Economists and think tanks, while commending the 2017 Budget for focusing on accelerating investments and promoting exports to boost economic growth in the ensuing years, stressed the need to improve the policy environment and business confidence.
Professor in Economics, Department of Economics, University of Colombo, Sirimal Abeyratne said, the budget should reflect the current economic status of the country and the fiscal position of the government on the one hand, and on the other, be consistent with the current macroeconomic policy and long-term development path of the country. Both pushed the Budget 2017 to a challenging position.
Budget 2017 has attempted to address some key issues in fiscal management, such as, revenue deficit and overall budget deficit, falling tax revenue as a percentage of the GDP and the rising debt burden and debt service. There are proposals to accelerate investments and exports, which need to be commended.
“I would like to see more emphasis on this area as improving policy environment and business confidence is fundamental for the country. Obviously, they will go beyond the boundaries of the budget. The Budget has also attempted to make it popular with a more conventional type handout delivery, assuming it is politically correct. I would like to see more discipline on the expenditure side,” Prof. Abeyratne said.
There too, the government’s expenditure targets have gone beyond the IMF forecasts, despite greater economic growth forecasts (What I mean is, if the denominator (GDP) is higher, then expenditure as a percentage of GDP should have been lower, but it was not so). More handouts might look like politically correct, but as time passes beyond 2017, we would see them incorrect, politically and economically.
The delivery of the budgetary forecasts will be based on the assumptions of higher investment and higher economic growth; as in the Budget, the government’s forecasts in these areas are greater than what was predicted by IMF a few months ago. While the budget envisaged an increase in real GDP growth to 6 % in 2017, and 7% in 2018, the IMF forecast in June was 5% for both years. The conservative growth targets of the government make a big difference to the actual budgetary outcome at the end of the year.
The forthcoming two years are bonus years for Sri Lanka to make necessary adjustments and corrections, to get ready for 2019 and beyond. I believe, the bonus years should not be wasted.
Raigam Group Chairman Dr. Ravi Liyanage said, with the government’s objective of formulating a cohesive policy to facilitate an equitable and inclusive level of social development, the 2017 Budget came up with the theme of “Accelerating Growth with Social Inclusion”.
As stipulated in the Budget speech, accomplishment of this broader objective is attempted mainly by stimulating the investment move (especially FDIs), fostering a knowledge based social market, resurrecting the mostly defunct State Owned Business Enterprises, encouraging income generating sectors, mainly the export sector, SMEs, agriculture and investing on education, digital and ICT related infrastructure etc which are prominently emphasized..
Efforts to integrate the international economic arena too could be observed in terms of targeting the world economy income waves moving to Asia, and aligning to proclaimed UN Sustainable Development Goals and also affiliation with the Asian Development Bank.
Finance Minister Ravi Karunanayake said in his budget speech, the government will focus on developing the economy in 2017, the year also dedicated by the President to eradicate poverty. He stated that the country will be part of the ‘One belt one road’ initiative of China and become a part of the international trade. It was also proposed that the country will consider joining the Trans-Pacific Partnership (TPP) Agreement and explore more trade agreements.
Dr. Liyanage said, in the above backdrop it is paramount that the agriculture sector is addressed, offering numerous relief measures such as subsidies, tax and duty waives, flexible loan facilities, establishment of farmer cooperatives for better negotiation of prices, technology and R&D driven motives, releasing government lands for cultivations, etc.
The 2017 Budget allocated Rs.74 million to the Coconut Research Institute (CRI) and the Coconut Development Board, Rs. 50 million to the Rubber Research Institute and made provisions to scrap the levies on tea exports.
While appreciating this move, I would like to emphasize the challenges that have to be encountered in the aspects of transparency, monitoring and practicality in the event of executing the proposals. The above facts are equally applicable even to the other peer sectors, e.g. dairy, poultry etc. Though traditional export plantation sectors have been addressed to a certain extent, it would have been better if more emphasis is laid on establishing international brands for value added products which will enable to claim a premier price to survive the severe competition posed by countries such as Kenya, which possesses a competitive edge with their virgin soil and cheap labour.
Promoting the tea hub concept was another hallmark of the 2017 budget which encourages the import of CTC teas (Cut, Tear and Curl) for re-export with value addition.
