• The budget did little to alleviate concerns about Sri Lanka’s foreign debt and how it will be addressed
• Despite a breakdown in confidence in the country’s monetary policy, the budget did not shed light on how trust will be rebuilt
Finance Minister Basil Rajapakse presented the country’s 76thbudget to parliament on Friday. It was his maiden budget. It was delivered at a time the country is living through an unprecedented crisis in the economy and in governance. Compounded by corruption, it has led to a loss of confidence in the people. living amidst economic woes triggered by a dearth of essential commodities and the high cost of living. Farmers have been protesting for months for fertiliser -be it synthetic or organic- after the government’s policy to go organic went awry. Principals and teachers have also been protesting for weeks because they want their salary grievances addressed. After a near four hour monologue, with a short break for the minister to get his breath back, the financial road map that was proposed for the year ahead has raised questions about its sustainability in the face of the country’s economic challenges including a high rate of inflation at seven percent.
Harsha De Silva, a former state minister for economic affairs tweeted that the budget was ‘totally disappointing’. ‘No vision. Nothing in it to address the major structural issues of fiscal and balance of payments deficits. No new plans on investments exports, technology and innovation. Nothing to address unbearable cost of living. Only politics’.
Among the most glaring of political proposals must be theminister’s allocation of 100 million rupees as compensation for political victimization during the Yahapalana government. He also included a proposal for Perpetual Treasuries Limited which is implicated in the bond scam which took place during the Yahapalana government, to return to the Treasury the 8. 5 billion rupees it earned in violation of the Central Bank‘s monetary code.
The government’s total projected revenue and expenditure of 2284 and 3912 billion rupees respectively for next year will leave the country with a deficit of 1628 billion rupees.
Sri Lanka’s budget deficit has been growing in the past years. In 2019 it was it was 9. 6 percent and in 2020 it was 11. 1 percent. It is projected to be the same in 2020 as well but is expected to shrink to 8. 8 percent in 2022.
The bulk of the budget expenditure, which is recurrent, will be for interest payments of 1115 billion rupees. This is an increase from last year when it was 1055 billion rupees. The other recurrent expenditure component is salaries which will be 1015 compared to 887 last year. The increase in salaries is attributed to the government’s decision to make permanent 53, 000 graduates which will cost it 27. 6 million rupees. The budget proposal to extend the retirement age of public sector employeesfrom 60 to 65 years will offset this expenditure. Meanwhile one of the budget proposals is to also extend the age of retirement of private sector employees to 60 years.
There are several major revenue generating proposals in the budget most of which will be from corporate taxes. According to Professor Mick Moore who is a non- resident fellow at VeriteResearch, a local think tank on economics, law and media, the government has given itself a bit of scope to introduce other taxes that will impact more on the people. Critics of the budget have questioned the rationale of introducing these new taxes without making existing tax structures more efficient since Sri Lanka’s reputation for being a country with the lowest levels of revenue collection is well known. The budget proposed several measures to improve tax administration including strengthening the Large Taxpayers Unit and Upper Corporate Unit in the Inland Revenue department, expediting implementation of the digital revenue collection system of the excise department and introducing a mechanism to verify tax documents, such as digital invoices and documents filed through the revenue collection systems.
Among the proposals to generate revenue is a one-off surcharge tax of 25 percent on individuals or companies that have earned taxable income in excess of 2,000 million rupees in 2020/2021which is expected to yield LKR 100 billion. There are an estimated 62 of such individuals or companies. This type of surcharge on income tax is not new in the country’s fiscal history. According to chartered accountants KPMG, surcharges between 10-25 percent have been imposed from time to time since 1961. In 2015, the Department of Inland Revenue had collected LKR 49, 000 million from this tax.
Banks, finance companies and other financial institutions will have to pay an 18 percent VAT for financial services provided by them between January and December 2022. The increase will raise the VAT threshold from 15 to 18 percent and expect to generate 14 billion rupees to the government.
Meanwhile a social security contribution of 2.5 percent where there is a turnover of more than 120 million rupees is expected to generate 140 billion rupees. The provision will come into effect in April next year.
A special GST on alcohol, cigarettes, telecommunications, vehicles, betting and gaming is expected to bring in 50 billionrupees. While the rate of tax has not been specified it is expected to come into effect in January next year.
A rise in the excise duty on cigarettes and liquor which will come into immediate effect will add 8 billion and 25 billion rupees respectively to the country’s purse. The retail price of one cigarette was increased by 5 rupees and the Excise Department announced price increases in local and foreign liquor. Local extra special arrack will increase by 96. 14 rupees and other local arrack by 103. 73 rupees. Foreign liquor, beer with less than 5 percent alcohol and beer with more than 5 percent alcohol in it will increase by 127, 3. 10 and 14 rupees respectively.
The proposal to impose a fee on vehicle upgrades will be an onerous one against the government’s decision to stop vehicle imports. Another proposal along similar lines is the fee that will be have to paid in the event of a motor traffic accident which can be claimed from the insurer.
Other proposals include the waiver of business registration fees in 2022 to provide an incentive for new business start-ups, an allocation of 39 billion rupees to promote the use of non – toxic weedicides and organic fertilizers and a revision to teachers’ salaries for which an allocation of 139 billion rupees was made. A contributory pension scheme for senior citizens who do not currently receive pensions and a regulatory authority for three wheelers were also proposed.
The budget did little to alleviate concerns about Sri Lanka’s foreign debt and how it will be addressed.
By end April 2021, the government’s foreign debt was USD 35.1 billion. Foreign reserves have been dwindling after sovereign bond repayments instead of roll overs and are now at a significant low of USD 2.3 billion. In 2022 and beyond over USD 5 billion will have to be paid in foreign debt repayments despite the challenging economic environment.
Despite a breakdown in confidence in the country’s monetary policy, the budget did not shed light on how trust will be rebuilt. Sri Lanka will not be able to get loans because rating agencies will lower their rankings even more. In August 2021 S&P downgraded Sri Lanka’s credit rating to CCC+ and in October Moody’s downgraded it to Caa1.(SW)
