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New taxes unlikely in Budget 2023: Shehan Semasinghe

13 Nov 2022

  • Working to get IMF approval in Dec., likely next year
  • Debt restructuring process will be done transparently
  • Exchanging data, discussing proposals with creditors
  • SOE and tax reforms key to increasing Govt. revenue
  • SOEs that eat up taxpayer funds must be reformed
  • Thankful for Opposition understanding and support
By Asiri Fernando  Sri Lanka’s biggest challenge in 2023 will be the repayment of loans and interest despite declaring bankruptcy, State Minister of Finance Shehan Semasinghe said last week, adding that the prospect of more taxes through this week’s Budget was unlikely. Sri Lanka is trying its best to secure Board-level approval for the International Monetary Fund (IMF) programme by the end of December, Semasinghe stressed, acknowledging that the island nation was at least six to eight months late in seeking assistance from the multilateral agency. He said that the Government had the political will and appreciated the understanding of the Opposition parties in pushing through unpopular economic and State sector reforms, arguing that the State would uphold its obligations to those seeking assistance from social safety nets, as the continued crisis pushes many communities into poverty and erodes the wealth of others. In an interview with The Sunday Morning, State Minister Semasinghe said that both bilateral and private creditors would be treated equally and claimed that the debt restructuring process would be transparent. Following are excerpts of the interview:   What is the status of discussions with Sri Lanka’s creditors, especially with India and China?   We have held the second round of discussions with our creditors. Basically, they are now in the stage of exchanging data and discussing the proposals. This approach is the same for all creditors, not only India and China. There is another meeting scheduled for 17 November. I think by then we [Government] will have a better assessment on what the status is.       How confident are you of securing IMF Board-level agreement for the Extended Fund Facility (EFF)? Will it be delayed till 2023? If so, by when?   At the moment, we are in the last stages. The IMF has to get financial assurances from our creditors and we are working with the authorities to get these. Our best push is to get the approval in December. We [the Government] started the process rather late, in March. The letter initiating the process was sent in March [2022], it should have been initiated at least six to eight months earlier.  However, we are trying our best to get financial assurances from our creditors. So far, from the discussions we have had, no creditor has indicated that they are not going to support Sri Lanka. Our policy – equal treatment for everybody – will apply when dealing with creditors. Comparable treatment and transparency will be followed with all creditors. Last week I spoke to the Indian High Commissioner and the Chinese Ambassador and I have updated them regarding the ongoing process. Their authorities are now working closely with our authorities. Further, the Paris Club is also working closely with our authorities. We really are giving it our best effort to obtain approval in December, because, as you know, for about four to five months now, Sri Lanka has been functioning without external resources, apart from some funds from a handful of countries. It is not easy, but we are managing the economy the best we can with all the tools we have. Interest rates are high; we would like to reduce them but, unfortunately, we are not in a position to do so. Basically, we are suppressing demand. This is not the ideal approach. But unfortunately, to manage foreign currency for the most essential items such as fuel, essential food, gas, and medicines, we need to do this.  We are confident that we will get IMF Board approval soon. If not in December, in early 2023; the IMF Board meets regularly.     Have the financial advisors appointed by Sri Lanka, Clifford Chance and Lazard Ltd., prepared a debt restructuring plan for the private creditors?   We met the private creditors in Washington, D.C. for the first time. They too had their advisors with them. The IMF also spoke with the private creditors and explained essentially the way forward. The private creditors were also of the view that we need to go for an IMF programme at our earliest. If our economy is stable, they too will benefit from it. The advisors Sri Lanka has secured to assist us are working on this too.  Our policy of equal treatment for all applies to the private creditors as much as it applies to bilateral creditors. At this critical moment, the IMF programme is the only way. I know some have other views on this matter, but the IMF is the only means at this point to build confidence to improve credit ratings and investor confidence, build creditor confidence, and reestablish financial discipline in the country. The IMF will help us to have the right checks and balances. The homegrown solutions have clearly failed; most of the decisions that led to the crisis were taken ignoring global factors. We can’t afford to make those mistakes again. Only a minority thinks that we can do it alone.   Last week, Opposition MP Dr. Harsha de Silva spoke in Parliament about the establishment of an independent budget office. How will the Government help in this process?   This is a concept that the President is very keen on and he wants to get it established soon, so there will be support from the Government. The President has also indicated to the Speaker that the committee and offices that we agreed upon to bring in good governance be established as soon as possible. The Speaker’s office had a view that there was a lack of support from the Opposition, so if the Opposition will also expedite by providing their nominations for such committees and offices, the process should move forward quickly. A meeting has been planned for today (10) headed by the Prime Minister and the Speaker on the Budget and this matter.                        We are helping with other mechanisms too. The Committee on Public Accounts is headed by an Opposition MP and the Committee on Public Finance is also led by an Opposition MP. I think that through this crisis we are going through, many lessons have been learnt. It is a bitter lesson and our people are suffering, but we may have to go through more suffering because some hard policy decisions will need to be made by the Government. But these policy decisions are being taken with the intention of economic recovery.     