Education being a centric variable in the government development model has been considered with a significant fund allocation proposing a number of developments which could be perceived as a positive move. This would drive producing graduates and school levers in large numbers who are much ICT driven, relatively in the present context that would be effective if employment generation too takes place to accommodate them either locally or internationally. Proposals on skills development are a positive response over the timely need being highlighted by industrialists, and would be effective if those programs are lucrative to attract the youth and also in terms of job guarantee after training which should be again income - lucrative, rather than easy income generating jobs, such as, youth taking to operating three-wheelers.
In the industry sector, the SME sector has been offered certain relief among which concessionary loan facilities are an important factor. My appeal is not to include unfair conditions in the criteria which would prevent needy companies from being eligible for such facilities.
Certain tax concessions given are in the form of capital allowances, which could be a real matter if the new project generates taxable profit in stipulated years of operations, or leave room to carry forward taxable losses. Also, the eligibility criteria for the concessions (investment / number of employees) are challengable to reach mainly, middle level organizations. While appreciating the motives given targeting foreign investments, if any motive could be extended to existing local companies by setting out eligible criteria based on “challengeable but achievable” logic, it would have been an encouragement in the expansion effort. Attempt made to develop the export sector is a positive step, investment on international branding, development to establish a commercial hub, focus on international fairs, are new moves. Focus on government’s mega-projects is a positive move, but again, the transparency of implementation is an aspect to look at.
Consideration given to offer listing status to SMEs at CSE might be a positive signal; nevertheless, implementation and success is faced with many challenges. Proposals on revising the corporate tax rate to be on a three tier structure of 14 %, 28 % and 40 % should be carefully implemented with more evaluations. Revival of Capital gain tax on immovable properties and reduction of NBT liable threshold might be another noteworthy highlight.
An Economist, Anushka Wijesinha said, the budget contained mainly continuity on key policy focus areas and said there are no major surprises.
He said, there are areas of concern that need to be clarified, especially, changes to taxes such as, the Notional Tax Credit removal and capital allowances. The moves to regulate tax online transactions are not consistent with expanding the digital economy.
He said, certain measures on the financial sector need to be carefully evaluated alongside the financial regulator. There is quite a bit of repetition of proposals of the 2016 Budget which emphasizes the need to focus on implementation, to build credibility in the Budget.
The move to improve direct tax revenue is commendable. The revenue proposals seem more realistic and achievable than those of last year.
The budget has come up with certain proposals that comply with the Chamber principles and submissions, such as, expanding access and quality in education and skills training.
There aren’t many measures to try and correct the distortions brought in previous budgets - the various para tariffs and other border taxes that have complicated the trade tax regime.Also, the budget contains many implications for the capital market which must be carefully studied before implementing
[Budget push for bank mergers]
The increased minimum capital requirements for banks proposed in the budget for 2017 should encourage consolidation in the banking sector, Bartleet Religare Securities said.“The minimum capital requirement of the Licensed Commercial Banks is lifted to Rs20 billion with the intention of meeting Basel III requirements early, hinting at industry consolidation,” they said.“Industry wide voluntary consolidation is a central theme in the 2017 Budget for the banking sector. We believe, this will put banks like DFCC, NDB and Seylan back again in the limelight.”The budget proposes to merge several specialized state banks, including amalgamation of HDFC Bank, State Mortgage and Investment Bank, and establish a Housing Bank with a capital infusion of Rs 7.5 billion. Cooperative Rural Banks and Divineguma Bank will also be amalgamated to create a stronger rural sector micro lending focused bank.The budget proposes to increase the minimum capital threshold levels of both Licensed Commercial Banks (LCB) and Licensed Specialized Banks (LSB) to Rs20 billion and Rs 7.5 billion respectively.“This is with the aim of promoting industry wide voluntary consolidation. As per our analysis three listed LCBs and 2 listed LSBs will be directly impacted by this new proposal,” Bartleet Religare Securities said. Listed LCBs with a capital of less than Rs 20 billion are NTB, Union Bank and PABC. Listed LSBs with a capital of less than Rs 7.5 billion are SDB and HDFC.
But Bartleet Religare Securities said, the budget also gives ‘mixed signals’ with the addition of a new EXIM bank with Rs 25 billion initial capital. “While encouraging industry consolidation, the Government sent mixed signals setting up a specialized EXIM bank. We see this, if successful only cannibalizing into the space of the existing banks with only a marginal benefit to trade related businesses.” SC Securities also said they were concerned about the proposal. “We perceive this as a negative development towards listed banking and finance counters in the CSE, as this will set in more competition and reduce earnings prospects.”