17 December, 2017

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Budget 2017: Significant Improvement If Not Marred By Policy Inconsistencies & Interference With The Monetary Board

By W.A Wijewardena

Dr. W.A Wijewardena

Dr. W.A Wijewardena

A significant improvement in Budget 2017 

Budget 2017, presented by Finance Minister Ravi Karunanayake in Parliament on 10 November 2016, is a significant improvement from his first budget for 2016. In fact, there was no budget for 2016 since most of the budget proposals had to be withdrawn even before the budget was approved by Parliament. The worst outcome was that instead of aligning itself with the goals of the economic policy statement delivered by Prime Minister Ranil Wickremasinghe in Parliament just two weeks’ before the budget, it went against it with completely counterproductive policies. For instance, the Premier had announced that the goal of the government was to change the tax structure of the country from the current overwhelming share it had for indirect taxes to direct taxes. PM had announced a target of changing it from the current indirect to direct at 80:20 to 60:40 in 2020. The budget was to lay foundation for this goal but it changed the ratio in the opposite direction coming up with a ratio of 87:13. The latest actual budget outturn has been a little better with a ratio of 84:16. The reason for it had been the failure of the Ministry of Finance to have the Value Added Tax or VAT amendments passed in Parliament in time, thereby losing six months of VAT collection. The budget 2017 has projected a further improvement with a ratio of 82:18. However, it is still far from what the Prime Minister wanted to have. These implications of Budget 2016 to the government’s economic policy statement were discussed by this writer in an article in this series earlier.

Howlers, in the budget 2016

There were some howlers also in the budget 2016. One instance was taking the imputed rent valued of the buildings belonging to educational and health authorities as non-tax income on one hand and expenditure on education and health on the other. This treatment that resulted in inflating both the expenditure and revenue of the budget was contrary to the principles laid down in the Government Finance Statistics Manual of the IMF. This was discussed by this writer in another article in this series.

The promising medium term outlook in the Budget 2017

Given these weaknesses in the Budget 2016, it is encouraging that the Budget 2017 has made an attempt at reducing the budget deficit over the medium term and improve the revenue of the government to attain that goal. Accordingly, the budget deficit is now projected to fall to 3% of GDP by 2020 from the current 4.6% of GDP to 3%. Accordingly, the government debt too is to fall from 75% of GDP in 2017 to 65% by 2020. If the government is able to attain this, it is a sizable budgetary improvement which is known in economic parlance as ‘fiscal consolidation’. It is thus the duty of all the parties in the unity government to support Ministry of Finance in attaining this goal which is good for the long-term development of the country.

However, the good side of the Budget 2017 has been marred by a number of howlers, inconsistencies and unhealthy interventions which the Minister of Finance should not do.

Proposal to give free tablets to AL students and teachers

One such howler is the proposal to give a free tablet to every Advanced Level student and every teacher teaching for that examination. The obvious objective would have been to increase digital literacy among students who are to join the labour market in a few years’ time and helping teachers to keep themselves updated. Objective-wise, it is laudable since the digital literacy of Sri Lankans, as revealed by the latest survey conducted by the Department of Census and Statistics, has been just 27% of the population as at mid 2015. This is a national average and in the case of the estate sector, the computer literacy is just 8% of the relevant population segment. However, an encouraging sign is that those in the age category of 15-19 that represent the students in AL classes, the computer literacy is the highest at 57%; there again, that number is almost wholly made up of those who have proficiency in English. So, Sri Lanka’s issue is not lack of computer literacy among AL students; its issue is lack of adequate knowledge of English to harness it fully.

Supply driven policies won’t work

The Budget 2017 has allocated Rs 5 billion for this project, about 2 times the annual administration budget of a medium size university. It, therefore, poses three basic problems for the government. First, given the large number of eligible students in AL classes which is swelling year after year and teachers who are attached to those classes, surely, the government cannot give a good quality iPad to them. Hence, it has to go for a low quality tablet which will have a very short life span. Consequently, students who are happy at the time of the distribution of the tablet will be annoyed when they realise that those tablets cannot give them good service. Second, this type of free handouts will impose a huge drain on the government’s resources in the future since the number would be swelling every passing year and once given, it could not be withdrawn even when the government would find it difficult to fund it in the future. Third, these are known supply driven policies and if there is no demand for them, they would be abused by the recipients totally defeating the laudable objective of the government. In a story in YouTube, a daughter presents her father with an iPad as a birthday gift. Later, when she inquires from his how he had been using it, father shows her how he had been using it as kitchen cutting board. This is a warning about what would exactly happen to this ‘supply-driven policy’ in the budget.

