Harsha Gunasena: July 2024

Thursday, July 18, 2024

CA Sri Lanka commemorates 65th anniversary this year

The Institute of Chartered Accountants of Sri Lanka incorporated under the Act No. 23 of 1959, completes 65 years of establishment in Sri Lanka. With the incorporation of the Institute the accounting profession was regularised in Sri Lanka. CA Sri Lanka is governed by a Council. Initially the Council should consist of a President, a Vice President and 10 other members. All should be appointed by the Minister in charge of the Institute. At present the President, the Vice President and six members should be appointed by the members of the Institute and eight members should be appointed by the Minister. Two of them should be the Auditor General and the immediate past President of the Institute.

At the initial stage members of the other institutes of accountants which were approved by the Council as an equivalent to the Institute and the persons who were registered as auditors under the Companies (Auditors) Regulations 1941 were appointed as members of the Institute.

At the initial stages the students enrolled to follow the course should be enrolled as Articled Clerks with the practicing Chartered Accountants since from the inception the Institute has given prominent role in practical training of the students. Initially Articled Clerks had paid a fee for the training they received. It was the responsibility of the Council to fix the maximum amount of the premium or fees to be charged from Articled Clerks and the conditions subject to which such fees were to be charged. Now the Council decides the minimum amount to be paid to the trainees and there is a tri-party agreement among the Institute, training partner and the trainee student.

In that period there were a limited number of students enrolled and the lectures were conducted by the Institute within its premises in English language. Examinations also were conducted by the Institute. There were separate divisions conducted these two activities.

Growing demand

Considering the growing demand for the Chartered Accountants, the Council in 1976 decided to broad base the system. With these changes the Institute has done away with the teaching part and it was the responsibility of the students to find out tutors. By taking away this bottleneck the Institute could enrol a large number of students. However, the responsibility of conducting the examinations was kept with the Institute.

The tutors also were gradually regulated, and guidelines were issued for practical training. Due to the enrolment of large number of students, the Institute allowed to obtain practical training for the first two years from the approved companies where there were proper accounting and internal audit departments. If the students wish to practice after qualifying it was mandatory that the final two years should be with the practicing accounting firm. Subsequently the Institute reduced the first two years training to one year.

From the beginning under the new scheme the teaching and examinations of the first level were conducted in all three languages in order to facilitate the expansion but teaching and examinations at the following levels were conducted in English. Examinations were conducted not only in Colombo but also in outstations. Therefore, by the time the Institute has added “to promote in general the theory and practice of accountancy and in particular auditing, financial management and taxation” as first objective of the Institute by an amendment Act No. 15 of 1998, the Institute has already done it.

Acceptability of CA members worldwide

As of 31 December 2023, there were 6,136 active members of the Institute and 31% of them are not resident in Sri Lanka and spread across over 40 countries. The Institute has seven overseas chapters. This shows the acceptability of CA members worldwide and the Institute’s non-hesitancy in accepting overseas jobs by its members.

These members may have other accounting qualifications to which the Institute also helped by entering into various agreements with other accounting bodies such as The Institute of Chartered Accountants in England and Wales, Chartered Accountants Australia and New Zealand, Chartered Institute of Management Accountants and CPA Australia where it is defined the easiest path for CA members to become members of those institutes and vice versa. Moreover, the National Academic Recognition Information Centre (NARIC) based in the United Kingdom confirmed that the CA Sri Lanka qualification is comparable to a master’s degree standard.

The Institute has 31,639 active students as of 31 December 2023. There are seven branches spread throughout the island to cater to them and 962 approved practical training partners and 30 teaching partners to support them.

SAB Campus, affiliated to the Institute conducts an applied accounting degree course which is approved by the University Grants Commission and the Ministry of Education, is having 1586 students. There are 350 other students following different other courses.

There was a widespread allegation against the Institute that the pass rates were low since the Institute intentionally kept it low. I also believed it. I realised that it was not correct when I assumed the duties as the Director of Examinations at the Institute. In fact, the examiners were trying hard to pass the students rather than fail them. Eventually examiners failed in their endeavour since the performance of the students were not up to the standard.

All three accounting bodies of Sri Lanka, CA Sri Lanka, CMA and AAT Sri Lanka are members of International Federation of Accountants (IFAC) and members of the Confederation of Asian and Pacific Accountants (CAPA); and CA Sri Lanka and CMA are members of South Asian Federation of Accountants (SAFA). Sri Lanka has produced two past presidents of CAPA, Ranel T. Wijesinha and Sujeewa Mudalige and six past presidents of SAFA, Lakshman R. Watawala, N.A.L. Cabraal, Lal Nanayakkara, Indrajith Fernando, Arjuna Herath and H.M. Hennayake Bandara. The current President of CA Sri Lanka Heshana Kuruppu is the current President of SAFA as well which a rare phenomenon.

