The first budget of Sri Lanka’s “unity” government, presented to parliament by Finance Minister Ravi Karunanayake last Friday, will impose a series of austerity measures.
The budget is in line with the “economic policy statement” delivered by Prime Minister Ranil Wickremesinghe to parliament on November 5. Those measures included the commercialisation or privatisation of state-owned enterprises, the cutting of price subsidies and greater tax rationalisation.
Karunanayake gifted himself a talking point by lowering the Special Commodity Levy imposed by the previous Rajapaksa regime. Potatoes, large onions, infant milk powder, sprats, dhal, chick peas, canned fish, kerosene oil, cooking gas and several other essential items will become will become affordable and less costly.
Karunanayake began his budget speech by highlighting the need to slash public spending. “The time has come to critically analyse and evaluate the expenditure needs of the line ministries and departments to rationalise unnecessary expenditure,” he declared.
Proper targeting is the new mantra. So the government wants to ensure aid to “those who actually require assistance.” A network headed by village officers will decide “who actually need to be included in social protection schemes.” The present price subsidies for fertiliser will be replaced by fixed grants of 25,000 rupees per hectare.
The Sirisena government proposes to abolish public sector pensions for new recruits from next year. Instead a contributory pension scheme would be launched. Karunanayake justified the measure, saying: “The pension bill has increased by 170 percent during 2005–2014 period requiring appropriate actions to manage the continuous increase.” .
The new budget has increased indirect taxes, which constitute 80 percent of the government’s tax income.
Liquor and tobacco will attract a 25 percent surtax. The Value Added Tax (VAT) for services will go up from 11 to 12.5 percent. The Nation Building Tax (NBT), which is applicable on all imports, manufactures and services, including wholesale and retail trades, will be doubled from 2 to 4 percent. The Ports and Airports Development Levy (PAL) on all imports will be increased from 5 percent to 7.5 percent.
As a part of the moves to privatise government owned companies, which have become a drag on the cash- strapped economy, the finance minister proposed the establishment of a Special Purpose Vehicle (SPV) to boost private investment in government-owned entities such as Norochcholai coal-fired power plant.
The rates for corporate and personal income taxes have been “simplified” to two bands of 15 percent and 30 percent. Apart from gambling, liquor, tobacco, banking, financial services and trading, all other business sectors will be taxed at 15 percent—down from the previous rate of 28 percent.
The government has also removed restrictions on foreigners owning land and withdrawn the tax for foreigners on leasing land. It has also removed income tax for non-citizens on dividends and allowed any bank account to provide for foreign investment. Karunanayake also eliminated mansion tax on luxury condominiums, levies on luxury and semi-luxury cars and a tax on corporate super profits.
Ceylon Chamber of Commerce has welcomed “the 2016 Budget for its measures to boost private investment and promote inclusive economic growth.” It demanded the strict implementation of the pro-investor proposals: “While the direction of the Budget is broadly positive, it needs a focused implementation strategy with specific milestones,” its statement declared.
The government has allocated an unprecedented Rs 306 billion ($2.2 billion) to the armed forces and police the finance minister said that the number of police stations would increase from 428 to 600.
By all accounts this is an austerity budget with an eye on FDI. It seeks to reduce the fiscal deficit from the current 6.8 percent of GDP to 3.5 percent by 2020.
Minister Karunanayake has few options since exports have slumped from 33 percent of GDP in 2000 to 14 percent in 2014.
The government will need to knock at the IMF doors for help to avert an impending balance of payment crisis. The bail out is pegged at around $ 4 billion.