Some observations on Budget 2022
Dissecting the mixed opinions on Budget 2022
By Sumudu Chamara – The Morning
On 12 November, the Government presented what, in economic terms, can be referred to as a recovery Budget, in a context where the country has just started paying attention to and supporting the revival of sectors that did not receive adequate attention last year.
In other words, unlike in the pre-Covid-19 pandemic era, this Budget is expected to ease the economic burden on almost all segments of the society, not only a select few. Doing so has also been challenging, as almost all modes of revenue have also been affected owing to disrupted economic activities.
The public and the Government both expect a lot from this Budget, and different parties point out how the Government has either succeeded, or failed, at living up to these expectations.
Pressing issues
Minister of Finance Basil Rajapaksa, speaking to the media on 13 November at the Government Information Department, explained the rationale behind some of the Budget proposals, where he extensively talked about pressing issues such as the cost of living and hardships faced by the agriculture sector.
Speaking of the Government’s plans to support farmers to embrace organic farming, he noted that the Budget paid attention to supporting farmers in several ways, including providing support to remove weeds. In order to do that, according to Rajapaksa, the Government is planning to encourage the employment of methods that do not involve chemical weedicides. Adding that that is however a very costly process, he said that the Budget has allocated funds for that purpose.
The Budget allocated Rs. 4 billion to assist farmers to use non-toxic weedicides, and an additional allocation of Rs. 5 billion was made to introduce new agricultural technology.
In response to a question posed by the media regarding giving compensation to farmers who have suffered crop yield losses, he said: “I request you not to be negative and to think positively. Now that a good amount of rain has been received, we request farmers to continue farming activities in this Maha farming season. Also, we have instructed the Agricultural and Agrarian Insurance Board (AAIB) and Sri Lanka Insurance to be prepared to assist farmers in the event farmers suffer losses.
“Even though it is the Government Budget that pays it, it is paid through the AAIB, and the necessary funds have been planned and issued. Therefore, there is no reason to fear, and at the same time, we hope that no farmer suffers losses due to low yield. Also, we have given Rs. 7,500 as a preliminary payment for basic farming activities.”
He also spoke about the rising prices of consumer goods, another pressing issue.
“This is an issue that has existed since 1947, and this is not confined to one country and the entire world is suffering from this issue. No government has reduced the prices of goods. However, at this juncture, we are focusing on reducing prices by increasing production and providing to the market more goods. Our target is to save the money that went to other countries’ farmers and companies, for this country’s farmers.”
He added that a sum of Rs. 31,000 million has been allocated to give reliefs to those who are in dire economic situations. One such example, according to Rajapaksa, is the allocation of Rs. 15,000 million to assist women to start a network of home shops.
Rajapaksa also voiced concern about the public sector during the press briefing, where he said that the public sector has become a burden.
“The public sector has expanded to a level the country cannot manage. We should acknowledge the fact that the public sector is a burden. Giving the public sector some kind of relief means that the Government has to get that money from the public, as it is the main way the Government can find money. The Government is not in a position to allocate any more public funds for the public sector for a period of another year. However, relief that does not require the Government to allocate a significantly high amount of funds will be considered.”
He further said that even though several measures have been taken for the benefit of public sector employees, the sector cannot be expanded, and that new recruitments will be done only to fill the vacancies created by those retiring. He added that although the ideal number of public sector employees is 1,401,890, currently, there are 1,423,116 employees.
Explaining a number of other Budget proposals, Rajapaksa stressed that in the history of Sri Lanka, no Budget allocated money to address the cost of living and food security like the 2022 Budget has.
However, certain parties including Opposition parties beg to differ, and they claim that the relief measures aimed at easing the economic burden on the people are not nearly enough.
Speaking to The Morning, National People’s Power (NPP) Parliamentarian Dr. Harini Amarasuriya rejected the Government’s claim that the Budget has adequately addressed the pressing issues such as the cost of living.
She added: “The Budget actually does not have any specific proposals related to reducing the cost of living. In fact, it talks more about vague proposals about improving or strengthening the rural economy, and also about providing some kind of support for the people who have been affected by the pandemic. Parties of special categories such as private van drivers and three-wheeler drivers have been allocated funds; however, it does not address the overall cost of living issue at all.”
Advocata Institute Chief Operations Officer Dhananath Fernando, meanwhile, expressed similar opinions, adding that the Budget has not addressed several other pressing matters in addition to the cost of living. He told The Morning that while giving direct reliefs to address the cost of living may be difficult, there are several large-scale measures that could have improved the country’s overall economic situation including the cost of living.
“The Government could have basically made the first part of the Budget speech a policy statement, because at this juncture, most of the investors are looking at a policy direction, as to how the Government is going to solve the burning issues of the economy. When I say burning issues, there are several. There is a US dollar (USD) shortage; how are we going to address that? Exporters are facing challenges because they are offered a lower rate than the market rate of Rs. 234 per USD by the banks, and they receive about Rs. 203 per USD. At the same time, people have a problem with some of the shortages of essential commodities, such as liquid petroleum gas (LPG).
“When it comes to investors, they are also seeking a policy direction as to how to make investment-related decisions. Most importantly, there is an issue of mounting pressure due to debts. These are the key areas the Government should have addressed in the Budget. Even though it has touched upon certain areas, especially when it comes to essential commodity prices, the Government has announced that the price controls have not worked. So they are planning to slowly move away from trying to control prices. But I think that because of the controls on the USD, exporters are unwilling to bring USD or convert USD to Sri Lankan rupees.
