Thursday, 5 February 2015 00:20
Panel from left: Commonwealth Secretariat Economic Division former Director Dr. Indrajit Coomaraswamy, Finance Ministry Secretary Dr. R.H.S. Samaratunga, Finance Minister Ravi Karunanayake, CCC Chairman Suresh Shah, Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva and Central Bank Governor Arjuna Mahendran
Promises economic empowerment, transparency and tax reforms, with emphasis on building a society devoid of povertyA seemingly-upbeat Government on Friday wooed the business community promising economic empowerment, transparency and tax reforms, with an emphasis on building a society devoid of poverty within a short span of time.
This empathetic message was conveyed by a top panel including Finance Minister Ravi Karunanayake, Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva, Finance Ministry Secretary Dr. R.H.S. Samaratunga, Central Bank Governor Arjuna Mahendran and of Commonwealth Secretariat Economic Division former Director Dr. Indrajit Coomaraswamy at the Interim Budget 2015 forum organised by the Ceylon Chamber of Commerce last week (30).
Karunanayake explains ‘Robin Hood Budget’
Making the forum a great platform to explain the measures introduced by the ‘Robin Hood Budget’, Finance Minister Ravi Karunanayake said, “When you look at the Interim Budget initially, the upper echelon has got a little concern, but 98% of the country is extremely happy. All we have got to do is to mix political aspirations and economic delivery and we have got to go this in the budget that was put into place in 2014 November, which was brought by former President Mahinda Rajapaksa. So we didn’t want to make a full change of all that was going on; we took certain elements where the costs were exorbitant, we got that reduced. We ensured that it was a policy that we don’t put any burden onto the common people who put their faith in President Maithripala Sirisena, Ranil Wickremesinghe and our Government. We want to deliver every single thing that we have mentioned within the 100 days. So, with those parameters there were very little options as to how to move forward.
“Firstly, you must understand that there was immense amount of confidence that was placed in our Government. So we did not want to breach that trust in any way. It may be in the short run that we have been a little offensive on certain areas, but we have a good fundamental reason for doing so as well. We will ensure when we say one-off is one-off, unless the market decides to behave in a different way. We are a very responsible Government and we want the economy to move not in the hands of a few, open it, a clean operation to move forward. That’s the promise our President, our Prime Minister and I gave in Parliament on Thursday (29). The Government is very keen to ensure such improvements.
“It’s going to be an open Government; there’s no necessity for one lot to be moving around the Finance Ministry or the Prime Minister or the President. It’s going to be a Government led by the Cabinet of Ministers and the collective responsibility will go down right to the last person. So, we have got a team that is responsible and that’s why I thought it was ideal place to meet up with you all and get our message across.
“While doing this, we are very concerned about the international wealth that is part and parcel of the operation. So, when we say that there is something going on here that obviously gives a lot of different opinions to them and that’s why when I went to deliver the Budget speech we didn’t want to dwell on the dead past, we only said we ‘inherited’ such a situation. Just to give you an example, the public debt which we thought was in the range of Rs. 6.9 trillion, we have done an estimate these past 20 days and it’s in the range of Rs. 8.8 trillion. Now these are things if we didn’t tell you six months down the line when we find more things then you will basically say ‘this is part of your dues’. So we didn’t want to take responsibility for anything that has not been done by us and if we are done anything thereafter we will take full responsibility. So that’s the premise by which we have brought in this 20-day budget.”
He said that there may be some genuine errors that could’ve happened which would be corrected. “Our intention is not to distort the market, but to ensure if there have been any ill-gotten gains on certain areas, certainly there will be no mercy on them but any area where there is a genuine error, we are the first to say sorry and we’ll get it correct. Once again, it was a 20-day operation. When I was coming here, some of the auditors and accounting specialists did say that there are certain areas of questions, we will get them corrected. But all in all, we take this opportunity to say that we have done our very best from an economy that has gone to wreck, not what was told by the Central Bank then. It has been handed over to a very confident person, Arjuna Mahendran, and our team will ensure that we’ll be ready to answer any of your questions today. So, I will open this to your questions because you know what we said on Thursday (29) and any clarifications on that will be answered by us.”
