By Marianne David
The main Opposition Samagi Jana Balawegaya (SJB) will not support Budget 2023 as things stand and will vote in favour only if its proposed changes are accommodated, said SJB MP Eran Wickramaratne, in an interview with The Sunday Morning.
The banker-turned-politician acknowledged that the Government’s goals in terms of revenue and economic growth seemed too ambitious and recommended that the Government should negotiate hard with the International Monetary Fund (IMF) in order for Sri Lanka to succeed.
He also spoke at length on the Budget proposals in relation to the tax regime, State-Owned Enterprise (SOE) reform, businesses and the banking sector, and protecting the most vulnerable, dissecting key proposals and outlining what they mean for Sri Lanka, its future, and its people, while also listing key measures to build confidence.
Following are excerpts of the interview:
The Government in its Budget 2023 has declared its intention of increasing Government revenue, creating a primary surplus of more than 2% of GDP by 2025, recording an economic growth rate of 7-8%, and increasing FDIs to more than $ 3 billion by 2033. Are these goals realistic or too ambitious?
I think these goals are too ambitious. Government revenue is about 8.3% of GDP. When we took office in 2015, it was about 10% of GDP and when we left office in 2019, it was 13% of GDP. Now it has crashed to 8.3%, so saying that they will get to 15% of GDP even by 2025 is very ambitious.
On the primary surplus, since 1948 Sri Lanka has had a primary surplus only five times. A primary surplus is where your revenues are more than your expenditure before your interest is paid. We’ve had this only five times – a couple of times in the 1950s, once in the 1960s or something, and then in 2017 and 2018 – so getting 2.3% of a primary surplus is also not realistic.
I would say, generally speaking, whether it is the budget deficit or getting your debt as a percentage of GDP to 100, these goals are too ambitious and I would urge the Government to really negotiate hard with the IMF.
Sri Lanka has an unsustainable level of debt, with negative foreign reserves and inflation at an unprecedented high. The Budget has been formulated in the context of restructuring debt and the IMF programme. Are the proposed measures practical?
They are not. The primary surplus is the indicator that there is debt sustainability. If your income is more than your revenue, then you have a surplus and you use that to basically service your debt – interest and capital. If you don’t have that, then you are borrowing to pay for borrowings. That’s really the issue.
Certainly we need an IMF agreement; we are a defaulted country. With an IMF agreement, there will be confidence in the debt market, there will be confidence in the investor market, and our ratings will go up. But the IMF and we both need to be realistic.
We have had 16 IMF programmes and only nine have been completed. Seven have not been completed. I can say that if we go with these targets, this is the eighth one that won’t get completed.
The Budget presented many proposals to improve tax administration, including the establishment of a presidential commission on taxation. Are the tax-related measures sufficient and practical?
I would first like to comment on the proposal to create a presidential tax commission. The first thing I would like to say is that we don’t need a presidential tax commission. We need a permanent tax commission.
It almost sounds like a joke – somebody told me yesterday that they have appointed a presidential commission to go into all the previous presidential commissions and to take their reports and look at them and so on.
I would say have a permanent tax commission; it’s important because then there will be continuity of tax policy and taxation. It will give a level of certainty. The business community needs that certainty so that they can plan, particularly for economic growth.
On taxation itself, in principle we have to all agree that taxes have to be raised because our revenues have collapsed. We are probably within the lowest six countries in the world when it comes to revenue as a percentage of GDP, so we have to tax.
I think the question that arises is, Sri Lanka is presently in an economic crisis. Inflation has gone through the roof and is at more than 60%, food inflation is at more than 100%, and people have already been taxed through inflation. Therefore we need to be sensitive.
My objections on the taxation would be this – we had a 14% tax rate for SMEs, agriculture, exports, IT, etc. and all these taxes have been increased to 30% in one shot. They need to be taxed, no question about it, but we need to be selective.
For example, take a working family. I am not talking of the poorest of the poor – they have to be shielded through social protection nets, no question about it. There is another group of people who are not holding their hands out to the Government, they are not begging, they have dignity, they work hard, they have taken responsibility for themselves and their families. They are earning Rs. 100,000 to Rs. 300,000 a month. What has happened with inflation going up is that their income has already been cut in half.
