- Top experts share key insights to opportunities and challenges of 2024 Budget at Daily FT-Colombo University MBA Alumni Association forum
By Charumini de Silva
In a comprehensive analysis of Budget 2024, top experts engaged in a thorough breakdown, shedding light on both the favourable and unfavourable aspects embedded in the key policy document.
In the discourse at the annual Daily FT-Colombo University MBA Alumni Association jointly organised Budget 2024 Forum titled, ‘A Tightrope Walk,’ private and public sector experts unanimously echoed the key role of effective implementation as the cue for achieving not only financial stability but also encouraging inclusivity across the multifaceted spectrum of proposals encapsulated in the Budget.
Chief Guest was President and Finance Minister Ranil Wickremesinghe who presented the Budget on 13 November in Parliament unveiling a host of proposals to further improve stability and rejuvenate growth.
President Wickremesinghe gave a pragmatic perspective of the dynamic nature of the 2024 Budget, stressing its task as a flexible framework for the future rather than rigid estimates. He also highlighted the importance of unpopular decisions in steering the country toward growth with the support of the private sector describing it a ‘national effort’. (see also https://www.ft.lk/top-story/Pragmatic-perspective-from-President-on-Budget-2024/26-755261)
The forum also had an expert panel discussion featuring Treasury Secretary, Mahinda Siriwardena, World Bank Sri Lanka Country Manager, Chiyo Kanda, Central Bank former Deputy Governor and FT columnist, W.A. Wijewardena, top diversified blue chip John Keells Holdings Chairperson, Krishan Balendra, forum’s strategic partner Standard Chartered Bank Sri Lanka CEO, Bingumal Thewarathanthri and forum’s knowledge partner Deloitte Sri Lanka and the Maldives Country Managing Partner, Channa Manoharan. The panel was moderated by Daily FT Editor and CEO, Nisthar Cassim.
The audience benefitted from a very interactive session with the President who readily responded to the multiple questions raised.
Delivering the keynote address, Wickremesinghe recognised the importance of unpopular decisions in steering the country’s toward growth with the support of the private sector describing it as a ‘national effort’.
“We thought the crisis was too big for us to deal with one Budget and you can’t. You have to make changes as we move along and that is the direction we are going in,” he added.
Referring to this year’s forum title ‘A Tightrope Walk’ he said: “This is called a tightrope walk, but I don’t know if I am a tightrope walker. I feel more like a trapeze artist as do the rest of the team members, that’s what we’ve been doing.”
Addressing ongoing debt restructuring negotiations, the President revealed that the country is in the final stages of bilateral talks, having received responses from various stakeholders, including China. He anticipated positive results by December, indicating that such agreements could influence better future Budgets.
“There’s nothing called a free lunch. We have to realise that we have to live within our means whether it is this Government or the next. No matter how difficult it is, we have to make unpopular decisions for the greater good,” he added.
Highlighting the economic vision embedded in the Budget proposals, Wickremesinghe said the goal extends beyond stabilising the economy to a transformative agenda to build a new economy, signifying a commitment to comprehensive and long-term economic development.
The panel of experts shared their observations on the pros and cons of Budget 2024. Standard Chartered Bank Sri Lanka CEO Thewarathanthri highlighted the positive aspect of staying on course for debt restructuring with the IMF program. However, he raised concerns that over-ambitious revenue targets growing at 45% were deemed unrealistic. He highlighted a forecasted fiscal deficit to revenue ratio of 13.1%, with a more likely outcome of around 10%.
World Bank Country Manager Kanda commended the resilience of Sri Lanka to revive the economy with drastic measures. However, she said the country is still not over the crisis.
Former Central Bank Deputy Governor Wijewardena welcomed the introduction of a new budgetary philosophy by the President. “New budgetary philosophy should be continued for Sri Lanka for the next 25 years to be a rich country by 2048,” he added. He expressed scepticism about overestimated revenue, describing it as a ‘black box’ with limited viable borrowing options.
JKH Chief Balendra emphasised the need for restructuring and diversifying funding sources while cautioning that falling short of revenue targets could lead to high-interest rates for the private sector.
