Verité Research hosted an expert commentary on the budget speech immediately after it was presented to parliament on November 12, 2021. The commentary focused on the promises stated in the budget speech along with analytical insights from PublicFinance.lk.
▪ According to the values given in the budget speech, revenue is expected to grow by 46% to LKR 2,284 billion in 2022. Several new taxes and tax increases are proposed in this regard: surcharge tax on profits, social security contribution, and financial VAT.
▪ Even if the projected contribution from the new revenue measures (LKR 333 billion) is considered realistic, the rest of the revenue base would need to grow by 24% in 2022 – at least double the expected nominal GDP growth – to achieve the expected revenue target. The discussion concluded that the estimated revenue growth of 46% was highly ambitious.
▪ Whilst several panellists agreed that weak revenue generation is a critical constraint in the Sri Lankan economy, efforts to improve digitalisation of the tax system and other administrative improvements were highlighted by some panellists.
▪ Similarities between the super gain tax introduced in the 2015 interim budget and the newly introduced surcharge tax were discussed. The tax is expected to bring a revenue of LKR 100 billion. However, due to its one-off nature, this tax will not be a sustainable solution to the structural revenue constraints in Sri Lanka. Furthermore, it is a retrospective tax that will undermine the government’s stated objective of creating a stable and predictable tax regime.
▪ The proposed social security contribution appears similar to NBT tax that was removed in 2020, but the budget projects collection to be around 40% more than the typical annual collection from NBT (LKR 105 billion in 2019). This ambitions projection is in spite of having a tax-free threshold (LKR 120 million per annum) ten times higher than the NBT threshold (LKR 12 million per annum), with implementation occurring only once legislation is passed in April.
▪ Concerns were raised regarding the dampening impact the new taxes may have on investor confidence, particularly since many of the new measures are one-off in nature, and in the case of the surcharge tax, it is retroactive in operation. The misalignment between the allocations provided in the budget speech and the priorities of the economy was highlighted throughout the discussion. The high allocations for defence, road development, and generally high levels of capital expenditure over allocations for education, healthcare, and skill development were identified as being problematic.
▪ The panellists also highlighted that social security should not be limited to Samurdhi payments and should have a wider scope in ensuring the safety and the security of the citizens.
▪ The proposal to include an amendment to the Appropriation Bill preventing requests for Supplementary Estimates for 2022 was viewed in a positive light by the panellists as it would ensure that the deviation from the budgeted and actual expenditure would be minimised.
▪ The failure of the budget to address some of the critical issues facing the economy was also highlighted. The lack of attention to and focus on the management of external debt, the lack of a clear plan to regain access to international capital markets, and the related implications for dollar liquidity in the banking system were identified as shortcomings in this year’s budget.
Sri Lanka still ‘under test’ before it can receive crucial second tranche from IMF
by Sanath Nanayakkare
International Monetary Fund (IMF) staff concluding their visit to Sri Lanka yesterday reaffirmed their support to Sri Lanka to move out of the ongoing economic crisis, but did not specify an exact timeline for releasing the second tranche of its Extended Fund Faculty (EFF) arrangement to Sri Lanka.
The IMF mission team led by Peter Breuer and Katsiaryna Svirydzenka that visited Colombo from September 14 to 27, is yet to be convinced that it has received a robust programme from the Sri Lankan authorities where they indicate how they would be addressing the persistent revenue shortfall besides outlining progress in foreign debt restructuring which would give Sri Lanka a breather to balance its financing requirements as it starts to repay its foreign debt.
“We had constructive and productive discussions with the Sri Lankan authorities on economic performance and policies underpinning the first review under the IMF Extended Fund Facility (EFF) arrangement. The people of Sri Lanka have shown remarkable resilience and the authorities have made significant progress on important reforms. The discussions will continue towards reaching a staff-level agreement in the near term that will maintain the reform momentum needed to allow Sri Lanka to emerge from its deep economic crisis, Peter Breuer said.
“The objectives of the IMF-supported program will continue to focus on restoring macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential, he said.
However, the press briefing given by the IMF team yesterday signaled that they needed to see more economic and financial policies to support the approval of the First Review of the program under the EFF arrangement.
“Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. These efforts are bearing fruit as the economy is showing tentative signs of stabilization. Inflation is down from a peak of 70 percent in September 2022 to below 2 percent in September 2023, gross international reserves increased by $1.5 billion during March-June this year, and shortages of essentials have eased. Despite early signs of stabilization, full economic recovery is not yet assured. Growth momentum remains subdued, with real GDP contracting by 3.1 percent in the second quarter on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months, he said.