According to the Sri Lanka Accounting and Auditing standards Act No. 15 of 1995 the Institute is the sole authority in Sri Lanka in establishing Accounting and Auditing Standards. The observances of the said standards are mandatory for Specific Business Enterprises in Sri Lanka.

International accounting standards

The Institute decided to adopt international accounting standards in Sri Lanka and converged with latest pronouncements issued by the International Accounting Standards Board, the International Auditing and Assurance Standard Board and International Federation of Accountants.

In order to support small businesses, the Institute adopted SME accounting standard and going further the Institute adopted a very simplified accounting standard for micro businesses.

Establishing international standards in Sri Lanka was criticised by many. They cited the example of India where international accounting standards were not adopted as they were. In Sri Lanka and in Maldives IFRS standards are required for domestic public companies. In Pakistan and In Bangladesh these are required with slight variations. IFRS Standards are required or permitted for listings by foreign companies in Sri Lanka, Maldives, Pakistan and Bangladesh. The IFRS for SME standard is required or permitted in Sri Lanka, Maldives, Pakistan and Bangladesh. In India even foreign companies are not required to adopt IFRS standards.

Sri Lanka is a small country. It is very advantageous to adopt international accounting standards since we are aligned with the majority. Sri Lanka has very low levels of Foreign Direct Investments which is essential at this juncture of the history of the country. There are various reasons why we do not get FDIs sufficiently. Adopting International Accounting Standards will be a positive point for the foreign investors. To that extent CA Sri Lanka has done its duty towards the country.

I wish all success in its future endeavour for our premier accounting body, The Institute of Chartered Accountants of Sri Lanka in its 65th anniversary.

(Published in Daily Ft on19 July 2024)

https://www.ft.lk/columns/CA-Sri-Lanka-commemorates-65th-anniversary-this-year/4-764465#:~:text=The%20Institute%20of%20Chartered%20Accountants,was%20regularised%20in%20Sri%20Lanka.

Wednesday, July 17, 2024

Will What Happened In Kenya, Happen In Sri Lanka

By Harsha Gunasena –

Harsha Gunasena

Ahilan Kadirgamar (hereinafter referred as AK), whose colourful academic credentials i.e., bachelor’s degree in electrical engineering, master’s in economics and a doctorate in anthropology would impress anyone, has written an article titled “Kenya to Sri Lanka: Protests, IMF and High Ambition” to the Daily Mirror published on July 1, 2024.

I have written this reply to Daily Mirror but I thought of sharing this with Colombo Telegraph readers as well.

AK basically criticized the respective IMF programmes in Kenya and Sri Lanka and was in the verge of predicting that Sri Lanka also will face riots similar to Kenya.

There were certain misinterpretations in the article of AK and the intention of this article is to address those points.

“The demands of the Kenyan movement now for the resignation of their president echoes what we heard here all over Sri Lanka, resulting then in the flight of President Gotabaya Rajapaksa.” This statement by AK is literary correct but the causes for the two incidents were completely the opposite. The former was associated with the solution and the latter was associated with the problem.

We will examine why the so-called solution had to meet stiff resistance from the people during the latter part of this article. Prior to that there are a few points which should be clarified. AK stated the following in the latter part of his article. ”The political opposition in Colombo waiting for the elections later this year need to wake up. If they cannot come up with an alternative to the IMF path of so-called economic recovery, their political future may end up the same as in Kenya.”

Both the main opposition parties SJB and NPP stated that they would continue with the IMF programme but both of them stated that they would renegotiate the agreement with the IMF. To my knowledge they have not clearly mentioned the areas they would renegotiate with the IMF and to what extent. In response to these claims IMF Sri Lanka Mission Head Peter Breuer responded in a press conference as follows “So, I mean, more broadly speaking, with respect to, you know, proposals, as I said before, we’re willing to listen to different views of how the program objectives can be reached, and these need to be realistic and achievable within the timeframe of the program. So that’s very important.”

Gotabaya Rajapaksa’s regime was against asking the help from the IMF which was clearly spelled out by Nalaka Godahewa prior to the elections, and it was clearly carried out by Nivard Cabraal, the political appointee to the Governorship of the Central Bank, who was more vocal than the Minister of Finance, during the crisis. Cabraal stated that he had a home-grown solution to the crisis rather than asking the help from the IMF. Had they asked that help prior to the bankruptcy Sri Lankan public would not have faced such a disastrous situation. What did Cabraal do? He dealt with the Central Banks of India and China and arranged currency swaps. That was the home-grown solution which was not adequate to rescue Sri Lanka.

