Over-indulgence in deficit finance and inflation

The Government has tabled the Appropriation Bill which shows an estimated expenditure of Rs 925 billion, excluding the items that are directly charged to the Consolidated Fund by other laws. We have to wait for Budget Day to find out how much tax revenue the Government will collect through new taxation and existing taxation. Economists say Revenue at existing rates will increase by the rate of growth in nominal GDP, which is around 15%. So the government cannot afford to increase expenditure by more than 15%.

But the Rs 925 billion is likely to go up during the Committee stage and will go up even further during the course of next year by way of Supplementary Estimates. We do hope these increases can be contained to the estimated increase in tax revenue. The Government is trying to wage war and also to develop the country through spending on infrastructure. Economists say even the world’s most powerful economy failed in a similar effort during the Vietnam war. The growth rate has declined from 7.4% to 6.4% in the first half of this year.

The Fiscal Management (Responsibility) Act has laid down that the deficit/GDP ratio should be 5% and the Total Debt Liabilities should not exceed 85%. Both limits have been violated by the Government. The current Debt/GDP ratio is 93% and the Budget deficit/GDP ratio is 8-9%. Economists say that if the growth rate is less than the rate of interest on government borrowing then these ratios will increase further. The rate of interest is now around 17% while the growth rate is coming down to around 6-6.5%.So these ratios will increase.

The higher budget deficit is stimulating aggregate demand for both domestic and imported goods. Since the supply of domestic goods cannot be increased in the short run to meet this demand, prices go up. Similarly the excess demand for imported goods causes a worsening of the current account deficit in the Balance-of-Payments. This is met either by a fall in the Net Foreign Assets or by a faster depreciation of the Rupee, which again increases the prices of imported goods.

So the stimulus to demand caused by excessive budget deficit is the cause of the higher inflation and the faster depreciation of the Rupee. So economists question the value of the higher growth rate. Some say it is only causing inflation since the increase in GDP is mainly in the Service sector which includes a large component of expenditure by the government on the war and on general government services. Such a growth doesn’t increase the supply of goods but only of services. Does such growth benefit the public? Economists would say, certainly not in the short run. So any over-indulgence in deficit finance which refers to running budget deficits and funding them partly by borrowing from the banking system, which economists say is printing money, is not advisable.


A flip side to the wage issue

An industry perspective on plantation wages

The flip side to the wage issue, is the matter of what should stakeholders be contributing to the wage negotiation process to ensure industries remain viable? This is an issue the plantation sector, in light of the recent pre-emptive wage rises, is hoping will be addressed in the near future as industry representatives face increasing competition globally, and threats to the sustainability of one of Sri Lanka’s oldest sectors.

By Samantha Whybrow
Wage issues are sensitive. Workers should be paid a fair wage, though precisely what constitutes a fair wage is much debated. The issue of workers’ wage increases is often taken to heart by politicians (especially during an election year); it can become a cause taken up by the media who have a knack for honing in on suffering and hardship (happiness is not as newsworthy it seems); it is often advanced by union leaders (who may have political aspirations of their own); while business, on the other hand, will note hard times are afoot, although most of the population will be unsympathetic to their cries.
The flip side to the wage issue, is the matter of what should stakeholders be contributing to the wage negotiation process to ensure industries remain viable?

This is an issue the plantation sector, in light of the recent pre-emptive wage rises, is hoping will be addressed in the near future as industry representatives face increasing competition globally, and threats to the sustainability of one of Sri Lanka’s oldest sectors.
An unorthodox rise

The past year has seen the plantation industry signing two separate collective agreements, raising the wages of workers each time. This is not an insignificant issue for the industry given wages account for 60 percent of production costs.
First, in December 2006, a collective agreement was signed following one month of labour stoppages on tea estates. That agreement, due to expire in December 2008, increased wages by 33 percent, guaranteeing workers a 170 rupee per day basic wage, with an additional 20 rupee price share supplement (PSS) per day (guaranteed) on top of that, and an attendance incentive of 70 rupees (for 75 percent attendance in a month).

All in all, this agreement amounted to a 190 rupee guaranteed daily rate and 70 rupee incentive, making earning potential 260 rupees per day (providing workers came to work 75 percent of the time).
“Based on a 25 day month, the total was 6,500 rupees per month in potential earnings,” concludes Ravi Peiris, Director-General of the Employers’ Federation of Ceylon (EFC), “well above the minimum of 5000 rupees set by wages boards for other sectors.” The figure is higher if performance bonuses are factored in.