Speaking further Peter Breuer said: “Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth. The authorities have met the program’s primary balance targets and remain committed to this important pillar of the program so as to support their efforts to restore debt sustainability. However, revenue mobilization gains – while improved relative to last year – are expected to fall short of initial projections by nearly 15 percent by year end, in part due to economic factors.
“The onus of fiscal adjustment would fall on public expenditure if there were no efforts to recoup this shortfall. This could weaken the government’s ability to provide essential public services and undermine the path to debt sustainability. To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion.
“Against continued uncertainty, it also remains important to rebuild external buffers through strong reserves accumulation. Building on the Central Bank of Sri Lanka’s success in controlling inflation, refraining from monetary financing will help keep inflation in check. Other challenges include maintaining cost recovery in electricity pricing.
“The government has made steady progress on structural reforms. Key legislations passed in Parliament, including the new Central Bank Act and the Anti-Corruption Act, could improve governance if implemented effectively. The IMF Governance Diagnostic report would inform future reform measures to strengthen governance when published.
“A new welfare benefit payment scheme was enacted with new eligibility criteria that aims to improve targeting, adequacy, and coverage of social safety nets. To ensure financial stability, steps were taken on conducting bank diagnostics, developing a roadmap for addressing banking system capital and liquidity shortfalls and improving the bank resolution framework.
“The authorities have also made headway on regaining debt sustainability through the execution of the domestic debt restructuring and advancing discussions with external creditors. As Sri Lanka is restructuring its public debt which is in arrears.
“Executive Board approval of the first program review requires the completion of financing assurances reviews. These financing assurances reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the program’s debt targets.
“Discussions are on-going, and the authorities are continuing to make progress on their plans for revenue mobilization targets, anti-corruption efforts, and other important structural reforms.”
The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, State Minister Shehan Semasinghe, Chief of Staff to the President Sagala Ratnayaka, Secretary to the Treasury K M Mahinda Siriwardana, and other senior government and CBSL officials, during the visit. The IMF team also met with parliamentarians, representatives from the private sector, civil society organizations, and development partners.
‘Imposing minimum room rates on five star hotels could ruin tourism sector’
By Hiran H.Senewiratne
The imposing of a minimum room rate on five star hotels on the basis of a recent gazette notification is actually killing the industry. Room rates, accordingly, could henceforth rise to between 80 percent and 100 percent, top travel and tourism industry expert Chandana Amaradasa said.
“The minimum room rate of a five star hotel currently comes to about US $ 65 but with the new gazette notification it would go up to US $ 170 per day. But our competitors, such as, Thailand, Malaysia and Vietnam are maintaining a minimum room rate of US$ 80 to US$ 85, Amaradasa told The Island Financial Review.
Amaradasa said that the tourism industry is just picking- up and ‘this type of move is detrimental to the entire sector because these room rates are normally determined by demand and supply and not by gazette notifications.
Amaradasa added: ‘At present, Colombo five star hotels are mainly patronized by Indian tourists, corporate clients and MICE tourists. This will not only impact hotel revenue but the outside supply chain as well. Nowhere in the world is the tourism industry regulated in this manner and this would enable our competitors, such as, Vietnam and Thailand to attract tourists.
“As a long term consequence, some of the airlines could also pull out of Sri Lanka and hotels will halt recruiting new staff and training them with the limiting of their revenue sources.’
ADL’s journey continues: Unveiling new offices in Indonesia and Malaysia for tech excellence
Axiata Digital Labs (ADL), the renowned technology hub of Axiata Group Berhad, is proud to announce the grand opening of two new offices in Indonesia and Malaysia. These strategic expansions, respectively, mark significant milestones in the company’s journey since it’s inception in 2019. This signifies ADL’s unwavering commitment to revolutionizing the telecommunications industry and propelling the global rate of digital transformation.
The inauguration of these state-of-the-art offices exemplifies the dedication ADL has towards expanding its footprint and harnessing the power of innovation across Southeast Asia. As the first CMMI 2.0 Level 3 IT organization in Sri Lanka and an ISO-certified company, ADL is well-positioned to lead the charge in transforming traditional telcos into techcos through its groundbreaking Axonect Product Suite.
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