Interim Budget Speech – 2022

Honourable Speaker, 

The Interim Budget is being presented to the Parliament, in order to prepare the basic foundation for changing the economic trajectory of our country. This is basic to the formulation of a national economic policy in accordance with the new world order. Based on this foundation, the Budget for the year 2023, will initiate the process of creating a new economy. For the process of creating a new economy, I plan to present a comprehensive set of proposals in the Budget 2023.  

 In presenting the Interim Budget, I wish to draw your attention to four aspects. 

 

 

 1.1 On many occasions, I have pointed out the extent and depth of the economic crisis that we are facing. We have not fallen into such an economic abyss in our recent history. Some people in our country do not yet have a real understanding of its severity. When pointing out the difficulties and hardships, they are viewed with sarcasm. They think like crabs that happily lay in the water that is on the fire, until it reaches boiling point. However, there are also those among us who think in a more responsible manner, having understood the gravity of this situation, and resolutely seek to battle in dousing the fire.  

 

 

2.1 It is a widespread slogan these days to claim that the country has deteriorated for 74 years after independence. Those who engage in chanting these slogans, earlier said that it was the colonial rulers who destroyed the country. This is the reality of slogan-led politics, they put forward slogans at different points in time for their own benefit. Engaging in rhetoric and politicalized economic policies for their own benefit rather than the country, are the main reasons for the collapse of our economy. 

2.2 Due to these short-sighted economic practices, the country’s progress has been hampered from time to time. Many of those setbacks occurred in the name of the citizens who also accepted those policies without any criticism. 

2.3 From the time the Government nationalized businesses, most of the tax revenue of our country has been spent to cover their losses. Funds which have to be utilized for the necessities of the community, are being wasted on keeping these companies afloat. Government should be formulating policies and implementing them. However, presently the Government does everything and the people also expect such from the country’s administration. 

2.4 We have not been following appropriate policies, not only in relation to state enterprises, but also in attracting foreign investments. Continuously there has been no proper use of the nation’s resources, that too in the guise of seeking to protect state assets.  

 

 

3.1 In order to solve this economic crisis, one of the basic tasks that we need is to extricate from our traditional political perspectives and impartially appraise the reality of the ground situation in the context of the global environment. 

3.2 I wish to quote a recent statement made by Mr. Sunil Handunneththi of the JVP “The Government should make policies. The Government does not have a role to engage in commercial ventures.” 

3.3 If we can nourish our minds with creative thoughts, according to the current trends of the modern world, then we can solve the economic crisis. 

 

 

4.1 This crisis will not be solved by accusing one another, nor by faulting the past. It can only be solved by adopting short- and long-term plans. 

4.2 In this context, we are now adopting the short-term measures. Negotiations with the International Monetary Fund (IMF) have successfully reached its final stage. Discussions on debt restructuring will be held with the main countries that provide loan assistance to our country. The United Nations in collaboration with leading international organizations, is launching a programme to ensure food security. The process of providing daily needs like gas, electricity and fuel without a shortage has been initiated. Schools have opened, and the universities are commencing their academic activities.  

4.3 All this reflects that, we are on the correct course in the short term for recovery. 

4.4 However, we cannot be complacent. We should prepare a National Economic Policy for implementation continuously at least over a period of 25 years. As I mentioned at the beginning, this Interim Budget forms the basic foundation for the National Economic Policy, which is envisaged to be established through the 2023 Budget. 

4.5 This Interim Budget speech, the IMF agreement and the Budget 2023 will set the framework for Economic Stabilization and Revival. Within it, we will set the Road Map.  

4.6 Once the discussions with the IMF are concluded, I expect to provide the information on the same to the Parliament.  

4.7 We briefly discussed the economic crisis, the cause of the economic crisis, the solution to the economic crisis and the method of solving the economic crisis. Now, I would like to present the Interim Budget and its proposals for your attention. 

 

 

5.1 Our fiscal stabilization programme envisages government revenue increasing to around 15 percent of GDP by 2025 from the 8.2 percent of GDP as at end 2021.  

5.2 The government is targeting a primary surplus more than 2 percent of GDP in 2025 and expects to improve upon this level thereafter.  

5.3 We aim to reduce public sector debt from around 110 percent of GDP as at end 2021, to no more than 100 percent of GDP in the medium term.  