Earlier the tax exemption limit was Rs. 2.4 million, that’s about Rs. 200,000 a month. They have reduced the limit to Rs. 1.2 million. I made this suggestion in Parliament and I requested the Government not to do that and to leave the same slabs, because these are people who are not waiting for a hand out. These are people who are standing on their own even though they are finding it difficult. Don’t move the tax relief slab; keep it at Rs. 2.4 million and they will look after themselves.
Then the next slab used to be Rs. 1.2 million and the same for the one after – so 6%, 12%, 18%, 24%, etc. What they have done now is make the next two slabs also Rs. 500,000. Therefore, the middle class and the lower middle class are going to get crushed with the tax burden. Why crush them and make them dependent when they are not a dependent population?
Yes, people have to be taxed; but who you tax and how you tax are things I don’t agree with in what the Government has done.
Exports are also being taxed at 30%. Bangladesh taxes at 12%; countries like Vietnam have 0% for the first three years and then 10%. Countries like Rwanda taxes 0% for 10 years, because exports are important. Exports need to receive priority at the moment, because we just don’t have dollars in this country.
The Government intends to restructure some key loss-making SOEs. How do you view the proposals and do you believe this Government has the will to see SOE reforms through?
It is certainly a welcome proposal. They named the CEB, CPC, SriLankan Airlines, and some of the others. They definitely need to be restructured; there is no question about it. They mentioned that in 2021, there was a loss of Rs. 86 billion, but what the President did not mention was that the loss figure of those main 50 or 52 SOEs is more than Rs. 800 billion in 2022 just in the first half of the year. That’s the magnitude of the problem we are having with SOEs.
Some would argue that it’s because of the exchange rate. If you are handling a business and it’s a private business, exchange rate or interest rate is also a part of what we have to manage in our businesses. These losses are huge and I am in agreement with the Government that they have to be restructured.
The issue then is, how do you restructure them? We can’t put that burden on the taxpayer. If the State has enterprises – I am not talking of defence security, food security, or energy security, which the Government is responsible for – if it has anything else, we can’t put the burden on the taxpayer. Those companies need to be run efficiently, they need to be making money, and then the Government comes in by taxing them and putting that money into social welfare, education, and health.
The public sector takes up a large portion of Government revenue in salaries. The Government has now proposed reforming the sector. Will this be yet another eyewash or will these desperately-needed reforms actually happen?
There is no question that this needs reform. Has the Government got the will? I just don’t know. We will have to wait and see, whether it is SOE reform or reforming the public sector. However, they have to be done and we will have to wish the Finance Minister and the people who support him good luck with this, that these measures will go through.
The public sector needs to be reformed. Just to illustrate the point, we have a population of 22 million and we have 1.5 million public servants – one for every 15 people. Japan has 3.3 million public servants and a population of 125 million – one public servant for nearly 40 citizens. If you take efficiency of the Public Service and apply Japanese standards, then Sri Lanka’s Public Service of 1.5 million public servants has to be brought down to 900,000.
Defence is no different. The defence budget is 10% of our total budget. India is the only country in Asia which has a similar allocation – 9% of its total expenditure – and that’s understandable. India is a big country and has many threats along its borders. Sri Lanka doesn’t have that threat.
Every other country in Asia – be it China, Nepal, Indonesia, Singapore, Hong Kong, and even countries as far as Australia and New Zealand – has 3-5% for defence. Laos has 1%. Countries in Africa like Rwanda and Kenya have only 3-4%. Some people say Sri Lanka’s situation is special. What’s special? All these countries have the same issues and problems that we have.
We respect our armed forces. This is not to be confused with that. They are forced to do things because politicians have not solved some of the fundamental problems in this country. That is why we are overspending on the armed forces.
We can’t do this in a day or two, whether it’s the defence budget or whatever. Over a period of time we should come more in line with the rest of the world. It’s the same with the Public Service; we can’t do it in a day or two, but have to admit that we have a problem, that we see it logically, and that we want to make our Public Service efficient.
It is the politicians who have ruined our Public Service by giving promises that they will give public sector employment for votes.
