I.) o Lum.1 pri.A- ~ LIU J. J_LO , exercised through state corporation monopolies, state import and trading mono- polies andU ratoning Oysta,,s. L.VIIIla Ue t result fLrom tUIILe near rI,Ionopo'ly position of some Government agencies and enterprises. Nevertheless, there is a st.rong trend the institutionalizalUo of pie counu-ois iuno a comn- prehensive system. - 130. In addition to its traditional function (furthering policies of income distributlon), the price mJehanisrm has been assigned a rvle in holding down profits. These policies have been pursued even in the cases where profit was broughtv down close to zero or was actually con-verted into loss. Needless to say the loss to the Treasury is imminent in such cases. Price and profit controls of this kind are unmistakably leading to distortions of the price structure, making them unrealistic in relation to costs. Even major changes in cost structure and level are, if at aii, foliowed by price changes with a considerable time lag. These controls are likely to have more straightforward consequences too. Througn the minimization oI profit incentives, they may bring about production restriction and affect the generation of resources for expansion. Promotion of small industries 131. i"The development and promotion of small industries, based primarily on local raw materials and established under a regional development program to solve the problems of unemployment and underemployment in rural areas will 1! Among the price controlled items are also umbrellas, barbed wire, toothpaste., drawing books, slate pencils. 2/ Price Control Division under the Commerce Department has recently been set up, while the establishment of the Price Control Courts is under way. receive the highest possible priority in the industrial sector" (Budget speech 1970/71). With this end in mind, a series or organizational and promotional measures have been announced or undertaken. The Department of Small Industries is to take a leading part in estab:Lishing new industrial units, and the Industrial Development Board has been reconstituted into the SmaJ.l Industries Development Board, an agency for the research, planning and promotion of small industries. A legislative motion for setting up Divisional Development Councils, as well. as People's Committees, has been launched. The creation of 50 powerloom centers is under way. It is hoped that a network of industrial estates, technical service centers and local development banks will emerge. Several supporting measures are being applied, including tax incentives, credit facilities and FEEC exemptions (when the turnover is less than Rs.75,000). I )?. The idea of easing the unemployment problem through the expansiorn of small industries deserves attention, and so do its underlying elements-mobil- ization of local savings and their productive use, and transforming seasonal employment into pernmanent employment. Nevertheless, there are difficul'ties in carrying this through into viable projects. In the absence of a longer-term strategy for industrial growth, the Government has decided to begin with a set of small. industry projects which could be brought about in the near future. The selection of projects is based on several general principles, in addition to "practical experience and common sense". These principles (or crite!ria) are: Dotential for generating employment, comparativelv low level of capital employed, use of indigenous resources, suitability for location in non-urban areas, ca.pacity of saving or earning foreign exchange, relatively low level of technical and managerial skills involved, ability to sub-contract for large-scale industries. and other social benefits created. On this bas`s. a list of 105; small scale candidate industries has been drawn up. The problem arises from thp omission of one major criterion - the economic viahilitv Of the projects selected. Are they to operate economically, that