5.4 It is expected that inflation will be brought back under control to a mid-single digit level in the medium term.  

5.5 In line with this, interest rates are also expected to reach a moderate level gradually. 

5.6 Once macroeconomic confidence is re-established and foreign exchange reserves are replenished through foreign financing, the adverse pressure on the exchange rate is also expected to abate. 

5.7 With the implementation of a series of growth enhancing structural reforms, the medium-term economic growth is expected to return towards 5 percent. 

 

 

6.1 The Interim Budget includes the provisions to accommodate the policy package introduced in January 2022, provisions for strengthening social safety net programmes, additional cost due to increased interest payments in 2022, receipts of foreign assistance through repurposed projects by the World Bank and the Asian Development Bank (ADB), provisions for financing obtained through the Indian Line of Credit and increased cost of fertilizer subsidy, among others.  

6.2 As I promised earlier, we have directed around Rs. 300 billion out of capital expenditure and less priority spending allocated in the original budget 2022 for above purposes, including the provision of relief to those who are affected by the economic crisis.   

 

 

7.1 A number of tax reforms pertaining to Income Tax, Value Added Tax (VAT), Telecommunication Levy and Betting and Gaming Levy have been already approved to be implemented. Some of these tax proposals have already been implemented. 

7.2 In addition, the VAT rate will be increased to 15 percent from the current rate of 12 percent with effect from 1st September 2022. 

7.3 Most revenue proposals introduced in May 2022 will be effective from 1st October 2022.  

7.4 The implementation of these proposals will help increase the revenue. It will enable to gradually reduce the quantum of monetary financing for government expenditure.  

7.5 The revenue from the above proposals is also included under the revenue estimates presented in the amendments to the 2021 Appropriation Act.  

7.6 In addition, it is expected to present new revenue enhancing proposals aiming at Budget 2023. 

 

 

8.1 In our efforts to increase the revenue, tax administration must play a pivotal role in enhancing the tax collection efficiency, strengthening tax compliance and preventing tax avoidance. 

8.2 In addition to the already existing requirements, I propose to introduce compulsory tax registration for all residents who are above 18 years of age without considering their annual income and tax-free thresholds.  

8.3 The government is committed to implement the recommendations in the Final Report of the “Presidential Commission of Inquiry into Sri Lanka Customs”. This will strengthen corporate, administrative, and operational processes of Sri Lanka Customs to discharge its responsibilities effectively and efficiently.  

 

 

9.1 Measures will be taken to enhance non-tax revenue, including royalties received for government assets. I also propose to take actions to attract foreign investors and/or technology holders to establish joint ventures with Sri Lankan partners for industrial investments with advanced technologies to ensure better utilization of our mineral resources and increase value addition without jeopardizing the interests of the national economy and the sustainable use of resources.  

 

 

10.1 At present, measures are being taken to develop a more prudent and evidence-based prioritisation mechanism for capital expenditure projects. Funding will be channelled to priority sectors such as education, healthcare, public transport, public service digitisation, and social protection. 

10.2 The effective expenditure management needs better and strong supervision as well. Hence, I propose to introduce required laws to establish a system like Inspector General (IG) in the USA, tasked with making sure government expenditure system is working well and in the way it is intended. The IG will be strongly empowered and will actively engage in protecting the integrity of the government by detecting and preventing fraud, waste, and abuse in government institutions.  

10.3 A comprehensive study of movable and immovable properties, including government owned buildings, lands and vehicles will be conducted with a view to optimise the utilisation and to identify potential real estate for income generating activities.  

10.4 Consolidation of identified Local Government Authorities 

 There are 341 Local Government Authorities currently operating in the country consisting of 24 Municipal Councils, 41 Urban Councils and 276 Pradeshiya Sabhas. While there are local government authorities which have ample revenue streams, there are also local government authorities which do not have sufficient sources of revenue. Therefore, in order to provide a more efficient public service and to facilitate efficacies in administration, I propose to merge selected Pradeshiya Sabhas with a Municipal Council or an Urban Council adjacent to them. 22 Pradeshiya Sabhas have been selected for this programme as the initial step. Details are given in the Annexure VII. 

In order to making services to be efficient and easier to the public, all the local government authorities should arrange to offer online services to collect the related revenues without any delay. Accordingly, the online revenue collection programme should be implemented in all local government authorities before the end of 2022.  

10.5 It is important to review the activities of the project offices and project units that have been established for various purposes as these involve significant number of staff and high amounts of payments. Hence, I propose to appoint a committee to review whether the intended purposes of such offices and units have been met and whether it is necessary to continue such entities and submit recommendations to the Cabinet of Ministers within a period of 3 months. 

