2011 budget delivery is 70% private sector owned and 30% GOSL responsibility
2nd key decision for SL is improving the ‘ease of doing business indicators’
SL has done well to manage the economic shocks in the last years.
I remember the days when I used to travel in military vehicles and in armed cars, when getting in to and around Jaffna during the height of the war with the LTTE. It was one of the most interesting times in my career. The objective being, how to develop economic activity in the Jaffna peninsula so that the LTTE will not be able to destabilise the heart beat of the Northern Province-Jaffna. It was all the more interesting as the government of Sri Lanka was serious about crushing the LTTE after 30 years of destruction in the country that had shaved off almost 200 billion dollars or more from the economy. LTTE had also earned the reputation of being perceived as one of the most ruthless terrorist organisations that the world had seen which was detrimental to the image of the country.
Lesson from the war
There were many bold decisions taken at that time amidst tough ground conditions. The private sector and people fell in line with the Government policy which helped us to eradicate terrorism from the face of Sri Lanka. One such decision was the staging of the massive trade exhibition in Jaffna in the month of December 2008 when the war on the LTTE was at its peak. There were more than 169 companies from the private sector that in my view challenged the LTTE and defied their call of boycott that ignited the business activity between the north and the south. By the end of May 2009 there were almost 150 companies operating directly or indirectly and today, there are over 250 companies operating in the peninsula. All this was possible only because the Government was clear on the policy and the private sector and the people followed the line.
Budget – cutting edge
Last week when I was listening to my former boss the Treasury Secretary delivering the key note at the Daily FT - Colombo University MBA Alumni Association Post Budget seminar, I got that same feeling once again that there was a very clear direction that the Government was taking in the Economic War just like what was done against the LTTE. At the helm this time, was a personality one of the most outstanding products that Sri Lanka has produced — Dr. P.B. Jayasundera. I have personally seen his brilliance when the economy was in a catch 22 situation but on 23 November what I saw was a brilliant architect visioning the future so that the economy can be unleashed. In his usual rugged but witty style the packed private sector audience was challenged by the masterpiece. There were some cutting edge decisions that had been taken like reducing taxes from different fronts so that the mantle fell squarely on the people who are responsible for generating 70% of the GDP in the Sri Lankan economy – the private sector.
The basic message that Treasury Secretary Dr. Jayasundera orchestrated was that 30 years of war has stunted Sri Lanka’s growth and now it was high time that the country got together and develop the economy with strong implementation on the ground than wasting time on debates and seminars. I have heard this line many times when I was heading the National Council for Economic Development (NCED) which was the key policy making body that was ably chaired by Dr. Jayasundera. However, the difference this time around was that the macro enabling environment was strongly positive. The LTTE being part of history, the second quarter GDP registering 8.5% growth, poverty declining to 7.6%, per capita income at 2300 dollars plus, private sector profits increasing by 237% the economy was waiting to be unleashed and that was exactly what was done by budget 2011. When the private sector perspective was given by apparel industry icon Ashroff Omar, the essence of the Government’s policy statement was aptly illustrated. He said it’s scary as one year from now, whether the private sector will have to stand on stage and state what they have achieved and delivered for Sri Lanka.
Whilst being very positive to the overall vibes of Budget 2011, a point that we need to note is that this was only the first step towards making Sri Lanka competitive in the global economic landscape. There is a lot of work that yet needs to be done once again by a private-public partnership approach.
One of them being the ‘Ease of doing business’ criteria where Sri Lanka is ranked 105 on a country base of 183 by the World Bank as at 2010. In short it means that it’s tough doing business in Sri Lanka. We cannot point the finger at any one, as at the end of the day we are a country that is coming out of a war after 30 years that has wiped out over 200 billion dollars from the economy.
But the good news is that with the strong government at play, and the peaceful environment around it, sets the stage for structural reforms to be taken even if they are unpopular. Let’s accept it even the Budget 2011 is not a popular budget by the masses. But these are the tipping point decisions that can generate strong results. Many of us in the business world are used to this. This is why the key decision makers in the private sector are very positively inclined to the Budget 2011. But they comment that many systemic changes are required in the near future to make the Budget 2011 work for Sri Lanka.
Let met me be specific. As per the World Bank study of 2010, Sri Lanka is ranked 168th in dealing with licences for business, 96th on the employment of workers, 148th in registering property, 71st in getting credit, 73rd in protecting investors, 166th in paying taxes, 65th on trading across borders, 137th in enforcing contracts and 45th in closing down businesses which clearly demonstrate the gap that needs be bridged.
I guess a point that surfaces strongly is that simplifying the tax systems and cutting down taxes will not help drive up the economy unless the above ‘ease of doing business in Sri Lanka’ ranking is on par with the growth economies of the world. Some of them are being addressed in the Budget 2011 and I will term it as the 1st step of unleashing the Sri Lankan economy. Now the next phase must be done so that people find it easy to do business in Sri Lanka.
Tracking last 3 years
Coming from a multinational business background we are trained to look at the past performances and pick up a few key learning’s so that we do not repeat them in the future. On this premise if we take the key financial indicators we can see the gap between the expectations we set for the country and what we ultimately delivered. But we must keep in mind that the budgeting was done at a time when the macro shocks were unbearable. The commodity bubble bursts, the global financial crisis and the continuous expenditure incurred to match the ruthless terror organisation the LTTE that had submarines, seven air planes and the most sophisticated communication equipment.
Some of the thoughts that came to my mind when I saw these numbers was that it is important to break the total to quarterly and may be monthly targets and evaluate them so that corrective action can be taken. We can see that overall top line numbers have been achieved but expenditure is one area that needs focus as it exceeds revenue for one and the other is that it has over shot the estimate.