How does this Budget bode for businesses – especially SMEs and MSMEs – which have already been impacted in many ways and are shutting down at a rate?
This Budget actually had virtually nothing to say about giving incentives to small and medium industries; virtually nothing for agriculture, fisheries, plantations, and the tourism industry. This Budget had no incentives to promote growth. I don’t know what the priority is.
Yes, we have to create stability, we all agree, but then we have a dollar shortage. Exports and industries which are going to bring us dollars should have been given priority both in terms of taxes and other incentives.
The banking sector is already facing many uncertainties. How do you view the Budget proposals and their impact on the sector?
The banking sector has huge pressure. One of the things I read with interest – and I think the banks are doing the right thing – is that the banks have made huge provisions in the last quarter and the last week. I think that’s the way to go, for banks to be prudent and build their reserves, because Non-Performing Loans (NPLs) will be very high.
Also, we have the general problem which has been created, for which the Government is also responsible. For example, take the construction industry. The Government says that it owes about Rs. 125 billion to contractors. When I met the industry, they told me it’s Rs. 195 billion. The industry has to borrow from banks but they can’t pay the banks, because the Government hasn’t paid them; it’s not their fault. The Government can’t pay them because it is bankrupt. The industry is caught in between.
We have to find creative ways and means to ensure the burden is taken off the banks and the construction companies and that NPLs are reduced drastically. We can’t risk our banking industry. We must strengthen it. The Government must proactively work at this, particularly where debts on NPLs are being created because the Government hasn’t been paying.
Biz leaders opine that the focus for the private sector will be on survival for the next year. In this environment, how can Sri Lanka realise the envisaged economic growth?
I think the reality has to be faced: a bankrupt country. Without some industries, companies, and individuals going bankrupt, the country can’t be bankrupt. The question is, how do we minimise? GDP is minus and they have to slowly bring it to zero and it is only then that we can go back to seeing positive growth. I think this is a five-year roadmap for us to get back.
No rosy picture; we have to first create stability. The Government must make the Central Bank independent. In 2019 we worked out a law for the independence of the Central Bank, which needs to be brought to Parliament immediately. This will give confidence. Even multilaterals and the IMF will welcome it.
Bringing inflation down is going to be critical and the Government has a responsibility there. When inflation reduces, interest rates will come down. Fiscal stability is the other necessity.
There are other measures that can be taken to build confidence. People have been saying that there is a lot of wastage, corruption, and leakages in the system. Bring the laws in immediately. Assets and liabilities need to be declared by all – the President, Prime Minister, Cabinet, politicians, and high officials – and made public. Put it online with one agency, like the Commission to Investigate Allegations of Bribery or Corruption (CIABOC).
They should make CIABOC itself independent and it also needs forensic people, bankers, lawyers, and accountants.
Then people are accusing people in high office of having stolen the country’s assets and hidden them all over the place like in other countries, in real estate, in banks, and so on. The World Bank supports the Stolen Assets Recovery (StAR) programme. Sri Lanka needs to bring the StAR law in and let that process also go on.
Finally, we also need to bring in an independent public prosecutor to prevent conflict of interest. The Government can easily put these measures in place to build confidence. The UNHRC for the first time referred to economic crimes. The IMF in discussions refers to corruption being tackled. These are things the Government can do to build confidence that we are serious about tackling our economic crisis.
While reforms are necessary, a lot of people have been pushed into absolute poverty. In terms of the social safety net being put in place, is the Budget allocation adequate and does the assistance really go to those who need it most?
It’s not adequate, but to be fair, how much can the Government put? The Government is bankrupt and therefore the amount it can put in is limited. The Government now basically depends on our friends overseas – it can be the World Bank, the Asian Development Bank, the World Food Programme, and other countries – for social protection.
We have to choose whom we can socially protect. I would say the priorities are pregnant mothers, then new-born babies and preschool children for whom nutrition really matters, and then the elderly population. We need the help of other countries in providing social protection.
Earlier we said the poor were about 3%; then the Government said it was about 13%; then other institutions like the World Bank have told us it is closer to 40%. The number of people who need social protection has increased and certainly the provisions are not enough. We understand the limitations the Government has and call upon all our friends to give the help that is needed.