 

 

11.1 As a part of efficient expenditure management, I propose to rationalize the number of government employees. Already, we have allowed those who are willing to take no pay leave for 5 years or so and go abroad or engage in educational activities in the country.  

11.2 It has been observed that there has been increasing unrest among unemployed youth as the government had decided to raise the mandatory retirement age of public sector employees to 65 years and that of semi-governmental employees to 62 years. Besides, it has also been reported that the increase in the retirement age has restricted the promotional opportunities available for many public sector and semi-governmental employees.  

 Accordingly, it is proposed to reduce the retirement age of public sector and semi-governmental employees to 60 years. Those who have been employed beyond 60 years of age at present in the government and semi government sectors will be retired as of 31.12.2022.  

11.3 The Director General of Management Services will be tasked to conduct a work study covering the entire public service for the purpose of optimally obtaining services of the primary level employees in the government entities and to submit the report to the Cabinet of Ministers within three months.  

11.4 The purchase of fossil fuel-based vehicles for public sector will be suspended from hereafter as a government policy. 

 As per this policy, only electric-powered vehicles will be purchased for the use of the public sector in the future and the private sector will also be encouraged to use electric vehicles.  

 In purchasing vehicles for the public sector, suitable categories of vehicles are decided on the basis of the efficiency and prices of the vehicles. This proposal will be implemented step by step and will be completed by 01st January 2026.  

 

 

12.1 As a geo-politically important country, Sri Lanka should work with everyone and design our defence policies accordingly to face the emerging realities.  

12.2 Hence, I propose to have a review on our defence strategy called “National Security - 2030” to achieve these objectives and to develop capabilities and knowledge of our security forces that would be required in the modern and evolving world.    

 

 

13.1 Another critical area of reform is the management of state-owned enterprises (SOEs). The major fiscal risks arise from a few key SOEs, particularly in the transportation (SriLankan Airlines) and energy sector (CEB and CPC). These entities face significant losses, negative equity (SLA/CPC), and large volumes of debt that is predominantly owed to the state banks, creating significant financial sector risk.  

13.2 Some of the state-owned enterprises have been making losses on continuous basis due to issues of structural nature existed for some time. As these losses cannot be met endlessly from the General Treasury, attention should be paid to find alternative mechanism make them effective. Accordingly, it is proposed to establish the “State-Owned Enterprise Restructuring Unit” to facilitate restructuring of government owned business entities. I propose to allocate Rs. 200 million to implement this proposal.  

13.3 In addition, I propose to re-activate the Statement of Corporate Intent (SCI) process for key 50 SOEs, excluding CEB, CPC and Sri Lankan Airlines, as they are under different efforts to restructure, to closely monitor the set targets.  13.4 These difficult but necessary measures pertaining to SOEs will no doubt be challenging to address, but failing to do so would create catastrophic risks, particularly for financial sector stability, and will entail even higher taxation burdens on the public in the future. 

 

 

14.1 The fiscal reforms that have been set out are not alien to us. These issues have long been recognized and until 2019, Sri Lanka was embarking on a path of fiscal stabilisation where many of these reforms were put in place. Unfortunately, these reforms were rolled back, putting the economy on a downward spiral to where we are today. We don’t have any alternative. We must undertake these reforms for the benefit of the future and the betterment of the presently young people.   

14.2 Therefore, it is essential that whatever reforms we put in place today are shielded from myopic and stubborn decision making that derails the economic recovery that we all hope to see. Towards this end, we will introduce new legislation under a Public Finance Management Act (PFM Act) that will include stronger Fiscal Rules.  

14.3 A “Parliamentary Committee on Ways and Means” will be established to closely deal with issues and make proposals in raising government revenue. 

 

 

 It is found that a large amount of scrap material are piled up in many government institutions due to non-removal/disposal of the same for a long time. Besides, the government is losing a lot of revenue that could be obtained by selling the scrap material.  

 Accordingly, a committee consisting of three government officials including Comptroller General of the General Treasury, will be appointed to supervise and implement the entire process of the disposal of scrap.  

 

 

 The government debt management related activities are carried out by the Central Bank of Sri Lanka, External Resources Department, National Budget Department and the Treasury Operations Department at present. As it is important to pay special attention to the management of public debt, an independent National Debt Management Agency (NDMA) will be set up under the General Treasury in lieu of current arrangement in this respect. 

