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The Blue Green Budget of the Unity Government


Comments / {{hitsCtrl.values.hits}} Views / Friday, 17 November 2017 00:10


The Budget proposals of the Unity Government under the theme ‘Blue Green Budget’ for the fiscal year 2018 are expected to support the achievement of medium-term targets such as Per Capita Income of $ 5,000, one million new jobs, FDI inflows of $ 5 billion and the doubling of exports to $ 20 billion. 

Finance and Mass Media Minister Mangala Samaraweera, presenting his maiden budget for 2018, envisions increasing the economic growth rate to 6% by 2020 from the current 4.5%. 

Samaraweera said, in 2018 we envisage a GDP growth of 5%, inflation of around 6%, and we hope to achieve for the first time in almost six decades primary surplus of 1% of GDP and a Budget deficit of 4.5% of GDP. The economy is expected to grow by around 4.5% in 2017 and projected to move gradually to a higher GDP growth path of around 6% by 2020, while containing the level of unemployment at around the 4% level.

Budget deficit

The Budget targets a fiscal deficit of 4.8% of GDP in 2018, which is only slightly above the 4.7% target agreed with the IMF and continues the consolidation that began in 2016. Floods, disease and drought weighed on the economy and public finances during 2017, and contributed to the Government missing its initial 2017 fiscal deficit target of 4.6% of GDP.

Nevertheless, the Government still expects the 2017 deficit to fall to 5.2% of GDP, from 5.4% in 2016. The hope for stability in 2017 has been largely driven by measures to boost tax revenue, including a hike in the value-added tax (VAT) to 15% in November 2016 from 11%. However, this push for indirect tax will certainly lead to more pressure on COL.

Revenue

On the revenue side the Government expects revenue to rise strongly again in 2018, to 15.7% of GDP, from 14.7% in 2017. The revenue increase is expected to be supported by an Inland Revenue Act passed in September 2016. 

The act, which will come into effect from 1 April 2018, aims to simplify the tax laws and improve the efficiency of the collection. Despite these positive reforms, there are numerous risks to the Government’s revenue projections given that they are based on a GDP growth assumption of 5-6% for next year and its track record in the last three years. However, Samaraweera is optimistic. 

He said: “We are in the process of effecting revenue reforms in all areas including Inland Revenue, Customs, Excise and others to raise Government revenue closer to 20% of GDP over the medium term. Samaraweera is confident that revenue will increase and that expenditure will remain well targeted and rationalised, and that the overall Budget deficit will reduce to 3.5% of GDP by 2020.

Government debt 

The next three years will be crucial with debt repayments amounting to almost Rs. 7,000 billion. The biggest challenge for the Unity Government is the repayment of international sovereign bonds which will mature every year from now on amounting to almost Rs. 600 billion where bunching is a severe strain on Government finances. 

Exchange rate depreciation could also push up the local currency value of government debt, given that around 40% of the total was denominated in foreign currency at end-2016,” In 2018 alone debt repayment amounted to Rs. 1,970 billion. The Government may be forced to compromise on the investments to be made in 2018, given the huge debt burden. The Government debt/GDP ratio rose to 79.3% of GDP in 2016 - well above the 60.9% median for sovereigns rated ‘B’ or lower. 

Fortunately foreign exchange reserves have risen to $ 7.5 billion at end-October from $ 6.1 billion at end-2016, and the reserves could be sufficient to cover 3.5 months of current account payment by end-2017. This certainly needs to improve further.

2018 proposals

The Government will introduce the Enterprise Sri Lanka Credit Scheme with the objective of encouraging the SME sector to strengthen entrepreneurs. During 2018-2020, the Government will support the formation of 50 agro and fishery companies, 25 majority women-owned companies and 150 youth centric start-ups. To encourage women entrepreneurs, the ‘Enterprise Sri Lanka Credit Scheme’ will make available credit facilities with the interest subsidy being at least 10% more for women entrepreneurs relative to others.

Rs. 2,000 million has been allocated to further strengthen the skills development programs undertaken by the National Youth Corps. The Government plans to implement a program where youth groups will undergo three-six month training courses in a specific skill as demanded by the private sector. 

To fund this, an ‘Employment Preparation Fund’ at the Ministry of National Policies and Economic Affairs will be set up with an allocation of Rs. 2,500 million.

With the aim of promoting direct foreign investments and simplifying business registration, a one stop shop for business registration through a single identification system and the introduction of a system to scan and digitise company records, create a database of trademarks using the Department of the Registrar of Companies’ funds.

With the aim of fostering reconciliation, a large number of proposals have been made, including the construction of 50,000 brick and mortar houses for the North and East, and the introduction of irrigation systems and construction of a home for differently-abled women in the North, introduction of low interest loans and provision of a stable livelihood for 12,600 rehabilitated ex-combatants. In addition, Rs. 2,500 million will be allocated to provide housing and infrastructure for the Muslims who were forcibly evicted from the North by the LTTE in the early 1990s.

Other highlights

  •  Rs. 500 million allocated to offer loans under ‘Entrepreneurs Sri Lanka’ program.
  •  Anti-dumping and countervailing laws to support local industries.
  •  Government will remove up to 1,800 para-tariffs in 2018.
  •  Loans for SME industries, without guarantors.
  •  Rs. 10,000 million allocated to establish an EXIM bank specially to provide long0-term loans to small and medium enterprises.
  •  Rs. 800 million for Export Market Access Program to be introduced for companies with less than $ 10 million in earnings and for potential new entrants to the export market.
  •  Restrictions on foreign ownership of shipping and freight forwarding agencies will be lifted.
  •  All tourism service providers will be required to register with the Sri Lanka Tourism Board to bring the informal sector under the broader tax net and a VAT refund scheme for foreign passport holders at airports and seaports from 1 May 2018.

Conclusion

This Budget is significant because of the Government’s efforts to make the country green by enforcing policies which are obviously aligned with international agreements over climate change. This could attract new money into the country. Then on the expenditure side, the Government expects public investment spending to rise by 20% in 2018, while recurring spending is forecast to decline. 

Interest payments are expected to account for more than one-third of total revenue, which is a key weakness in the fiscal profile. High Government debt and the large cost of debt servicing weigh heavily on Sri Lanka’s credit rating and managing that will require sustained fiscal consolidation over the long term with strong leadership. 

The new tax on bank debt and basing the duty tax on engine capacity of vehicles instead of CIF needs a rethink. However, to implement the 2018 proposals of the Budget, Parliament will firstly need to approve it and secondly the Green Blue Government will have to work together as a team to implement it. Finally, the proof of the Budget proposals will be in their implementation and realisation.

(The writer is a thought leader)


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