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President and Finance Minister Ranil Wickremesinghe gestures during the interactive Q&A session at post Budget forum organised by the Daily FT and Colombo MBA Alumni Association on Friday at Shangri La, Colombo
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By Charumini de Silva
In an apparent personification of the art of possibility, President Ranil Wickremesinghe on Friday spent an inspiring hour plus sharing how Sri Lanka can emerge out of its worst crisis, by way of responses to multiple questions posed from the audience at the Daily FT-Colombo University MBA Alumni Association post-Budget forum.
His keynote lasted only about 30 minutes but despite his busy schedule, the President stayed on at the forum for over an hour to drive home the new Government’s thinking and strategies to lead the country to future growth from stability at present.
The audience and the moderator akin to a fireside chat, fired a host of questions to a willing President who effectively responded. By his responses, Wickremesinghe, apart from driving home his intellect on issues and possible solutions, raised hope among the 300 participants at the forum.
For the most contentious debate over the high Rs. 500 billion defence expenditure and the fact that if it can be reduced by Rs. 50 billion, and the higher taxation on exporters could be avoided, the President’s response was pragmatic to many.
His specific response to concern expressed by exporters over high taxation too was emphatic.
The President’s answers to the public sector reforms and restructuring of State Owned Enterprises were blunt too. His witty response to when will the Government float the Rupee evoked laughter when he said, “It is sinking at the moment and I cannot float it.”
The forum played an ideal platform to clarify a host of concerning issues or reinforce the validity of several of the Government’s policy initiatives.
Overall the post-Budget Forum titled ‘Hurdling towards opportunities beyond challenges’ also highlighted key insights from an eminent panel comprising Treasury Secretary Mahinda Siriwardena, Central Bank Governor Dr. Nandalal Weerasinghe, World Bank Country Director Sri Lanka, Maldives, Nepal and South Asia Faris Hadad-Zervos, Asian Development Bank Country Director Dr. Chen Chen, Institute of Policy Studies Executive Director Dr. Dushni Weerakoon, SCB Sri Lanka CEO Bingumal Thewarathanthri, Ceylon Chamber of Commerce Chairman Vish Govindasamy, PriceWaterhouseCoopers Sri Lanka Tax Director Charmaine Tillekaratne, SC Securities CEO Roshantha Fernando and Colombo Uni. MBAA President Chandima Samarasinghe. It was moderated by Daily FT Editor and CEO Nisthar Cassim.
Standard Chartered Bank was the Strategic Partner whilst other partners were SC Securities, PwC and Ogilvy Digital.
Here are excerpts from the Q&A with President Ranil Wickremesinghe during the Daily FT-Colombo University MBA Alumni Association post-Budget Forum.
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Q: The 2023 Budget hasn’t been explicit on rationalisation of high Government expenditure. Why?
Government expenditure includes a fair amount of wasteful expenditure. As much as we have raised taxes, we have to reduce expenditures. There are some projects, and we don’t know why those were taken on. Sometimes, the same category of projects takes place in the same area by two separate ministries. We have to rationalise and reduce the expenditure or otherwise, we have to increase taxes.
The Government’s role must be confined to what is needed to develop the economy, for the social sector programs, and for infrastructure — not beyond those limits. We have around 1,280 spending units. We need to control the expenditure in the economy. It is an enormous task. As the Opposition has requested we are trying to reach a ‘zero budgeting’ next year by reducing Government expenditure and allowing more money to be circulated among the private sector investments.
Q: Budget 2023 articulates an export-led economy but there is concern over doubling of income tax on exporters. Why?
The simple answer is we need the revenue. In most parts of the world, the export industry pays the same tax as other local industries. There is no differential. Then the question comes whether by giving tax exemptions we are actually subsidising the export industry which is otherwise not competitive. We have to look at both aspects. We want a competitive economy and a competitive export industry. We give exporters concessions to start with but thereafter we certainly have to get the revenue from the export industry. Otherwise you have an export-oriented economy and you have less revenue than you have today. The Government has a duty to maintain a stable exchange rate. So both combined lets go ahead. This is a time of transformation for all enterprises local or export-oriented. We have to ensure that they are certainly competitive and need not be in any way subsidised by the State.
Q: Is the high corporate income tax of 30% here to stay or a temporary measure?
Let’s leave it at a guess level and decide once we reach the objective. I must tell you all that in the 1970s income tax of my father’s business we paid taxes as high as 70% and therefore the 30% is nothing.
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Q: What is the plan for e-Government to improve overall efficiency?
We are moving towards an e-Government to have better control over the 40% of the population who require social welfare. It is also easy for the Inland Revenue Department to operate and collect taxes. We are moving towards a digital economy.
Q: What are your comments on brain drain and are you planning to open up for migration?
I am very concerned about it. But on the one hand, people have decided that the future is not good here and to move out. Therefore we must first improve the economic situation. Secondly, we have to go for mass training and education. Post-school education and experience are very important given the current economic dynamic. Finally, if any sector is experiencing a shortfall of human capital we will allow a certain number of people to be recruited. But do you know that there is a large number of people who are already working in the areas of Wennappuwa and Naththandiya who have come from India with no documents or visa and they have not come through the airport either?