May be we need to be sharp on the targets we set too even though it’s good to set higher targets whereby it challenges people to stretch. However, given that the economy is moving to a more professional agenda may be we need to be more realistic with the numbers and achieve them so that we demonstrate to the word that we deliver on set targets based on our best judgment of the macro economic framework. By delivering the numbers we also demonstrate to the world that we are sharper in reading the global market which anyway is very murky at this moment of time.
Top 20 - highlights
I have practically experienced that in the modern day world the future is not extrapolated from the past. If the passion for delivery is higher and commitment is greater we can change the course of time and develop a new growth trajectory. In this same private sector spirit let me share as per my view the top 20 Budget proposals and its implications.
1)The allocation of Rs.3000 million to address the families of servicemen/women and Rs. 1 lakh for the 3rd child of families in the armed forces will help the healing process and gratitude for those who gave us peace in Sri Lanka.
2) Imposing CESS on raw materials such as Tea and Rubber is strategically right but it needs be phased out so that propositions that Sri Lanka has invested on such as the brand name ‘Ceylon Tea’ needs to be thought through. We must also note that bulk tea also caters to the customer requirement and we cannot abandon this segment overnight.
3)Reduction of duty on machinery so that modern technology can be introduced can spruce up productivity. The depreciation of 33 1/3rd will make this proposition very attractive to the business world.
4)Lowering of income tax from 15% to 10% for industries that do value addition of 65%+ and in the case of export and tourism companies from 15% to 12% will drive companies to higher performance. However, electricity tariff increase must not offset advantage or make this incentive not very attractive is my view.
5)The income tax on profits from 35% to 28% needs to re-invested by the private sector for business development initiatives like research and development as there is a 200% deduction on such initiatives.
6)Imposing a levy of $20 per bed on five star hotels that charge below $125 per room makes sense, but a proper classification has to be done which properties conform to the classification of modern five star property. This must include very high standards of hygiene and sanitation as one law suit can kill the industry. We must be ready for this kind of actions just like in the Maldives.
7)Exempt exercise tax and VAT on imports of electric and hybrid vehicles is very futuristic in nature but we must introduce legislation on vehicle emissions of existing vehicles just like in India and monitor the environmental pollution.
8)Introduction of a knowledge city in each province linked to a university is an excellent idea but it must cater to the needs of the SME sector that require business development services as a priority. We need to note that 70% of the Sri Lanka’s economy is driven by the SME sector.
9)Levying Rs.2 per minute for outgoing international calls is not very global marketing oriented. The logic being that in an open market economy communication cost must be reduced so that integration to the world is greater. We must also note that the 1 million plus Sri Lankans are working abroad and their loved ones need connectivity. May be broad band cost needs to be lowered.
10)The increase in foreign exchange allowances on import of raw gem stones will support the industry but we must develop our own brand on Blue Sapphires on the previous lines of Syria.
11)Driving the Apparel Industry forward by attracting leading buyers to set up headquarters in Sri Lanka with income tax incentives is a strong move but more importantly we need to re-engage the EU and work on the GSP+.
12)Using the 5000 million rupee mobilisation from World Bank to address the unpaid liabilities of the SME sector is timely but we must focus on giving priority to the North Eastern geographical areas which have been badly affected due to the conflict. This also can contribute to reconciliation.
13)The allocation of Rs.1000 million to set up an Innovation and Technology fund to drive R&D is a welcome move but its best that it be targeted to a particular set of industries that require such initiatives to be competitive globally. The best will be the 1.5 billion dollar Tea Industry, The Cinnamon business where Sri Lanka has 90% plus market share globally to name a few.
14)The introduction of trilingual communication to all government institutions will help the reconciliation process but why not be mandatory in the private sector who runs 70 percent of the economy.
15)Streamlining the approval procedures at the UDA will help us increase the competitiveness ranking but it must be extended to cover other ‘ease of doing business’ indicators too like construction permits that currently take 214 days and registering property takes 83 days with a 5% of the value of the property.
16)Bringing in all offices of the Foreign Employment Bureau, Tea Board and Department of Commerce under the supervision of the Sri Lankan embassy in that respective country will benefit the country provided clear targets are provided and evaluated periodically.
17)The reduction of personal income will motivate the private sector working class but they must integrate to working with the chambers and different committees of the government so that stronger private-public linkages are built at middle management level.
18)The subsidy given to small holders of Tea for replanting purposes will work only if an alternate means of income is provided during the 3-4 years of gestation.
19)Increasing Rubber plantations by promoting new plantations can drive export revenue but we must introduce a brand name like Lankaprene into the high end latex targeting the global medical companies.
20)The incentives to the fisheries sector will help reconciliation especially among the fishing community of North and East but we must link it to packaging so that the global market can be targeted on the principle of value addition.
Whilst there can be many more important strategies in the Budget 2011 a point to note is that in tandem with driving productivity up and increasing national output there has to be a consumer to purchase these products and services. Hence whilst there can be to some extent domestic up-scaling the fact of the matter is that the global consumer has to be the target. In that context it is very important that we also look at the demand side challenges and how the Government can support the private sector in the 2012 Budget and beyond whilst the Budget 2011 can be on supply chain development.
The thoughts expressed are the authors own ideas, and does not reflect the offices he holds in the Public, Private or the International public sector.
(Rohantha Athukorala is a business economist by training. He headed Sri Lanka’s National Council for Economic Development under the Presidential Secretariat when the country averaged 7.4% GDP growth. He is a business professional by practice, winning twice the Marketing Achiever Award, Business Achiever Award from Alumni PIM, University of Sri Jayewardenepura, whilst also winning a Global Leadership Award from Johnson Lever. Rohantha is actively involved in the growth agenda of the Sri Lankan economy.)