Budget deficit equal to 5.2% of GDP

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By 2017-11-12

By Paneetha Ameresekere

This year's budget deficit is expected to be equivalent to 5.2 per cent of the GDP (Rs 680 billion), before contracting to 4.8 per cent of the GDP (Rs 675 billion) in the next budget, according to official data. The budget deficit last year was estimated at 5.4 per cent of the GDP.

Finance Minister Mangala Samaraweera in his maiden budget speech made in Parliament on Thursday said that revenue would be enhanced to be equivalent to 15 per cent of GDP this year (Rs 1,989 billion) or 15.3 per cent of GDP according to the data, a 13 per cent year on year (YoY) growth.

This compares with a lower revenue collection of 14.9 per cent of GDP last year. Revenue collection this year would have been uplifted by the enhanced VAT charge from 11 per cent to 15 per cent effective from last November, coupled with its applicability to supermarkets.
Data showed that tax revenue, last year over this year, is expected to increase from 12.4 per cent of GDP to 13.5 per cent of GDP this year.

As a result, the budget deficit is expected to contract to 5.2 per cent of GDP this year, from 5.4 per cent in the last (2016).
The Minister further said that the Government would further enhance revenue collection to be equivalent to 20 per cent of GDP in the midterm.

These higher projections would no doubt be given a boost by enhanced revenue collection vis-à-vis Budget 2018, which revenue proposition alone would uplift Government revenue by Rs 110 billion next year, according to the data.
KPMG Tax Head Ms Shamila Jayasekara speaking at a post budget seminar on Friday (10 November) said that aside from the Budget 2018 proposals, additionally, as per provisions in the new Inland Revenue Department (IRD) Act which would become law in April, would add an additional Rs 65 billion to Government revenue. ('Ceylon Today's issue of Saturday, 11 November).
As a consequence, total revenue, next year over this year (2018 over 2017) is expected to increase to Rs 2,316 billion (16.3 per cent of GDP) from Rs 1,989 billion (15.3 per cent of GDP), a one percentage point GDP increase.

Effects of climate change
Samaraweera in his speech also said that due to the ill effects of climate change complemented by the drought, would knock growth down by one per cent of GDP this year. He said that the budget for the first time this year, after 60 years, returned a primary surplus (i.e. net debt servicing costs) of one per cent of GDP.

Nonetheless, official data showed that the primary surplus this year would be equivalent to 0.3 per cent of GDP (Rs 45 billion) while expanding to one per cent of GDP (Rs 145 billion) next year (2018).
The economy is expected to grow by 4.7 per cent of GDP this year, while accelerating to five per cent in the next, said Samaraweera. Economic growth last year was projected at 4.4 per cent of GDP.

He said that the budget deficit would be reduced to 3.5 per cent of GDP by 2020, while the economy is estimated to grow by 6 per cent of GDP by 2020. Unemployment by then would be contained at four per cent and inflation, despite supply side shocks, will be managed at the mid single digit range.

The Budget, constrained by record debt repayments next year, numbering some Rs 1.97 trillion, spurred by former President Mahinda Rajapaksa's investments made from commercial loans from the Chinese on costly, non viable infrastructure projects such as a seaport and an airport at Hambantota, has resulted in new taxes being introduced which may affect the common man.

Those taxes comprise a 25 cents tax per SMS, Rs two tax on each telephone call made, 50 cents tax per each gram of sugar in a beverage, Rs 15 tax on an ethanol litre for hard liquor manufacture, 20 cents tax on each bank transaction of minimum Rs 1,000 in value, two per cent nation's building tax (NBT), additional Rs 50,000 tax on imported diesel 3-wheelers, 17 cents carbon tax a day on motorcycles and Rs 10 tax on a kilogram of polythene resin.

Some measures to alleviate the sufferings of the common man include, imposing maximum retail prices of Rs 80 for a kilo of potatoes, Rs 150 for a kg of big onions, Rs 150 for a kg of red split lentils, Rs 750 for a kg of dry fish and Rs 350 for a litre of vegetable oil, including coconut oil.

Samaraweera who termed his budget as 'Enterprise Sri Lanka', said that for the island to grow to high middle income status, the economy needs to be liberalised further for which State sector reforms were sine qua non.

'One-stop-shop'
He said that the Registrar of Companies would be transformed to act as a 'one stop shop' to encourage foreign direct investments, presumably taking on the role now played by the Board of Investments (BoI).The archaic 1869 Customs Ordinance would be replaced by a new Act, with the same being replicated in respect of the 1912 Excise Ordinance.
The laws governing lands and agriculture lands that came to effect in 1972 and 1973 respectively and the Paddy Lands Act of 1958 are to be amended. Rs 10 billion to be allocated to provide long term loans to entrepreneurs engaged in the small and medium enterprise (SME) sector.

