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Budget 2022: Government does not have guts to address key issues says Eran Wickramaratne

13 Nov 2021

By Asiri Fernando Today, Sri Lanka stands at a fork in the road, with many of her youths poised to seek relief and better opportunities overseas. They, like many before them over the generations, have lost faith in the governance of Sri Lanka. It is in this gloomy backdrop of youths queuing to leave the country and of the public trying to find fuel to light their house fires, that the Budget for 2022 was read in Parliament. Many had hoped for significant changes, for a change in direction. Many were looking for hope. However, the expected reforms and a recalibration of the country’s trajectory was not seen in the Budget 2022 by many. In an interview with The Sunday Morning, Opposition Samagi Jana Balawegaya (SJB) Parliamentarian and former State Minister of Finance Eran Wickramaratne discussed the Budget proposed for 2022. Following are excerpts from the interview. What are your initial views of the Budget presented by the Government for 2022?  I think the Budget didn’t break any new ground. It is a traditional budget; it didn’t address any systemic issues. It was not a reformist budget. Unfortunately, it has failed to address the day-to-day issues ordinary people are facing, such as food prices and inflation. Inflation, over the last month, has pushed up the cost of living significantly; even things like vegetables and other food items have shot up in price. Some vegetables have gone up by Rs. 100 a kilogramme (kg). The Budget has failed the people. The fundamental economic issues such as the budget deficit, which needs to be brought under control with fiscal consolidation, and the Balance of Payments, have not been addressed. In your opinion, has the Government taken adequate steps through the Budget for Sri Lanka to manage the debt crisis effectively? No, it hasn’t. It has been pointed out that debt increased during the previous Government. That is partially correct because, in that period, we raised money, and about 70% of the debt we took was to repay previous debt. About 30% that was taken during the final period, which we did not utilise, became part of the reserves. The thinking at the time, in 2019, when the decision was made, was that with two elections coming (General and Parliamentary Elections), for a period of six months to one year, we wouldn’t want to go to the financial markets. Therefore, it was thought to be a good idea to add to the county’s reserves. Debt was taken but not spent; it was made part of the reserves. The debt we took – the 70% I mentioned – was to repay the debt taken under the Rajapaksa era. Since this Government took office, our reserves have dropped, from about $ 7.6 billion in 2019 to about $ 5.6 billion in 2020; in August this year, it was $ 3.5 billion; in October it was around $ 2 billion. It has dropped to a very dangerous level. The Government is trying to handle local debt by printing money. But regarding international debt, with our reserves so low, there is a looming crisis. Do you think the Budget addresses the critical issue of the foreign currency crisis? What could have been done differently? This Budget doesn’t address it at all. The foreign currency crisis is a very serious one. I don’t know if this country has seen a crisis like this in the last few decades. The Budget didn’t address it because ultimately, you have to generate foreign currency in order to get over this crisis. The general conversation over the last year has been to secure a swap with someone and secure cash flow for the next three months. But they are not addressing the problem, merely prolonging it. Earlier, you could pay debt by borrowing more, but with the ratings agencies’ downgrading, that access to the market has also become a problem. This Budget should have addressed two key issues. One is on exports, which are very important, because ultimately, it is the exports that will bring in foreign currency. We also have a huge problem with our agriculture sector that is manmade, due to the banning of (chemical) fertiliser use. The farming sector is down, and farmers’ income has gone down. Agriculture is one area where the Government could have done value additions through the Budget to boost exports. Another area that the Budget could have addressed is providing technology subsidies. There are lots of lessons, globally, about how such tech subsidies can improve productivity and value addition. Also, for Sri Lankan exports, be it tea, rubber, coconut, or garments, and information technology (IT), generally, the structure is that it is the large companies that are the exporters, less so local small and medium enterprises (SMEs). Ideally, I think the Government should have used the Budget to help SMEs find markets and give them technology subsidies to improve the quality of goods and services. As a strategy, the Government should help local SMEs find markets with help from private sector and business communities like the different chambers. These are things they should have looked at through the Budget. The Government has lost its way. The Government is targeting a budget deficit of 8.8% of GDP in 2022 (Rs. 1,628 billion). What is your view of this target? I think they are very ambitious with that target. If you look at the revenue, even for this year, going by the Government’s own estimates, they will be Rs. 400-500 billion lower. They have estimated revenue at Rs. 1.5 trillion now. In the Budget, they are saying next year it