A Budget for the Pandemic
By N. Sathiya Moorthy
There is no denying that Budget-2021, presented by Prime Minister Mahinda Rajapaksa as Finance Minister, to Parliament, is aimed at easing the economic pressures on the individual, caused especially by the COVID-19 pandemic, and preparing him for the immediate and medium terms. Still the Government may need to do something like in the form of putting money in the hands of the people, so as to increase demand, and promote consumption – especially of goods manufactured by the domestic sector, without actually creating problems for the Nation from a series of import bans, as is becoming evident from the European Union (EU) statement the other day.
For particular commendation should be the Budget proposal for LKR 500,000 start-up loan for entrepreneurs and dairy farmers alike. The former also comes with a five-year grace period, but a 0.25 per cent levy on loan application, to assess the seriousness of the intended entrepreneur. It is for helping to encourage the setting up of new and possibly small industry units, employing locally-available talent.
The loan for dairy farming was expected after President Gotabaya Rajapaksa repeatedly underscored the need for encouraging the farm sector and also discourage avoidable forex outgo. In his Budget speech, Prime Minister Mahinda pointed out the Nation was losing $300 M to the import of dairy products. The current proposal is to bring it down by $ 55 M. It is unclear if over the years, and depending on the success of the current proposal, the aim would be to bring down the dairy import bill to near-nil.
Simultaneously, the Budget has promised tax concessions, for industries and investors alike. The Prime Minister announced easing of capital gains tax collection and proposed to “exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds.”
To boost forex inflows from locals, the Budget has promised Rs 2 per dollar remitted by Sri Lankan migrants overseas. This way, the Government obviously hopes to boost forex reserves on the one hand, and also encourage Sri Lankans working elsewhere, to put more money in the hands of their family members that are staying back.
In this context, the Prime Minister acknowledged that low-income women migrated for work and their remittances had strengthened the national economy. The aim now was to increase their remittances to $ 7 billion a year. He pointed out how apart from the Rs 2-incentive proposed in the Budget, how the prevailing exchange rates too would work out to their advantage and that of the Nation. At the same time, to insure their future care and security, the Government plans to implement a contributory pension scheme for immigrant employees, he added.
In this background and also the overall context, however, the overseas job situation may require re-assessing over the coming months, in the wake of the COVID-19 pandemic almost all across the world, and the consequent impact on domestic economy and job scene in very many countries where Sri Lankans are working. The list includes those working as housemaids and as skilled and semi-skilled labour, the latter, particularly men.
At the same time, Prime Minister Rajapaksa said that “when appointing or transferring public servants, it is proposed to ensure that such postings are made giving preference to the districts of residence.” The idea seems to be to reduce the establishment cost of the families, if they had to have more than one establishment, one in where the employee stays and the other where the rest of the family with school-going children and aged members may reside permanently.
To help Government staff to boost their incomes, the budget has also promised permission for non-executive office employees of the public service to engage in other jobs or employment after office hours. Those seeking foreign employment will be granted leave for two years. “I propose to reduce the maximum interest charged on housing and property loans of public servants granted by banks under housing loans and advances up to a maximum of seven per cent,” the Prime Minister said.
What makes the Budget speech, both interesting and challenging at the same time, is the Government’s confidence in being able to propel acceptable economic growth under the circumstances, and also rein in runaway deficit, the latter, though only for the next five years. In the post-Easter blasts, post-pandemic situation, it may even sound over-ambitious, but it is indicative of the Government’s resolve to tame the bull by the horn.
“The expected economic growth rate for 2021 is 5.5 per cent,” Prime Minister Mahinda told Parliament. “I emphasise that it is our medium- term vision to reduce the budget-gap through increasing the economic growth up to six per cent and increasing the Government revenue from its current level of 9.7 per cent to 14.1 per cent. By 2025, the Budget deficit is expected to be four per cent of the GDP due to growth in tax revenue through the expansion of the economy and the trust placed on the management of public expenditure and public enterprises.”