“Also, we hear that even the remittances have dropped compared to September last year, because, in my opinion, the exporters are looking at sending USD through informal channels. In that sense, I think that there is a lot of area for improvement in terms of addressing the people’s main issue, which is the cost of living. At the same time, we must also admit that generally, when you say our Budget should address the cost of living, most people expect subsidies such as increasing the Samurdhi subsidy. But we have to admit that our Government is in a very difficult situation after the pandemic, and also due to following some wrong economic prescriptions. So basically, the Government really does not have any ability to provide subsidies or any kind of relief programme at this point.”
Financial and tax policies
Imposing taxes is an integral part of any Budget, and this Budget focused on not only imposing new taxes, but also talked about altering tax policies. According to the Budget, in 2022, the Government plans to increase its total revenue from Rs. 1,556 billion to Rs. 2,274 billion, while increasing the tax revenue from Rs. 1,325 billion to Rs. 1,987 billion. It also proposed new taxes.
With regard to taxes, Rajapaksa said that when he prepared this Budget, one of the most important aspects that was considered was sticking to the tax policies introduced by former Minister of Finance and incumbent Prime Minister Mahinda Rajapaksa, because the business community and the people raised concerns about changing it frequently and have requested that it should be continued for at least three years, so that they can make their plans.
Speaking of the proposed Special Goods and Service Tax, which was presented in last year’s Budget, Basil Rajapaksa said that the necessary legal provisions have already been drafted, and that it will come into effect on 1 January 2022. He stressed that the Government will stick to tax policies without changing them often. However, he refused to reveal more details about this tax.
Meanwhile, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal, speaking at a post-Budget forum titled “Dissecting the Budget 2021” organised by the Centre for Banking Studies of the CBSL, talked about Sri Lanka’s tax policies.
He said: “We must appreciate that no policy can be continued without changes at all, and that some changes need to be done. There will always be the need to tweak and improve certain policies, and that kind of freedom and space must be available to any government in the implementation of policies. Policy consistency does not mean that once you set a policy it will be there forever without any changes.”
During the same discussion, Treasury and Finance Ministry Secretary S.R. Attygalle added: “This is a growth-centric Budget, and this Budget was formulated to boast the signs of growth that we have been experiencing since the pandemic. The Government is of the view that ultimately, the sustainable economy it wants to bring about is only possible with an aggressive drive towards bringing the structural reforms that will promote investments and productivity.
“As such, the Budget can be looked at as a Budget that has targeted reforms aimed at broadly four aspects, namely, strengthening the external positioning, shifting to manufacture-based investments, supporting the vulnerable in a targeted manner, and strengthening the fiscal position.”
Fernando also spoke about tax policies, adding that Sri Lanka is in need of serious structural reforms to the economy. He talked about how the Government’s financial policies could have been improved.
“Basil Rajapaksa has indicated that we are seriously considering reducing our expenditure. As a result, he has frozen the construction of buildings for the government sector, and also he has taken the initiative to cut down about five litres of fuel for government members entitled to it. It may not be a significant saving, but at least it indicates that we are considering cutting down our expenditure.
“Also, the age of retirement for public sector employees has been extended by 10 years. These are all good indications. They may not save a lot of money to overcome an economic crisis, but it provides some signalling. But the question is, at the same time, there are some policies which are contradictory to the said process. For example, the Budget also highlights further recruitment for some institutions in the public sector.
“My view is, we cannot really come out from this economic crisis without serious structural reforms to our economy. For example, if the retirement or the pension expenditure is high, we really cannot cut down on that expense. We have to really cut down public sector recruitments, and we have to offer a voluntary retirement scheme (VRS), and really shrink the public sector workforce.
“In terms of the revenue measures, I think that there is a lot of room to increase the revenue through the existing channels, rather than introducing new taxes which will create a lot of uncertainty among the business community.”
Fernando said that overall, even though the Budget has shown some signs of cutting down expenditure, he was of the opinion that it is not adequate to overcome the current economic crisis the country is facing.
Changes
When questioned about what the Government could have done differently as far as Budget proposals are concerned, Fernando added that the Government could have paid more attention to addressing the foreign debt issue, as the country is spending about $ 4-5 billion a year, in a context where foreign reserves are also declining. He added that in a context where investors are looking at how Sri Lanka is planning to solve the debt issue, the Budget does not adequately explain as to what new strategies the Government is planning to adopt to address that issue.
“I think that should have been a main area addressed through this Budget, because that would have provided a lot of clarity for most of the investors and also the stakeholders. Maybe the Government has left it for the CBSL to manage, but in my view, the CBSL is mainly for monetary policies and to keep inflation under control, while the Finance Ministry has to provide a clear direction as to what the country must do to address the debt issue.”
Speaking of the same, Dr. Amarasuriya said: “As a whole, the country is facing certain critical issues which have not been addressed by the Budget. Increasing debts, the falling of USD reserves, and declining government income are some of them. We really need a Budget that would address those three critical issues, and we need Budget proposals aimed at increasing Government revenue, and also how we are going to service the debts.”
She said that even though the Budget contained certain proposals addressing certain aspects of the said matters, there were no concrete proposals to achieve them, and that even the measures introduced to cut down on the Government’s expenses were not adequate to address the overall economic hardships.
“There needs to be some kind of restructuring of our tax system, in order to ensure that we are not so dependent on indirect taxes. These indirect factors disproportionately affect the poorer sections of the community. The Government could have come up with somewhat different or innovative ways of addressing the issues that we are facing. But what was presented instead was a very traditional Budget that seems to ignore the reality of the people’s lives as well as the very serious macroeconomic situation in the country.”
Through the Budget, the Government has informed the public what it can give and what it plans to gain, and in a context where there is no promise that the pandemic would come to an end next year, the people will have to manage their economy more wisely. At the same time, as those who spoke with The Morning noted, the Government too has a responsibility to understand that a Budget entails responsibilities that go beyond allocating funds and finding ways to collect funds.
