Picking brains on Budget 2021

• Top professionals and business leaders share key insights at CIMA, ICC Sri Lanka and Daily FT post Budget webinar

By Darshana Abayasingha

ICCSL Chairman Dinesh Weerakkody

Budget 2021 attracted plaudits and a few brickbats, with much of the private sector seemingly nodding approval to policy consistency and encouraging both foreign and local investments. However, purists raised reasonable concern with respect to meeting revenue targets and some of the methodology adopted to formulate the Budget. 

The post-Budget forum hosted by CIMA Sri Lanka and the International Chamber of Commerce Sri Lanka (ICCSL) together with the Daily FT last week lent interesting insights from some champions of industry and policymakers.

State Minister Ajith Nivard Cabraal set the stage detailing the Government’s rationale behind its proposals, and reiterated the administration hopes to keep tax policy consistent in its effort to achieve 5.5% GDP growth next year and 6.5% thereon. Consistent policy would appeal to investors, he said, and provide assurance that even during trying times the Government would make room for businesses to thrive. More importantly, Cabraal stated the administration hoped to adjust its debt mix with a much stronger bias (60%) towards domestic borrowing. 

The balancing act

“We have shown very clearly that we would like the Colombo Stock Exchange to be one of the drivers of sourcing capital, and make sure capital markets stay buoyant. For a long time, we have had about 250 companies listed on the Stock Exchange and the number is still around that. We want to make the Stock Exchange robust. By 2014, the Colombo Stock Exchange was positioned to be the organ through which around 70% of the capital of the country could be accessed. By 2020 it was positioned to have a market capitalisation of about 75% of GDP, but unfortunately we couldn’t do that. I also would like to see more debt being listed. In lots of countries, corporates list their debt more than shares and we need to encourage that. The Colombo Stock Exchange and the Securities Exchange Commission will be requested to play their role in a more holistic manner,” Cabraal said. 

The State Minister also spoke on ensuring stable macro fundamentals at benign levels, with special emphasis on maintaining a stable rupee. “As much as Rs. 1.8 trillion was added to our debt by the end of 2019 only because the rupee depreciated during those years. That’s a new addition to debt with no corresponding value on the other side of the equation. During COVID-19 we took the extraordinary steps of even curtailing imports and we are gradually relaxing that. That step was taken to ensure the rupee doesn’t depreciate and for our debt management. Our macro fundamentals have to be managed, so enterprises will have an easier passage to do business.”

Touching on public sector reforms, Cabraal averred this need not necessarily mean simply cutting down jobs and reducing benefits, and it could even come in the form of enhanced accountability. He pointed to the responsibilities gazetted for each minister as a step in this direction. The Port City will provide multiple new opportunities for the private sector for investment and employment, whilst striking an effective balance in a people-centric economy, he claimed.

“We are seeking a partnership between people and the Government. This is an important time for all of us where we will reinvent and reimagine ourselves, and we need to actually walk the talk and reposition ourselves in this new normal. Life and businesses will change completely even in the future after COVID-19,” Cabraal said.

Head in the Sand

Joining the discussion, former Assistant Governor of the Central Bank of Sri Lanka, Anila Dias Bandaranaike, however posed some concerns with respect to revenue. She added that whilst there was great emphasis on improving administration of tax through digital solutions, very few connectivity programs of the Government had borne fruit.

“There is a need to build confidence and the State sector needs to be streamlined. Revenue remains a concern, and there is over-estimation of numbers in terms of revenue. The government is in denial. I can’t decide if it is fooling itself by playing ostrich, or parading the emperor’s new clothes and trying to fool others. This Budget for me shows no vision to tackle the new global realities. It’s like it was written before COVID and are expecting the pandemic would disappear. There is also not enough money on Health in the Budget. The Budget numbers are inconsistent and it was failed rhetoric. We need to grow agriculture, but not in the way it has been said here which has been seen in the past. We will muddle along minus the pre-COVID safety nets. I see no light at the end of this tunnel, and I am sad I have to be very negative,” Bandaranaike stated. 

SL now an easy sell

GRI Tires Managing Director and Export Development Board Chairman, Prabhash Subasinghe, was far more optimistic with his views. “The Budget is not costing us any more money than it did before, and that’s good for the people of Sri Lanka. I look at our business, is it going to cost us more money, and the answer is no,” he enthused. 

