How do you look at the 2023 budget presented by the President in Parliament recently? How does it differ from previous budgets? Has it laid a new foundation for the country’s economy which is in a crisis? Is it a budget aimed at “long-term development to be based on correct and not popular decisions”, as it was described by the President himself? To find out answers to these questions, the Daily News spoke to Professor in Economics, University of Colombo, Sirimal Abeyratne on this nail biting budget.
Q: How do you describe this budget?
A: It is a reformist budget. It is to my understanding one of the best that I have seen for decades. It has addressed not only the current economic crisis but also some of the long standing reforms that we need for this country. It has addressed the current and fundamental issues at their source. One is export growth and also the policy environment related to export growth. That is at the centre of the budgetary proposals and that is why I call it a reformist budget.
Q: The Budget aims to make Sri Lanka a market economy with GDP growth 7% - 8%. Is this realistic?
A: I think Sri Lanka can achieve the 7% - 8% not immediately this year or next year, but gradually. Sri Lanka will be able to achieve that growth rate. There are countries which have achieved that growth rate and maintained it. Sri Lanka has the potential to do that. The problem in the past has been the fact that we have not tapped into these areas because we were busy coming up populist budgets. So if we are serious about our reforms and putting our economy back on track, we have the capacity to achieve a 7% - 8% economic growth rate or even beyond that.
Q: The budget also plans to reduce the public sector debt from around 110 percent of GDP as at the end 2021 to no more than 100 percent of GDP in the medium term. Is it possible in the short run?
A: Not in the short term. It is possible if our economic growth rate is going to rise. If the numerator is growing slowly and the denominator is growing fast, then the ratio should come down. So in that way if we are restricting our borrowings, that is a possibility in the medium term, not in the short term. Not in one or two years. Maybe in the next five years, it is possible. 
Q: Budget also outlines an important policy decision to attract FDI. How do you view this?
A: That is a must. I think one of the main reasons why Sri Lanka failed during the last 10 or 12 years is that we failed to attract foreign investments. Sri Lanka has a very poor record of foreign investment. Maybe it was because of the war. During the last 10 or 12 years, it was due to other reasons. Sri Lanka should have FDI, because you know that last year, Sri Lanka did not achieve even half a billion FDI, whereas our neighbour India received over US$ 60 billion and Singapore received over US$ 90 billion. So there is something wrong in this country. The outcome depends on how we undertake these reforms mentioned in the budget. Foreign investors would like to see that doing business is easy in Sri Lanka compared to neighbouring countries. This is a challenge that the Sri Lanka bureaucracy faces. It needs to establish that kind of investment friendly regulatory and policy environment.
Secondly investor like to see, political and policy predictability of the country where they are going. That is why Vietnam and China attract so much investment. Even India can attract, because even though there are changes in Government, they have a policy direction established. But in this country we are not sure about it. We don’t know what policy will be followed, when the Government changes. With these kinds of messy political environments, although we appreciate them in the name of democracy, that is something we need to sort out. All political parties need to understand that we need FDI.
Q: The President also said that he wants to convert Sri Lanka into an export- oriented country and also plans to increase the exports by three billion dollars annually from 2023. But is it possible to convert Sri Lanka into an export-oriented country because we do not have enough resources?
A: Having resources is not needed to make a country rich or make the country export-oriented. What it requires is a right policy environment. In that sense, Sri Lanka can become an export-oriented economy. It has to be, because Sri Lanka is a small country with a 22 million population market. Even China is too small for Chinese manufacturers. India is too small for Indian manufacturers. Our market is the global market. Countries like Singapore or Dubai have become export-oriented, so why not Sri Lanka? Africa has lots of resources, but it has not been a fast growing region. Only now, some of the countries have been picking up. So it is not the resource base that makes a country rich or export-oriented. It is the right policies.
Q: Budget also aims to attract three billion US dollars (FDI) each year for the next ten years. Is it a realistic budget proposal?
A: India attracted over US$ 60 billion. So to my understanding, US$ 3 billion is too small.
Q: What do you think of the tax reforms in the budget?
A: I think tax reforms are in the right direction, although the implementation part is not yet clear. Right direction means improving our direct tax share of the tax revenue, and the budgetary proposals are there in that right direction to improve the direct tax, meaning income taxes. We have a multiple and complicated indirect tax system with a lot of tax rates and there is also a proposal to simplify things and that is also in the right direction. So the proposed tax reforms are in the right direction, although still it is too early to say what will be the outcome, because there should be an implementation plan, particularly for the improvement in income taxes. This country should be ideally, all the people over 18 should be in a database reporting their income and wealth. We have not come to that efficient administrative system. If it is done, it would be a very good thing and we are in the right direction.
Q: There is also a proposal to impose a surcharge tax on importation on diesel, petrol and crude oil. Do you think that this will aggravate the economic situation because it will increase prices of all products?