Government’s investment plans
The Finance Minister then drew the attention of the participants to the Government’s plans in the investment arena.
“Once again let me tell all of you this an open Government that’s there, if you have good proposals, you don’t need to go behind any minister – we will have a team that is there, you can come there and then ensure that it moves at a quick pace. When we open this subject up to the investments that are going to come, we very specifically mentioned that we have put a proposal in that you have a final answer in 100 days including all the Government institutions that are there. One person may ask ‘why 100 days? You can do it in 30 days,’ but we want to be practical, and we want to ensure what we said will be done. So, ladies and gentlemen, please take this as a working experience with you all today, that is if there are good proposals that have come, I’m sure we’ll be able to get those incorporated.
“The most important thing that we have done in every element in this Budget is that we have done it without adding onto the budget deficit. We inherited a budget deficit which was supposed to be Rs. 521 billion, 4.6% of GDP. We, after doing every single thing, have managed to reduce the budget deficit to Rs. 494 billion and 4.4% of GDP. That has stunned the present Opposition, but we have done not just an arithmetic gimmick that was there, but genuinely cut down certain capital costs which are corrupt in nature, which were unwanted. We have done certain financial considerations, so that we can show that we are financially responsible and that’s the way we will go.”
Harsha de Silva on development
Policy Planning and Economic Affairs Deputy Minister Dr.Harsha de Silva said: “One major issue we want to address is ‘what is development?’ That was a question that we raised in Parliament, outside Parliament, in meetings in Colombo, Badulla, Mannar, Tissamaharama. Are roads, shiny buildings and tall towers development? This is what we were told. We were told that the GDP per capita was close to $ 4,000 so therefore we are a middle income country. We should be thankful to the economic team for showing ‘wondrous growth’. We totally disagree! That is not development.
“Development is when a household – be it in a slum of Colombo, middle class home in Kotte or rural household in Tissamaharama – feels the standard of living is improving, has improved, will improve and that is development to us. It does not really matter how tall the towers are, all that matters is ‘can I get my new tiles, can I buy that new TV, can I afford my daughter’s wedding, do I have to pawn every piece of jewellery I have to make a living?’ And if the answer to these questions is yes, the meaning of development has to be either agreed or disagreed upon.
“We have a very simple objective, and that is improve the lives of the people of this country, which means in a measurable way, real household income. If real household income is increasing, we succeed; if it’s not, we fail. As politicians Ravi and I instructed by our bosses Ranil and everyone else are working towards this single objective. In fact, we have broken the Ministry of Finance and people ask why? Implementation with Ravi, Planning and Economic Affairs with the Prime Minister and if you look at Planning and Economic Affairs, we’ve got the Department of National Planning, Fiscal planning, External Resource Planning, Census and Statistics Department, Institute of Policy Studies, so the expertise is there. Ideally we would be public, private, academic, research institutions collaboration where we will be receptive to what the market wants and structure our policies to take this country to where it ought to go. The difference is what the 7.5% GDP growth means, as opposed to 0.5% household real income growth. That was the problem we had.
“While the country was growing at 7.5% in real terms, household income in the last six years grew at only 0.5% per annum. So we need to change that and give more real money to the people. The people of this country must be able to enjoy peace. What we expect from a peaceful environment means the dividends of growth must be distributed in equitable manner, not just restricted growth in Colombo. This is the reason why we went around the country saying that we are for devolution of power and that power is economic power. People must be economically empowered and that is our objective and that’s the way we are going with it. It’s been a series of long days and short nights to get this process on the road. Like Ravi said, it was a 20-day exercise and there may be blisters and some may not like what’s there in the Budget, but Ravi said he will be the first to admit the genuine errors and rectify them as we formulate policy implementation.”