"If the Government falls short of the revenue targets there is a risk that the private sector could get high interest rates,” he said. He also cautioned on the Government’s increased credit share, reaching 70% of the GDP.
He expressed satisfaction with the progress in privatisation, citing the Government’s expressions of interest in divesting a 20% stake in two State banks, potentially attracting strategic investors as the stock market needs the liquidity of large-cap stocks.
“It is good to see that the privatisation is now on track with the Government expediting the process,” Balendra added.
Deloitte Sri Lanka Country Managing Partner Manoharan highlighted positive aspects, such as the inclusion of the digital economy, digital ID, AI centres and opening up the education sector to foreign universities.
However, he flagged concerns about the Government’s capacity to implement proposals, citing a cost-cutting approach in State agencies and inefficiencies in the public sector.
Q: In your view, has the President done a balancing job with the Budget?
Wijewardena: Sri Lanka is going through a rough time and in 2022 most of us might have descended to the level of Lebanon. We didn’t, and the Central Bank has done a wonderful job of stabilising the economy and bringing the IMF into the picture so that we can now build confidence among the foreign investors and creditors about Sri Lanka. The 2024 Budget is targeting an election although the President denied it earlier. Therefore, he would have to walk on a tightrope. The University of Colombo MBAA has very aptly chosen the title for the post-Budget forum because it is a balancing activity. But in the balancing activity, I’ve seen that most of the Budgetary numbers that the Treasury Secretary has produced, conform to IMF requirements because that revenue of 13% to the GDP and the primary account surplus is also going to be in line with what the IMF has said, so in paper I don’t have any problem. It is a very good balancing activity.
Q: Where do you see progress and improvements going forward?
Kanda: We recognise the remarkable achievements and progress made in the reforms. Last year the crisis was at unprecedented levels and that changed the whole development landscape of Sri Lanka. Since then the Government has taken swift and decisive actions in introducing many measures necessary to stabilise the economy and also to fiscal and debt management to overcome the crisis. We also recognise the resilience of the Sri Lankan people demonstrated over the past year. During the past 15 months since the crisis erupted in 2022, we have seen signs of stabilisation, but it still is a tightrope walk as the forum title says. We are not totally out of it but progress has been made in terms of inflation coming down much faster than expected and pressure on the forex much eased. The stabilisation effort has to continue and the 2024 Budget shows commitment and determination although the targets are quite challenging. It shows that the Government is trying to continue on the path. Going forward, we need to increasingly move towards more growth-enhancing reforms. The Government has already begun some structural reforms to enhance medium-term growth such as the energy sector and trade facilitation that are necessary important steps. The World Bank has been working with the Government through Budget support development policy operations and other technical assistance to help create the enabling policy environment for a better business and investment climate to realise more outward-oriented growth going forward. The growth has to come from the private sector with job creation and private capital. The Government can do its part; it has to give space for the private sector to grow and invest. We support the policy side and enterprise reform especially, the commercial reoriented one to encourage more private sector participation. Digital transformation, energy transformation and tourism are important. Those are based on Sri Lanka’s natural endowments, assets and strategic strengths. There is much potential in those areas and the country needs to build on that. Women's participation is much higher as Sri Lanka has a wealth of educated and confident females who could contribute more to the economy.
Q: How confident are you in ensuring the effective implementation of the Budget proposals and transparency?
Siriwardena: It is a good development that people are increasingly interested in keeping a close tab on the implementation of the Budget as well as the operations of the Government. If you look at the Fiscal Policy Management Responsibility Act, we have to publish a Mid-Year Fiscal Report and Fiscal Management Report. We have also published a booklet to provide information on allocations and implementation in a snapshot to create awareness among the public. People often think the Budget speech is the Budget, but it only contains the future direction and progress made and new proposals added to existing resources set out in terms of estimates. We should have more mechanisms to share information about public finances.
Q: There were comments from the panel too about very ambitious revenue targets. How confident are you and what new measures would you implement?