is, at 'Least wi thct incuirring losses? hihoil H the demand and marketing outlooks not be regarded as equally important criteria on which decisions must be based'? Institutional changes 1.33. Some changes within the existing institutional framework that are reva1-)n+. to the inrthiqfriI sector, hnve a1readv been mentionerd. A frpeqh addition is the attempt to organize the coordinating and regulatory activities of thep st.ate 4in t.he! nriiqut.ral fleld on a new 'hqqJis This i~q to h be ah:Irz.Up through industrial development corporations, to be established for all (preumably8tlR +n ir) manuartung eto.nrs. Enah nantorail deneolenmon+p corporation (or boEard) would be responsible for: (1.) the development planning and coordination of production programs, (2) all.ocation of resources w+hJi the setor, (3) research work in the field, (L) management of state 1nduttkes, (5) investment in selected private industries, and 1 !!- t .> ' remains clahified and defined, before thue relMal, imp,licationS of thin maJor institutional, change become clear. The idea contains both p ossL ..iA ti.es4 4f - r sec- a. d- AV-.LpJ1- - - - b--oards: to bIecome an eflfe tC. ve dvi for rational coordination and purposeful direction and developmnint elfort,s, or a new, superimposed administrative structure which woul d tenA to reduce the autonomy of production units even more. Through set.ting up -oeciftic s-ctoral development targets, the new scheme might elimin.te some of the gaps in the existing planning mechanism. But it will certplnly noi; solve the problem of coordination between the sectors, in fact; it, m.i r neccnt,u;t.e ;hi.s problem even more. I x. It is in this field - planning at the level of the manufnctiuring 3ec1,o-r as a whole - where an effective change is badly needed. There is nothinr resembling an integrated syst.em of industria3 n]anning nt present.. The Government's concern in planning has traditionally been with the puhlic sector. Processing of traditional export crops, manufacturing, public and private industries are in many respects differently treated. l/ Foreign trade policies related to industry (1) Foreign exchange allocation 1I-. After abolishing OGL imports in mid 1970, a new system was created. Its starting point was amounts of foreign exchange 'actually used" in o(09, corrected for the "estimated raw material reouirements" where deemed necessary. Since foreign exchange available was insufficient to match the 1969 allocation, the industries were given a reduced percentage of it. For this purpose, all industries were classified i.n three groups depending on their importance. Industries producing articles considered as essential were given 70% of their estimated foreign exchange requirements (Iroup 4); those producing less essential articles, 60%o (Group B); and those producing non-essential articles, h0% (Group C). All the articles under price control (17 items) were given 100% of their estimated requirements. The allocation for 22 so called "regulated induistries" was made equal to their 1969 al.location. 137. The same system has been extended through 1971. As before, the Mli.nistry of Industries is given the foreign exchnnge allocation for the nrivate sector en bloc. There is also a reserve fund for increases during the year. Imnort licences are obligatory. The allocation procedure is as time consuming for the applicants as i.t used to be. Some delays are due to the nrocedure of determining foreign exchange renuirements. 2/ Since importing I/ For example. labor problems are under the Ministry of Indlstries for the public cornoratlonst and inder the Ministrv of T,Lhor for nri vate indu stries. '/ Definite estimates of those reouirements for each individual firm in 1271 are expected to be completerd hv the mi ddle of the year_ of trade quota items is being taken over by state trading organiz'tions, a number of private businessmen will have to stop engaging in irport andi foreign exchange transactions. 