Q: Budget talks about SL’s maritime logistic hub. There are still restrictions on foreign ownership in shipping and freight forwarding. Your views on it?
It is an issue that has to be sorted by the industry itself. It is split at present between those who want to protect and open it. However, we are seriously looking at it.
Q: What are the plans for innovation and Research and Development to support economic growth? What is the relationship between Government, universities, research and the private sector?
The relationship between universities, the private sector and the Government is essential. We are giving our attention to it. We will come up with our proposals hopefully with the support of the World Bank.
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Q: How does the Government plan to ease difficulties in making overseas university fee payments in foreign currency?
As far as Sri Lankan students are concerned if they make the payments in rupees, they will have to then confine the Sri Lankan student intake by 25% to 40%. We will have to make a formula as to how they can take out the profits. Those are details that have to be looked at. We also have to promote not-for-profit, non-State Sri Lanka universities to have arrangements with foreign universities and if they have foreign lecturers, then we will have to make some provisions to pay for them, as it would be in foreign currencies.
Q: What is the agriculture modernisation strategy? Should the Government set up a dedicated department?
Simple answer would be to change the attitude of the Agriculture Department. First, we are looking at restructuring four groups; the Agriculture Ministry, Plantation Industries Ministry, Technology Ministry and non-government people. There should be no Minor Crop Exports Department and all should be major exports. There will be some radical restructuring of those agencies and departments. We are setting up a dedicated agency to promote cinnamon exports. To broaden the sector, we are also looking at expanding into an Agri Technology University to conduct postgraduate courses and with the support of RRI, TRI, CRI and all other research institutes will also be connected to modernise the agriculture sector. Change has to be in totality not half-baked.
Q: What are your views on apparel firms relocating to other countries?
The exchange rate has been very favourable to exporters this year, but there are other issues. Are we competitive enough? We have low-wage and high-wage apparel industries. The low-wage apparel industries will keep moving out. Companies have to see how you all could increase technological inputs and go upmarket. We must do our best to retain them, but as our wages go up, this will be less competitive and they will move out. It is not only the taxes, but many other factors as well. We will talk to the export industry separately. As our wages go up, they may move out. Singapore and Taiwan also faced the same situation in the post-low wage scenario. We shouldn’t lose these firms, and see how we can adjust to this situation.
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Q: What is the debt restructuring timeline with official and private creditors?
We have two alternate targets — December and January. China and India have not gone into debt restriction before so we have to give some space to them. It was decided with China that we start the discussions after the party congress is over in October and we are trying to start discussions soon. We are trying our best to conclude it and have it before the Board meeting in December. Otherwise, we have to go for January.
Q: How are we going to attract shopping-centric tourism and attract top global hotel brands?
We are not only looking at shopping tourism, but cruise tourism; we are looking at opening up some large resorts and nature-oriented ones that are upmarket as far as our archaeological sites are concerned. Shopping is one aspect and it will not be the main area. There will be other attractions and activities we have in mind. We need more people running high-end hotels but we have some boutique hotels that are well beyond $ 500 or $ 1,000. We need smaller hotel markets developed, while the larger hotels cater to what is available. As we push for high-end tourists, we need some good names in addition to what we have. We mustn’t think that having foreign brands is good enough as we already have our homegrown brands and help them to upgrade. Many of them are already operating in the Maldives, India and Middle East. While we attract more high-end tourists, we must also encourage our hotels to go upmarket and build on the brand names they have created.
Q: Can the Government consider taking the additional part of taxation on exporters by way of foreign exchange earned directly to the banking sector? This will have an automatic increase in foreign inflows.
Treasury Secretary: Good suggestion. We need to study the pros and cons.
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Q: Are we going for a domestic debt restructuring?
We are trying to avoid damage to the domestic structure, but everyone will have to take a fair share. So far we have only looked at the foreign debt and as far as the local end is concerned we are working to minimise the impractical. There is no need to panic. If all the taxes come in, we will be able to avoid it completely.
Q: What are your plans to strengthen the construction industry?
We will have to repay the monies that are owed by the Government and the Government’s share of construction will come down. We have to get the private sector moving and liberalise to allow foreign investments. More investments in tourism, etc. will lead to more construction.
Q: The Colombo Port City has not made much progress. Why?
Two reasons. One is the present economic situation. Second is the objective of the port city. When we started it was more for off-shore business and domestic activity. But then it expanded into hotels, tourism, casinos, and many others. My view is that it has to be focused only on business and not all things you want to do.
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Q: What are the real timelines once we reach board-level approval and our short-term reserve target and SOE restructuring?
Wickremesinghe: We have to finalise the negotiations with India and China, while Paris Club has already agreed to it. The IMF staff level has agreed and going into the private creditors will not be problematic. It is going to take a bit of time to negotiate. Other than that we hope the rest of the roads will be smooth travelling. In terms of restructuring and divesting SOEs, by December is the given timeline for the four or five SOEs mentioned in my 2023 Budget speech.