If the NPP does not have an alternate solution to the IMF, why do not AK and the rest of the similar minded economists put forward an alternate solution and then all of us could debate and if acceptable we all can push the Presidential candidates to accept and adopt it.

I do not agree with the foreign policy of the USA or that of Russia or that of any other powerful country since naturally my perspective is the Sri Lankan perspective. However, there could be certain alignments on those different perspective at different times and such alignments may have led to the so-called high ambition rhetoric referred to by AK.

AK says “That such financialisation is at the root of the current wave of sovereign debt crisis was propelled by commercial borrowings in international capital markets is not a consideration (for Washington or for the IMF)”. Not really. The root of the wave is arrogance and lack of financial literacy at the highest levels of the governments resulted in the negligence of the basics. One cannot blame Wall Street for that.

The statement of AK can be examined further in the Sri Lankan context since there is a link between financialisation and debt crisis. Sri Lanka was upgraded to lower middle-income country in 1997 and as a result Sri Lanka lost access to most concessional financing which means loans with lower interest rates and longer repayment periods. Sri Lanka issued first International Sovereign Bond(ISB) in 2007. Politicians and the top rank government officials are happy with these loans since those loans although come with higher interest rates and shorter repayment periods, equally associates with no conditions. Mahinda Rajapaksa’s government prevailed at that time promoted domestic infrastructure and consumption driven growth with the ISBs and China Exim Bank loans. The top Ranks of that government looked down upon the institutional and bilateral loans with low interests and more conditions. That was one reason why the light rail project of Japan was stopped abruptly during the time of Gotabaya Rajapaksa.

AK also says, “It is futile to pursue the IMF’s path of debt resolution, as the IMF’s interests are aligned with those of the creditors and the West.”No. IMF interests are aligned with the fundamental interests of the borrowing country. If and only if the borrowing country is financially stable the IMF loan and the other loans can be repaid. IMF is not involved in the debt restricting negotiations which would result in writing off a portion of the loans (haircuts) and/or lowering the interest rates and/or prolonging the repayment period. After the restructuring the agreed amount should be paid or else that country can remain an outcast to global financial transactions and go back to an ala bathala economy.

What happened in Kenya? Willium Ruto became the Kenyan President in 2022 and the IMF support schemes namely Extended Fund Facility(EFF) and Extended Credit Facility(ECF) were requested and approved during the time of previous President Uhuru Kenyatta in 2021. The International Criminal Court (ICC) opened an investigation of post election violence of 2007-08 against both Ruto and Kenyatta. Ruto’s aggression against the recent peaceful demonstrators was widely condemned.

Kenya like Sri Lanka was facing prolonged twin deficits i.e. budget deficit and current account deficit. IMF is not at fault for having these deficits. As a result of these deficits the debt of Kenya got piled up. Then Kenya requested the assistance of the IMF. Not that IMF voluntarily offered helping Kenya.

In Kenya there is no free health care in comparison to Sri Lanka. Many government hospitals offer free or low-cost medical services. These services often cover essential health care, maternal and child health services, and treatment for certain diseases. There is medical insurance scheme and free community health care programmes organized by NGOs are in operation. University education in Kenya is not free. There are certain concessions in government universities. Kenya is a lower middle-income country but the challenges of poverty and income inequalities remain. In 2019 almost one third of Kenyans (33.6%) were living below the poverty line.

The EFF and ECF programme objective in relation to Fiscal policy was to undertake growth-friendly fiscal consolidation to preserve debt sustainability by bolstering revenue primarily through broadening of the tax base and curtailing overall spending while prioritizing high-impact social and investment expenditure. Primary balance of the government budget which means total income minus total expenditure other than interest payments and loan repayments was negative and the intention was to make it positive by increasing the revenue and reducing the expenditure.

Prior to the grant of the IMF facility Kenya increased the maximum income tax from 25% to 30% and the VAT rate from 14% to 16%. This was a reversal of previous tax cuts. The ratio of Kenyan Income Tax revenue to VAT revenue was 62:37. In the projections also they maintain the same proportion. This is quite contrary to the Sri Lanka situation.

This may be due to the fact that considering the higher income inequality and higher poverty rate.