Is it going to the right people? Sri Lanka’s social protection scheme has actually been politicised over a long period of time. We have to figure out the social protection net on a scientific basis. The answer is, no, we don’t have a proper net. We need to make sure that the social safety net transfers are done electronically so that they go directly to the recipient.
Companies have been moving out of Sri Lanka steadily and there is a significant migration of skilled talent. Higher taxes are leading to a higher rate of brain drain, especially in the IT sector. How can Sri Lanka address this?
I am glad that this issue is coming up. When I was a student 35 years ago, I wrote my master’s paper on the tea industry. At the time I said Sri Lanka was the world’s number one tea exporter; today we are fourth or fifth. I said at the time that Africa was beginning to rise; today African countries like Kenya and so on have gone way above us in terms of quantities of tea and global sales.
How did those companies come up? Sri Lankans moved into those countries; our management talent moved and the industry flourished there. A similar thing is happening today. Take the garments industry. It has been moving to Bangladesh in the last decade or two, managed again by lots of Sri Lankans. Now some of it is moving elsewhere. This story began in the 1950s. After 1956 and throughout the 1960s, Sri Lanka’s human resource talent pool began to move.
The same thing happened in the Public Service. We had one of the best public services in the world for a small island state. What happened? Our public servants began to move in the 1960s to countries like Singapore and Malaysia. They contributed and have made super public services in those countries.
This pool of talent has migrated. Why did they migrate? They didn’t migrate only because of economic issues; they migrated because they felt that they didn’t get a fair deal in this country, that the law was not applied fairly to everybody, and the country was not a meritocracy. We always considered ridiculous things like race, religion, class, caste, things like that, rather than being a meritocracy. That is why that migration started.
Again the migration has started. Young people are queuing up for visas and looking for jobs in different places.
People are leaving in virtually every profession. The reason is not only economic. We can address the non-economic reasons immediately.
I would say to Sri Lankans living in other countries in the world: you are welcome here, we need your education, your experience, your technology, your savings, and your investments.
With dual citizens we only have one restriction – they can’t run for president or Parliament and that’s only because there is a conflict of interest. If they want to be president or a legislator, they can do so by renouncing that citizenship and taking Sri Lankan citizenship.
Improving the ease of doing business to attract FDI is essential. The Budget proposes to set up a new investment agency and make the BOI, EDB, etc. a one-stop shop. Will these changes actually happen?
I welcome the proposal. As to the question of whether it will happen or not, I can’t really comment. I welcome the proposal for the reason that we don’t want to create another agency and leave all these agencies as they are and increase bureaucracy. But if you are looking at the present ones and you are going to rationalise them and create one out of them, then it is welcome. Investors – foreign or local – don’t have time to waste; they want an immediate answer.
They also said they want to create one agency for land and I thought it was a good thing. I am fully in agreement with the concept that bringing things together helps; it creates efficiency.
In terms of FDI, if you look at all international rankings, Sri Lanka is low and some of the reasons it is low is not having a one-stop concept and land in particular is an issue. If you are trying to start a factory or something like that, you have to run in circles to get so many approvals.
How do we ensure policy stability and consistency regardless of which government is in power? How can a long-term framework be implemented?
To the credit of the President, I must say that he is trying to create a dialogue across the House in trying to arrive at common policies and I think that is a welcome thing, but it should not depend on a president or an individual. We have to put it into an institutional framework and I am hoping that that framework can be worked out.
We are in the Opposition. When there are violations of human rights, democracy, or the rule of law, we will oppose the Government and will not back down.
We want to work within a democratic framework, but we have also told the Government that if it comes up with strong reform proposals, particularly on the economy, we will be supportive. Country first; we are not supporting the Government, we are supporting the country and the people.
Will you and the SJB vote in favour of the Budget 2023?
As it is now, we are not going to vote in favour. We are asking them to make some changes in the Budget.
For example, today (16) I proposed to the Government to keep the existing band on the relief on taxation at Rs. 2.4 million instead of making it Rs. 1.2 million, because people are going to find it extremely difficult.
We are suggesting some changes and we are saying that we are working cooperatively. If they accommodate our proposals, certainly we will have to change our minds at that point.