 

 

 A national agency will be established for the purpose of identifying and facilitating investment to be undertaken in partnership with the public and private sector. I propose to allocate Rs. 250 million for the implementation of this proposal.  

 

 

 18.1 The new Central Bank Act will be implemented as a key legislation to strengthen the monetary sector in the country. This legislation would provide the framework for effective implementation of inflation targeting and prevent monetary financing of the budget deficit - what is commonly known as money printing.  

 The new law insulates the Central Bank of Sri Lanka from politicisation of monetary policy decisions.  

 Given the weak government revenue and lack of net foreign financing of the budget, it is inevitable that a limited level of monetary financing would continue until tax policy measures help improve the government cash flow and the IMF programme unlocks foreign financing for the budget.  

 18.2 Allotment of 20 percent shareholding in state banks to the depositors and staff of those banks 

 In order to meet recapitalization requirement borne out due to increase in interest rates, rising NPLs, loan settlement issues faced by businesses due to economic crisis, and liquidity issues faced by the state banks, it is proposed to allow 20 percent of shareholding of the Bank of Ceylon and People’s Bank by their depositors and staff.  

 It is noted that government’s ability to provide additional capital at this stage to the state banks is very limited given the lack of fiscal space.  

 

 

19.1 The Welfare Benefits Act became law in 2002, but it has not properly implemented thus far. The Welfare Benefits Board has now been activated and the data collection to establish the database or the social registry is progressing. A new mechanism for identifying beneficiaries through objective and verifiable criteria has also been established. It will ensure that transparent laws and systems are in place. With the completion of this work, the welfare programmes will be better targeted and cash transfers will be made directly to bank accounts of beneficiaries. 

19.2 I am well aware of the difficulties faced by many due to the ongoing crisis. That’s why I decided to cut some of the capital expenditure and find room to provide enhanced support for vulnerable communities. 

19.3 As you are aware, the government spent additional amount of about Rs. 31,000 million approximately from May to July 2022 to provide an additional monthly allowance as urgent assistance to those who have affected due to loss of employment, decline in agriculture output and inability to cultivate due to many reasons.  

 I propose to continue this programme for further four months to reduce the pressure of the economic crisis on the affected people mentioned above. 

 I also propose to provide additional monthly allowance of Rs. 2,500 for pregnant mothers in addition to Rs. 20,000 already provided for them. 

 It has been reported that there are about 61,000 food insecure families, which need urgent assistance. I will provide Rs. 10,000 per family for a period of further four months. 

19.4 For all the above programmes, I will allocate Rs. 46,600 million for a period of 4 months. 

19.5 The recent increase in the kerosene prices has created difficulties for the owners of small boats which are used for fishing industry and for those who in the plantation areas that has no electricity services. I will provide a subsidy for these areas. 

19.6 Rs. 133 billion has been allocated under the World Bank loan assistance for the implementation of programs with the view of reducing the impact of the current economic crisis and restoring social stability.  

 

 Accordingly, I have obtained approval through the Supplementary Estimate presented to Parliament before presenting this budget to provide immediate relief to around 3.2 million people affected by the current economic situation.  

 Under this, monthly Samurdhi allowance has been increased to an amount ranging between Rs. 5,000 to Rs. 7,500 per month for approximately 1.7 million currently Samurdhi receiving families. Apart from that, an assistance of Rs. 5,000 was provided per month temporarily to around 726,000 families who were in the waiting list for expecting Samurdhi benefits.  

 Also, the allowance paid for the elderly, disabled, and kidney patients was increased to an amount ranging between Rs. 5,000 to Rs. 7,500. Further, the temporary assistance of Rs. 5,000 was arranged for the people who are in the waiting lists in anticipation of receiving this assistance. 

 In addition to the above concessions provided under this project, US dollars 110 million (Rs. 40 billion) has been allocated for the import of Urea required for paddy cultivation in the 2022/2023 “Maha” season, and fertilizer procurement is already underway. I believe that this will enable the paddy farmers to get a good harvest in the coming season and thus will be able to get rice at a reasonable price for the rice consumers. 

 Further, under this loan facility, domestic cooking gas was imported and distributed in the country during a short time duration to overcome the domestic gas shortage that had arisen in the country due to the current shortage of foreign exchange. Also, we are working to meet the domestic gas requirement without shortage in the future as well. It is intended to spend about US dollars 70 million (Rs. 25 billion) from this loan assistance for that.   That is in addition to the concessions mentioned in Section 19.3 above.