However this consideration was reversed in the Finance Bill 2024 where bread was subject to 16% VAT among several other products which was previously exempted. In addition to that the government introduced 25% exercise duty on cooking oil and as a result the price of cooking oil was increased by around 80% in the retail market. In respect of imported sugar, the current exercise duty of KES 42.91 per kg was increased to KES 257.55 per kg. In respect of Income Tax there were no drastic changes, but certain tax exemptions were removed. There was no increase of Income Tax rate. The impact of these changes on the national budget would surely change the Income Tax to VAT ratio. Income Tax is paid by those who can afford to pay, and VAT is paid by all the consumers. If VAT is increased on essentials in a country where there is a higher poverty rate, it will eventually lead to social unrest.

A government should be prudent and should know where to collect the taxes and where to cut the expenses in order to strengthen fiscal stability. When things go wrong one cannot blame the IMF or Washington for that. Therefore, one cannot predict that what happened in Kenya will happen in Sri Lanka as well.

published in Colombo Telegraph on 10 July 2024

https://www.colombotelegraph.com/index.php/will-what-happened-in-kenya-happen-in-sri-lanka/

ramona therese fernando / July 11, 2024

whywhy,
–
If Kristalina Georgieva said that the IMF conditions need not pass onto the bulk of the people, it means that a plan to tax the monied-elite is also fine with them. Ranil building up commercial venture in the midst of bankruptcy for future Generation-2048, will only heap even more debt onto Lankan parents and grandparents, and most probably pass onto this future generation as well. Debt will never be paid back.
–
NPP and Anura, thus sanctioned by the IMF, will tax the wealthy, spread the wealth, and by 2028, then and only then restart the commercial venture. All will be far more successful that way. Country money will stay in-country, and we won’t have to sell ourselves to India, China, US, Japan et al. to sustain.

Harsha Gunasena / July 11, 2024

ramona therese fernando

“it means that a plan to tax the monied-elite is also fine with them”- definitely. Property tax will be coming next year. I do not know why it was delayed.
“NPP and Anura, thus sanctioned by the IMF, will tax the wealthy, spread the wealth, and by 2028, then and only then restart the commercial venture.” – Let them come up with a plan. How to earn and how to spend. We will discuss it at that point.

