Financial Times

Budget not defending country from global economic crisis, say professionals and exporters

By Dilshani Samaraweera

Professionals say Budget 2009 does not reflect an understanding of external global conditions or even an understanding of taxation.

Island mentality

The budget is not seen to anticipate potential impacts of the spreading global economic slowdown, to be able to defend Sri Lanka’s economy.

The national budget for 2009 was unveiled when the impacts of the global economic downturn began to show on Sri Lanka’s economy. The country’s biggest exports, tea, rubber and garments are already in trouble, and more dark clouds are looming.

Remittances in danger

With foreign exchange inflows from exports reducing, Sri Lanka is now depending even more on inward remittances to meet foreign exchange needs. But professionals warn that remittances are next in the hit list, due to the drop in crude oil prices and the global cash crunch spreading into the Middle East.
“Around 57% of our inward remittances are from the Middle East and about 27% from Europe.

Thousands of our people work in the Middle East. If economic activities in the Middle East reduce, due to the recession in the West, what is going to happen to us?,” said Chairman of Hatton National Bank, Rienzie Wijetilleke, speaking at a budget seminar organised by the partners of K P M G Ford Rhodes, Thornton and Co, on Friday.

Other sources of foreign funds are also endangered and the budget is not seen to make adequate provisions for emergencies.

“Western taxpayers are now called on to keep their own economies going. So can they afford to provide more funds for donor agencies and multilateral bodies? Even UN agencies delivering humanitarian aid in the country may see funds reducing. But with the huge budget deficit we are running, can we afford to put money into social needs if outside funds reduce?” said Mr Wijetilleke.

Cost of borrowing

Professionals also noted the increased borrowing by the government from external sources. The 2009 budget is expected to run a deficit of Rs 336 billion out of which Rs 153 billion would be financed through external sources and the balance Rs 183 billion is to be met through domestic sources. But the cost of external borrowing could increase due to the global cash crunch.

Meanwhile, the rupee is also increasingly coming under pressure. Many countries have allowed their currencies to depreciate, to remain competitive in global export markets, and local exporters say the Sri Lankan rupee is over-valued. This is making Sri Lankan exports uncompetitive.

“Although the government allowed the rupee to depreciate from Rs 108 to the US dollar, to about Rs 110, the rupee should realistically be between Rs 120 - Rs 130 to the US dollar,” said Mohan Mendis, a past chairman and a member of the governing committee of the Exporters Association of Sri Lanka.
However, deprecating the rupee further, would also make the country’s external debt balloon. Therefore, the government is called on to do some very serious thinking to keep the economy in balance.

Tax system fuelling black economy

Meanwhile, tax experts say new taxes introduced in the budget, are making the tax system even more complicated.“The Nation Building Levy (NBL) is another tax that is adding to a plethora of taxes. It helps to complicate things further and is adding to costs and prices,” said the head of the tax section at K P M G Ford, Rhodes, Thornton, Premila Perera.

The NBL is also going to be an administrative headache for the tax collectors. Exporters point out that cess on imports, is expected to indirectly impact exports.“Cess on imports put up the price of goods and increases the cost of living. This means we have to increase wages. This will put up our costs,” said Mr Mendis.

Others point out that the tax system rewards black marketers while penalising genuine businesses with additional taxes.

“There is a huge black economy in the country. There is a huge amount of artificially created money and this also impacts on inflation,” said Mr Wijetilleke. “The government has to find ways of widening the tax net to include these people that are making money but are not declaring it,” said Mr Wijetilleke.

Overall, the national budget for 2009 is seen as a “short-term solution” and a “get-by-for-one-year,” budget, in anticipation of elections in 2010, instead of being an instrument of good governance.

It’s not all bad news

On a positive note, exporters and the Ceylon Chamber of Commerce noted that the budget had taken into consideration representations by business and industries.

The budget is seen to attempt to protect domestic industries and to encourage domestic agriculture. The government is also looking at developing “knowledge economy” based ventures.

“Submissions by different interested parties have been considered, but issues like the cost of fuel have not been adequately addressed,” said Mr Mendis.

“Importantly the issues highlighted by the Ceylon Chamber in partnership with other chambers were without exception clearly acknowledged. This was a very positive outcome,” said the Chairman Ceylon Chamber of Commerce, J.D.Bandaranayake .The Inland Revenue Department also says the government is setting up a Presidential Task Force to “rationalise” the tax system and called on businesses to contribute their inputs.

Tough on revenue targets

In a separate statement to The Sunday Times FT Revenue, tax consultant N.R. Gajendran said that its highly unlikely for the government to achieve the Rs 32 billion revenue surplus projected in 2009 budget.
“This was there last year as well which was at Rs 37 billion. It is very challenging for the government,” he said. “The revenue target for 2009 is at Rs 855 billion. This is about Rs 147 billion over the revised revenue target for 2008 which is Rs 709 billion. This Rs 709 billion is about Rs 40 billion below the budgeted figure. As such they will find it difficult to reach the Rs 855 billion under the current macro economic conditions,” he said.

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