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On March 5, 2019, Finance Minister Mangala Samaraweera presented the Budget in Parliament.
Groundviews spoke to economists for their reactions. Here’s what we asked:
W A Wijewardena – Former Deputy Governor Central Bank
Contrary to speculation by many, “Khema’s Boy” has been able to keep the pressure from his colleagues to deliver an election budget; instead of promoting consumption which had been done by previous Finance Ministers in the wake of elections, he has diverted scarce government funds away from consumption to investment in human capital and infrastructure projects that would bring benefits to the country in the medium to long term. The development of the country’s skill and talent base through liberal higher education programs is a strategy adopted by Mahathir Mohammad in 1980s in Malaysia; it brought dividends to that country for a long period.
Nisha Arunatilake -Director of Research, Institute of Policy Studies
I think the budget does have many good initiatives. There are several initiatives to improve labour force participation of women. The budget proposes not only to provide elderly and child care facilities to facilitate this, but also to amend labour laws to improve flexibility in the labour market. Also concessions are given to firms who give maternity benefits to new mothers. This is especially important for smaller firms.
The budget proposes to develop rural areas in several ways. ‘Gamperaliya’ proposes to improve rural infrastructure – which has the potential to reduce transaction costs and improve productivity of rural businessman. Also there are initiatives to encourage entrepreneurs through the ‘Enterprise Sri Lanka’ initiative. Encouragingly this is not only about giving concessionary access to credit, but also about connecting rural entrepreneurs to markets at the national and international level.
D A Jayamanne, Advocata Fellow
On another note, the emphasis on subsidised internships (up to Rs. 25,000 or 50% salary subsidy) for unemployed art-graduates to enter into the IT/BPM sector is an interesting experiment. It’s cheaper and more productive than simply giving them a government job, which has been the more popular solution and I’m looking forward to seeing the results of this policy.
Ravi Ratnasabapathy – Advocata Institute
There are a few liberalising and positive measures:
- A general reduction in CESS (by 30%) on construction materials is liberal and if correct is very welcome since it will reduce house building cost. Phasing out these taxes will lead to increased competition and lower prices for consumers. Sri Lanka’s construction costs are 60% higher than Thailand and Malaysia. Saving to build a house is often cited as the reason to migrate for overseas jobs.
- Exempting duty, PAL, CESS, NBT for negative list items. This will significantly reduce the cost of construction for new investments- but this will be restricted to large investments. The protectionist lobby will fight tooth and nail which is probably why they have limited the exemption to
a) large foreign investment over USD 50 million
b) only during the construction stage (ie not after commercial operations). At a minimum this should be extended to factories but it is a tiny step in the right direction. - It is proposed to phase out all para-tariffs over a period of 5 years starting from the para-tariffs removal in November 2017 for 1200 items. 10% of all HS codes considered to be sensitive items will not be subject to a complete para-tariffs phase out. Sectors such as construction, tourism and manufacturing are identified for accelerated CESS reduction program. Any intermediate goods in these sectors will have CESS reduction phased out over a period of 3 years. This sets a good direction to policy but it is only a statement, and will have no immediate impact.
- Removal of CESS on fruit, nuts (bananas, pineapples, guavas and mangos) is positive that may translate to lower fruit prices.(Taxes reduce from 101% to 62%). Is it cost effective to sell imported fruit with the reduced tax structure? We will have to wait and see if there is an actual impact. Apples and grapes are not affected.
- Reduction of PAL from 7.5% to 2.5% on dried vegetables, onions, mushrooms, garlic. Again may not have much impact. May benefit hotels.
- ITO levy on telecommunications companies supported a grey market dominated by politicos. Removing this will help the telecommunications industry.
- Taxing vanity items like personalised number plates is a good step, as is VAT on apartments
- Financial assistance to established daycare centers for children of working mothers in order to encourage women in the workforce is a good move but remains to be seen how it will be implemented.
- Tax concessions for companies that grant 3 months of maternity leave. It is unclear how this will be implemented.
- Providing financial assistance for higher education in non-state universities; the private sector is encouraged to provide courses for nurses where a stipend will be paid by the government. This is a giveaway but a good scheme because it promotes choice – instead of providing low-quality university education, give scholarships and allow students to choose where to receive education.