For fiscal 2021, the Prime Minister said, “The estimated Government Revenue for 2021 is Rs 1,961 billion. The total Government expenditure is Rs 3,525 billion and as such the difference between the revenue and the expenditure is Rs 1,564 billion.” In the immediate, “it is planned to maintain the budget gap at nine per cent of the GDP since the private investments, which amounted to 32.3 per cent of the GDP in 2014 has decreased up to 27.6 per cent in 2019 and since it is required to provide a robust start by the Government to revive the economic growth which had stagnated recently.”
The Budget proposes to support the two-year medium-term programme of poverty-alleviation and economic revival outlined for 2021-23 in the “Vistas of Prosperity and Splendour’, the Prime Minister said. To this end, Samurdhi recipients will be given seven per cent loan. As a part thereof, the Budget has earmarked Rs 3,000 million for a scholarship programme to provide Rs 4,000 monthly allowance to each student receiving vocational education, based on their active participation.
Student intake in technical colleges will be increased from 100,000 students to 200,000 per year of which the annual intake is presently at 100,000 would be increased to 200,000 students per year, and a five-year grace period has been announced for tax purposes on Vocational Training Centres, New technical colleges will be established in Colombo, Kalutara, Kandy, Anuradhapura and Batticaloa.
New city universities would be set up in each district to cater to students pursuing popular subjects. Considering that a full academic year, 2000, too was almost spent in lockdown, the Budget has also proposed five-year tax-breaks for private educational institutions.
The Government can be expected to come up with its plans to create jobs in the technical and vocational sectors, whether inside the country or through arrangements with foreign countries where such talent may be in need and in such large numbers. Either way, it should, when successful, create a low-level buoyancy in the economy through increased family incomes, hence purchasing capacity.
Equally interesting and ambitious is the Prime Minister’s announcement to create a sports economy worth $ 1,000 million during the next four years, beginning 2021. To this, the Budget has allocated Rs 1,000 million, though here again, details are awaited – whether it would be through the manufacture of sports goods, establishing training facilities of global standards, or hosting international competitions, either the existing ones in the global circuit or through new ones, in the form of what could be described as ‘sports tourism’.
Loans and repayments
Given the tight economic situation, especially on the forex front, the Prime Minister said that the World Bank, the Asian Development Bank and the Japan International Cooperation Agency are expected to lend $ 1,400 million annually over the next five years. Of even greater interest should be his announcement that the Government has repaid $ 4.2 billion in overseas loan, and thus avoid, debt-default.
“We were able to stabilise the exchange rate, which was steadily deprecating then at Rs 185 to the dollar, and to service the foreign debt of $ 4,200 million, averting the country being classified into a debt-default status,” the Prime Minister declared in the House. Now, it remains to be seen how international rating agencies are going to react, given their recent downgrading of the Sri Lankan economy, successively.
Over all, the Government’s plan seems to be to continue improving the economy even while stabilising and reversing the COVID-19 situation, especially in the light of the second wave of the pandemic. in recent weeks, as outlined by President Gotabaya some time ago. Though the President had referred mainly to daily activities, the Budget shows that the thinking has guided the Nations’ economic managers, too.
“We have three options in the face of the spread of the pandemic. The first is to lock down the entire country by imposing curfew. The second is not to do anything. Carrying our normal activities while controlling the disease is the third option and we opted for that,” the President had said on the occasion.
Where a problem has arisen in terms of the Government’s economic planning is that more and more countries have come up with reservations to the unilateral import ban announced some time ago. This has led to even a normal, widely-used cooking medium like turmeric being smuggled in large quantities from neighbouring India, even as large quantities of imported stocks from neighbouring India are allowed to rot and perish in the Colombo Port.
A delegation of EU ambassadors have since met Foreign Minister Dinesh Gunawardena and expressed their concern in this regard. In terms of international economy, it is ‘protectionism’, which can be taken to the WTO, for instance, or individual Nations or regional groupings like EU could initiate counter-actions aimed at hurting the Sri Lankan economy equally.
It is however, too early to predict what kind of counter-actions can the EU, for instance, initiate – whether it could ban import of marine products, for instance, from the country, or could it include ‘services’ too, in the form of migrant labour, on whose contribution the Budget has long-term plans for the future, too!
About the writer
The writer is Distinguished Fellow and Head-Chennai Initiative, Observer Research Foundation, the multi-disciplinary Indian public-policy think-tank, headquartered in New Delhi. email: [email protected]