Siriwardena: This is the key question and element in the Budget and we are looking at it seriously because we are now under an IMF program and a debt restructuring program as well. There is a contour and we have to prepare our Budget within that. Against this backdrop, we are asking other countries to consider a haircut or reduce our liabilities while they are watching us on how we as a country are doing in this recovery process. Therefore, we must put our country first to ensure a successful transition. As per the new Central Bank Act, we cannot get money from the Central Bank to finance the Budget. In addition, we also have limitations on borrowing till we complete the debt restructuring process. If we do not get the revenue right, the country would face many difficulties. Therefore, tax collection is a must to overcome the economic problems. Already we have come up with a relatively strong tax policy which includes four key components: corporate tax, personal income tax, value-added tax and other tax. The question is how you get the maximum yield from this policy that is already in place and that is where the tax administration comes into play. In the past, there were many attempts to digitalise the systems. For example, in the Inland Revenue Department (IRD) the RAMIS was started in 2013 but even after a decade, we haven’t been able to implement it. After much effort, the IRD has started to feed information into the system and is gradually moving in the direction of digitalising the tax administration system. We also need to interlink this system with all other institutions including banks; only then would we have a better information system, in addition to other mechanisms like audits. These are highlighted in the Budget annexes, to improve the tax administration side, which is lacking in the country due to various factors. There is no point in blaming history, we must focus on the future taking these measures as challenges and implementing the necessary reforms. This is a national task and besides me only the Central Bank Governor understands the depth of this crisis. When I try to manage the cash flow I know what is there and not there amid the demand coming from the public, private sector, Parliament and the Cabinet. It is a tough task and if we are not meeting the revenue goal it would be very difficult. We also need a change in attitude of the institutions and that’s why the President came up with the Revenue Authority idea to guide them and implement the tax policy to get the collections. Already they are contributing and the Finance Ministry will extend more support to meet the revenue targets with technical assistance from the World Bank and the IMF. We will introduce quarterly-based KPI measures to deliver on targets.
Q: What can the Government do to expect revenue to increase threefold after a huge economic downturn?
Siriwardena: Based on the numbers we have seen an increase of about Rs. 800 billion this year, and next year it would be around Rs. 1.2 trillion change. This increase of Rs. 800 billion is from the existing tax payers but with policies and measures in place we hope to get as many people and companies into the tax net next year. We also need to change the non-compliance culture and make people pay their taxes as no Government would be in a position to afford concessions anymore. This is why the President mentioned the social contract and we need to understand the situation. However, this is not an excuse for the Government not to be responsible. The Government is bound to spend the taxes collected efficiently, effectively and transparently. It is a system that the country has had for three decades or more and changing these with new reforms and measures is tough within a year, but the change must start at least now. We have to start that journey slowly and steadily. Although this year will see a negative growth, we are hopeful of a positive growth next year and that would provide some stimulus in the tax collection efforts. Some of the policies that were not there will come into effect next year. The Public Finance Management Bill which was supported by the World Bank, IMF and ADB is now drafted to provide a legal framework. It is different to the Fiscal Management Responsibility Act introduced in 2003. Everyone must push the Government to implement these important legislations because that is the only way to discipline the Government. It is the fiscal indiscipline that got the country into this position.
Questions from Audience
Q: People are required to pay taxes to support inefficiencies in the public sector, while corruption is happening at the same or worse level. The taxpayers are not benefiting whereas in countries like Australia and Canada, they benefit, and hence pay taxes voluntarily. It is unfair.
Siriwardena: If you look at the Government's cash flow about Rs. 95 billion is to pay salaries, Rs. 30 billion for pension and Rs. 30 billion for welfare; the balance for interest payments. The Treasury has given the highest priority to the Health industry. Monthly we receive around Rs. 215 billion as taxes. The taxpayers’ monies are being used effectively but the concern is on other ways of money leakages such as, procurement or capital expenditure or projects, and that is the area we need to address. Often what is published in the media is due to the implementation of projects or pursued corruption in the past and the possibility of having that in the future as well. Elimination of corruption I think is not a possibility, but at least we need to minimise it. Introducing this Anti-Corruption Act and the new mechanism is to have an active and better legal framework to prevent and address corruption.
Q: Compensation for claims for suspended bilateral funded projects is huge and the Government ends up paying more with no outcome. Why?
Siriwardena: We have announced a temporary suspension of selected Government external debt mainly ISBs and bilateral loans. We did not stop multilateral loans and paid close to $ 1 billion even amid the debt crisis, only temporary suspension. Cost escalations persist and we see them at the Cabinet Sub-Committees. The External Resources or the Treasury are working on it.