Levy on financial transactions

An example of the ‘budget proposal inconsistency’ is the proposed levy on financial transactions. Accordingly, the Budget 2017 proposes to levy a fee of 0.05% on every financial transaction which works out to Rs 5 per Rs 10,000 worth of transactions. The Budget has not defined what these applicable transactions but has simply revealed that the government expects to raise about Rs 8 billion out of this levy. If it is applied to all the financial transactions that go through the financial services industry, the tax base in 2015 happened to be enormous at Rs 95 trillion, roughly nine times higher than the country’s GDP. It is growing at a rate of 20% per annum generating an estimated tax base of some Rs 137 trillion in 2017. At 0.05%, this tax base would generate some Rs 68 billion as non-tax revenue to the government. Surely, banks and other financial institutions cannot absorb such a big amount of money they pay as levy to government and they have to pass it onto the customers. Then, it would discourage large companies to pay their salaries through electronic modes of payment and individual householders to pay their bills and payments through online payment systems.

Discouraging the use of cash

In another budget proposal, the government has announced that it would impose a levy of 2% when bank customers withdraw more than Rs 5 million from banks. This is again a huge tax, amounting to Rs 100,000 per Rs 5 million withdrawn from the bank. Since current accounts do not earn interest, this tax is unaffordable for large companies. The objective of this proposal is to encourage Sri Lankans to use digital payments as much as possible. But the above tax proposal will tax then heavily when they use digital payments as encouraged by the government. What would a rational person do in these circumstances? It is obvious. He would withdraw less than Rs 5 million and make all his payments by using cash. Thus, the modernisation of the country’s financial system by introducing digital banking will come to a halt with two contradictory policies. The Association of Professional Bankers or APB used this as the theme of their annual sessions continuously in the five year period since they sincerely believed that that was the gateway for Sri Lanka’s banking sector in the future.

The Monetary Board should be an independent body

The Budget 2017 has also sought to encroach into the functions of the Monetary Board of the Central Bank of Sri Lanka by proposing certain proposals coming within the purview of the Monetary Board. This is against the objective of creating the Monetary Board and the Central Bank by Parliament in 1949. That objective was to allow an independent Monetary Board to manage the country’s monetary and financial systems, free from intervention of politicians or outside parties. These two functions are too precious to be left to the politicians who have personal agendas. Hence, the Monetary Law Act MLA made provisions to safeguard the position of Monetary Board members; Once appointed by the President on the recommendation of the Minister of Finance and in consultation with the Constitutional Council, they cannot be removed while they hold office at the whims and fancies of the Minister of Finance. If he desires to do so, there is a specific procedure stipulated in MLA. Further, unlike the other public sector corporations and institutions in Sri Lanka, the Monetary Board is the only entity to which the Minister of Finance cannot issue general or specific directions. However, if there is a dispute between Monetary Board and the Minister with respect any particular desire of the latter, the Minister could still have his say being carried out by the Board by issuing a directive in writing to the Board in terms of section 162 of MLA. But, when he issues this directive, he has to inform the Board that the government will take full responsibility of the consequences of carrying out that directive. This provision was used only on one occasion in Sri Lanka through the history of the Central Bank. That was when Prime Minister Wijayananda Dahanayake issued a directive to the Monetary Board to reduce interest rates in 1959 so that he could win the forthcoming Parliamentary elections. In the subsequent election, the government took full responsibility for the consequences of reducing interest rates, because his government was thrown out and he himself lost his seat in Parliament. Hence, a Minister of Finance should not take this golden provision in MLA lightly.