Kithmina Hewage – Research Officer, Institute of Policy Studies
As anticipated, the budget includes some “relief” with elections around the corner. However, the budget has largely restrained it self from populist policies that would have impeded recent progress in stabilising Sri Lanka’s macroeconomic fundaments. The budget appears to focus more on creating adequate incentives for more private sector driven economic growth.
The expansion of Enterprise Sri Lanka to promote greater SME involvement in the export sector, is a particularly positive move as access to credit has historically been a significant obstacle. Among others, measures to improve female labour force participation such as those related to maternity leave, providing creche facilities at work, and proposals to amend labour laws to accommodate flexible hours are all positive steps.
Gayani Hurulle, LirneAsia
The budget proposals seems well thought out overall. The Government has, for instance, has stayed away from providing large agricultural concessions. This may be costly in a political light, but makes economic sense given the low productivity of the sector. The focus has been on private sector growth, through initiatives such as concessionary loan facilities from the Enterprise Lanka scheme. This push, hopefully, will prevent individuals from becoming dependent on the overly inflated public sector as a means of gaining employment.
The removal of the international telecommunications operator levy (ITOL), which otherwise adds unnecessary levies on incoming network calls, is a good move as much of the funds collected have remained unused in the past. The ITOL was unlikely to remain a viable source on income for the government in the long run, as more and more individuals switch to using internet-based services for making calls instead.
The 2012 census states that 8.7% of the population are persons with disabilities. With this in mind, the proposals to make public transport and public buildings accessible to persons with disabilities are a step in the right direction. Such proposals will also become increasingly relevant given the country’s aging population.
W A Wijewardena
The revenue proposals are all on what is known as sin taxes like increase in excise duty on tobacco and alcohol, import duty increase on vehicles which also has become a sin in the country today, stamp duty on foreign payments by credit card etc. These taxes can be collected at source and hence can be assured of their revenue yields.
Nisha Arunatilake
The revenue proposals are very limited. There are no proposals to increase income taxes. Perhaps that is because of the limited time available to introduce an income tax reform. Most of the revenue increases are through taxing cigarettes, alcohol, and some luxury goods. Not sure these will be sufficient to increase revenue by proposed amounts.
The State may not get the expected revenues, so the budget deficit may expand meaning more debt. The biggest issue is with the salary increase for public sector employees, which has long term implications, including for pensions. Public sector salary increases should be a part of an annual standardised process. It should not be used as an electioneering tool, which is the case here. Public sector salaries and pensions are a fiscal time bomb, they already consume 50% of tax receipts. This is the most problematic giveaway since it creates long term problems.
As per the World Bank“ The Public Servants Pension Scheme (PSPS) provides a relatively generous defined-benefit pension for Government employees with an estimated replacement rate of 83-88 percent but the costs of the scheme are projected to increase in the coming years from the current cost of about 1.4 percent of GDP thereby making it increasingly difficult for the authorities to afford the benefit promises over the long-term”.
Kithmina Hewage
The government has set ambitious revenue targets in this budget. Historically, Sri Lankan governments across the political spectrum have been unable to achieve the revenue targets set in their budgets. As a result, often it leads to reductions in government spending in order to compensate. While increases in tariffs/excise duty on vehicles, alcohol etc. alone are unlikely to lead to as big a revenue increase, the recent implementation of the Inland Revenue Act and the subsequent streamlining of the tax code, may help with better revenue collection.
W A Wijewardena
Since they have less than 8 months, it’s a challenging task to implement them in time; already, the Finance Ministry is scandalised by its inability to implement budget proposals in the past; it’s highly likely that the present budget too will end up in the same destiny.
Nisha Arunatilake
Enterprise Sri Lanka is a good initiative. But, I am not really in favour of giving preference to those with National Youth council certificates. I think all proposals should be evaluated for their merit. Also, bankers should be trained to evaluate projects for their feasibility and profitability. I don’t think this is the usual function of a banker. Rather than reprimanding bank officials who do not provide loans, the capacity of the bank officials should be improved to assist potential entrepreneurs to develop their business plans and benefit from this initiative.
On the proposed Rs. 500 million to facilitate the country’s top performers at Physical Science, Biological Science, Technology, Commerce and Arts, at the Advanced Level Examinations held each year to pursue their undergraduate education at top universities, such as Harvard, MIT, Oxford, Cambridge, etc. I am not sure if this initiative will result in intended outcomes. There is no guarantee that those who leave for studies will come back to serve the country. Although they are required to work in Sri Lanka for 10 years, I’m not sure how the government will implement this. Also, I’m not sure if there are jobs for these graduates in the country. I think it is better to provide first class education opportunities in the country so that more children can benefit from those opportunities.