ramona therese fernando / July 11, 2024
3
4
Harsha Gunasena,
–
Ranil will only tax the suffering working class who have high home mortgages. Ancestral homes and millionaire businessmen property won’t be taxed as Ranil is depending on their monies to magically create the commercial venture that usually looks after their solely exclusive lifestyles and untaxable offshore accounts.
- Harsha Gunasena / July 12, 2024
  2
  1
  ramona therese fernando
  How do you know? When Ranil increased the upper limit of income tax to 36% NPP and the others objected. They said taxes were too high and wanted to reduce it. They were not specific. They could have said to increase the lower tax limit of 100,000 and widen the tax brackets but they were targeting the upper limit of 36%. If it was reduced the high income groups would be benefited. There was huge protest against income tax increase. I have spoken in favour of tax increase.
  When the VAT was increased and widened there was no big protest. NPP and the others were silent. Common people were affected by this. NPP could not say that the government agreed rate of VAT with IMF was 15% although the government increased it to 18%. I have raised this issue. https://www.youtube.com/watch?v=P9Z3P8Qmbgw&t=1s
  NPP was invaded by middle-class professionals who are no different to Viyathmaga and who think that all the evils will be eroded by catching thieves.
  NPP is focusing on to maintain state run ventures. Those should be privatized and the wealth concentrated in the state should go to the private sector in order to have a higher growth.
  - ramona therese fernando / July 12, 2024
    1
    1
    Harsha Gunasena,
    –
    Zero taxation on the monied elite IS Ranil’s top policy.
    –
    But I was speaking about capital gains tax of 35% and more on sale of property+ 35% migration tax. Also that the offshore accounts be divulged and taxed. All the other taxes you mention are only skirting around these main taxes. Only a radical change of government can achieve this.
    - Harsha Gunasena / July 13, 2024
      1
      0
      ramona therese fernando
      maximum income tax rate was increased to 36% from 1.1.2023 under Ranil.
      Capital gains tax was reintroduced from 1.4.2018 under Ranil.
      Property Tax is going to be introduced in 2025 planned under Ranil.
      Therefore monied elite is not zero taxed under Ranil.
      Interest on foreign currency accounts are free from income tax.
      Highest revenue earners of any country are income tax and VAT or GST and not capital gains tax or migration tax.
      If you say income tax and VAT are skirting around the main taxes of capital gains and migration tax, it is not correct.
    - Lasantha Pethiyagoda / July 10, 2024
      7
      2
      The NPP will phase out the dependent relationship we had with the IMF, having requested help on around 38 different occasions so far. This is because no country that had a dependency with the IMF and WB became developed countries (both the IMF and WB are not in the least compassionate entities whose mission is to help but mere extensions of US global hegemony). This is one of the main reasons why a fundamental change in attitudes, national governance and political structure are critically needed. The game that seasoned rascals and their criminal cabals played for many decades must come to an end this year.
      - Harsha Gunasena / July 11, 2024
        3
        2
        Lasantha Pethiyagoda
        Sri Lanka has gone to the IMF in 16 times previously. In many occasions Sri Lanka has withdrawn from the respective programmes in order to accommodate populist thinking. For instance India went to the IMF seven times but after 1991 in which year they have carried out economic reforms they did not go to the IMF. Now India is a great economy. If we can do the reforms this time we may mot have to go to the IMF once again.
      - SJ / July 10, 2024
        3
        2
        The author is missing the essence of AKs comment.
        It is abut the plight of two countries caught by their b***s by the IMF. How they did is a detail.
      - Harsha Gunasena / July 11, 2024
        7
        1
        SJ
        The IMF is saying to increase the income and reduce the expenditure. This is common sense. What is wrong with this? They are not here to suggest the ways to accelerate our growth and improve the exports.
      - SJ / July 11, 2024
        2
        6
        What expenditure and what income decide to whom it makes sense.
        The IMF has been nowhere to help anyone but imperialism
      - Harsha Gunasena / July 12, 2024
        0
        1
        SJ
        Could you be specific please. IMF does not say what expenditure to reduce and what income to increase. It is up to the government. Why don’t you visit the IMF website and let us know what proposals help imperialism? Does Aswesuma help imperialism?
        SJ / July 12, 2024
        2
        1
        You should know better about IMF prescriptions.
        Have you no idea of their conditions and whom they are deigned to hurt?
        Governments have little say when they get stupid enough to rely on the mercy of the IMF.
        IMF is interested in two things : (1) making sure thar we pay all loans with interest and (2) making sure that we will keep paying.
        Harsha Gunasena / July 13, 2024
        2
        1
        SJ
        You are just uttering dogmas.
        You say IMF is interested in making sure that we pay all loans with interest continuously.
        Role of IMF is to support the government to negotiate with the lenders to agree on loan balance which could be repaid over a period of time and to support the government to arrange its internal position for that. This role is not directed at safeguarding the creditors. If we do not wish to pay the creditors we could have done it when we defaulted. Sumanasiri Liyanage suggested it. Declare that we will be not paying the loans and become a pariah state. Then we can be an isolated state and no letters of credits even.
        Even then we have to spend out of our income only which is promoted by the IMF now.
        If you think that any lender would help us to default the pervious lenders, and if not it is imperialism, it is not correct
        Ratnam Nadarajah / July 10, 2024
        5
        2
        Dear Lasantha
        I have not read the article fully. However, I am penning a few lines
        I know a little about IMF and WB politics and little about its policies.
        The late PM of Singapore Lee Kuwan summed it in few words ” we know better about our needs better than any of you, so please do not preach your gospel on third world economies” words to these effects.
        Yes, RW jumping into bed with IMF in a hurry is expected but not the best option. But again beggars can’t be choosers. Did he have a choice? May be selling more of our destiny to the Chinese. I am no expert on this either
        More later
        Ratnam Nadarajah
        Harsha Gunasena / July 11, 2024
        7
        3
        Ratnam Nadarajah
        You better read the article and then comment.
        Yes. Lee knew better than anyone else about his country and he was not subject to cheap populist economics. We do not know about our country and that was why we are bankrupt today caused by a populist President.
        Ajith / July 11, 2024
        4
        1
        Harsha,
        Yes IMF is saying to increase the income and reduce the expenditure but you don’t need IMF to tell this. It is a simple economics. Revenue – Expenditure = + is positive, – is negative.
        Then why should they put the nasty conditions to the loan?
        Harsha Gunasena / July 12, 2024
        0
        2
        Ajith
        What are those nasty conditions. All these are available in IMF websitehttps://www.imf.org/en/Countries/LKA
        Mahila / July 11, 2024
        5
        1
        Harsha,
        Absolutely nothing wrong in that concept!!!???
        Except, Except, (repeat for emphasis) such action wouldn’t Garner Votes!!!??? Make Politicians “Unelectable Quantity”!!?? That is Difficult!!!?? Like, Trump telling Governors to find 11,000+ votes after voting and counting!!??? That may be resorted to, by our very Intelligent, Nay Cunning Political elite, to overcome the Impasse and gain seats in Parliament!!?? Political INFLUECE!!??
        Harsha Gunasena / July 12, 2024
        1
        1
        Mahila
        Yes such actions would not garner votes. Voters can decide now whether they want to go towards another bankruptcy or whether they want to go out of it.