1/ (2) Export promotion policies T 38. The incentives for encouraging exports of manufactured products are the following: (a) Rebate on exports (a 100T drawback of customs duty paid on raw materials for the manufacture of industrial products for exports); (b) Fiscal incentives: (i) Three year tax holiday on export products, and (ii) Income tax rebate on industrial exports; and (c) The FEEC premium of 55% on exports of nontraditional items. In addition, more favorable treatment is accorded to producers of exportable goods in the allocation of imported raw materials. 139. The existing set of incentives has proved to be ineffective. The export rebate scheme has failed in its objectives, in part due to the cumber- some procedures involved. 2/ For this reason, a new scheme with an a1- inclusive flat rate of rebate of 10% of the f.o.b. value of goods has been introduced as a temporary measure. The three year tax holiday period may be too short. The 55% FEEC premium wi11 not solve the problem either, unless it is integrated into a broader policy framework. These inducements are of little importance in countries at the very beginning of industrialization. t'hfat is needed is a more powerful impetus to be applied in selected industries. Export promotion in a narrower sense should be introduced and given an active Dart in organizing export activities on a growing scale (market research, marketing, advertising, technical assistance, personnel training, manufacturersr representatives abroad). 3/ 1/ nut of Rs.2n0o million allocated for raw material imnorts in the first quarter of 1971, almost Rs.100 million is earmarked for the National Textile CnornorAtAnn _nd Salu Sqlqa and the remaminder for nrivate sertor industries other than textile. ?/ Delaysg otf nover 2b mont.hs haver becotme custo.msary in t.he prvcelure fo>r sett+lngr the rebate ammonts between the Customs, Ministry of Industry and exporting 3/ At the moment, there are only 1 commercial counselors with Ceylon's embassies, and t-hey are dealiner maninlY wit}b t."-raiJtional- ovnnot iters. (3) Longer-term strategy J10e. Probably the main feature of Ceylonts industrialization effort has been its inward-looking, import substitution orientation. At earlier stages,the regime of import restrictions was intended to eliminate less essential goods from imports, while the relatively permissive investment approvals policy lead to the setting up of precisely the same, highly protected industries. Later on, the imports liberalization within the exchange reform of May 1968 induced a growth acceleration of a temporary nature, based on better capacity utilization and capacity extension. The import restrictions which were introduced again in mid 197n, being non- selective, affected the efficient and inefficient producers alike. The new svstem of exchange allocation clearly has inherent defficiencies. one. The lack of flexibility in rationing imports on the basis of the previous year's shares of individual firms in the exchange allocation, tends to fix shares in the market, and in the long run, to freeze the existing structure of production, with little discrimination between more and less efficient entrepreneurs. In the field of industrial exports, the system does very little to make production for export at least as attractive as for the home market. Xl11. Considering the existing foreign exchange constraint on industrial growth, a development strategy aiming at a high import substitution priority would seem to be natural. But what kind and degree of import substitution, in which manufacturing sectors and how much - if at all - interconnected with export oriented sectors? 