Sri Lanka budget signals continuity, but implementation key: CCC

Nov 17, 2016 (LBO) – Sri Lanka’s budget 2017 has signaled continuity in the economic policy priorities of the government, but successful implementation should be the benchmark against which it is measured, the island’s leading business chamber said.

“Budget 2017 seeks to continue the government’s focus on modernizing the economy, inclusive growth, strengthening the middle class, and re-balancing towards an exports and private investment driven economic trajectory,” the Ceylon Chamber of Commerce said issuing a statement.

“The efforts to cut the deficit to 4.6 percent in 2017 and raise the tax to GDP ratio to 13.5 percent are laudable, albeit ambitious.”

However, they say clarifications are needed on implementation of several of the new tax measures.

“For instance new taxation of institutional unit trust investors, the removal of the Notional Tax Credit, and the move back to VAT refunds from the SVAT scheme.”

The CCC urges the Ministry of Finance to consult with relevant stakeholders fully before implementing these measures, to avoid negative fall outs.

The full statement follows

Budget 2017 has signaled continuity in the economic policy priorities of the government, following from Budget 2016, and the Prime Minister’s economic policy statements of November 2015 and October 2016. CCC observes that Budget 2017 seeks to continue the government’s focus on modernizing the economy, inclusive growth, strengthening the middle class, and rebalancing towards an exports and private investment driven economic trajectory. The CCC welcomes the proposals to strengthen education and skills, especially the proposal to enable students who do not get into state universities to study in UGC-approved private higher education institutions. This is much needed to ensure greater inclusion in tertiary education access and build a competitive workforce.

Tighter Fiscal Policy

Given that persistently high budget deficits have been a root cause of macroeconomic instability in Sri Lanka, the efforts of the 2017 Budget to cut the deficit to 4.6% in 2017 and raise the tax to GDP ratio to 13.5% are laudable, albeit ambitious. We believe that many of the tax revenue measures outlined in the Budget are attainable, if implementation is carried out successfully. The measures to enhance direct tax revenue collection, by ending some tax exemptions will help fiscal consolidation and rebalance tax collection towards a greater direct tax contribution. Especially as Sri Lanka is now more exposed to international capital markets, and is also under an IMF Extended Fund Facility programme, it is important that pronouncements on Budget deficits and tax revenues are met, in order to build credibility in the country’s fiscal management. Yet, the government must be cautious of what a tighter fiscal policy could do to aggregate demand, in the midst of tighter monetary policy as well. In the absence of robust growth, and poor performance on exports and FDI, tighter fiscal policy could douse out demand in the system.

Investment Incentives

A key recommendation in the Chamber’s Budget proposals this year, also conveyed in discussions with the Ministry of Development Strategies and International Trade, was the reforming of the investment incentives regime. To this end, we are pleased with the announced shift towards expenditure-based incentives like capital allowances/accelerated depreciation, and away from profit-based incentives like blanket tax holidays. The former has the characteristic of incentivizing and rewarding new capital infusion and new investment. Clarity on the new incentives regime would give a fillip to prospective investors, as many investors are concerned about policy consistency.

However, the continuation of business unfriendly policies like price controls; directing operational decisions of businesses (for instance, bank lending to specified sectors and singling out a specific private entity to make a donation to the President’s Fund); and encouraging more government-linked commercial ventures (e.g. a new domestic airline and a new shopping mall), will hurt domestic and foreign investor sentiment.

Consultation Before Implementation

Clarifications are needed on implementation of several of the new tax measures, for instance new taxation of institutional unit trust investors, the removal of the Notional Tax Credit, and the move back to VAT refunds from the SVAT scheme. The CCC urges the Ministry of Finance to consult with relevant stakeholders fully before implementing these measures, to avoid negative fallouts. The proposal to limit the Regional Plantation Companies (RPCs) to 5,000 acres needs careful re-consideration, as many are CSE-listed entities and this proposal will have strong implications on their business structure. Measures to promote domestic industries, particularly primary industries, must be calibrated carefully so as to not foster under-performance and lethargy due to protectionism offered to specific industries. Some of the proposals presented fall under the purview of the Monetary Board of the Central Bank of Sri Lanka, and therefore need further clarity on implementation. Meanwhile, the efforts to introduce a state-linked e-commerce and online payments platform appear misguided as it can stifle entrepreneurship in the burgeoning digital economy.

Implementation is Key

On the overall orientation of the Budget, it is encouraging to see elements of the two partners in the coalition government coming together in this Budget, which bodes well for the implementation of a realistic economic reform agenda. Implementation is often the ‘Achilles heel’ of successive Sri Lankan Budgets, and therefore successful implementation of Budget 2017 should be the benchmark against which the Budget is measured. In fact, several proposals announced in Budget 2016 went unimplemented over the past year, and many of these proposals were repeated or reiterated in this Budget as well. In this context, the CCC welcomes the Finance Minister’s proposal to set up a committee comprising of members of the private and public sector to ‘oversee the implementation’ of Budget 2017, and looks forward to playing a meaningful role in this exercise. We also suggest that a Plan of Action is formulated to implement and Ministries are given this plan with clear timelines and milestones.