Yet, less than six months later, in May, 2007, the industry was required to enter into another round of discussions about wage rises when some union representatives wrote regarding an additional wage rise—demanding a minimum 200 rupee per day guaranteed wage.

“Initially, they [unions] wrote to us about what we considered a 10 rupee anomaly,” said Peiris, who spoke to The Nation Economist in an interview last week. “They requested a 200 rupee per day minimum wage. We were working on the principle that workers had a guaranteed 190 rupee per day minimum already, so the difference in what they were asking was 10 rupees,” he said, adding, “although, even so, we replied to them that if workers came to work, then they would actually receive 260 rupees per day—well above what they were demanding.”

After some to-ing and fro-ing, the letters culminated in a meeting in August, which ultimately led to a meeting two weeks ago when industry representatives were summonsed by President Mahinda Rajapaksa.
At that meeting, a new collective agreement was signed entitling workers to a basic wage of 200 rupees per day (guaranteed), the 20 rupee per day (guaranteed) PSS, and the 70 rupee per day attendance incentive—a guaranteed earning of 220 rupees per day, and a potential earning of 290 rupees per day, if workers turn up to work 75 percent of the time.
The new agreement will expire at the end of March, 2009 although industry had asked for an extension to December 31, 2009, which would have been a time-frame akin to the usual bi-annual agreements.

Leaving aside the issue of the amount workers are paid, it does seem a little unorthodox that a two year agreement should be replaced less than half way through its tenure, with Jeyaraj, in his column in The Nation last week, drawing the parallel between the signing of the new agreement and the re-instating of members of the Ceylon Workers Congress to their previous parliamentary posts.

Yet, for their part, industry representatives appear resigned to the increases and have been cordial in reference to government intervention in the matter. Peiris pointed out that wage reviews happen every two years anyway. And, with regard to this latest agreement, Peiris stated, “We cannot complain because we have signed on the dotted line. We will try to get the best out of the situation.”

A fair day’s work
This does not mean the industry is happy; for, while not disputing the increases per se, it is concerned that these wage increases will not be met with comparable increases in worker productivity.

And while worker productivity is not the only factor affecting overall productivity of the plantations—the industry itself acknowledged at the recent Tea Convention that ageing tea bushes and relative lack of innovation highlighted were among a number of issues contributing to low yields—it is significant in the present context. Especially, say industry representatives, given the fact wages have risen by more than 350% since privatization in 1992 with little improvement in worker productivity.
A fact President Mahinda Rajapaksa, it seems, is aware of. “In our meeting with the President, he emphasized to the unions that the productivity issue must be addressed with the workers,” said Peiris, who indicated, however, he was unsure when or how the industry would see any evidence of this.

Absenteeism and low worker productivity are enduring concerns of plantation owners, who have seen the size of their workforce depleted over the years along with the size of their global market share.

Lalith Obeyesekere, CEO of Balangoda and Madulsima Plantations, notes that in one of his plantations the out-turn (number of workers turning up to work) is 15%. “In the low country in general, the out-turn is 40%, which is a big issue,” he adds. To be clear, Obeyesekere clarified this means, on any given day, employers can expect only 40% of the workforce to turn up.
Plantation companies take this into account to ensure the tea gets plucked. “If I have a field that needs 100 workers to work it, and I know that only 50% will turn up, then I have to have 200 workers in order to make sure that I get the number of workers I need,” says Obeyesekere, explaining the predicament facing many in the industry.

Further elaborating on the productivity issue, Peiris points out that pluckers should bring in around 18kg per day. “However, while 70 percent of the workforce performs well, 25-30 percent of the workforce is not performing as it should,” he said, noting workers could bring in as little as two-thirds of that target.

Residents and workers
Plantation industry representatives feel their side of the story is often missed in the debate about worker wages, and that they tend to bear the brunt of attention, sector-wise, on the issue. For instance, Obeyesekere points out tea plantation workers have guaranteed work. This means anyone over 16 who resides on the plantation is guaranteed 25 days a month work—a very different scenario from that of the general population where unemployment is running rife.
“Yet, while employment is guaranteed, one of the biggest issues faced by employers is that only around 50% of people who reside on the plantation actually work there,” says Obeyeskere.