Ceylon Chamber of Commerce views
Sharing how the Ceylon Chamber of Commerce views this Interim Budget, CCC Chairman Suresh Shah said: “The Interim Budget on one hand seems a budget where election promises have been fulfilled as they should be; promises were made, promises have been delivered on. In order to meet expenditure, there was a need to generate revenue and that revenue has been expected to be generated via a set of proposals which will touch and which will impact a smaller segment of the community. So, there are few one-off taxes which might be seen by the markets a little distortionary, but having said that we hope that the Budget in a sense is a collection of a number of items rather than a meaningful expression of a full economic policy.
“We don’t expect an economic policy or economic strategy to be delivered within a short period of time like 20 days and that is understandable. So we do hope that going forward when the next budget is presented, it will be based on a number of sound economic principles. I must also tell my good friend Minister Karunanayake that not everyone in the private sector has ill-gotten gains. I think a number of us in the private sector do our business well and I hope that we would be appreciated going forward as that really was the fundamental concern we had, whether the private sector might be viewed in the wrong light. Therefore, we look forward to work closely with the Government both in terms of its economic policy as well as on the governance aspect. We wish the Government all the very best and look forward to a close working relationship. We extend the fullest support and cooperation of the Ceylon Chamber in these endeavours of the new Government.”
Tax reforms and meeting revenue targets
Highlighting the importance of tax reforms in meeting the revenue targets, Central Bank Governor Arjuna Mahendran said: “The taxation system in Sri Lanka is far too complicated and we have to simplify this. There are too many element. If you look at several countries across the world when you simplify the taxes, bring them down to five or six which people understand and convince easily, your tax collection rate to GDP goes up. Currently, we collect only 12% of GDP, of 20 odd taxes. This system cannot persist. The Minister made a specific mention about this in his speech and we thank you for taking our advice and that really is the key to the whole puzzle.
“We have to simplify the tax system. There is a paradox in this Budget, which is in the short term we have actually brought in lot of ad hoc taxes like the super taxes which on the face of it seem contradictory to what I am saying, but I think the key principle has been established. What are taxes for? Taxes are basically a means of redistributing income. You tax the rich and then you help the not-so-rich to better their lives, but that somehow got lost along the way of translation from my perspective.
“We’ve been taxing things like food excessively over the last 10-15 years and this I think led to a lot of hardships amongst the ordinary people. However, when the Finance Minister made that comment in Parliament on Thursday showing people how much of their basic food items have been taxed, I think that made a huge impact. I think that’s a very important principle. The fact is that regressive taxation impacts the ordinary people of the society more than the more affluent sections of the society, that whole regressive tax system has to be changed to be more progressive; that’s what taxes are for, as we understand.
“The second point is that there has been a lot of Government spending on infrastructure recently. Now that’s good for the country obviously, we have an infrastructure deficit. But the point is, did it become excessive? And certainly thinking from the Central Bank’s perspective we can see that there is a debt issue in this country. We can’t keep going excessively, we have to be able to service that debt. So, the issue of raising our tax to GDP links in with the amount of debt we can contract and that’s why this is where fiscal and monetary policy will really have to combined in the medium term structural adjustments now evolving, which will help us to get on to a sustainable fiscal plot. However, looking at the numbers in the last 20 days, we have found out that for the last three consecutive years revenues have never exceeded 85% of the original estimates in the Government Budget. In other words for three years, perhaps longer, 15% of the expected revenue simply didn’t turn up. Now, that is ‘not acceptable’ and that’s why the Minister has got a such a challenge to meet these budgetary targets, to give a true picture of what is possible in terms of revenue collection through the people of this country and I applaud him for that because he’s been absolutely transparent in that.