Unsavoury interferences with the Monetary Board

There are several proposals made in the Budget which come within the purview of the Monetary Board. One is the proposal to increase the capital of commercial banks, specialised banks and primary dealers. Another is to specify a loan to value ratio when commercial banks lend money to customers by way of leasing or hire-purchase schemes. A third is the proposal to direct the Credit Information Bureau or CRIB not to issue loan certificates for loans less than Rs 500,000. This is against the CRIB Act because neither the Central Bank nor the Minister of Finance could issue such a direction to CRIB’s board of directors who are appointed by the individual members. A fourth is the proposal to set up a Sri Lanka payments gateway outside the Central Bank by using the software resources of the Information and Communication Technology Agency or ICTA. This is a serious proposal since it comes within the purview of the Central Bank. Further, according to banking sources, the Minister of Finance is planning to set up this payments gateway when the Central Bank has been making preparations to set up such a payments gateway by using its own outfit, namely the LankaClear which is charged with the responsibility of clearing cheques and facilitating online payments. Fifth, there is a proposal to introduce a threshold of leasing to commercial banks thereby taking them effectively out of the leasing market. Sixth, the Minister of Finance is planning to introduce mandatory credit allocations to commercial banks in accordance with priorities which he has identified. Seventh, it is also proposed to issue a directive to commercial banks that they should lend at least 15% of the deposits they mobilise in a particular area to within that area itself. The last two proposals will lead to corruption because bank managers would devise ingenious methods to allocate funds to their fathers in law and sons in law This is the experience which India had with such mandatory credit allocations.

It is still not too late to rectify the errors

These are serious issues and it is hoped that the government would take appropriate action to correct these howlers, inconsistencies and undue interferences with the Monetary Board before it is passed in Parliament.

*W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com

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Latest comments

  • 3
    0

    Dr. Wije. as long as the corrupt UNP-SLFP political caste continue to loot the Sri Lanka and have immunity and impunity for Financial Crimes and are not held ACCOUNTABLE Sri Lanka will remain in the China-IMF DEBT TRAP.

    We need an end to the political culture of immunity and impunity for financial crimes. Corrupt politicians – MR, Ranil, Sira and cronies must be held accountable.

    The people of Sri Lanka should PROTEST and refuse to pay all income taxes to the corrupt government and STATE as a protest against corrupt politicians and the prevailing political culture of stinking corruption and impunity for financial crimes in the country today!

    Citizens for Good Governance should launch an anti-income tax movement in Sri Lanka and encourage everyone to stop paying income tax to the corrupt STATE, until the corrupt Politicians start paying their taxes! Charity begins at home!

    • 0
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      Quite correct SM!

      Sri Lanka’s economic crisis due to political corruption is building up. Soon there will be a proxy war in the streets of Colombo as in so many other countries of the global south, this time between China-backed Mahinda Jarapassa and US-backed Ranil, because there is NO alternative (TINA), unless JVP takes over.

      Today Ranil and Sira’s Jarapalanaya has out done MR’s jarapalanaya!

      So, there will be no Foreign Direct Investment into Lanka and the rupee will continue to free-fall and the debt crisis will get worse while Sri Lanka remains a hot air HUB of financial crime, as long as the political culture of impunity and immunity for Financial Crimes committed by corrupt UNP-SLFP politician continues.

      The so called new constitution is a grand distraction from the political culture of corruption under Rani-Sira, just as racism was the divide, distract and rule policy of MR.

      What are the FCID and Bribery Commission doing? Why has that Avant Gauard crook called the Minister of Justice, Wijedasa Jarapassa, Gots’s best buddy not been sacked?

      Why is the Constitutional Council silent on the failure of these oversight institutions including Ministry of Justice?

      The culture of impunity for corrupt politicians must end. They need to be tried in open court for financial crimes against the people of Lanka, and held ACCOUNTABLE for under-valuing and then selling off their duty free car permits.

      The vehicles bought on duty free permits must be confiscated and auctioned off to pay off national debt. The system of duty free cars for politicians must end and they should only be given small Maruti cars to travel in.

      As long as the bi-partisan culture of corruption continues Sri Lankan people should not pay taxes to the corrupt government.

  • 1
    1

    I believe that the Budget is more a policy statement implemented through govt. agencies. FM could work out through the CBSL. We remember during the past there was a Budget proposal to devalue the Rupee by 3% which the Governor of the Central bank and Dr. Wijewardena came to know while listening to the Budget speech. Developing countries have no time to waste being guided by ancient rules and regulations but be practical for the benefit of the country. Should payment gateways be under the Central Bank? What has it got to do with the monetary policy and fiscal policy main concerns of the CBSL. Will the CBSL be able to ensure always that a payment will reach the real beneficiary and not in Nigeria. Any way we are in times where the Central Bank of Bangladesh failed to protect its own reserves and their funds were remitted fraudulently using their own payment gateways.