Dr. Weerasinghe: If we had not announced a temporary debt suspension, Sri Lanka could have ended up with a hard default that would have been the worst crisis the country encountered. Since the temporary debt suspension was made we were able to renegotiate and explore debt restructuring opportunities. If we allowed the Government to default without any announcement the bilateral partners would not come back for many years to recommence the projects. I also propose that the Finance Ministry consider analysing the cost to the economy and how many partners would come back.
Q: PAL and CESS are misused. When will you terminate it? Some of the local companies are misusing it.
Siriwardena: It’s a condition to pace out the CESS under the World Bank program. It will be ready soon.
Q: The country appears to have come out of part of the woods as it were. Is there sufficient confidence in foreign investors investing in the stock market and the country, soon?
Thewarathanthri: We are not out of the woods yet, partially we are, I agree. We have made some progress and we still have the debt suspension and the default rating. However, with all of that, there is interest in Sri Lanka in specific sectors. One big sector is renewable energy solely because of the Northern Mannar basin and there are several World Bank studies on it which estimate about 40GW wind power opportunity. Sri Lanka is among the top three in the world for wind power in terms of concentration. These are multi-billion dollar FDI opportunities that can go into market-expanding FDIs. You have to re-export because our requirement is only 7-8GWs in total. So, those companies are lining up clearly. They have met the BOI and the Government. However, the policy framework is still not ready for that kind of large investor. In my view, we are not ready at all to bring in such investors. There are also conversations on tourism with a pipeline of over $ 1 billion. I think everybody is doing their feasibility studies and SOE reforms. For SOEs on sale, I think there are investors for those as well. It looks like all are waiting for a rating upgrade. Therefore, crossing debt restructuring would be critical but conversations are happening and the investors are visiting Sri Lanka. We can’t expect a typical OECD investor to come and set up a factory. It would be naive to think so. If we have a treaty with India to re-export that’s an opportunity but at this point, we don’t see those large manufacturers coming here because the market size is also small. But Sri Lanka has a niche in many areas and we need to play to our strengths.
Q: There was a suggestion to increase the WHT. Do you think the Government could have looked at it as an efficient revenue measure?
Thewarathanthri: Yes, we were expecting that because withholding tax is an easy way of collecting Rs. 40-50 billion that would have been an option. Because of the complexity around the implementation with the senior citizens’ interest rates, the Government may have decided to stay away from things like WHT. It would have been a low-hanging fruit until we broadened it. Till we broaden tax collection we would see a serious problem in the revenue.
Q: Do you think IRD is ready for the massive revenue collection process given issues with RAMIS?
Siriwardena: Yes, we have identified it as an issue with no proper system in place. It is something we are tackling gradually.
Q: Any retrospective taxes like Super Gain or Wealth taxes in the offing?
Siriwardena: No super gain taxes. But in terms of wealth tax, there was a proposal to start in 2025 January but it is not an easy task. We have got some technical assistance missions and explore some experiences of other countries. There’s no urgency for that, we have about another 14 months to prepare for it.
Q: CEB’s perspective is a fixed tariff for 20 years, but I don’t think anyone can predict interest rates for the next year. In that context, there’s a huge disparity between market fundamentals and policy. As local companies, why is the Government making different rates for foreign companies and local companies? The resources to invest are not being given a dollar tariff. How would the local industry be sustained?
Thewarathanthri: The entire policy framework for energy is changing. I’m unable to talk about the long-term tariff. But liberalising power is certainly on the cards. it has to happen. In terms of local and foreign, we have to treat everyone equally and we support local investors. We also have to be open-minded to partner with global investors because these are large investments and I don’t think any local company can invest $ 5-10 billion in the power opportunities we have. At this point, we can’t even get $ 0.5 billion. Not a single bank in Sri Lanka can support $ 1 billion on its own. I think we have to explore partnerships. The JKH and Adani partnership is a good example in my opinion, partnering with some of these global giants and getting the benefit for the country.
Q: There is a freeze on academic recruitment in universities. We’ve lost a fair number of academics due to migration. We can’t produce knowledge workers without academics being recruited to universities. Is there a possibility for the Treasury to re-prioritise some of the expenses and allow recruitment into universities?