“As you know, the new Government is now going in for super transparency, there’s a Right to Information Act and several other similar enactments; so that’s the perspective. We have to conduct fiscal policy as it should be. I will give you an example in Georgia; from 10% of GDP they raised tax collections to 25% of GDP in a span of three years, by simply reducing the number of taxes to five. People found it easier to pay their taxes and they delivered. That’s all we have to do in Sri Lanka. Some of these problems are very easy to solve and that’s the message we have given to the Finance Minister and he has taken it on board. However, in the short term we have a bit of ad-hoc, but we can live with that I’m sure. Once, the Minister is through the next general election, he’ll come up with the goods.”
Macro landscape in the short term
Commonwealth Secretariat Economic Division former Director Dr.Indrajit Coomaraswamy divided his remarks into two perspectives; first on sketching out the landscape within which this Budget was formulated and elaborated on short-term and medium-term perspective of the Budget.
“In terms of the macro landscape in the short term, it was Lee Kuan Yew who said that in developing countries elections are an auction of a non-existent resources. It’s not just in Sri Lanka, but in every country with competitive politics, it’s not unusual for elections to be expansionary fiscal policy and budgetary give away. However, it is fair to ask the question whether this Interim Budget; two concerns. Is there a rational for relief measures? Have these measures been accommodated in a way that will not undermine macroeconomic stability?
“We had Dr. Harsha de Silva in his remarks say that household income grew only at 0.5% per annum. So we have a situation clearly where a significant segment of the total population (as the average is 0.5%) who experience a decline in their real income. So there was clearly a strong political compulsion to address that issue. Put into the context that Sri Lanka is increasingly an aspirational society, people are very impatient in terms of their material advancements. Now in such a context, we also need to remember that we have been a society where there have been significant problems on the basis of ethnicity, religion, social classes and so forth which we can’t shy away from. Hence, if we don’t address the situation now where real incomes are going up very slowly or declining, then you create an environment where extremist elements can rise due to frustration.
“One can argue that there was a strong political compulsion to support the relief measures that were introduced in the Budget. One could also argue that there was a fairly sound economic rationale as well in the short term, because in recent years it’s been domestic demand that has been driving the growth process of this economy, but that’s not the right model we should have. With a country of 21 million people and a market of that size, it shouldn’t be domestic demand, but that’s where we are or where we were. So in the short front one can argue that given in the domestic demand driving the economic growth that you can buy some time to make the transition to the export expansion model, by boosting domestic demand to really protect the growth momentum in the economy. Somebody in the panel said that ‘this was quantitative easing for the consumer’, that’s a very nice way of putting it. You boost the consumer or the demand and you’re buying time to do the structural changes that are necessary to get into an export-driven growth model. There are economic, political and social reasons that one can argue for supporting this relief market.
Macroeconomic stability and revenue
“The second question is, what about macroeconomic stability? Highest pumping of this demand through these relief measures, has it undermined macroeconomic stability? And here I think it’s commendable that measures has been taken to fund these measures and if you look at the overall budget deficit, there’s actually been a small improvement. It has come down from 4.6% of GDP to 4.4% of GDP in November, which means the deficit have been contained; you’re not having incremental excess demand being pumped into the system. So, one can argue that the macroeconomic impact is actually in better shape, but I would like to raise two issues.
“Having commended the Government for funding the measures, whether the financing was done in the optimal possible way? There’s one school of thought which would say less distortionary to increase overall rates and go down that road. Another would say discreet measures which target those who are able to pay. This is the debate you can have and as we go along, we will see if we have done it the best way.
“The second point is revenue. Historically in recent years we have had great difficulty in meeting our revenue targets. Now I did say that the impact of the measures are designed to be neutral as the proposals are presented the deficit will actually come down slightly, but of course if we don’t meet the revenue targets and the budget deficit increases, then clearly you’re going to have an additional demand pumped into the system and that can have implications for prices, that’s inflation and the balance of payments. So, it’s important that the revenue targets are met. Another point is that, even if the revenue targets are met; one needs to be aware that by shifting essentially resources from a relatively wealthy segment of the economy to one that’s less well-off, you will have an impact on savings, on investments, on consumption and so forth because the saving and consumption patterns are different parts of the economy and that can have an impact on prices and import intensity of expenditure within the economy.