1h2. The first effect of import substitution policy in any country is, in the short nin. likely to increase the foreign exchange deficit. In the case of Ceylon, this effect has been intensified due to certain specific cirrimst.ances. Gevlon's marnifacturing sector has had a verv high imnort coefficient from the outset. The import coefficient of investment is even higher- which is qimte understanriah1 when the consumntion oriented structure of industry is taken into account. The policy neglecting the development of interindstral relations has tended to make thej iTnport content hipgh even in industries relying on domestic raw materials (because of machinery and i rm+ed;oj+ e p+.odv.-ur%,iM-ct inputs, ncsts of infrastrotr ndrrincn etc). Finally, by moving from simple to more sophisticated production lines, a shift is taking place in the pattern. of import-A, in favor of inemdit n capital goods. 1/ In other words, the cost of import substitution tends to beco..Je high.er9 the fu+h-er allong thne -ay the process otI. 4J-1X.4aliatj n go es '.13. Reg~ardU.less0 of). ou bui lJU Lt .-14n d4£tis,UL.-, the i . Jsi Ilo process may, under circumstances, yield substa..vial benefits both in terms of U± VU- t I | L dLIU d~U&,l~iL'llllJ ULJIIItC L,J H' '-Ub C U±'. J lJ, dii'- IIId. i 11i~ LLJ5 CA9b 11C i.). balance. This depends, of course, on whether appropriate strategy and policies Hre pursaued. Ceylon needs in the future to ensure that the selection of i/ The reiationsnip between import5edc consumption goous an[u -ntermedi at plus capital goods was reversed from 60:h0 in 1964 to 4o:60 in 1969. -7 - incustries (and of firms within the industries) gives preference to undertakings with a higher proportion of local value added. In addit on, much more use has to be made of the potential for developing domestic sources of raw material supplies both in import substituting and exporting activities. 1-1X1' These policies are essential if the industrial sector in Ceylon is to realise its potential contribution to growth. Industrial Statistics No. 83.1 State Industrial Corporations: Capacity, Production and Employment 1969/70 and 1.970/71 (Estirated) 8.2 Stnte Industrial Corporations: Capital1, 'rofits/Losses and Return on Investments 8.3 St.ate Industrial. Corporations: Value of "'roduction and Shares In Production and Employment F.. It Statle Industrial Corporations: Foreign Trade Component of Production in 1969/70 R, R' C Exports of Industrial Goods, 1965-1969 D O +> 0w N~~~~~CI C o - N - .. - _ - _ '0 N1 8 0 0 }i N j 3N -o o ' IN .3I'o8. 38- ° 8 N IN N g ~~~~~~~~~~~~~~~~~~~~~~ '0 N N 0D4 '0 <~~~~~~ N N °N .2._V ,C a_ N VC ) °a eR N N -D I- 0 A -2 8 (",V;4 °' o D ~~~~~- . 8 3 1- _ -eD VV C _. D -- _ _S "S _" aR-v_D B~~~~~~~~~~~~O N ND O~0 '0..N4- - IN .' .ON < s Z ~~~~~~~~~~~~~~~~~~~~~~~~~Aa It r D N 2< a..2 VA cNI'-O rCC NC '0.- -'VA0 0- CC CC NNN _INN' NIN '0 N '"'CI'- N CNN NINN CNN N_ -CINIC..- N --CONO fl 'ON O'C'dN . . 0 ~~c c O _|I j . N _ IN IN ' Nl G ON Nr (1 N NoN IA N '0 No o '- ("a G .CI ' aat < : ev :B|t0-2 N -: NN 5~' " IN- -2- Table 8. 2 STATE INDUSTRIAL CORPORATIONS CAPITAL, PROFITS/LOSSES AND RETURN ON tNVESTMlTsl/ Public 2orporations/ Capital &nployed in Production 1969/70 Profit/Loss (in Rs. 000) Return on Investment before Tax (in %) (in Rs. DOO) 1965/66 1966/67 1967/68 1968/69 1969/70 1970/712/ 1968/69 1969/70 197Q/71_/ National Textile 42,600 1,482 667 2,8914 2,7314 2,126 9,280 7 5 22 ~eylon Cement 96,355 9,628 8,285 13,875 13,897 26,009 36,033 22 27 37.5 ,eylon Ceramics 19,852 4142 765 3,000 4±,000 3,502 3,502 20 16 18 Ceylon Steel 117,923 - - 2,018 2,350 1±,132 9,433 2 3.5 8 National Small Industries 18,960 -1,000 -660 -645 -454 -1,1406 358 Loss Loss 2 ;astern Paper iLLls 29,000 3,565 5,882 3,919 6,61±1 3,150 2,098 23 11 7 'eylon Tyre 67,525 - - 8o5 1,000 3,335 8,823 1.5 5 13 Ceylon State Har,dare 18,725 - -878 -379 -7062./ -1,922 828 Loss Loss 4 Paranthan Chemicals 11,802 -265 203 667 398 -853 823 3 Loss 7 Ceylon Minearal Sands 15,225 -203 54 192 688 1,284 2,061h 5 8.14 13.5 Ceylon Leather Products 6,245 293 391 187 335 -206 n.a. 5 Loss n.a. Ceylon Oils and Fats 22,695 568 248 1,603 2,188 1,173 1,493 11 5 6 National Salt 10,149 618-5 860 1,713 2,071± 2,200 2,271 26 21.6 21.7 Ceylon Plywnoods 5,772 14 600 557 2,386 565 1,598 1i 9.7 26 C eylon Pislieries 36,095 -1,285 -4,610 -3,600 -2,8Co -3,440 n.a. Loss Loss n.a. Scate Flour Milling 26.96- _ n.a-_ 213 _na. na. 0.8 n.a. Total (net) 54±5,319 13,853 11,807 26,803 34±,731 39,862 78,601 7.'5 7.3 14.1 1,/Pr,ofits from trading activities are excluded. Profits are before taxes. 