How does the Government plan to bring about Sri Lanka’s economic recovery?   This will be in three phases. First, is economic stabilisation. This is what we are doing with the help of the IMF. Secondly, we must plan out the recovery. Thirdly, we have to look at growth. The IMF will help us bring in policies that will make sure that Sri Lanka will not face such difficulties in the future. This kind of crisis must never happen again.   The Government has moved to lower the tax threshold, bringing more into the tax net. Doesn’t the Government have an alternative plan to increase State revenue?   The increase of tax revenue is not the only measure the Government is taking on State revenue. Taxation is only one part of it. Also, the proposed tax structure is debatable; the matter is before courts. We are awaiting the decision of the Supreme Court; it is only then that we can discuss the tax structure in detail.  We are also looking at restructuring the State-Owned Enterprises (SOE) which are eating into the revenue of the State, the taxpayer’s money. If anyone thinks that SOEs don't eat up our money, they are quite mistaken. In the SOE sector, we have appointed a committee to propose reforms and we expect to get this report soon. Of course, we can do alterations to those recommendations – if there are better ideas submitted, there is room to look at them and adopt them where necessary. SOE reforms and the tax reforms are the two main approaches the Government is looking at to increase revenue. One issue with the tax reforms is that though we increase the tax percentage and the base, there needs to be an effective mechanism to collect taxes. We need to automate the system. This Government is determined to automate the tax system; we need to reduce as much human involvement as possible and let the automation work. That will help with ease of paying tax and understanding tax and the tax net will expand. In my opinion, it is not only the tax system but most Government systems that also need to be automated urgently. For example, if you look at the welfare system, the grants that those in poverty get are all done manually. There are many complaints that despite the welfare benefits introduced by the Government, those who need it the most are not being taken care of and that unwarranted people are benefitting from them. This is happening due to the lack of automation. Therefore, the Government is working with several automation programmes with the help of several donor agencies and multilateral agencies. Automation will make the system more streamlined and easier to manage and interact with. Lastly, the Government is working on several pieces of legislation which will be safeguards against acts of corruption and malpractice in the future.   Economic experts have pointed out that one way to increase State revenue is to cut State expenditure and reform loss-making SOEs. Why hasn’t the Government prioritised this approach instead of introducing higher taxes first?   We have prioritised them both. Both are being looked at in parallel.     State sector overheads take a major portion of State expenditure. What is being done to cut State expenditure?    Yes, the Government has taken some measures regarding this, but they are long-term measures. Budget 2023 will only include necessary expenditure. The Treasury has had discussions with all ministries regarding this and instructions have been given.    The biggest challenge for us in terms of expenditure in 2023 will be the payment of interest and capital on borrowed money. That is going to be a huge shock. It will be quite a burden for the Government, despite having debt standstill. These are matters that we need to address seriously. Some people think that the economy has stabilised just because there are no queues anymore and prices are slowly coming down. That is wrong; it has not stabilised yet. There is a lot more to do. We must get the IMF programme. If we don’t, we will end up in a much worse situation than what we experienced in the last 11 months. This is why the Government has to take some serious decisions to address the situation. Most of the decisions that we have taken and will take are unpopular decisions, but, unfortunately, we have to take them to bring stabilisation to the economy. There is no other way. We will have to be very careful in State expenditure. This will be painful but is necessary. The Government has some outstanding payments which we have to honour, such as for the construction industry. Likewise we have some expenditure that is mandatory. If you look at the mandatory expenditure, it covers State remuneration, welfare schemes, and more. All of them will work up to approximately Rs. 130 billion per month. That is the minimum figure. We can’t reduce the welfare schemes; we can’t touch them with what people are going through in this crisis. The IMF has not told us to reduce them; in fact, they have asked us to maintain a robust social safety net. Many who were beyond the poverty line have dropped below it due to the crisis, so we can’t reduce the social safety net.     Is the Government planning to introduce news taxes in Budget 2023? If so, which ones will be introduced?    I think we should allow the President to announce the revenue measures, but the structures which we want to change have been announced already. I don’t think there is anticipation for further taxing and there is little room for further taxation. I think it will be controlled expenditure and revenue collections that will be enacted.     Does the Government have the political will to proceed with the relevant economic and public sector reforms? Will the Government take the necessary tough decisions?    Well, as of now, in Parliament, no matter how much they criticise the Government, I must thank the Opposition for understanding the situation we are in and pointing out alternative solutions or paths we can take. I am confident that a majority of the Opposition will not play politics at this critical juncture. We appreciate that understanding and support. I am sure they too understand that the difficult decisions, reforms, and policy changes that we are pushing for are not ones we are comfortable with either, but they are necessary. This kind of consensus in Parliament is good; it should be encouraged. As the Government, the President is keen to push through the reforms and make the hard decisions. We are ready to help him.  

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