Mangala’s designer Budget will be “lean, clean and green”
Finance Minister Mangala Samaraweera was joking about himself when he told officials helping him with his first budget “you all get the statistics ready. I will make a designer budget.” He was of course referring to his early days as a fashion designer, a profession for which he received training in London. But politics took over and he is now busy with the national budget which he reveals“will further strengthen the social safety net for the poor and the less fortunate.”
Samaraweera’s one liner on the budget – “it will be lean, clean and green”. Here is a Q & A he had with the Sunday Times : AN OVERVIEW OF THE ECONOMY: Sri Lankan economy is showing signs of stabilization, building on a growth of 4.4% in 2016, and 3.8% in the first quarter of 2017. Unfavorable weather conditions and sluggish trade performance amidst lower-than-expected recovery of global economy caused some slowing. However, with the rebound of industry and services sectors, the economy is poised to record a growth of well above 4.5% in 2017. Inflation is moderating to 5% level in the recent months, and interest rates are showing a downward adjustment.
Fiscal consolidation continues to perform solidly as government revenue grew by 22% during the first five months in 2017 over the same period in 2016. Also, the budget deficit is estimated to reduce to 4.8% of GDP in 2017 from 5.4% of GDP in 2016. Exports are expected to improve in the coming months with the support of a more flexible exchange rate and regaining the GSP+ concession to European markets. Hence, the external current account deficit is expected to decline to 2.1% of GDP in 2017 from 2.4% in GDP in 2016.
ON FURTHER BURDENS ON THE PUBLIC: Our Government implemented an array of incomparable public-welfare measures. The well-coordinated monetary and fiscal policy making will further ensure that any corrective economic policy decision would cause the least burden on the public. The ratio of indirect to direct tax of 80 to 20 is totally unacceptable, highly regressive and inflicts an unfair burden on the poorest members of society. Our target is to change this ratio to 60/40 in the next 3 years bringing more relief by bringing down the indirect taxes and widening the income tax base. The new Inland Revenue act will be an important step.
ON THE FINANCE MINISTRY NOT BEING DIRECTLY INVOLVED IN NEGOTIATIONS OVER HAMBANTOTA PORT - The agreement was finalized with the consultation of all relevant ministries and stake-holders. It was a collective decision by the Cabinet of Ministers. I am delighted a new deal has been signed for the Hambantota Port. This deal will be more profitable to Sri Lanka and will also address security concerns.
The Hambantota Port since its commercial operations began in November 2011 has made combined losses over Rs. 46.7 billion. Had these losses not been incurred by the Government, they could have paid for the annual medical expenses for 2.5 million families or the Department of Education’s budget could have seen an annual increase by 60 per cent.
IS THE GOVERNMENT ENTITLED TO TIE DOWN A COUNTRY FOR THREE GENERATIONS? - This is not a case of tying down a country. The problem inherited by this government was the fact that large amounts of foreign loans were obtained by the previous government. It had invested in assets that have not generated the returns to pay back these loans. Therefore, we are compelled to find solutions to make these investments commercially viable. Failure to do so would leave us in a debt trap that would keep the country tied down for several generations.
If the question is based on the tenure of the Hambantota PPP agreement, one needs to be absolutely clear that many high net-worth commercial arrangements are long-term in nature. What is more important is that any project undertaken by the Government needs to be beneficial for the economy on sustainable basis.
ACCORDING TO THE PRIME MINISTER, THE COUNTRY IS IN DEBT TO THE TUNE OF US $ 25 BILLION. WITH CHINESE PAYMENT OF ONE BILLION DOLLARS, IT WILL COME DOWN TO US $24 BILLION. HOW DOES THE GOVERNMENT MEET THE BALANCE? - Managing a debt overhang of this nature cannot be achieved overnight. It requires a progressive and multi-pronged approach. selected highlights of Vision 2020: A 3-Year Economic Delivery Programme: Over the next three years, within the 2025 Vision, we will implement a comprehensive economic strategy to address constraints on growth. We will aim to raise per capita income level to USD 5,000 per year, create one million jobs, increase FDI to USD 5 billion per year, and double exports to USD 20 billion per year. These intermediate targets lay the foundation for our Vision 2025: Sri Lanka becoming a higher-middle income country. The exchange rate to be market determined. This will enable cost reflective pricing across all goods and services produced and traded in the economy, strengthening the competitiveness of Sri Lanka’s exports in global markets. Greater flexibility in exchange rate determination will help to build international reserves and strengthen the resilience of the economy to external shocks. Encourage Public-Private Partnerships(PPPs).The government will support PPPs as a means of The first step is to improve the budget deficit and fiscal position. In the last decade, Sri Lanka’s revenue collection has eroded significantly due to numerous exemptions and concessions. As a result, 80% of Sri Lanka’s taxes are collected as indirect taxes on goods and services. This is highly regressive and inflicts an unfair burden on the poorest members of society.
