Finance Minister Basil Rajapaksa, presented the 76th budget of independent Sri Lanka in Parliament on November 12, creating a personal and global milestone. For he and his brother, former President and incumbent Prime Minister Mahinda Rajapaksa are the only two brothers of the same family in any part of the world to have presented the National Budget in any country.
It is the second budget of the present Government and maiden budget speech of the current Minister of Finance. It has been estimated that the Government will be able to receive Rs. 2,284 billion as its revenue, including grants, and total government expenditure stands at Rs. 3,912 billion. The deficit is expected to be around 8.8 per cent of the Gross Domestic Product of the country. The Government expects to raise Rs. 1,628 billion through both foreign and domestic sources to finance the budget deficit.
Finance Minister Basil Rajapaksa has a daunting task as he attempts to bridge an astronomical Rs. 1.6 Trillion Budget Deficit. The 2022 Budget has the fingerprints of the incumbent Secretary to the President and former Treasury Secretary Dr. Punchi Banda Jayasundera. This columnist is also inspired by the spirit of the quote of the Proprietary Editor of the Chicago Tribune, Yale University Graduate and Advocate of Constitutional Liberties and winner of the 20th Century Victory Medal, Robert McCormick who said: “The newspaper is a development of modern civilization to present the news of the day, to foster industry and commerce, to inform and lead public opinion and to furnish that check upon Government which no constitution has ever been provide”.
The budget proposals have received mixed reactions from the business community, academia, politicians, and general public. This analysis expects to highlight some of the positive developments, areas for further improvements, as well as the proposals which should have been avoided.
Education sector
The budget 2022 has given a greater focus on education sector by allocating around 7.5 per cent of its total expenditure and additional resources largely targeted in solving the principal-teacher salary demands which put the education sector in disarray in recent months. The demand for salary increase is a long-standing issue and solving it is critical in enhancing overall performance of the sector, in particular, to get the principals and teachers to engage in teaching and other related educational activities in a productive manner. Any delays in solving this issue could have affected schoolchildren who largely depend only on public education. Similarly, the Government allocated a sizable amount of money for improving telecommunication facilities at public schools and provision of better telecommunication facilities to all schools is essential in reaping the benefits of fast-expanding e-resources for teaching and learning. In particular, the COVID-19 pandemic highlighted the importance of having proper telecommunication facilities to conduct teaching, learning, and assessment uninterrupted manner.
The budget 2022 has given greater priority on rural development, allocating a large sum of money for rural infrastructure development, including roads, agriculture facilities, irrigation, and electricity. In Sri Lanka, over 70 per cent of people live in the rural sector and it contribute to the economy in terms of providing essential foods and other domestically produced goods and services. The sector is not in a position, either to contribute or benefit from, to serve the national economy due to various infrastructure bottlenecks. The government has identified those limitations, partly due to the conversations, the President had with people under the name of Gama Samaga Pilisandarak (Conversation with the Village) programme. For a lasting sustainable development, it is highly important that the rural sector connects with the national economy where the latter get connected with the global economy.
The government has proposed a number of programmes for promoting exports, by promoting export processing zones for specific products/services and entrepreneurship among youth and women.
Further the Government plans to promote identified sea ports for specialized economic activities, i.e. Galle Port as a tourism port and Trincomalee Port as an industrial port. This is very useful in promoting related economic activities around the port and getting the maximum benefits for the country. Many countries around the world have utilized their ports for various specialized purposes thereby uplifting the economic value of their factor endowment. These and other related proposals will be very useful for the country to enhance its capacity to earn foreign exchange which has become very critical to the economy.
Forex earnings
The COVID-19 pandemic highlighted the fact that the country needs to enhance and diversify its foreign exchange earnings in order to avoid difficulties, in particular, in a crisis situation. In addition, the Government should have given additional focus on promoting exports, both goods and services, by declaring ‘a decade of exports’ and proposing a mechanism to identify potential products/service and entrepreneurs which/who could be introduced to the world market. The current economic crisis is mainly due to the fact that Sri Lanka has failed to get integrated to the world market and reap its benefits of economic growth and development. As discussed earlier, sustainable rural development is possible only through connecting the sector with the world economy.
The budget 2022 has recognized the need for fiscal consolidation; improving revenue and rationalizing expenditure. A high budget deficit leads to more borrowing, either from domestic or foreign sources. Sri Lanka presently faces a daunting task of repaying debts which the successive Governments borrowed over the past years to fill the financing gap. The last year, the budget deficit was predicted to be at 11 per cent of the GDP and the budget 2022 expects the deficit to come down to 8.8 per cent. In the light of the present economic crisis, it is prudent that the budget 2022 contains new proposals for improving public revenue and expenditure cuts. It is expected that the Government may adopt new proposals which aim at taxing those who could pay taxes, i.e. giving more emphasis on direct taxes. Similarly, it is imperative that government pays greater attention to loss making public enterprises to reduce the burden such enterprises put on the public coffers.
Budget 2022 has extended some financial support to parties severely affected by the pandemic, though the allocated amount may be limited due to severe financial difficulties. The COVID-19 pandemic hit hard on micro-small and medium businesses as well as people involve in transport and Arts and entertainment activities. The government extended financial support to some of the workers engaged in the tourism industry; i.e. tour drivers and tour operators. It is important that the Government identify a suitable mechanism which could be in place to provide the proposed relief so that political affiliation won’t be a determinant to qualify for the relief as well as the programme to be run free of bribery and corruption.
Overall, the budget 2022 contains useful proposals and measures aimed at addressing some of the pressing economic issues currently faced by the country in order to put the economy back into a sustainable growth path. However, in future, it is important to place more attention on fiscal consolidation measures as well as measures to enhance exports and Foreign Direct Investment. In that respect, it is imperative that the Government streamline policy measures and introduce economic reforms to improve the business environment and competitiveness of the economy. Around the world it is evident that giving a greater focus on integrating with the world market is the sustainable path for a smaller economy to prosper. It is important that the policy makers do not deviate from this fact. One of the key limitations in the budgetary process is the lack of focus on the implementation process. A number of studies have shown in the past that some budget proposals never get to the ground while some other proposals were implemented in a haphazard manner. It is important that the policy makers pay increased attention to the implementation process to make sure that the proposals are properly and productively implemented.
Critical factors
The budget is about revenue and expenditure. The total projected Government revenue has increased to Rs. 2.2 Trillion, which is a 45 per cent increase over the last year which has put the economy in a precarious situation. The impact of the COVID-19 will also be felt strongly.
This will also mean that the Government might have to increase the taxes. One way is to increase the collections but it is debatable whether the targets will be met. Or else, the economy will have to grow. But the economy will not grow at that pace. Additional taxes are supposed to yield Rs. 330 Billion, but that seems to be too farfetched to collect.
The Government, under those circumstances, will have to borrow from local or foreign sources. Overseas institutional sources such as the International Monetary Fund, will be giving say, a maximum of US$ 2 Billion. The rest will have to be printed locally. Local borrowings will also crowd out the private sector.
The Government might have to shelve some of the proposals if the going gets tough. What will happen, only time will tell.
Tourism industry has to be developed in 2022.
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