Nov 22, 2015 (LBO) – The Ceylon Chamber of Commerce has welcomed the Budget 2016 for its measures to boost private investment and promote inclusive economic growth. The statement is reproduced below. Budget 2016 has shown a commitment to enhancing private sector participation in the economy through PPPs, begin to rationalise state expenditure, undertake some much needed reforms in pensions, subsidies and welfare, and renew focus on the competitiveness of agriculture and small enterprises. The Chamber sees reasonable congruence between the policy statement by the Prime Minister on 5th November and this Budget, indicating a consistent economic vision for the country. The Chamber also observes that the revenue targets contained in this Budget are ambitious, and achieving them will be critical to build confidence in the fiscal consolidation effort. Private Sector Orientation The Chamber acknowledges that many of the areas that the Chamber has advocated for through its recently launched ‘10 Principles’ are indicated in this Budget. One of the key features of Budget 2016, which the Chamber sees as a positive step, is the greater involvement of the private sector across a range of economic activities. This includes, inviting private sector participation in railway services for goods and tourism; a role for private investment in infrastructure projects; private management of Export Processing Zones (EPZs); and private investment in tertiary education and vocational training. These will open up new spaces for firms and bring in greater efficiencies to the economy, without burdening the state. Some critical areas impacting the investment climate, which the Chamber had been advocating for some time, have also been resolved in this budget. Most notably, the removal of the tax on land leases by foreign nationals and allowing freehold if certain investment criteria are met, will encourage FDI. On the latter, however, careful attention must be paid to not allow discretion in granting of the freehold rights as discretion on the part of public officials on the size and type of investment could open up opportunities for rent-seeking. Meanwhile, the opening up of unused and underutilized state land for private investment is a welcome move as access to land has been consistently cited as a constraint in Sri Lanka’s investment climate. The easing of regulations on inward remittances and proposed reforms to make exchange management more practical are also positive for investment. The Chamber also welcomes the principle of the state exiting its shareholdings in certain non-strategic SOEs and listing them on the CSE; this can bring in much needed accountability and improve business-orientation. Taxation The Chamber welcomes the reduction in corporate tax rates, as it helps expand overall private sector activity. Simplifying tax returns and simplifying the overall tax code can encourage compliance. The unique digital identifier can be used to enhance compliance and track tax-payer transactions. There are concerns around the ability to maintain a lower tax regime in the event that the tax base does not expand as envisaged. The estimated 38% increase in revenue is ambitious, considering trends in the past – 7.7% increase in 2013 and 5% in 2014. Sri Lanka is now more exposed to international capital markets than before, and global investors and ratings agencies will be closely watching the fiscal consolidation effort. A slipping on the budget deficit will no doubt impact credibility. On the direct-indirect tax ratio, there continued dependency on regressive indirect taxes and this appears inconsistent with the Prime Minister’s policy statement. Budget 2016 estimates show that next year too the ratio will remain at roughly 80:20 rather than a relative shift towards direct taxation. Digitalization The Chamber also welcomes moves towards greater digitization of the overall economy and encourage more transactions to take place via formal banking channels. The proposed voucher scheme for school uniforms, together with the introduction of a new unique digital identifier, are important steps towards achieving greater efficacy of welfare transfers to citizens and preventing leakages. Over time, the government should extend this to other government payments, , as electronic administration can bring in accountability, continuous monitoring, Any government payment. Agriculture The nature of the Budget 2016’s focus on the agriculture sector marks a distinct and important shift. A significant move is the change of the fertilizer subsidy, which was fraught with problems, and the granting of a direct cash grant to farmers to buy inputs of their choice. Rather than previous strategies of ad hoc handouts to boost the rural agricultural economy, which has had limited success, the focus of the Budget to promote agri-entrepreneurship, value addition, technology adoption, and as well as reduce post-harvest losses by setting up cold-storage warehouses, are positive steps. Agriculture sector, while employing 30% of the workforce, produces less than 10% of GDP. The new measures announced can provide the opportunity to transform this. Education and Skills The quality of Sri Lanka’s school education has been a consistent challenge, and is eroding the country’s competitiveness. Budget 2016’s measures to increase investment in education (from 2% to over 6% over GDP), to invest in upgrading facilities in schools including science and electronics laboratories, are positive steps. Permitting private sector participation in higher education can expand the number of students able to follow tertiary education, while the conditions regarding providing 10% of seats to public school leavers, can address equity concerns. The efforts to boost vocational and skill training contained in the Budget will also contribute to strengthening workforce competitiveness. This effort will complement the incentives granted for enterprises locating in lagging regions, as a key constraint faced by businesses locating in these regions is the lack of available skilled workers. Exports and FDI In order to achieve export targets of US$ 50 billion and beyond, Sri Lanka must take advantage of the trade-investment nexus; attracting export-oriented FDI. For this, the investment climate matters. While the export sector received little special mention in Budget 2016, other proposals to promote a more conducive business climate can have a positive effect on exports via enhancing FDI. These include, proposals to simplify the tax system and cut corporate taxes; easing land regulations; setting up a new Strategic Development Agency and International Trade Agency; a New Investment Act; lowering tax rates; removing dividend taxes for foreign investors; liberalizing tea imports to enable a ‘tea blending hub’; introducing a five day work week; and allowing private sector management of zones. Along with this their must be a greater focus on expanding access to markets through forging trade agreements, broadening the product base through technology advancement, and mobilizing Sri Lanka’s commercial officers overseas to promote trade. The Chamber also recommends going beyond the Budget 2016 proposal of allowing private management of EPZs, to allow private investors to develop zones within other existing industrial estates (e.g. IDB). Areas to Work Out The Chamber draws attentions to some specific areas that will need a relook before implementation. Regarding the 50 licenses for duty free importation of gold, the Chamber urges the government to auction these licenses to prevent corruption and discretion. The stipulation that R&D tax deductibility is only possible if the research yields development does not appreciate the process of how innovation takes place, and needs to be revised. Stipulating that banks must cease leasing activities within 6 months needs to be revisited in order to strike a better balance between government policy motives and industry realities. Meanwhile, in developing the Colombo International Finance Centre it is important to build expert capacity and international confidence in the country to make the project a success, and the timeline for implementation (1st April 2016) appears too ambitious. Focused Implementation The Budget 2016 has announced a tackling of issues that are often seen as politically difficult; ranging from public sector pensions, to fertilizer subsidy and welfare transfers. Yet, these are critical and much-delayed reforms, and the Chamber encourages the government to proceed boldly on these. We also urge the government to consult with the private sector in drafting the proposed new Acts and structuring the new trade and investment institutions. The overall credibility of a budget, and the ability of a government to deliver on programmes announced in it, necessarily hinges on raising the required revenue. Therefore, it is vital that the government achieves the revenue increases envisaged; fiscal slippage will have serious macroeconomic implications and affect the business climate. While the direction of the Budget is broadly positive, it needs a focussed implementation strategy with specific milestones. The Chamber is keen to see the success of this budget, and will support the government by engaging in a participatory approach to ensure effective implementation.