We are bringing in new legislation including the Inland Revenue Bill to enhance revenue collection while ensuring that we collect more income taxes and thus ease the tax burden on the poor. Sri Lanka’s primary budget deficit was brought down to 0.2% in 2016 from 1.5% in 2014, and we expect to be in primary surplus by 2020.At the same time, we are re-structuring loss making state owned enterprises, which have been a major contributor to government debt. Furthermore, we will implement the Public Private Partnership model to ensure the best returns for state owned assets. This will enable us to continue with public investment to grow the economy, without further adding to the debt burden.
The clustering of certain large debt-repayments during 2019-2022 period. (Over 80% being from the pre-2015 era) warrant special emphasis and proactive measures. We need to build up adequate buffers pre-emptively to meet debt obligations without igniting imbalances elsewhere in the economy.
RESPONSE TO ACCUSATIONS THAT THE GOVERNMENT IS SELLING ‘THE FAMILY SILVER’ TO MEET DEBT REPAYMENTS: There is a significant clustering of foreign debt servicing during 2019-2022. We need to prepare the economy to absorb such debt servicing in a prudent manner before it severely impact on the government fiscal operations. Therefore, as we have announced already, government is considering re-structuring non-strategic stateowned business enterprises. Sri Lanka has a large SOE sector, which has not been growing substantively over time with a few exceptions in the finance sector.
The concentration of larger number of assets under ‘inefficient’ management could lead to unproductive utilization of country’s valuable assets. It also dampens competition in the key sectors of the economy, so that, discouraging private sector participation and growth potential.
If you are referring to the Hambantota port, the Government is certainly not selling public assets. It is a lease agreement where there are provisions for the SLPA to acquire ownership after a period of time. SLPA through the shareholding structure, has a majority share ownership of HIPS, which manages port services including security. Importantly, the Sri Lanka government retains control over all issues of national security in relation to the port and its usage. We need to pause and ask ourselves, have we made use of the silver we are talking about?
Yes, the Hambantota Port is a strategic location and a truly valuable asset, but has it been managed properly? Ship arrivals at the port have been negligible, annual losses run up to billions of rupees. The profits of the Colombo port were being siphoned for the upkeep of this ship less port which to me was a display of hubris of an arrogant autocrat. Mattala Airport has faced a similar problem with minimal operations due to poor planning and lack of professional management. What reducing reliance on loan agreements in the provision of public assets and services. We are formulating a clear PPP policy with a well-defined legal, regulatory and institutional framework to attract private players with the requisite capacities. PPPs currently focus on provision of public amenities such as transport services, energy generation, drinking water, waste management, and industrial parks. Potential areas for expanding PPPs include healthcare, leisure, tourism, education, ports and aviation. We will prioritise expanding opportunities for alternate financing, including securitisation, to support PPP programmes. Weak governance and institutional mechanisms continue to undermine Sri Lanka’s long-term growth potential. Weaknesses in rule of law, perceptions of corruption and democratic freedoms, amongst others have continued to negatively impact the country’s standing in global indices on governance standards. Such weaknesses often manifest in policy unpredictability, weak public service this Government is doing is trying to create robust management structures, and where necessary bringing in foreign investment in partnership with local investment, to convert these valuable assets into commercially viable operations and thus unleashing their true potential.
SUCCESSIVE GOVERNMENTS HAD RELIED HEAVILY ON FOREIGN REMITTANCES TO BEEF UP RESERVES. ACCORDING TO LATEST FIGURES, THERE IS A 4 % DROP IN SUCH REVENUE. FDIs HAVE DROPPED TO NEW LOWS: Remittances have indeed been on the decline due to the adverse geo-political situation in West Asia and low oil prices which have been detrimental to those economies which are the major sources of Sri Lanka’s foreign remittances. A country that relies on remittances is symptomatic of economic weakness – and Sri Lanka should aspire to create an economy that does not rely on the lifeline of remittances.