  • 1
    3

    This is the most pathetic budget speech in Parliament after Independence; PM Wickremasinghe, Minister Kiriella and many Government MPs and ministers were taking a nap while the speech was going on. What’s this Yahapalanaya? What’s the use of giving long budget speeches if even PM, ministers and Govt MPs don’t listen; probably they are already aware that Finance minister does not know what he is talking about?
    For ex: Today he said he did not suggest the minimum fine of Rs 2500.00 for traffic offences but it is there on his speech in black and white. Even some journalists are asking what he is talking about! Finance Minister Ravi Karunanayake is the most impractical member in Yahapalana cabinet. Doesn’t he know that tax hikes affect the price of every commodity?
    I will not be surprised if Gotabhaya is elected by a resounding majority at the next presidential election just like the US voter gave a chance to an apolitical leader recently!

  • 0
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    The writer says: “No Budget in 2016”. Now 2017 Budget: “Serous Issues – Howlers, Inconsistencies, & Undue Interference with the Monetary Board”. This Budget (2o17), according to Government spokesmen was unique, in that, countrywide discussions, consultations with academics and business community and finally before bringing it up in Parliament, was discussed by the Cabinet. So didn’t anyone see those “Serious Issues” the writer speaks in this article? Then, if we are to agree with that presentation, how and in what manner the Government is going to attract much spoken and advertised “Foreign Investments”? In my opinion, this Budget has not made any lay out to streamline the economy, set up the social environment needed to attract investments from the local and foreign investors. In short, the people have lost any confidence and trust in the Government to bring about a change they desired. The beginning of the end has started and gathering momentum. The President feels the pulse, but the Prime Minister and the Ministers are living in a yet cool but slowly boiling pot.

  • 0
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    What about they want to privatize some affairs inside tge Central Bank.

    Is it like Absorbing PErtual Treasuries into the Central Bank.

    So, the Rats will be inside the Bank ?

    govt can give not only tablets everything free as long as Middle east is not in recession and politicians can become Vessantharas.

    After that, Sri lanka will be bankrupt.

  • 0
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    It is the dangers of intrusion into the payment system as highlighted in this article that is alarming. Is this the opening of the path to another scam like the bond scam. Forewarned in fore armed, so those involved in the payment industry, particularly the current governor of the central bank and other senior central bankers must advise the President of the dangers this poses to the entire economy in general and the payment industry in particular and nip this in the bud.

  • 0
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    Mr. Wijewardene: I listened to a TV (ITN) discussion you participated in regard to the Budget 2017. You specifically stated that the country has to deviate from the agricultural (rice, rubber, tea,etc) base and establish “Technological” based products as done in Singapore. I wonder where you live in stating that fact. Have you forgotten that Sri Lanka is mainly an agricultural country and we have been dependent and continue to be dependent for our own food supply. When, we say “Food Supply”, it is not only rice; but all other agricultural produce such as vegetables, spices etc. Do you know, how much we “Import” of these food items to supplement the short fall in our own produce? A simple example is the quantity of dry chilly powder we import from India and the foreign exchange that flow out from the country. We also have a “Premium” product “Tea” and “Rubber” world known; but what have we done to “Improve” this product to meet the demands from the world? How much of our “Natural Resources” have we developed to meet the demand of the world. Have you ever assessed the quality of our “GRAPHITE” (98.9% carbon content) and looked into the world demand for products based on that national resource? Having ignored all that you tend to suggest “Singapore Model” for this country. Obviously, Singapore has to adopt that model, because it hasn’t got any “Natural Resources” and it has been a must to go for “Technologically Developed Products”. In contrast the countries that have “Natural Resources” have to and must adopt a model to develop and produce “PRODUCTS” to cater to the world demands while meeting the local demand and avoid “imports, saving on out flow of money. Of course, it is necessary to make an INVESTMENT in “Technologically Developed Techniques” to improve and produce, products based on our Natural Resources. Do you think that the Budget 2017 has looked into that aspect? Why you did not address your mind to that aspect in discussing the Budget 2017 in that TV programme?

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