A: I think this has been imposed because the Government needs revenue. Government has also cut down on many indirect tax rates spacing out in the next couple of years. The Government tax revenue has declined so much in the past. So for the revenue purpose, we cannot say anything against it.
Q: The budget has proposed CESS to be phased out within three years and VAT revision to be implemented from April 2023. How do you look at this?
A: It is good to space out multiple taxes from our system. Although we say that Sri Lanka is an open economy, things have made Sri Lanka not an open economy. If you look at taxes on trade, the Government collects more than 25% taxes from international trade. Our neighbouring countries collect much less than that. India collects only 5% of trade taxes. Most of these countries in our neighbourhood are more open than Sri Lanka. So in order to reverse this situation, we have to have a bold tax reform system in this country.
Q: The Government plans to allocate Rs.50 billion to develop the tourism sector. Do you think that the Government can afford this amount?
A: There are many proposals the Government needs to allocate money to. So this is one of them. It may not be unrealistic because the Government targets about three and a half trillion income within the next year. It also depends on how the economy performs within the next year. So if that is the case, it is not a difficult target to achieve.
Q: Do you think the Government can achieve the revenue target mentioned in the budget?
A: That is a challenge. The reason is that the economy has been shrinking. Next year we have to turn this around. So that means our production base has to be restored. We need to make every effort to make the inputs available. Make the inputs available for production, for services, for tourism; make every possible effort to increase our exports; put the economy on the right track. It will start growing. Once it is done – that is a difficult part for me to comment on right now, because we are not yet there at the moment. But I expect the country to be there by early next year. If we can pick up our growth rate, it may not be an unrealistic target.
Q: There is also a proposal to set up economic zones in Western Province, North Western Province, Hambantota and Trincomalee. Some say this is an outdated concept. What is your view?
A: Many countries have done this as a bypass strategy. When we realize that the overall country’s policy and regulatory mechanism is not conducive to attract foreign investments, not conducive to generate exports as the way we need it, in that case one of the bypass strategies would be to set up separate economic zones. If you look at Port City, it is a special economic zone, administered under a separate regulatory mechanism. So in such situations it would be good to attract foreign investments just like the Port City. There are two things that we should do - The Port City model should be replicated in other areas like Trincomalee and Hambantota. Secondly, some of the regulatory reforms that we have introduced to Port City should be extended beyond Port City to the rest of the country. With these two things I think Sri Lanka can achieve export-oriented industrialization easily. At least replication is necessary. So I think it is a good thing.
Q: There is also a proposal to amend the labour laws. Do you think we have to revise the labour laws in the country?
A: To be competitive with other countries, in our neighbourhood, even with countries like Bangladesh, I think it has been a long due problem in this country. Labour laws have to be revised and we have to protect not the jobs but the people. In the outdated labour law system, it is protecting the jobs and not the people. Our labour law reforms should be geared to protect and improve the standards of labour in this country. But that can be done only by reforming labour laws through which we will encourage more investment, through which we will encourage more production and productivity. And then, it will be translated into incomes. This will improve the workers’ income as well. But if we keep our outdated labour laws as we have been doing for so many years, there will be no investment. Investors will not come to this country. They will go to our neighbouring countries that have flexible labour regulations. Their living standards are very much improved. Our people will then start migrating to those countries, which is already happening. Politically motivated parties have taken up this issue for their own benefit, and then riding on the back of the people. So I think it has to come to an end.
Q: The Government also claims that this budget is focused on youth development. Do you agree with that?
A: The youth is the future of the country. They are in a hopeless situation now. They cannot envision a future. They would love jobs that pay better. They are also thinking of marriage. They need to have a house of their own. They need to have a better future. They have to take care of their families. All this has collapsed with the economic crisis. This is the pathetic situation of the educated youth of this country. I think it is a wise decision to look at the youth first.
Q: President said that he took correct decisions, but not popular decisions. What do you think of this?
A: I think he is right. It is true by looking at the outlook of the budget that he has presented. These are not popular decisions unlike in the past budgets where you have proposals to auction unavailable resources, borrowing money and carrying out those decisions, putting the economy in more and more trouble. In that way, what the President said is absolutely right. But the challenging part is how to translate the budget into action.
Q: The budget is planning to restructure the loss making institutions. How do you look at this?
A: Even though I say this Budget is one of the best, I can bring out a list of things, which are not according to my understanding, good. They are in a way compromising. This State Owned Enterprise (SOE) is something similar to that. I know there is a proposal to restructure some SOEs and their subsidiaries. But we have 400 plus SOEs in this country. So what are we going to do with them? How do we justify their very existence? That is one of the weaker areas in the budget, which has not been addressed adequately, even though a couple of the SOEs have been mentioned there to restructure.
Q: There is a proposal to introduce a regulatory commission for micro finance. It is one of the main problems in rural areas. How do you see this?
A: This is one of the areas which I have reservations about – introducing a lot of committees and institutions. If the problem can be corrected by introducing a committee, I don’t mind. I support it.
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