Subasinghe said that all taxes had been maintained the same and this addressed what was one of the biggest complaints of the private sector, pointing out the Government had openly announced there would be five years of stability in terms of taxation.

“I look at this Budget in three different ways. It’s focused on investments, which we desperately need; second, it is built on trade and building business, and third it’s built on exports. I think it’s a really exciting story that a budget can focus on these really important aspects for Sri Lanka. We need to go to the world and give a convincing story for them to come invest with us, and today we have that story and we can offer something no other country in Asia offers, which is a 10-year tax holiday. It is arguable, but we need to pitch something that is different. I think it’s a game-changer for Sri Lanka. We need knowledge and capital in this country and for that we need to bring in investment,” Subasinghe averred.

The EDB Chairman pointed out that Sri Lanka’s export sector had done well in 2020 despite the pandemic, and global trade had declined only about 10%. Sri Lanka’s exports have held steady despite some disruptions to its supply chain, and the Budget provides further impetus to the export sector. However, he stressed the need to revamp Sri Lanka’s export basket as it has more or less stayed the same for the past 25 years. We also need to increase exports by at least 25 to 30%.

Subasinghe was highly supportive of measures proposed by the Budget to encourage multinationals to manufacture in Sri Lanka for export. He also underscored the need to make it easier for smaller businesses to import items to add value to local products for export as export diversification is essential. Access to new markets are also pivotal for expansion as Sri Lanka is over-dependent on the US and Europe, and there should be focus on new markets and regions such as ASEAN, he added.

The business of tax

Subasinghe’s views were echoed by Board of Investment Director General, Sanjaya Mohottala, who said this was one of the best budgets presented in the recent past. “In terms of attracting Foreign Direct Investments this sets the trend. Investors always ask if we will walk the talk. We can go and sell Sri Lanka in the best light with a good narration, but they will always compare us to Malaysia, Indonesia or Vietnam and India. People worry about policy consistency. There are many challenges before us, but next year is the year we must lay the foundation to come out strongly. Every country is putting their hands up to attract the changing global investor landscape. It will change the fabric of the country if we can attract them due to the technology and expertise we can bring in, and these are beneficial to us even with tax breaks,” Mohottala stated.

KPMG’s Principal of Tax and Regulatory Division Suresh Perera discussed some of the new tax structures in the Government’s Budget proposals. Touching on the new Special Goods and Services Tax for five sectors – Alcohol, Tobacco, Vehicle Imports, Gaming, Telecommunications – he said it remained to be seen if this would be a tax on turnover or value addition. 

“What will be the timeline for introduction, as it would require a serious effort? Administrative capability, plus, infrastructure and all companies need to change their internal systems to suit this.” But there are benefits to be had if it can be done successfully, he said. A similar change had taken place in India recently. However, the hottest topic will be the proposed new COVID-levy of 0.25% on turnover of all businesses with more than 50 employees. Such measures are already visible in many markets, Perera said, and it will help retail and wholesale sector employees. But, will this apply to companies that qualify for tax holidays, what about companies that make losses and those earning low margins? Plus, will this be a one-off tax like the recent Super Gains Tax or a recurring tax, Perera wondered.

Some jugglery took place

Former Central Bank Deputy Governor W. A. Wijewardena was a little sceptical of some of the measures proposed in the Budget and manner in which it had been compiled. He responded to a query on bridging the budget deficit with local borrowings as follows:

“There has been a little jugglery done with public finances in the Budget 2020/2021. Because the outstanding bills paid in 2020 have been passed on to 2019. And the bills that are to be paid next year have been passed onto this year. So, the Government of Sri Lanka does not adopt an accounting system based on accruals, it is based on cash flow. Therefore, this jugglery has been done. Therefore, the deficit in 2019 has gone up to some 9% now, and 2020 has come down to 7%. What has happened therefore is an increase in the deficit in 2021. The implication is since the Government will borrow from the domestic market the fund availability in the domestic market will be very limited, also because of the low interest rate regime where people won’t deposit much. Our total national savings is about 23% of GDP. Out of that is the government going to get the bigger share? Naturally then the money available for the private sector would be much less,” Wijewardena said.