2/There are about ten more public corporations engaged in industrial processing, assembling or servicing activities. Some cf them are of minor importance, and the others are not included due to lack of information. 3/Budgeted . h/Budgeted profit expressed as percentages of invested capital. I/A-nual Report of the Central Bank of Ceylon, 1969. Source: Ministry of Industries and Scientific Affaires. - x~~~~~~~~~~~~~~~~ablef STATE INDUSTRIAL CORPORATIONS VAIIJE OEP PRODIJCTION AND SHARES IN PRODUCTIDN ANID EKPI)YNENT Value of Production, 1969/70 Shares in Production (in %) Shares in increwse between Shares in Enployment (in %) (Rs COO, al; sale prices) 1567/68 1968/69 1969,/70 1967/68 and 1969/70 (in %) 1969/70 LLtional Textile 3i,471 6.1 5.6 6.1 6.2 10.6 Ceyrlon 3ezent 58,754 17.2 14.7 10.5 6.0 1C0.4 Ceylon Ceraadc s 14,913 4.8 4.4 2.7 1.3 4.4 Ceylon Steel 34,569 13.6 9.7' 6.2 1.2 4.2 llationaL Small Industriefs 8,399 3.9 2.3 1.5 -.0.1 81.2 ELstern Paper MiLls 2!,,223 8.5 5.9, 4.5 1.8 6.5 Ceylon Tyre 28,624 7.0 5.6, 5.1 3.9 5.7 State ELardwre 2, 468 2.3 1.3 O . IJ --0.8 h.7 Ceylon Mineral Sands ;,862 0.7 1.8 1.0 1.3 1.9 Pzarantkban Chnzicals 2, 487 1.1 0.6, 0. 4 --O.0 1.4 Ceylon leathier Products 59,808 3.4 2.2 1.7 o.6 3.1 C,eylon Oil-s and Fats 30,604 9.6 9.1 5.4 2.7 3.4 NationaL Salt 11,235 3.0 2.6 2.0D 1.3 4.8 Cerylon Plyuoods 8,6656 3.3 2.8 1.5 0.4 5.2 Ce-ylon Fisheries 111,550 3.1 4.3 2.1 1.3 5.8a Ceylon iAyurvedic Drugs 1,248 - - 0.2 0.4 0.7 State FLour Mflling 3(,581 - 1. 5 4, 9.0 .9 Si-i La a Sugar 7,286 7.6 4.4 1.3 --2.9 9.8 National Mfilk Board[ 4C),117 4.8 6.c' 7.1 8.7 5.1 Ceylon Petroleum Refinery 194l809 - 156, 7 >7.7 2.2 Total 561,665 100.0 1 00.0. 1 00. IDo0.o 100D.0 aBlsed om employment in 11968/6?. Scurce: Ministry of Indcustries and Scientific Affaires and Central Bank of Ceylon. Table 8. 4 STATE, INDUSTREAL CORPORATIONS, FOREIGN TR1ADE COMFPIIT OF PRODUCTION IN 1 969/(70 ImportedL material as % of Exports as , of Total. rawr material usage Value of Pro h3wtiLon Value of Prodrticu, NationtL Texrtile 91.2 29.7 Cerylon Cemen t 31.1 2.2 Ceryloni Ceramics 20.8 7.0 0.2 CGemylo StAeel 89.1 35.4 National Small Industries 10.5 2.6 Eastern Paper Hills 63.5 23.5 Ceylon Tyre 72.0 26.3 Sltate Hardware 70.0 51.9 2.0 Ceyloa Minueral Sands - 77.1 Paran-than Che.icals - Ceylon Leather Products 39.3 16.8 n.a. Creylon Oils and Fats 13..7 11.0 8.7 Ngtional Salt Ceylon Plywoods 15..h 5.6 0.9 CeYylD Fisheries n. 31. 1.6 4.5 S tate Flour Milling n.a. 71.6 6.5a Total 50,3b 21 . 21 1, agstimated blDf the corporations listed. C Of 20 corporations listed in Table 8.3. For the corporations liLsted abkDve, the percentage is 3.1. Source: Ninistry of Industries anid Scientific Affaires and Central Bank of Ceylon. Table 8.15 EXP)RTS OF INMJSTRIAL GDODS* 1L965-1969 T(n RS. 000 1965 1966 1967 196E8 1969? Food, Beverages & Tolbacco 498 636 6h4. 668 41) TextiLles & Wearing Apparel 1,166 629 i,b16 5l,32 4,245 Leather & Rubber Products 2,724 3,285 2,770 3, L61 5,3713 !anufacture of Wood 221 267 226 326 717 Thu1p and PaDer 18 1 10 2 - (hemicals & Chem:ical Products 1,271 1,313 2,961. 1h,022 2,20:1 Pl=astic Procts -- - - 252 Non-rnetallic bineral Products 7,203 7,283 8,250 10,b89 12,h3D3 !etal Products other than MachinQ y - 700 705 1,23Is L,C098 ]Pachinery other than Electrical - 177 150C 528 - Electrical Macr-hinery & Appliances 388 162 2L0h 30 330 Total 13,b89 l.,h53 16,433 26,085 27,061 4* Manrfactures and semi-4nanufactures. Source: Mdnistry of Indastries and Scientific Affaires.