Sri Lanka’s interim budget presented by President cum Finance Minister Ranil Wickremesinghe in parliament here on Tuesday, is intended to lay the foundation for a progressive economy even as it provides a buffer to the poor who are bearing the brunt of the current unprecedented economic crisis.
“The Interim Budget is basic to the formulation of a national economic policy in accordance with the new world order. Based on this foundation, the Budget for the year 2023, will initiate the process of creating a new economy,” Wickremesinghe said.
First and foremost, he called for an attitudinal change towards the political economy and appealed for the rejection of old ideas which have pushed the country downhill.
“From the time the Government nationalized businesses, most of the tax revenue of our country has been spent to cover their losses. Funds which have to be utilized for the necessities of the community, are being wasted on keeping these companies afloat. Government should be formulating policies and implementing them. However, presently the Government does everything and the people also expect such from the country’s administration,” he said.
“We have not been following appropriate policies, not only in relation to state enterprises, but also in attracting foreign investments. Continuously, there has been no proper use of the nation’s resources, that too in the guise of seeking to protect state assets,” he said.
“If we can nourish our minds with creative thoughts, according to the current trends of the modern world, then we can solve the economic crisis,” he added.
Short and Long Term
Wickremesinghe said that he is adopting short and long term policies. In the short term, he said: “Negotiations with the IMF have successfully reached the final stage. Discussions on debt restructuring will be held with the main countries that provide loan assistance to our country. The United Nations, in collaboration with leading international organizations, is launching a program to ensure food security. The process of providing daily needs like gas, electricity and fuel without a shortage has been initiated. Schools have opened, and the universities are commencing their academic activities. All this reflects that we are on the correct course in the short term for recovery.”
Delineating the macro-fiscal framework, Wickremesinghe said: “Our fiscal stabilization program envisages government revenue increasing to around 15% of GDP by 2025 from the 8.2 % of GDP as at end 2021. We aim to reduce public sector debt from around 110% of GDP as at end 2021, to no more than 100% of GDP in the medium term. It is expected that inflation will be brought back under control to a mid-single digit level in the medium term. In line with this, interest rates are also expected to reach a moderate level gradually. The medium-term economic growth is expected to return towards 5%.”
Buffer for Poor
To cushion the poor who are in the majority, the President said that government has allowed LKR 300 billion out of capital expenditure and less priority spending allocated in the original budget 2022 for the provision of relief to those who are affected by the economic crisis.
On tax reforms, Wickremesinghe said that the VAT rate will be increased to 15% from the current rate of 12% with effect from September 1, 2022. In addition, it is expected to present new revenue enhancing proposals aiming at Budget 2023. He also proposes to introduce compulsory tax registration for all residents who are above 18 years of age without considering their annual income and tax-free thresholds.
Foreign investors and/or technology holders would be encouraged to establish joint ventures with Sri Lankan partners for industrial investments with advanced technologies to ensure better utilization of mineral resources and increase value addition without jeopardizing the interests of the national economy and the sustainable use of resources, Wickremesinghe said.
On prudent expenditure management, he said funding will be channeled to priority sectors such as education, healthcare, public transport, public service digitization, and social protection.
More specifically, he proposes to “introduce required laws to establish a system like Inspector General (IG) in the USA, tasked with making sure government expenditure system is working well and in the way it is intended. The IG will be strongly empowered and will actively engage in protecting the integrity of the government by detecting and preventing fraud, waste, and abuse in government institutions.”
For the better use of existing properties, the President proposes a “comprehensive study of movable and immovable properties, including government owned buildings, lands and vehicles will be conducted with a view to optimize the utilization and to identify potential real estate for income generating activities.”
Consolidation of Local Bodies
Stressing the need for consolidating the local bodies, Wickremesinghe said: “ There are 341 Local Government Authorities currently operating in the country consisting of 24 Municipal Councils, 41 Urban Councils and 276 Pradeshiya Sabhas. While there are local government authorities which have ample revenue streams, there are also local government authorities that do not have sufficient sources of revenue. Therefore, in order to provide a more efficient public service and to facilitate efficacies in administration, I propose to merge selected Pradeshiya Sabhas with a Municipal Council or an Urban Council adjacent to them. 22 Pradeshiya Sabhas have been selected for this programme as the initial step. And in order to making services to be efficient and easier to the public, all the local government authorities should arrange to offer online services to collect the related revenues without any delay. Accordingly, the online revenue collection programme should be implemented in all local government authorities before the end of 2022, he said.
Public Sector Reforms
As a part of efficient expenditure management, Wickremesinghe proposed to rationalize the number of government employees.
“Already, we have allowed those who are willing to take no pay leave for 5 years or so and go abroad or engage in educational activities in the country. It has been observed that there has been increasing unrest among unemployed youth as the government had decided to raise the mandatory retirement age of public sector employees to 65 years and that of semi- governmental employees to 62 years. Besides, it has also been reported that the increase in the retirement age has restricted the promotional opportunities available for many public sector and semi-governmental employees. Accordingly, it is proposed to reduce the retirement age of public sector and semi-governmental employees to 60 years. Those who have been employed beyond 60 years of age at present in the government and semi government sectors will be retired as of 31.12.2022.”
