Interim Budget 2022: Transformation Of The Economic Direction Of The Country

By Harsha Gunasena –

President Ranil Wickremesinghe in the capacity of the Minister of Finance presented the interim budget 2022 to the parliament recently. According to this budget proposals the economic direction of the country would be transformed in the sense the government would reduce its involvement in economic activities and would focus more on regulation.

The governments of Sri Lanka have, from time to time, changed the economic direction of the country and in some instances, it was a 180-degree reverse affecting the economy of the country. Now it is an essential decision change this direction since the economy of the country has fallen due to the imprudent economic direction the country followed.

This change is not in line with the political ideology of the Podujana Peramuna. However, they have taken practical decisions against their political ideology. Basil Rajapaksa presenting the 2022 budget to the parliament told that there were around 300 government enterprises and the government invested around Rs. 670 Billion. The government pumps annually around Rs. 75 Million to maintain those enterprises. He suggested efficient management to reduce this waste.

Profits can be improved by efficient management. Temasek Holdings owned by the government of Singapore is one such organization.  In Sri Lankan political culture, which is a subset of a larger Sri Lankan social culture, a friend or a relative is selected over the qualified and the competent. The Singaporean Prime Minister changed this social and political culture forcibly.

The JVP is of the view and emphasizes that the political culture of Sri Lanka should be changed. Yes, it should be changed. Not only that, the social culture also should be changed as did by Lee Kuan Yew. 

If the government can be smaller and focuses on regulation it would have a positive impact on reduction of the budget deficit which is a burning issue. Following is an incident where the dominant ideology of the country, that treating the known well over the natural justice and keeping the business entities in the possession of the government irrespective of the results, is upheld.

When Mahinda Rajapaksa was the president, SriLankan Airlines which was managed profitably by Emirates at that time, was requested to offload 30 passengers who have paid for their tickets and confirmed the passage in order to accommodate the president and his party who were not on official visit. Naturally the request was not accommodated. In retaliation the then president cancelled the resident visa of the Head of Emirates in Sri Lanka, whose wife was a Sri Lankan, and taken steps to take back SriLankan Airlines. The airline is in the front among the loss-making government entities and the losses are compensated even by the people who have never visited the airport.

The president identified in the budget speech that SriLankan Airlines, Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) were the prime institutions for restructuring. Stated capital, reserves and accumulated profit of Sri Lankan Airlines as at 31 March 2021 was Rs. 281 Billion negative and the loss for the same year was Rs. 45 Billion. Recently privatized Indian national carrier Air India was a much bigger company with much bigger losses.

The restructuring process of CEB and CPC was already started. Electricity and fuel prices were increased and brought to the level where there were no subsidies. Therefore, there should be a reduction of prices paid by the consumer.

It was proposed that 20% of the shares of Bank of Ceylon and Peoples Bank to be offered to the depositors and the employees. The main reason was that to improve the liquidity of those banks and the government was unable to do so. Parliamentarian Champika Ranawaka said that there was no point of going ahead with this proposal keeping the officials who released large sums of money to politicians including the present parliamentarians paving way to provide those loans as bad debts. In addition to that these banks were used to pump funds to the government institutions which were making huge losses.

In fact, there will not be a big change by providing 20% of the capital to the depositors and the employees but this will be the starting point of the restructure. This will be the start of the breaking of the ideology that the ownership of the state institutions which make profits should be kept with the state.

Around 50% of the ownership of these banks together with the management should be privatized. These two banks account for around 35% of the market share. Other private banks are in the shade of these two banks. All of them need a stimulation. 

In this country where these government banks, private banks, rural banks and regional development banks are in operation an entrepreneur with a good business plan finds difficult to solicit a loan without a security to be offered. Giving loans with securities is not a difficult task since unconsciously detailed study is reduced to the level of reduced risk. Giving loans without security is a difficult task since there are persons who obtain loans with the intention of not to pay. Small entrepreneurs accounts for 52% of the gross domestic production of this country. The economy of the country cannot be upheld without giving a helping hand to these entrepreneurs.

Sampath Bank came to the market in 1986 and introduced technology to the industry. They installed first ATM machine out of which the customers and the bank were benefitted. After that the banking industry followed that path and it has awakened the industry. 

I believe that connecting the private sector to the state banks would change the backward banking culture of this country. This change would also influence the family businesses of this country to abandon some of their foolish practices. 

The president should establish without delay an institution which provides initial capital to the small businesses. Once the business is stable this capital could be recovered. These are the tasks to be done with great effort. A country cannot be transformed without engaging in this type of tasks.

Value added tax (VAT) has been increased from 12% to 15%. VAT at the time of previous yahapalana government also was 15%. Gotabaya Rajapaksa government in December 2019 reduced it to 8%. Along with that there were reductions of many taxes including income tax, and this was a cause   for the present economic crisis. Ranil Wickremesinghe increased VAT in May this year to 12% and he increased it further and brought it to the previous level.

Due to the increased cost of living as a result of the unprecedented inflationary trend, it is hard for the people to bear this. But it is not correct to say that only the VAT which is affecting ordinary people was increased. In the budget speech it was mentioned that the tax increases announced in May this year would be effective from 1^st October 2022.

Accordingly, tax exempt limit of Rs. 3.0 Mn for personal taxes was reduced to Rs. 1.8 Mn. This was previously at the level of Rs. 1.2 Mn and it was increased to Rs. 3 Mn level in January 2020. Personal tax rates also will be increased. Accordingly, the existing tax brackets, where first Rs. 3 Mn is taxed at 6%, second Rs. 3 Mn is taxed at 12% and the rest is taxed at 18%, will be changed to seven brackets comprising of Rs. 1.2 Mn each which will be taxed from increasing rates of 4% to 28%. The rest which is over Rs. 8.4 Mn will be taxed at 32%.

This is taxing the people who can pay. Also, it was proposed that all the citizens who are over 18 years of age should open a tax file. This is a good proposal, but it would face obstacles when implementing. The task of the Inland Revenue Department will be eased if the data bases of various departments of the government are amalgamated with giving more recognition to the information technologists. 

The president has allocated a considerable portion of his speech for the concessions to the people who would be affected due to the economic catastrophe. Prevalent inflationary trend caused many difficulties to the fixed income earners. Subsidies enjoyed by the rich as well as the poor are being withdrawn. Therefore, it is the duty of the government to support the real persons who are affected. It was proposed to give direct cash transfers to their accounts.

After all these proposals the budget deficit is Rs. 2.3 trillion. The deficit of the Budget 2022 presented by Basil Rajapaksa was Rs. 1.6 trillion. Deficit was increased. Since several months of the year was passed the credibility of the figures is increased. The country will get the benefits of these budget proposals and the change of the direction of the economy in the future.

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