Sri Lanka’s 2023 reform-focused budget risks compromising on bold policies

ECONOMYNEXT – Sri Lanka’s 2023 budget due November 14 is expected to focus on long-delayed reforms, but compromises on bold policies are expected to get the crisis-hit economy back on track sooner due to the political expediency, according to analysts and economists.

President Ranil Wickremesinghe, who is also finance minister, will present his government’s first full annual budget on Monday, November 14. He is expected to announce more taxes, including the wealth tax, some initial reform plans for state-owned enterprises, plans to minimize budget deficits under International Monetary Fund (IMF) terms in exchange for a loan of 2.9 billion over four years.

Wickremesinghe has already announced a series of tax reforms, including raising value added tax (VAT) from 8% to 15% as well as increasing personal income tax rates while reducing the tax threshold.

“We expect new taxes, including wealth taxes, as many key taxes are already being introduced,” Dimantha Mathew, head of research at Colombo-based First Capital, told EconomyNext.

“On the spending side, we may not see much. He can talk about restructuring public enterprises and it will be a reform-oriented budget because they have no money for a social budget. The main budget concerns will be how much the budget deficit could be reduced and how quickly we can reform state-owned enterprises.

The island nation under the previous government led by ousted President Gotabaya Rajapaksa was aiming for a social budget for 2022 to deal with the impact of COVID-19. However, analysts say his ill-conceived tax cuts in 2019 and the misguided ban on chemical fertilizers have pushed the country into its current economic crisis, even though the country’s financial situation was already strained when he took power. .

hard choices

Wickremesinghe will have to tackle a bloated and inefficient public sector, low tax revenue collection, waste of government resources, growing brain drain, declining foreign exchange earnings, high borrowing costs , sovereign debt default, stubbornly high inflation and high government spending.

However, the president risks being paralyzed by a parliament in which he does not have enough MPs from his own party to support his policies.

Wickremesinghe is the leader of the centre-right United National Party (UNP), which has only one lawmaker in the 225-member parliament.

His former centre-left and Sri Lankan nationalist rivals Podujana Peramuna (SLPP) now support him after being ousted following a wave of public protests from May to July this year against their failing economic policies.

The SLPP at the time was contrary to IMF conditions, privatizing state assets, shrinking the public sector, allowing markets to determine the rupee and interest rates, and a liberalized economy led by the private sector.

“I think the budget is going in the right direction. But I don’t know if he will be bold enough not to compromise based on political reality,” Sirimal Abeyratne, a professor of economics at the University of Colombo, told EconomyNext.

“He will try to meet the demands of the IMF, but these are not the demands of the IMF, but ours. The budget should also ensure a proper implementation mechanism for all Sri Lankan citizens to assess their income data in real time.

“This data is not only for tax purposes, but also for other purposes. So that the government knows who owns the wealth, who needs to be supported and who needs social security benefits.

System change

The budget also comes at a time when a growing number of people are calling for “system change” in governance and reforms to the parliamentary process.

People demanded a cut in “unnecessary” government spending and an end to wasting tax money on “white elephant” projects. They also demanded an investigation into the family of former President Mahinda Rajapaksa, accused of being involved in corruption and embezzlement of public funds.

The Rajapaksas rejected the allegations, while Wickremesinghe resisted such demands from the protesting public. Instead, his government began cracking down on protests, rights groups say.

Economists expect Wickremesinghe not to disrupt the apple basket.

“On the spending side, there’s been a lot of trade-offs throughout history with politicians using tax money for their own benefits. You can’t have ad hoc policies. You have to have a holistic approach to this. said Abeyratne.

“For example, just take the roads near schools in Colombo. You can see that many government owned vehicles are used to transport students and these drivers are also government resources. It’s stealing taxpayers’ money. There is no liability. There is no transparency and no one is questioned about it.

“So on the expenditure side, there has to be a top-down approach. Politicians at the lowest level, they should prove that tax money is used well and not wasted and everyone pays taxes,” he said. (Colombo/November 11, 2022)

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