- Says Govt. avoided “trap” of increasing taxes, has provided consistent policy platform for next 5 years
- Calls on biz to tap into opportunities and not be deterred by COVID-19
- Capital market incentives to list 500 companies by 2025
- Port City to be key driver in SL becoming financial hub
- 289 projects worth Rs.5 t
- to be fast-tracked to boost growth
- Banks encouraged to participate in financial industry consolidation
- Budget focus on “sustainable goodies” for public
By Uditha Jayasinghe
State Minister of Money and Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal
The freshly-unveiled Budget 2021 policies are aimed at focusing on multiple aspects of the economy to drive forward growth, including capital market expansion, socioeconomic development and attract investment, a top official said yesterday, terming it as the bedrock for Sri Lanka’s next wave of economic expansion.
State Minister of Money and Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal, speaking at the KPMG Budget Analysis 2021 ‘Road to Resilience and Recovery,’ elaborated on the thinking behind the key policy document, explaining that policymakers were keen to show the glass as half full to the private sector, so they would see and respond to investment opportunities.
He described the temptation to increase taxes as a “trap” the Government had chosen to sidestep.
“The Budget is the foundation on which the entire thrust of development activities and stabilisation efforts will be built on. It will be the bedrock of the next wave of development for our country. We could have said it’s a COVID-19 year and looked at austerity measures, but it is not the right moment to do that. We should look to move forward and achieve what was focused on by the President when he said he wanted to deliver growth. It is about getting fundamentals right and delivering sustainable development,” he told the online gathering.
The State Minister argued that even though Sri Lanka had struggled with persistently slow growth for a number of years, the only way to break out of it was to be bullish about growth and by tapping into the rewiring of the global economy caused by COVID-19.
The State Minister pointed out the Budget had delivered consistency to the private sector, with no major additional taxes and said the capital market incentives were to attract 500 companies to list by 2025.
“We had a plan to take market capitalisations to at least 65% of GDP, but for this we need to list larger companies and see a thriving robust capital market. We have said we will provide those companies 50% reduction of taxes and other concessions for three years. This is also to broad base the capital market inclusion in Sri Lanka and this will not happen unless there is some incentive provided.
“The Government is giving you an opportunity to be part of the capital formation of this country. We also want to see new businesses being formed, which is why there are concessionary Rs. 500,000 loans being given. We also want import substitution industries to grow. So we have put in place policies that will support different sides of the economy,” Cabraal said.
He also touched on the potential for Sri Lanka to be positioned as a financial hub and echoed Budget proposals to present to the parliament to take the Port City investment to the next step.
“Growth momentum will be sustained by the private sector. We also have a large number of Government projects that are being implemented very slowly and initial assessment shows there are 289 projects that are worth more than Rs. 1 billion, collectively Rs. 5 trillion. Many of them are stalled because there are constraints that have inhibited the growth structure, but we will address and complete projects fast.”
He also said the Government would take steps to counter currency depreciation and maintain low interest rates in the medium-term. Cabraal stressed that this would keep the deficit in check and assist businesses to operate in a relatively stable environment, despite the challenges posed by COVID-19.
“In any budget situation the macro-fundamentals need to be addressed carefully. Even though the deficit is high, our borrowing will be local and non-revenue sources, and foreign borrowings will be much lower.
“Foreign debt needs to be brought down to about 40% of deficit financing. We need to give incentives to businesses, create new opportunities, and we want ongoing projects sustained and invite FDIs. On the latter, we will create pockets for these FDIs to come in via the capital market and other manufacturing opportunities.”
“We also want to see banks play a key role. In the future, we will expect more from them; to play a development role and keep the financial system stable. We have re-introduced a consolidation measure and this is another area where banks can play a role,” he said.
He also pointed out the Government was conscious of delivering real solutions to people’s problems, especially in rural areas, and therefore focused on “sustainable goodies” such as resolving the human-elephant conflict that affected 14 districts.
Critical to this mindset change was providing solutions to serious problems facing millions of people. Cabraal recalled that before 2015, the former Government had focused on expanding electricity access to the people and was now focused on doing the same with pipe-borne water.
“I would say that in 2021 and beyond, we need to focus on the needs for our people to have water. Only 42% of people have pipe-borne water and we will take it to at least the 95% mark. The road network needs to be improved, we need to upgrade at least 100,000 kms of road. The elephant-human conflict affects 14 districts in our country, many people can’t send their children to school and people close down their shops by 6 p.m., so many economic activities are suspended in those areas and we need to address this.”
“Real goodies are long-term sustainable initiatives that the government must undertake. When I was going around the country for election campaigning, what I was told by people was that they want jobs for their children, they want to stop travelling three km to get water, roads to bring their produce to market. That is what will genuinely change their lives.
“This is what we have said and that message seems to be getting across. For this, we need investment but it’s worth it. If we can get 500 companies to list, then we are changing the way we do business in this country. We are encouraging people to harvest their own capabilities and contribute to the economy. We need to think strategically, to think beyond the next election,” he added.
Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon, speaking as part of the panel discussion, warned the Government could struggle to balance low interest rates with a high budget deficit as well as aim for high growth while fighting a pandemic.
“The Budget is trying to provide incentives for businesses to take a long-term view and that is welcomed, but from a macroeconomic point of view, we are focusing on borrowing from domestic markets and that could raise concerns about what that means for the policy intention of maintaining low interest rates.
“Would that then have an impact on the growth outlook? So that is a whole host of multiple challenges that policy makers will be dealing with. Flexibility on aspects such as public investment has been maintained, especially if COVID-19 infections rise and the Government has to provide more public support in social spending. Debt sustainability should be built-in to how the deficit is managed,” she said.