“The Director General of Management Services will be tasked to conduct a work study covering the entire public service for the purpose of optimally obtaining services of the primary level employees in the government entities and to submit the report to the Cabinet of Ministers within three months.”
To discourage purchase of fossil fuel-based vehicles in the public sector such purchases will be suspended hereafter as government policy.
“As per this policy, only electric-powered vehicles will be purchased for the use of the public sector in the future and the private sector will also be encouraged to use electric vehicles. In purchasing vehicles for the public sector, suitable categories of vehicles are decided on the basis of the efficiency and prices of the vehicles. This proposal will be implemented step by step and will be completed by 01st January 2026,” the President said.
State Owned Enterprises
On the ticklish issue of the reform of the State-Owned Enterprises, Wickremesinghe said: “The major fiscal risks arise from a few key SOEs, particularly in the transportation (SriLankan Airlines) and energy sector (CEB and CPC). These entities face significant losses, negative equity (SLA/CPC), and large volumes of debt that is predominantly owed to the state banks, creating significant financial sector risk. enterprises (SOEs). The major fiscal risks arise from a few key SOEs, particularly in the transportation (SriLankan Airlines) and energy sector (CEB and CPC). These entities face significant losses, negative equity (SLA/CPC), and large volumes of debt that is predominantly owed to the state banks, creating significant financial sector risk.”
“Some of the state-owned enterprises have been making losses on continuous basis due to issues of structural nature existed for some time. As these losses cannot be met endlessly from the General Treasury, attention should be paid to find alternative mechanism make them effective. Accordingly, it is proposed to establish the “State-Owned Enterprise Restructuring Unit” to facilitate restructuring of government owned business entities. I propose to allocate Rs. 200 million to implement this proposal.”
“I propose to re-activate the Statement of Corporate Intent (SCI) process for key 50 SOEs, excluding CEB, CPC and Sri Lankan Airlines, as they are under different efforts to restructure, to closely monitor the set targets.”
“These difficult but necessary measures pertaining to SOEs will no doubt be challenging to address, but failing to do so would create catastrophic risks, particularly for financial sector stability, and will entail even higher taxation burdens on the public in the future,” the President said.
Fiscal Legislative/Oversight Framework
Since parliament has a responsibility to manage the country’s public finances, Wickremesinghe said that it is essential that whatever reforms put in place today are shielded from myopic and stubborn decision making that derails economic recovery.
“We will introduce new legislation under a Public Finance Management Act (PFM Act) that will include stronger Fiscal Rules.” Further, a Parliamentary Committee on Ways and Means” will be established to closely deal with issues and make proposals in raising government revenue.
On social welfare the President made the following points:
There will be provision of an additional monthly allowance of Rs. 2,500 for pregnant mothers in addition to Rs. 20,000 already provided for them. It has been reported that there are about 61,000 food insecure families, which need urgent assistance. “I will provide Rs. 10,000 per family for a period of further four months. For all the above programmes, I will allocate Rs. 46,600 million for a period of 4 months,” he said.
“The recent increase in the kerosene prices has created difficulties for the owners of small boats which are used for fishing industry and for those who in the plantation areas that has no electricity services. I will provide a subsidy for these areas.”
Rs. 133 billion has been allocated under the World Bank loan assistance for the implementation of programs with the view of reducing the impact of the current economic crisis and restoring social stability.
“Accordingly, I have obtained approval through the Supplementary Estimate presented to Parliament before presenting this budget to provide immediate relief to around 3.2 million people affected by the current economic situation. Under this, monthly Samurdhi allowance has been increased to an amount ranging between Rs. 5,000 to Rs. 7,500 per month for approximately 1.7 million currently Samurdhi receiving families. Apart from that, an assistance of Rs. 5,000 was provided per month temporarily to around 726,000 families who were in the waiting list for expecting Samurdhi benefits,” the President said.
“Also, the allowance paid for the elderly, disabled, and kidney patients was increased to an amount ranging between Rs. 5,000 to Rs. 7,500. Further, the temporary assistance of Rs. 5,000 was arranged for the people who are in the waiting lists in anticipation of receiving this assistance,” he added.
The President said that US dollars 110 million (Rs. 40 billion) has been allocated for the import of Urea required for paddy cultivation in the 2022/2023 “Maha” season, and fertilizer procurement is already underway. I believe that this will enable the paddy farmers to get a good harvest in the coming season and thus will be able to get rice at a reasonable price for the rice consumers.
On cooking gas availability, the President said that government is working to meet the domestic gas requirement without shortage in the future as well. It is intended to spend about US dollars 70 million (Rs. 25 billion) for that.