Small enterprises with a minimum of 10 shareholders ploughing seed capital to the tune of Rs 10,000 each would be assisted by the Government allocating a total of Rs 500 million for the development of such projects, with these reliefs going up to 2020.
Women entrepreneurs to get a 10 per cent relief on the interest cost of loans taken, while disabled entrepreneurs will get a 15 per cent relief package. Government will provide Rs three billion for the promotion of 'angel' funds to give uplift to the ICT sector. Fifty per cent of the rent for such ICT startups would be met by the Government. The Government's SME guarantee fund will also be extended to the ICT sector.

All para tariffs will be abolished in three years, beginning with the abolishment of 1,200 para tariffs this year and para tariffs on the tourism sector to be waived. An anti-dumping law will be in place.

Small exporters who earn under US$ 10 million exports per annum will be provided with Rs 800 million to buy shelf space in foreign lands. Loans from the SME Guarantee Fund will be extended to those in the 'CRIB' who, otherwise would have been debarred from obtaining loans from the country's financial sector.
State Finance Minister Eran Wickramaratne speaking at a post budget seminar organized by KPMG on Friday (10 November) said that the uplift provided to the SME sector in relation to exports was because their export volume numbered only five per cent of the total export volume.

Meanwhile, among the other measures is to uplift 'Enterprise Sri Lanka' where foreigners will be allowed to own 100 per cent of shipping agency offices, hitherto restricted to be minority shareholders in such enterprise. Transformation from 'Innovators to Industry' would be helped by the allocation of Rs 350 million for this purpose.

Waiver of the NBT on the gem and jewellery sector which imports such commodities for the purpose of value addition and export and Rs 2.5 billion will be allocated for technical training of youth and nano technology to be made a subject in schools and two food processing centres to be set-up in Delft Island and Kilinochchi and 50 per cent of the electricity costs at the Atchuveli Free Trade Zone (AFTZ) will be borne by the Government for two years.

No relief to partnerships

Tax Consultant N.R. Gajendran said yesterday (Saturday, 11 November) that Budget 2018 was consistent with the policies adopted by the new regime vis-à-vis taxation, but which left certain anomalies vis-a-vis the new Inland Revenue Act (NIRA) unchanged.
'For instance, while companies making an annual turnover of under Rs 500 million as per the NIRA will be liable to a lower tax regime of 14 per cent, on the other hand partnerships, proprietorships and small and medium sized professional firms will be taxed doubled that rate, i.e. at the standard rate of 28 per cent', he alleged. The small and medium enterprises sectors, of which a sizeable chunk is either sole proprietorships or partnerships, are the backbone of Sri Lanka's economy.

Absence of rupee defence, so primary surplus

Central Bank of Sri Lanka (CBSL) Deputy Governor
Dr Nandalal Weerasinghe speaking at the same seminar on Friday (10 November) said that by obtaining a primary surplus in the budget that would ensure both exchange rates (ER) and interest rate stability.
The budget is expected to return a primary surplus equivalent to 0.3 per cent of GDP this year (Rs 45 billion), while expanding to one per cent of GDP (Rs 145 billion) next year, according to data.
What generally causes a primary deficit in the budget is when depreciation of the local currency is prevented due to Governmental interference.

This takes the form with the Treasury borrowing rupees from the market to buy the required dollars from CBSL's reserves and sell those greenbacks at a discounted rate to the market so ensure ER stability in the short term. But this action increases Government's debt as well as its borrowing cost liabilities, thereby increasing its recurrent expenditure while at the same time impairing the country's foreign reserves.

When the Government, at some point of time, stops defending the rupee, because of the bleeding caused to the country's foreign reserves as a result, this stoppage would, however, tend the rupee to depreciate more sharply, because in such a scenario it will be only the market, which will be supplying, ipso facto the market, with dollars and not CBSL.

Also, when the CBSL stops supplying greenbacks to the market at discounted prices, thereby leading to a steeper depreciation of the ER, more rupees will then be needed to buy the required dollars, because of the dollar's high rupee price, due to its value being market determined, resulting in a greater demand for rupee borrowings, causing interest rates to be inflated as a consequence.
The Government's foreign debt servicing commitments are generally met by the Treasury. In the absence of the Treasury having the necessary greenbacks to meet such commitments, then the needed dollars are bought from CBSL's foreign reserves, which, ipso facto are also that of the Government. Those dollars are paid for in rupees. So when the required rupees are borrowed from the market to buy the necessary greenbacks, that action causes upward pressure on rates.

Next year's debt servicing commitments, both domestic and foreign, is expected to rise to a record Rs 1.97 trillion, spurred by former President Mahinda Rajapaksa's commercial borrowings on costly but non viable infrastructure projects such as a seaport and an airport at Hambantota.

Balancing politics
with economics

State Finance Minister Eran Wickramaratne added that the agriculture sector was 'socially and politically important,' but 'economically and financially' a drain. He said that the Agriculture Sector employs 28 per cent of the workforce but provides only nine per cent of GDP. He said that cash transfers on the fertilizer subsidy has plugged leakages, eliminated the middleman and ensured direct dealings between the Government and the farmer. Meanwhile, the Government has allocated Rs three billion for insurance of agro lands against climate change, with the cost per acre being Rs 40,000 on a cost sharing basis with the farmer, in 'Budget 2018'.

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