The plantation population, provided with housing and facilities, is around 934,000. Of this, the resident worker population is 246,331. This means plantations support around three dependents for every worker with housing and other plantation facilities.
For Obeyesekere and others in the industry this presents a challenge as accommodation costs are borne for people who do not actually work on the plantation. “We have a housing issue, which is one of the major issues facing the Sri Lankan industry that other tea growing countries do not face,” he added, indicating this to be one factor depleting Sri Lanka’s competitive edge.
Other industry representatives have pointed out there are a number of residents who are eligible to work but who either do not, or else participate minimally in plantation work.
For instance, they say many plantation youth live on the plantations, work for a few days, and then go and work elsewhere off the plantation. In this way, they receive the benefits of living on the plantation without necessarily adding very significantly to its productivity.

Peiris, from the EFC, pointed out that media had interviewed workers in the run-up to the last round of agreements where claims had been made that some workers only received 1,500 rupees per month. However, he notes this would only be possible if the person only turned up for 5 or 6 days work, begging the question how the rest of their time was spent.
The industry, it seems, feels caught between a rock and a hard place; one of the many worker benefits plantation owners themselves often espouse, particularly with regard to the male workforce, is that male workers typically work a half-day—finishing by 12:30pm—which frees them up for outside work should they choose.
As the industry is witnessing, workers are choosing to use this opportunity. This helps to boost the workers’ incomes—undoubtedly positive for the workers—but can be a factor working against the plantations.

Non-wage benefits
Peiris maintains that cost of living issues in plantations cannot be compared to those in other industries, particularly because, aside from housing, the industry provides other benefits to workers such as free medical care (90% of hospitals are plantation-run rather than government run), education, water, transport to work and school, funeral allowance, and crèche facilities—non-wage benefits that workers in other sectors may not have access to.

“Anyone, until they die, is entitled to all facilities on the plantation,” says Obeyesekere.
In a recent presentation, the Director of Plantations, Kahawatte Plantations, Roshan Rajadurai, calculated that these benefits amounted to around 635 rupees per month per worker; costs borne by the plantation. This, the industry points out, is not a small sum but is something people seem to forget.

Rajadurai further notes that while housing, clothing, transport, fuel, lights, and recreation made up 45 percent of household expenditure of the national population, these were only 30 percent in the estate population.
While Peiris is also quick to emphasise that the plantation sector upholds the rights of workers—such as freedom to join trade unions—to the highest possible levels, even to the point of getting hurt. “As an industry, they have upheld freedom to join unions, etcetera and got hurt in the process,” he says.

Impact on industry
The wage issue and costs of non-wage benefits are important to the industry, since producing tea in Sri Lanka is a comparatively costly exercise anyway—with 60 percent of those costs being wages. Rajadurai points out that while it costs around US$2 to produce tea on the island, in India the figure is US$1.05, and in Kenya the cost is US$0.80.
With 246,331 workers in Registered Plantation Companies (RPC), each guaranteed 300 days per year of work, there are 73,899,300 ‘man days’ of work in total, meaning the impact of the recent 30 rupee per day wage hike will be significant.
Based on information from the plantation companies, the impact to the industry of this most recent wage increase (which includes the 30 rupee wage rise, plus EPF, ETF, gratuity, and holiday pay, bringing the total cost to employers to Rs. 39.73) is estimated to be Rs. 2,936,019,189 for one year for the RPCs.
According to the EFC, the average cost per (RPC) company will be around Rs. 139,810,438, which may be difficult for some to bear.
“Already, seven or eight companies have informed me they will not be able to absorb these costs. It is anybody’s guess what will happen to them,” said Obeyesekere. “All companies operate on borrowed funds and some will have negative balance sheets, which means no-one will want to lend to them,” he added.

A fair go for industry
The plantation sector is not actually disputing the wage increases or crying foul. Instead, as Peiris said, they will hope to make the best of the situation. However, the industry is hoping the fact they signed the agreement will be taken into consideration by the various stakeholders in decisions about concessions to the industry in the upcoming future—recognising the significant place the plantation sector occupies in the national economy.

“Considering the situation we are in now with the wage increases, we hope the government will come out with some relief, such as tax relief or subsidies,” says Peiris. “We need concessions for the industry to be sustainable.”
From the industry perspective, the sustainability of the plantation sector—tea in particular—is under threat. And, to ensure it survives, all stakeholders must be involved, with Peiris commenting that the last few agreements have been very one-sided.
Peiris, in summing up the position of the Employers Federation, notes, “For the sake of sustainability, all stakeholders must get involved—workers, unions, and government—as well as the employers. We [industry] cannot be making all of the concessions.”











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