CBSL Governor: The priority is to obtain financing assurance from the bilateral creditors. We also need to negotiate with commercial creditors. Then the IMF can evaluate and start disbursing money as mentioned by the President in December or January. The restructuring, finalising it and debt exchange will take place after the IMF disburses money. Thereafter, we have another six months of full process with bilateral and commercial creditors. In terms of the reserves, we need to build up to a comfortable level from where we are now. With confidence coming back into the system, we anticipate the FDI, and portfolio investors’ inflows will come in. We hope that we can reach the reserve levels we had in 2019. We are hopeful that the IMF program will stabilise currency and inflation.
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Q: Exporters are in a dilemma because of the doubling of income tax apart from mandatory conversion of earnings proceeds thereby leaving little for re-investment. This will lead to exporters setting up operations elsewhere.
President: You have to look at the dilemma of the Government and the country first. If you say the companies are profitable when you’re tax-free, then in the long term you are not competitive. Maybe we have gone as high as 30% at the moment and it will be adjusted as we recover. If Sri Lanka is your source of export, you have to stay here.
CBSL Governor: All exporters are using the resources of Sri Lanka and exporting. Only the foreign exchange-earning export sectors are making profits given the favourable foreign exchange rate. This is at the cost of other industries such as local transport and construction industries. Exporters are making a profit at the cost of other industries. What is the rationale for exporters to use different tax rates when they exploit the same resources? They move out because it is easier to do business in countries like Dubai. Even after a low of 14-15%, preferential taxes have these export companies expanded? Are we satisfied with the growth in export industries compared to Bangladesh and Vietnam? Have we seen the results of these tax concessions funded by every taxpayer? I think we have not seen a sizable growth.
In my view, taxes have to be fair, and equal to all and these are a tax on profits. In terms of repatriation, exporters repatriate 100%. There’s some improvement but they still keep 75% in foreign exchange. If you’re earning in foreign exchange there is some responsibility in the current situation to repatriate and convert, to help your own industry and other industries.
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Q: With the outlook for apparel exports being gloomy, is this the correct time to impose taxes?
I think apparel exports will come down as the recession in the US and Europe is already setting in. Apparel exporters have also signalled that the exports will come down and the question is how do we find the money for the people? We asked the IMF too — you have to tax everyone alive. At some stage, you have to adjust to it and might as well adjust now. In the US whether you are an importer or exporter, you have to pay the same tax. It is unfortunate, we are bringing it in this time when the export sector has made good money. You have to be competitive. Let’s not get into this game now. We are all in this country and in this together. The Government can either make it easy or difficult. But we are all in it together, and we can all get out and go.
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Q: Proposed higher taxation on export income is estimated to raise Rs. 50 billion in revenue to the Government. Instead of taxing exports, as an alternative why cannot the Government reduce the Rs. 500 billion defence expenditure by Rs. 50 billion?
I can reduce the (defence) allocation of Rs. 50 billion and reduce the armed forces at the same time. What will happen to the well-trained, unarmed people who will then be unemployed? These are easy questions. Without having an employable market it is hard to implement. I cannot take Rs. 50 billion from Defence without stabilising the country. The situation will be chaotic if those people come to the streets. It is easier said than done.
Q: Why do you think anyone will buy SriLankan Airlines in the current environment and if no takers will the Government scrap the national carrier?
We are going to carry this out in a way that the debt will not be passed on to the new buyer. They can take 51% of the controlling stakes. It is an established airline and the routes we operate are a very good proposition to any potential airline.
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Q: When can you float the exchange rate?
It is sinking at the moment and I cannot float it.
Q: How are you going to reform the legislators?
We are trying to bring the oversight committees, we are bringing in the parliamentary budget office, the code of ethics for legislators and a new election system. We can’t change the system unless the voters also change their attitude. Of the 225 MPs, 174 of them have been elected by the voters with three preferences. Remember you have to choose the correct party and person. What we try to do is to have a list system without a choice or have a mixed system to appoint 150-170 MPs and the rest are given on a PR basis. One of the two systems has to come in as a basic change. But in this Parliament, except for 29, the rest have all been elected and chosen by the voters — I am the one that they did not choose.
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Q: What steps does the Government plan to take to reform the legal system so cases are resolved expeditiously?
We have to first improve our arbitration system. Most companies and investors go for the arbitration system. We also need separate courts for commercial work similar to what we have for the port city. These are issues to be discussed.
Q: How confident are you about bipartisan support?
This is for the future. It is a question of who is willing to stand by or not. Two categories — one are those who believe in the old system and the second is those who see it as good but don’t have the courage to say they are going to vote for it. You have to judge those who support the private sector and the country at large.
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Panel of experts opinion on 2023 Budget tomorrow
The Daily FT will feature the opinions on 2023 Budget expressed by the panel of experts at the Daily FT-Colombo University MBA Alumni Association forum tomorrow.
President Ranil Wickremesinghe being ushered by Colombo University MBA Alumni Association President Chandima Samarasinghe (third from left) along with Colombo Uni. MBAA Deputy President Kulendran Sivaram, Vice President Prabhath Kaushallya and Secretary Suraj Radampola
Pix by Upul Abayasekara and Ruwan Walpola
