While the search is on for a new management cum stakeholder partner for heavy-losses SriLankan Airlines, the national carrier suffered a loss of Rs. 28.4 billion in the eight months to August 2017, up from Rs. 12.6 billion in the 2016 comparative period, according to the Ministry of Finance and Media. In its fiscal management [...]

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National carrier in search of partner, bid to buy four more aircraft: Report


While the search is on for a new management cum stakeholder partner for heavy-losses SriLankan Airlines, the national carrier suffered a loss of Rs. 28.4 billion in the eight months to August 2017, up from Rs. 12.6 billion in the 2016 comparative period, according to the Ministry of Finance and Media.

File picture of a smiling Finance and Media Minister Mangala Samaraweera walking into parliament to present the budget

In its fiscal management report submitted alongside with the 2018 budget last week, the ministry said the increased losses were due to an additional cost of Rs. 14.3 billion incurred due to cancellation of three aircraft (A350-900) on lease agreement. The closure of the Bandaranaike International Airport during day time for first three months of 2017 which cancelled around 600 flights during the period, added to the losses.

“However, there is an agreement to purchase brand new four aircraft (A350-900) which are to be delivered in 2020. The Cabinet has appointed a special ministerial committee to make final decision in this regard,” the report said.

Dealing with revenue, the report said total government revenue increased by 15.7 per cent to Rs. 1,172.4 billion in the first eight months of 2017 compared to Rs. 1,013.4 billion in the same period of 2016. Tax revenue increased by 17.5 per cent to Rs. 1,094.9 billion while non-tax revenue declined by 4.9 per cent to Rs. 77.4 billion.

Revenue from liquor eased by 5.9 per cent to Rs. 73.6 billion in the review period due to declined consumption resulting with increased excise duty rates on liquor products. Revenue from cigarette products also declined by 8.1 per cent to Rs. 54.6 billion due to lower production owing to increased tax rates on cigarettes.

Revenue from PAYE tax increased by 18.6 per cent to Rs. 22.4 billion compared to Rs. 18.9 billion in the same period of 2016 due to increased numbers of employment especially in high earning categories such as managers, senior officials, technicians in the sectors of information and communication, construction, manufacturing, education, health and social services, etc.

The report said interest payments on domestic and foreign debt increased by a 25.1 per cent to Rs. 518.6 billion from Rs. 414.6 billion earlier, reflecting an increase in the interest rates. Total interest payments consisted of domestic loans Rs. 377 billion and foreign loans Rs. 97 billion.

Debt repayments increased by 41 per cent to Rs. 784 billion in the first eight months of 2017 compared to Rs. 555 billion in 2016.

Japan made the highest foreign assistance commitment during this period at US$431.3 million, followed by India ($320 million), World Bank ($220.5 million), China ($58 million) and European Investment Bank ($53.4 million), respectively.

The report said total outstanding external debt of the government by end August 2017 was $28.5 billion.

In its “Fiscal Strategy Statement – 2018”, the ministry said real GDP is forecast to edge up to 5 per cent in 2017 due to lingering supply-side shocks in the domestic economy and continued downside risks in the global economy.

Economic transition to a broader-based growth in 2018 is expected, supported by household consumption, investment, and exports. Broader macroeconomic conditions have been improved with the revenue-based fiscal consolidation process, well-anchored inflation expectations, and improved external reserves. Headline inflation will remain below 5 per cent in 2018 and the Central Bank is in the process of implementing flexible inflation targeting over the medium term.

Tax revenue to GDP ratio, which declined until 2015, remained as a constraint to fiscal consolidation efforts and this ratio was low at about 10.8 per cent over the period 2010-2014. This ratio increased to 12.4 per cent in 2015 and it sustained in 2016. The revenue shortfall exerted pressure on the public debt resulting in an increase of debt to GDP ratio to 79.3 percent in 2016. In addition, some loss-making State-Owned Enterprises (SOEs) have contributed to the accumulation of public debt in the country.

“The ongoing prudent fiscal consolidation and public financial management measures will help mitigate possible risks associated with macroeconomic vulnerabilities in the country over the medium term,” the report said.

A series of measures has been taken by the government to rationalise tax exemptions and concessions and simplify the tax laws while strengthening the tax administration in revenue collecting agencies such as Inland Revenue Department (IRD), Sri Lanka Customs (SLC) and the Excise Department.

These administrative measures will minimise tax evasion while improving tax compliance and public financial management. The Government is keen on gradually changing the ratio of direct to indirect tax collection in the medium term to reduce the burden of taxes on the poorer segment of the society. In addition, improvement of the non-tax collection is underway.

Sri Lanka has a full potential to grow faster in 2018 and beyond since the South Asia remains as the fastest growing region in the world led by excessively positive growth in India, the report noted.

Several tax reforms have been undertaken to address issues in the tax system to enable the government to sustainably cover its commitments through broadening the tax base, simplifying the tax system, rationalising the tax exemptions and strengthening the tax administration. The reforms include the increase in Value Added Tax (VAT) rate from 11 per cent to 15 per cent, the expansion of VAT base by reducing VAT registration threshold and removing several tax exemptions, reducing the threshold level of Nation Building Tax (NBT), the increase of Economic Service Charge (ESC) rate from 0.25 per cent to 0.5 per cent, the removal of existing exclusion of profit-making business and imposition of ESC at the point of importation on certain goods, the increase in unit rates of excise duty applicable to motor vehicles.

Also, Excise (Ordinance) duty on imported foreign liquor was imposed while reducing the allowance for the loss of ethanol by evaporation and leakage in storage and transportation. The new Inland Revenue Act has been passed in Parliament to simply the tax laws which will help increase the direct tax revenue collection of the government.

The preparation of Budget 2018 and beyond was based on the Performance Based Budgeting (PBB) framework, aiming at rationalising recurrent expenditure and prioritising capital expenditure while enhancing the government revenue and public investment which will lead to the containment of the budget deficit and the outstanding government debt. The PBB has been initiated based on the experience of implementing the zero-based budgeting approach adopted in the preceding years.

In addition, quarterly expenditure and revenue commitments would help efficient management of public finance.

The 19th amendment to the Constitution created the National Procurement Commission (NPC) to regulate and oversight the procurement in the country. The NPC is engaged in revising and improving the regulatory framework, monitoring and evaluating and handling complaints. The government is at the stage of implementing electronic government procurement (eGP) strategy after completion of its readiness assessment. Meanwhile, the government has created a new position of Comptroller General to manage public assets and develop a ‘National Asset Registry’ of non-financial assets.

Four major SOEs such as Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), National Water Supply and Drainage Board (NWSDB) and Sri Lanka Ports Authority (SLPA) have improved their performance indicators and provided the basis for increased financial discipline.

Meanwhile, CEB and CPC will implement automatic cost-reflective pricing mechanism for fuel and electricity.

Public investment is forecast to maintain at around 5‐6 per cent of GDP over the medium term in order to provide sufficient level of economic infrastructure as well as human resource development.

FDI inflows to Sri Lanka average around 1.5 per cent of GDP over the last five years and the bulk of them are on real estate and mixed development projects. The Vision 2025 envisages to increase FDI inflows to $5 billion over the medium term. Steps have been taken to ensure policy consistency and streamline procedures to create a conducive climate for businesses by improving existing legal and regularity framework, financial market structure and institutional development.

The report said Sri Lanka needs far reaching reforms to boost export sector through diversification of products, increase value addition, promotion of export-oriented foreign direct investments, entering into bilateral and regional trade agreements and creation of competitive infrastructure. With these reforms, Vision 2025 aims at doubling exports to $20 billion per year.

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