The government is proposing to get the army involved in providing vocational training. The country has a wide network of vocational and technical training institutions spread throughout the country. It is not clear why it is necessary to bring in the army to carry out this work. More needs to be done to streamline training facilities in the country and improve the teaching and learning process in these institutions.
D A Jayamanne, Advocata Fellow
The proposed NBT of 3.5% on foreign currency transactions will push up prices for businesses that depend on cloud and online services, as well as regular people who purchase products online through amazon and other international e-commerce sites. This is on top of a massive currency depreciation against the US Dollar we experienced last year. The NBT replaces a stamp duty on foreign currency transactions on Credit and Debit cards. Therefore total costs will be a somewhat small increase, but this is going backwards.
Ravi Ratnasabapathy
From 01st April 2020 the online booking of lodging with more than 5 rooms allowed only if they are registered with Sri Lanka Tourism Development Authority.
This will affect small hostels and hotels which generally offer cheaper accommodation. Larger hotels have been lobbying for restrictions on the informal sector – to restrict competition thus enabling them to charge higher prices. The growth of the informal sector has been one of the great successes of the tourist industry. The system of online ratings means that customers get a good regular rating on quality, which means the industry is essentially self regulating. There is no benefit to the consumer that can come from regulation but will cause unnecessary hassle, increasing administrative costs for smaller businesses.
How the government intends to enforce this regulation is unclear. It may end up being saved by the impracticality of enforcement.
There is also the tax exemption on Go-Karts and Tyres – Bad policy that violates the principle of uniform treatment. Why only Go Karts? What about other tyres which are heavily taxed? A specific policy to benefit a specific business, another classic example of corporate welfare – The Speed Drome in Battaramulla (owned by the McLarens Group) and the newer and larger Sri Lanka Karting Circuit in Bandaragama (owned by the David Pieris Motor Company).
Excessively high alcohol taxes promote black markets, which the politicos have a hand in. The government indicated that soft alcohol would be taxed lightly and reduced taxes last year. This year taxes have increased again on both hard and soft alcohol. Which way is policy going? We would have liked to have seen progressive reductions in taxes which would have improved government revenue and given a clear signal as to direction.
There is similar policy confusion with taxes on cars, ad-hoc changes year to year but nothing to address the fundamental problems of public transport and congestion.
In addition the proposal to support the primary school children’s nutrition effort by giving a free glass of milk for primary school children across the country. Can you imagine the cost of administering such a project, buying, storing, distributing milk? Why not cut the taxes on milk instead?
Kithmina Hewage
As anticipated, the budget includes some “relief” with elections around the corner. However, the budget has largely restrained it self from populist policies that would have impeded recent progress in stabilising Sri Lanka’s macroeconomic fundaments. The budget appears to focus more on creating adequate incentives for more private sector driven economic growth.
The expansion of Enterprise Sri Lanka to promote greater SME involvement in the export sector, is a particularly positive move as access to credit has historically been a significant obstacle. Among others, measures to improve female labour force participation such as those related to maternity leave, providing creche facilities at work, and proposals to amend labour laws to accommodate flexible hours are all positive steps.
In order to capture the discussion while the Budget was being read out in Parliament and afterwards, Groundviews put together a Twitter moment which captures commentary from the Finance Minister, and responses by researchers and economists and the wider public. Access it here. Groundviews will continue to update this post as responses are received.
Gayani Hurulle
Implementation of the budget proposals have been a challenge in the past. This issue is likely to continue. It is stated that an additional allowance of LKR2500 would be granted for public sector employees as an interim measure. The Salary Commission should consider performance based pay schemes for the public sector at large. The good conduct pay for the armed forces seems to be first step in this direction. It will be interesting to monitor the success of this scheme to see if the incentive received is sufficient to induce behavioural change (which I assume is an intended outcome of the allowance), given the rather nominal incentives at an individual level (ranging from LKR 3 per day for 1st badge to LKR 20 per day to 5th badge).
Editor’s Note: Read “Budget 2017: The Good, Bad and Ugly” and “A Tale of Taxation: A Rundown on Budget 2016”