“The point I’m trying to make is that, it’s important that the authorities monitor the situation very carefully, and if they see any overheating, that they move very quickly and decisively and to use all the tools that are disposal. The Central Bank monetary and exchange rate policy, fiscal policy is less flexible, but that can also be used to contain any excess demand that emerges in the system. I think we need to learn a lesson in what happened in 2011-2012, when we were a little late in responding to the overheating of the economy which meant that there was a fairly severe stabilisation package that had to be brought and that held back the economy quite a lot. Also, some of the trends that Dr. Harsha de Silva alluded to in terms of the households was in my view really a fallout from that stabilisation package. The message is, one has to monitor what’s happening; if there’s overheating move quickly and use all the instruments to and at once dispose. That’s really the landscape and the short term.”
In the medium term he highlighted three points; structural problems in relation to revenue, fiscal sustainability, and moving towards more efficient social safety nets.
“On the revenue side, as I said before, we had problems; that’s where really we have fallen short in our targets and expectations over the years. The Governor has spoken about streamlining the tax system and certainly that’s something needs to be done. I would like to suggest the report of the Tax Reform Commission is already there on the table and some things have been done, but I haven’t seen it. I should really commend the authority, the Minister and his team for increased transparency. The Tax Reform Commission report, I think one needs to look at it. One needs to continue to strengthen tax administration.
“Another option which ideologically was off the table, but I hope which won’t be for new dispensation, is the annual listing of State-Owned Enterprises (SOEs). Really that is a way you can increase revenue and you can improve corporate governance. There are examples, the State Bank of India was a highly-bloated, inefficient organisation; they listed 10% of their capital and it was transformative. One thing I need to say also, which actually the authorities have their eye on, is that the Interim Budget has put in place a stream of recurrent expenditure, but a lot of the measures are one-off things. There’s a structural challenge the Minister and his team would need to address in the medium term as you go forward.
Strengthening the growth framework
“Secondly, on strengthening the growth framework, there are lots of things. If you look at each of the factor markets, SOEs, SMEs, there’s a whole list of stuff, but you need to just focus on one thing and if you look at the post-conflict years, in my view the most disappointing aspect was investment performance. The fact that private investment has been on 23% of GDP, the fact that our Foreign Direct Investments (FDIs) just been $ 1 billion; that’s really very disappointing. “One way of getting fiscal sustainability and strengthening revenue is to strengthen the growth framework of the economy, get the economy growing faster and automatically your fiscal situation will go. Look at the US economy, they had a massive debt, as the US economy has started to grow faster all the debt, the deficits, are coming down sharply and given the rounder fragile debt dynamics. It’s clearly important that we think in terms of medium term fiscal sustainability and getting the economy going and creating greater investment opportunities. There the most important thing in many ways with which we have had a challenge in past is really the consistency and stability of policy. Minister, I hope will be very much the hallmark of this dispensation’s efforts to strengthen the country’s growth framework.
“Thirdly, on the social safety net, two points; one is I think the literature now suggests that messing around with administered prices and subsides and so forth is the second best solution and the better way to have those needed is to have a well-designed program of income transfers. Clearly this is the medium to long term initiative and this is something the Minister and his team may want to think about.
“Finally, this is something for all Sri Lankans; I’m not sure we can continue with the entitlement culture that we are in. We need to really transform from that to a far more productivity-focused, entrepreneurial culture.
We need to tighten our belts and get our acts together and that means we need a cultural shift which is much more focused on productivity and I hope the Finance Minister and his team will give us leadership.”
Pix by Lasantha KumaraArticle based on Q&A will be published tomorrow