FDI has indeed underperformed. However, the government is cognizant of the reasons behind this weakness. We are taking all steps necessary to ensure a stable and transparent policy environment that is conducive to investment, while ruthlessly eliminating red tape and other bottlenecks in the investment climate. We will focus on minimizing the upfront costs of investment whilst providing infrastructural and institutional support to our investors.
ON THE SLIDE OF THE RUPEE THE US DOLLAR - I have all confidence in the way the Central Bank, led by Governor Coomaraswamy, manages the exchange rate. We are moving away from a system of controls to a system of management of economic instruments such as the exchange rate. The Foreign Exchange Act is an important step in this journey. As a government, we will create a policy environment that is conducive to the development of exports, encourages FDI, and capital inflows, and thereby will naturally lead to a robust balance of payments and currency stability.
IS A BIG BUREAUCRACY EATING INTO PUBLIC FINANCES? HOW DO YOU PROPOSE TO OVERCOME IT? - We value the role of the public sector. Our priority is to optimize the productivity of the public service to ensure that the public gets good value for money in terms of the services they receive – be it education, health, transportation, and many others. We will manage government spending by efficient gains through digitalization and automation of public services, enhancing transparency of procurement, and numerous other productivity enhancements by effective deployment of technology. We are leading by example at the Finance Ministry, with RAMIS being implemented at the Inland Revenue Department to bring automation to revenue administration, and we will soon roll out ITMIS(Integrated Treasury Management Information System), which will embody greater technology in our treasury management processes.
YOU SPOKE OF A NEW ALCOHOL POLICY. ARE YOU PURSUING THIS? - Alcohol abuse is a major challenge, and it has a disproportionate negative impact on the poor and vulnerable sectors of our society. There is mounting evidence that the efforts of successive governments in curbing alcohol consumption through taxation and regulation have not yielded the desired results. The higher taxes on the formal sector have increasingly driven consumers towards illicit liquor and tobacco products, which are far more detrimental to human health. Our alcohol tax structure is at odds with global best practices and these have in fact incentivized consumers towards hard liquor. We are making a systematic review of our entire excise policy and we will make the necessary changes to reduce distortions and to discourage the consumption of illicit alcohol and tobacco products.
ON THE DIRECTION OF THE 2018 BUDGET AND WHAT IS IN STORE FOR THE COMMON MAN - The budget will further empower the export sector while creating a rules based environment conducive to foreign direct investment. Youth empowerment and gender empowerment will be important themes of the budget and we will further strengthen the social safety net for the poor and the less fortunate. The budget will also actively contribute to attaining the sustainable development goals. It is a green / blue budget; paving the way for an environmentally friendly new Sri Lanka, harnessing the riches of the blue economy surrounding our beautiful island. My first budget will be lean, clean and green. delivery and administrative red-tape that deter private investment, both local and foreign. Strengthen policies of good governance.We have embarked upon an extensive reform agenda, incorporating elements of constitutional reform, economic policy changes, improved governance, and transitional justice. We commit to fight against corruption, unaccountability, non-transparency and inefficiency in the public service. Strengthen ongoing reconciliation efforts to ensure the rights of all citizens and enable everyone to feel Sri Lankan. These efforts will include creating equal opportunity for individual economic growth and advancement. Uphold and strengthen citizens Right to Information. The newly passed Right to Information Act makes the state accountable to the people, enables people to take part in decisions, and creates informed debate vital to a thriving democracy. It enhances people's participation in government by empowering grassroots democracy and activism, and by improving the quality of input and debate. At all levels of the government we will affirm and abide by the Right to Information. This week’s developments show that President Sirisena is set to face challenges both on the political and economic front. Local government and Provincial Council polls, the first popularity test for him and his Government and a set of new Constitutional amendments are among them. On the economic front, the controversial Hambantota Port project will get under way on October 1 when the Government hands it over to the Chinese firm. As for Vision 2020, most features contained in them have been re-iterated in the past two years ahead of budget proposals. There are some new features. However, even those are ones that were included in the Government’s pledges ahead of presidential and parliamentary elections. One is not wrong in saying that it is old wine in a new bottle. There are pledges again even to eliminate corruption. How much will get done remains the critical question.