will be Rs. 2.3 trillion – which is Rs. 800 billion more, so you can’t help but wonder if the Government is dreaming. It makes you think they don’t have a feel for numbers. I don’t think they will get anywhere near the number they predict. When we were in the government, we managed to get a primary balance in 2017 and 2018. That was because we were serious about fiscal consolidation, we were serious about the country’s revenue. The fiscal consolidation programme, which we had worked out very carefully, was dropped by this Government. We increased the taxpayer base from 900,000 to 1.5 million. Now, they are trying to increase revenue. But revenue will not go up by 40% or so in one year. That is not good news for the private sector too. Basil Rajapaksa is now talking as the Finance Minister. In 2019, he was a Campaign Director. As the Campaign Director he told the public, “we are going to reduce taxes”. That pledge had no scientific basis at all, and it was just an election promise; a promise to win an election. Many believed it and gave their vote. Come December 2019, they reduced taxes without a study. The following year, revenue plunged by nearly one-third. The revenue drop was between Rs. 500-600 billion. This was the result of this Government’s unscientific approach, which was irresponsible. And the same individual is now coming as the Minister of Finance of the country. It is almost like a joke. And now, he is reversing his decision. He is reinstating taxes. He has realised his mistakes. But instead of paying for it, he was rewarded with a Finance Minister portfolio.  So, we have leaders who don’t follow a scientific basis, pushing the country one step forward and two steps back. In your opinion, do you think the Government has taken adequate steps to reduce state expenditure through the Budget? No. I feel that they have done a few meaningless things about expenditure. It is an eyewash. Take for example this move to cut only five litres of fuel usage. It is a meaningless move if you are serious about reducing public expenditure; some areas are overfunded, and some are underfunded. Two areas that are heavily underfunded are education and health. From a social justice and growth perspective, education and health are two areas that should have been prioritised for more funding. If we are serious about expenditure reforms, one area that many don’t like to look at – defence expenditure – needs to be reviewed closely. The armed conflict in this country was over a decade ago. Defence is far more sophisticated today than it was then. So, certainly, we need investment for intelligence and to bring in new technology, but other defence expenditure needs to be relooked at. When we say this, some cast aspersions that we mean that defence is not a priority. I am saying defence is a priority. But priorities should also be expenditure smart. And if we are claiming that we have peace, defence expenditure can’t be rising. Expenditure has to be reasonable. Another unpopular topic which needs to be addressed is public sector reforms. If you really want to reduce expenditure, we should want a smart, well-paid, and well-trained public sector. So, we have to pay our public servants better, and put more money into their training and skills development. The cuts will come in the form of a drop in numbers. So, quality over quantity. None of these key issues were addressed in the Budget. I don’t think the Finance Minister or the Government has the guts to address these kinds of issues. If you want to take Sri Lanka to the future and retain our youths, our smart, young people who are queuing up to leave, and reassure their parents that the children will have a good opportunity in this country, these key issues need to be addressed. Do you think introducing new taxes will work while the Inland Revenue Department (IRD) remains ineffective in collecting taxes which already exist? When we were in power, we introduced new systems to improve efficiency. Their implementation has been slow. However, not much has been done since then to improve efficiency. The introduction of new technology can streamline tax collection, make collection timely, and reduce the hassle for the taxpayer. The other thing IT does is it reduces human interaction. In most cases, where human interaction is reduced, corruption and efficiency go up. I am not singling out the revenue service here; it can be Customs, or any government service. What are your thoughts on the revenue proposals made in the Budget Speech? How will they impact the private sector? Taxes must always be consistent. So, the Minister has introduced a one-off tax. From a social justice point of view, that may have merit. However, on principle, we must oppose one-off taxes, because it creates unpredictability. Businesses don’t object to taxes when they are fair, predictable, and they know there are no surprises. Businesses cannot thrive when there is unpredictability and surprises. So, on principle, we oppose one-off taxes. There is the problem of inconsistency. We raised VAT, then they (this Government) came and reduced it, and again yesterday, he (Finance Minister) increased it. VAT was a significant part of revenue. Sri Lanka changed VAT 10 times in 23 years up to last week, and with this Budget, we have now changed it 11 times. New Zealand (a country that Sri Lanka closely observes in terms of economic modelling) has only revised VAT twice in 35 years. So, you can get an idea about how bad this is in terms of predictability for the private sector. So, the private sector suffers from poor fiscal planning by the Government. What impact will the Budget have on the cost of living in 2022? We are in a rising inflation situation, and we have a huge deficit. As we know, the revenue numbers are an overestimation. 