Siriwardena: On 26 April 2022, we issued a circular to freeze recruitment. If there’s any justifiable area and a need there’s a mechanism to get the relevant approval.
Balendra: The President mentioned tourism in his speech and in the Budget. I think at various forums the President refers to it as the low-hanging fruit for the country and it is. Our peak arrivals were in 2018 and welcomed 2.3 million tourists. Our target is 5 million but I think we can go beyond that target soon. A couple of priority areas are the airport and the new airport terminal to be built soon. The Budget mentioned a promotion campaign and it is important, but I think the allocation of Rs. 1 billion which is $ 3 million is not sufficient, though it’s a good start. In 2018, we earned $ 4.4 billion from tourism; it can easily grow up to $ 7 billion. Tourism is a low-hanging fruit that should be our focus.
Thewarathanthri: I think we should all put our efforts around restructuring, getting out of debt suspension or the default status that we are in. The country must move forward as we can't go beyond 31 March 2024. Secondly, broadening the tax base and making sure that every step we take is a move towards increasing revenue to around 20% in the medium even though it would be a challenging task this year. We have to make sure that we make the citizens responsible for paying taxes. It is not the Government’s responsibility to collect taxes. In a lot of countries, the citizen or the corporation is responsible for paying taxes and you can put people behind bars. So activating the whole legal system would be critical if you will get to a certain level. The moment you get to a certain level, renegotiating with the IMF would be critical for us. You can't go with this universal tax of 30% and 36%. We are one of the highest in Asia at this point. Asia's average corporate tax is less than 20%. We are at 30% close to India and Australia. We can't even compete or compare ourselves with India and Australia. We have to be competitive in terms of bringing corporations into the country as well as for the local corporations to reinvest in their businesses. We also have to ensure the young executives are protected during this time. So renegotiation with the IMF at some point would be critical for Sri Lanka.
Kanda: Stabilisation and the rebuilding of the fiscal restructure is to be done. Although it would be too painful Sri Lanka cannot afford to wait to be investing and the growth to happen. So, the challenge the country faces is rebuilding the whole ship or overhauling it while sailing in it. In that sense, the Government is trying to start the engine and then start sailing or moving forward. As the World Bank, together with other different partners, we've been trying to support the very challenging, difficult process amid this narrow path. There are some ways and instruments to de-risk some of the investments by leveraging from using the World Bank or other Multilateral Development Bank (MDB) financing or providing guarantees to give a bit more comfort and for the private sector to start investing. The World Bank will stand ready to help with whatever we can do to rebuild Sri Lanka.
Wijewardena: I think the success of the Budget depends on its implementation and not on the speech delivered by the President in Parliament or the debate that is taking place in Parliament now. As the Treasury Secretary very correctly said that the revenue target should be realised, I also agree with him. One advantage he has is that in modern days the taxes are paid not on the real income, but on the nominal income. In ancient times when Sri Lanka had Kings the taxes were paid in kind, so it was a real tax. The real income is falling, but the nominal income is rising. For example, the nominal GDP in 2023 was Rs. 30 trillion and in 2024 we expect it to rise to Rs. 33 trillion. As a result, Siriwardena will be able to generate this tax revenue. At the same time, I have to warn him that there can be a spillover effect on the expenditure, which he has to control very strictly. If it happens, all the Budget numbers would go haywire. Therefore, the expenditure has to be controlled and no more supplementary estimates and all the spending agencies should be instructed not to come up with new supplementary estimates. By disciplining both the expenditure side while also generating revenue, I think he will be able to achieve success in his second Budget.
Manoharan: As regards privatisation of the initiatives in the Budget, the policy intent is very clear. But I think we should pick a few that we want to make an impact with, and execute that well. The President invited the private sector to step in where the public sector is unable to execute, but we know the limitations within the Government regulations as to how much the private sector can get involved. The bilateral agencies have a big role to play in funding the expertise and the capacity required by the Government to execute some of the key initiatives. If we get that right and prioritise some of the key ones, I think the rest would fall into place.
Pix by Upul Abayasekara and Ruwan Walpola