With respect to the Government adding Rs. 2 to remittances of foreign workers, Wijewardena said the Government of Sri Lanka would have to compensate commercial banks for paying that amount to the people bringing in that money. As a result, it will be a cost to people like us who pay taxes, he said.

Roll over and not play dead

Prior to that ICCSL Chairman Dinesh Weerakkody asked State Minister Cabraal how the Government proposed to reduce the budget deficit should COVID-19 persist. 

“Expenditure includes loans that need to be rolled over. We would make sure the overall broad macro fundamentals are kept in reasonable shape, and that we can roll over at rates that are lower than what’s been in the past. It’s much easier to handle debt in our own currency and we need to move gently toward that area. We are keen to have consolidation in the finance sector and lesser NBFIs. It is time for us to shrink those numbers, it will have to be driven fast so we can have a stronger sector,” Cabraal said.

The State Minister added that Sri Lanka had a lot of space in its economy to generate growth, including multiple Government projects that were lying dormant and not performing to potential, which could be tweaked. The Government hopes to generate activity in these projects by troubleshooting them and unlocking their potential.

Daily FT Editor Nisthar Cassim posed the question to Cabraal as to why he kept saying we had no need for the International Monetary Fund (IMF).

“What will they say and what will they do? We are taking steps in a holistic and responsible manner. I think sometimes we need to take responsibility for our decisions ourselves, and we do not need to be eternally told by someone what to do. We know and are doing what is best for the country. We have a plan of action, which is very clear and we are articulating that and telling investors what it is we are doing. We have shown in the past we can deliver on our promises,” Cabraal replied.

The travel factor

Tourist Hotels Association of Sri Lanka Chairman Sanath Ukwatte called it a progressive budget that encourages local entrepreneurs moving away from the traditional practice of handouts. It encourages investors to invest, he said. He noted that the Government had identified tourism as an industry that could support Sri Lanka’s growth, noting that it would be a game changer under the right conditions. He noted the positive measures taken which supported the sector and enhanced competitiveness until March before COVID hit. 

Whilst welcoming measures to extend the debt moratorium for the sector till March next year, Ukwatte said the industry had expected a little more in terms of wage support system. “We hope the Government would consider that opportunity to safeguard jobs in the industry, because with no income it is difficult to maintain and we need to stabilise their livelihoods,” he said. A grant or concessionary loan of Rs. 1 billion a month for six months would be welcome, he added.

Telecommunications Regulatory Commission Director General Oshada Senanayake remarked the Government’s Budget proposals had moved aside impeding tax regimes to support further expansion of infrastructure and funding. He also noted the support provided to encourage local manufacturing, pointing to telecom towers and technology, stating Sri Lanka had been exporting to the Middle East when it could focus on similar operations here at home. The Government has understood the core underpinning elements that have to be addressed in this Budget, Senanayake said.

The theory in practice

Accordingly, Budget 2021 presents many positives with a sprinkling of questions – some serious ones perhaps. Revenue streams is the primary concern expressed by many, and it remains to be seen how the Government and its machinery will deliver on this aspect. Former CBSL Deputy Governor Wijewardena attributed modus operandi as below:

“The present Government doesn’t believe in the monetarist approach to monetary policy. Because the monetarist approach to monetary policy is if you keep the inflation rate low, it will give incentives to all others to do long-term planning and make investments. That is the practice adopted by all the Governors heading the Central Bank prior to the present Governor. The present Governor and the people of the Ministry of Finance call themselves Modern Monetary Theorists (MMT).

“In Modern Monetary Theory what is accepted is, for example you can go for a tolerable rate of inflation… say 20%. And they say people don’t die at 20%, but people will live if you print money and hand over that money to them through Government projects and Government expenditure programs; then they will live. Therefore, the presentation in the Budget was in fact… in a different way they have come up with the MMT view of monetary policy and they want the CBSL to do away with the inflation targeting policy that has been accepted as the policy framework in CBSL in 2016, and go for a certain rate of inflation, say a tolerable one of 12% and then print money up to that level and allow the economy to prosper. The view of the Modern Monetary Theorist is that once the supply is improved and when the new supply comes to the market, then there is an increase in the total supply and as a result the initial inflationary tendencies would die out automatically on their own. So, if you can bring about prosperity to a nation by printing money, and if the monetary system itself can take care of the macro-economic imbalances, then Modern Monetary Theorists must feel that’s the way to do that.”