By Chandeepa Wettasinghe
The upcoming budget in November will include major revisions to the entire existing economic system, the country’s Finance Minister said this week.
“We will have a very simple system going on. It will give new thinking to the process,” Ravi Karunanayake said at the ‘Sri Lanka 2020: Potential for Investment’ forum organized by the Ceylon Chamber of Commerce’s Malaysia Business Council.
He said that the taxes will be simplified and broad based to increase government revenue.
Taxes in 2014 amounted to Rs.1.05 trillion or 10.7 percent of the gross domestic product (GDP), falling from 11.6 percent in 2013. Advanced economies get around 36 percent of their revenue through taxes.
“At this particular moment, there are many people calling and asking ‘will that tax go off and will this tax come on?’ Yes, many will go off, some will come in. But that some will bring in more than the many that was there before,” Karunanayake said.
He noted that capital expenditure will be made in a responsible manner to derive income in the future, while re-strategizing failed investments of the past regime.
He added that the banking sector will be subjected to vast changes, but that this will not be done through repressive legislation but through friendly requests to ensure a business friendly environment.
“There will be unbelievable changes. The banking sector is one, which has been shielded constitutionally. They are a protected species. They must be made to play the role; to bank. To ensure that they take the risk and not pull out the umbrella only when the sun is shining,”
Karunananyake said that bankers should assist in the country’s development instead of just private sector balance sheet development.
He mentioned that industries, which were closed off for foreigners through various mechanisms will be removed as well.
“Even what is restricted now will be opened up,” he said.
He added that targeted subsidies will be provided to the agriculture sector to facilitate commercialization of the process, and that foreigners could look at investing there for fair returns. Currently 30 percent of the labour force is in agriculture contributing just 10 percent to GDP.
“Agriculture needs to be taken from 10 percent to around 14 percent through commercialization,” he said.
He added that the restricted land laws will be reviewed, with investors who bring in investments above a certain limit being granted freehold land.
Karunanayake added that the customs operations will be made convenient through a ‘single door’ operation with advanced scanning facilities in April 2016.
Influx of funds
A massive influx of funds has been observed from Sri Lankan bank accounts abroad after the government announced a blanket amnesty, Karunanayake said.
He made the announcement early this month saying that Swiss banks had asked Sri Lankans to close their accounts in the Swiss banking system, and called on Sri Lankan nationals across the world to deposit their money in Sri Lanka with no prosecution or any questions asked.
He had also said that the funds would enjoy favourable interest rates compared to the near-zero interest rates in those countries.
“Today we could see that it was not only a call for Switzerland. That it was an open call and I’m sure there are many bankers who have seen that there has been a tremendous inflow from this open platform,” Karunanayake said.
Karunanayake in the past had alleged that the previous regime had stored a massive amount of black funds in countries such as Switzerland, Dubai and the Seychelles.
When the media inquired, Karunanayake said that no questions would be asked if those funds are brought in to Sri Lanka as well.
However, currently, intensive investigative action is believed to be taking place against an alleged Dubai account of a son of a VVIP in the past regime.
Karunanayake said that the amnesty was provided to improve domestic investments into public infrastructure, which are currently making up just 17-18 percent of GDP of the 35-40 percent of GDP required.
Karunanayake said that the upcoming budget will look at improving this ‘open and genuine’ inflows system.
He said that other countries in South Asia will also be allowed to bring in funds through the system, making Sri Lanka a ‘mini financial hub’.
Deficit to reach 6.9%
The budget deficit this year is likely to reach an unanticipated 6.9 percent of the Gross Domestic Product, Karunananyake revealed.
“The budget deficit will be in the range of 6.8-6.9 (percent),” he said.
Karunanayake’s interim budget on January 29 projected a budget deficit of 4.6 percent or Rs. 499 billion, revising from Former President Mahinda Rajapaksa’s budget deficit of 4.8 percent, or Rs.521 billion.
However, the International Monetary Fund last month projected the budget deficit to increase to 5.5 percent.
When Mirror Business inquired of the matter from Karunanayake early this month, he said that the IMF did not have a grasp of the ground realities, and defended the 4.4 percent figure.
Even though Karunanayake had at that moment been unable to point out the budget deficit for the first 9 months of the year, later reports quoted him saying that the budget deficit had exceeded Rs.533 billion or 4.9 percent for the first 6 months of the year.
This week he said that the cause was the expenditure approved by the past regime, as the new regime since January has expended less than the government revenue. This is partly due to the fall in oil prices and the reduction in scope of some infrastructure projects.
“But we see that there are certain expenditures we could not see when we took over. Expenditure which was signed without cabinet approvals were running freely roughly in the range of about Rs.280 billion,”
Even though Customs and Excise revenue have increased since January, the revenue targets of the interim budget could not be met either, as an additional Rs.80.3 billion was to be drawn up from one-off retrospective taxes, which are still being debated, having been blocked in parliament throughout the year.
The interim budget had outlined populist expenditure measures amounting to Rs. 95.45 billion, which were enacted promptly, and are increasing the entitlement mindset and reducing productivity in the country.
However, Karunanayake promised that the new government will increase productivity through innovation and added that labour laws require reforms.