43% is an absolute overestimation, which means there is very little flexibility on the expenditure numbers. The salaries and wages, pension payments, and interest payments alone exceed the Government’s revenue – and that is without capital expenditure. So, as revenue numbers are overestimated, they (Government) will have to borrow more in rupees. With the Government trying to hold the exchange rate, they have a big problem on their hands. With that being the case, we might continue on the same road, with the Central Bank printing more, which will lead to more inflation. This is why when we were in power, we wanted to strengthen the independence of the Central Bank. Had the checks and balances we planned gone ahead, it would have automatically checked inflation. This is what is absent in the present situation – there are no checks. The Government will likely continue to print money and that will adversely affect inflation and the cost of living. How do you think international rating agencies will respond to the Budget?  They may be having a good laugh. I don’t know. In terms of securing much-needed foreign direct investments (FDIs), do you think the Government has sent the right signal to potential investors? FDI comes if there is rule of law; if the country’s judiciary works and if the country honours agreements and international treaty obligations. Only then will investors have confidence to bring in FDIs. So, in terms of credibility, this Government has huge problems, be it from the United Nations Human Rights Commission (UNHRC) to the European Union (EU) Parliament. There is a real lack of confidence in the Government. Even in our major export markets, which are the US, the UK, and the EU, there is a lack of confidence in Sri Lanka. The EU GSP+ (Generalised Scheme of Preferences-Plus) concession is also under threat. Secondly, the Government has to reduce the barriers for FDIs to enter markets. There is a lot to be done here. Many don’t understand that international financial markets and international commerce works on trust and confidence. Basically, it works on policy, consistency, and who the backers are, which are all important factors. Sometimes, the importance of these factors is not appreciated by people who do not come from an economics or commerce background. The Government plans to auction broadcast telecommunication frequencies in the coming years. Do you think this is a good move? In principle, we are in agreement that telecommunication and broadcast frequencies are public property. It doesn’t belong to the government of the day, to barter in the pursuit of political objectives.  But I would be very cautious about the auctioneer. Because now, in Sri Lanka, we have very little transparency. The transparency and checks and balances brought in by the 19th Amendment to the Constitution has been removed by the 20th Amendment under President Gotabaya Rajapaksa. We have seen what a disaster the changes of the 20th Amendment had led to. For example, the recently concluded transaction regarding energy. Usually, a tender is called, for which there are bidders; normally, the controversy is about why it was given to a higher bidder, but here, it was given to an entity that didn’t even bid for the tender. Giving lip service to the market doesn’t help. There needs to be transparency and trust in the system. The Government has indicated allocations to rectify salary issues of teachers and principals. In your opinion, will the Government be able address the teacher-principal salary issue with the funds allocated? The Rs. 30 billion allocated by the Government is welcomed, even though it may not be adequate (requirement estimated at Rs. 36 billion). More funding will be needed in the coming years as more teachers enter those categories. Teachers in this country are really underpaid. It is a good investment to increase their salaries. There should be more funding allocated to train teachers. In your opinion, will the continued emphasis on road infrastructure by the Government, instead of export expansion, digitisation, and introduction of new technology, benefit Sri Lanka? The Government is on the wrong road. It is putting its money in hard infrastructure like roads and highways. The recent World Bank (WB) loan is also debt, even though interest rates are less. We need to be putting what little money we have into things where there are more direct returns, rather than returns that will come in 30 years. We need productive investment. They should have put it into education and skills and training, for the development of entrepreneurship, for innovation and technology, and in research. When you have limited funds, you have to make hard decisions. So, this Government has got it wrong. They may be focusing on road infrastructure for political expediency. Sometimes, when it is roads, you can put it where your supporters are. This trend of decentralised budgets is politicising this country, which is very unfortunate. The entire concept of planning and making decisions by civil servants have been set back over the last few decades by politicians. Today, civil servants are forced to pay obeisance to politicians with such approaches and let them make decisions. I would question if such decentralised budgets would really help the country.


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