The Sunday Leader Online

Key roads in the city were closed on Thursday, budget day, and on parliament sitting days last week to ensure the security of parliamentarians. The huge traffic blocks left many motorists and bus travellers stranded on the roads for hours. Photo shows traffic proceeding towards Battaramulla and beyond held up in one big pile near the Ayurveda Hospital junction in Rajagiriya in anticipation of the President using the road on budget day. However the President used a helicopter (see inset) to travel to parliament.

By Mandana Ismail Abeywickrema

The government in its budget for 2009 has not hidden its desperation to safeguard the dwindling foreign reserves in the guise of promoting the country's national economy.

On the other hand, the government has also increased the tax burden on the people. Although the 15% VAT component has been reduced to 12%, economists have pointed out that the reduction has not affected the government's tax collection due to the imposition of a plethora of new taxes as well as the increase of several other existing taxes and cess'.

Initial calculations have revealed that an additional Rs. 30 billion would be placed on the people in the form of tax payments for 2009. (Rs. 1,500 in additional taxes to be paid by each person.)

Economists feel that the government's 2009 budget is aimed at killing "two birds with one stone." In other words, while the government through the budget creates euphoria among the masses and several political parties with its bid to uplift the 'national economy,' on the other it would be able to prevent its dollars from flowing out of the country through imports.

Foreign exchange crisis

Economist, Dr. Harsha de Silva said the country is faced with a serious foreign exchange crisis with reserves sinking low.

"The US$ 300 million loan the government launched on October 7 is yet to come in and is to make quite a significant loan repayment in the next few months," he said.

Therefore, the government's 2009 budget has been formulated to manage its remaining foreign exchange while not showing its desperation to the people.

According to Dr. de Silva, the budget proposals should be looked at along with the new government regulations imposed with regard to the margins on LCs end last month.

However, the government has laid a heavy burden on imports and called for "import substitution."

"Import substitution is no longer valid in economic terms. They are policies that do not work," Dr. de Silva said.

Presenting the budget for 2009 last week President Mahinda Rajapakse in his capacity as Finance Minister said, "We rejected 'Regaining Sri Lanka' which underestimated local entrepreneurship and viewed any problem with a blind eye in the guise of globalisation and neo-liberalism. We proposed an alternate strategy through Mahinda Chinthana, which would strengthen the domestic economy, domestic identity, and a new value to national wealth. We have realised through our own experience and by looking at the global experience, that economic and social welfare cannot be successfully achieved through total reliance on the private sector or only through a market economy."

Local production

He said the policy of Mahinda Chinthana was to encourage local producers and production. As such, imposition of cess, introduction of loan schemes and extension services were done to promote local production.

However, an opposition member of parliament said the government could slap such restrictions on imports like wheat flour and sugar if the country is in a position to supply enough to meet the demand from within the country.

"The country should be able to meet the local demand, if not there will be a shortage of certain items in the market creating a price hike on those items. The consumers would have to shoulder the burden of high prices yet again," he said.

In the budget proposals for 2009, there have been increases in cess on imported items, notably consumer goods, food items and even animal feed.

New taxes have been introduced while several existing taxes have been increased. Some analysts have pointed out that this move could have an adverse impact on the consumers.

"The Nation Building Tax of 1%, on all importing, manufacturing and service industries could have a wide-ranging impact on all sectors of the economy. The nature and quantum of this needs to be clarified and assessed on a case by case basis," an analyst had reportedly said.

Additional revenue

According to Dr. de Silva, although the government would stand to lose Rs. 45 billion due to the reduction in VAT, the collection from the other taxes would amount to Rs. 76 billion.

"If you calculate it, the additional Rs. 30 billion the government would earn as taxes would mean an additional Rs. 1, 500 to be added to the amount of taxes to be paid by each person in the country," he said.

Referring to government debt, Dr. de Silva said the state was looking at cutting down capital expenditure to mend the deficit.

The government he says has adopted "a dog in the manger" attitude.

"We need investments, but the government won't open for private participation and continue to hold on to all sectors. They are not looking at reforms," Dr. de Silva said.

He charged that the government after allocating meager amounts as capital expenditure, later on resorts to curtail them to maintain the deficit.

Citing neighboring India as an example, Dr. de Silva said the country has resorted to building airports, roads and ports with private investments. On the contrary, the Sri Lankan government, knowing very well it cannot afford such endeavours continues to engage itself in such activities.

Mihin shocker

However, the government's decision to reinvest money in the bankrupt airline, Mihin Lanka, came as a shock to many.

Rajapakse said, "Our government is taking measures to expand domestic and international airline services, operate Mihin Lanka Airline to be able to offer an affordable service to the general public and to construct the Weerawila International Airport. Although Mihin Lanka Airline suffered a setback due to increasing oil prices and inadequate capital, the operations could be revived by providing the required capital, since we have secured long-term financing to acquire the required aircraft. This move will improve domestic and regional air travel and also be a major concession to the export of fruits and vegetables. We have already included the required allocation of Rs. 6,000 million in the budget estimates."

Dr. de Silva, commenting on the decision to operate Mihin Lanka said it showed the arrogance of the government when it came to fiscal discipline.

Budget 2009 at a glance

Cess imposed on several imported items - 5% cess on imported wheat flour, 15% cess on imported agricultural produce such as blackgram, kurakkan and cowpea)

Cess on imported rubber latex and tea Rs. 25 and Rs. 4 per/kg respectively.

Cess of 25% imposed on imported maize and animal feed.

Cess of 5% imposed on paper imports

Cess of Rs. 2000 per/kg on all imported leather goods

Cess on polythene and plastic increased from 1% - 5%

Increase in cess on ayurvedic medicine imports

Increase in existing cess on all imported foods and vegetables

Increase in cess on sarees, sarongs, readymade garments and material imported by 50%

Increase in cess on imports of fridges, fans and ceramic wear by 50%

Increase in cess on imported chocolates, biscuits and sweets by 50%

Cess of Rs. 10 imposed on imported salt

Levy on imported milk powder increased from Rs.5 to Rs.15 per/kg

Levy on imported sugar increased by Rs.2

Electricity consumers using less than 90 units granted a rebate of Rs. 30 per month. Those using less than 15 units of water granted a Rs. 20 discount.

Telephone levy of 10% applicable to mobile and CDMA phones expanded to fixed line telephones.

ncome tax payable by Sri Lanka professionals serving in a company or partnership based in Sri Lanka and providing international services and earning in foreign currency confined to 20%.

Income tax concessions to producers, authors, singers, musicians and stage drama artistes.

Amendments to the Intellectual Property Act to make it mandatory to provide financial benefits for scriptwriters, composers and singers of songs when their songs are transmitted via radio or TV.

Monthly allowance paid to soldiers engaged in operational areas to be increased from Rs. 3000 to Rs. 5000.

VAT reduced from 15% to 12% with affect from January 1, 2009. However, 20% VAT on motor vehicles, luxury goods and liquor to remain.

Economic Service Charge (ESC) liability of Rs. 60 million increased to Rs. 120 million.

Nation building tax of 1% to be imposed on the turnover on imports, manufacturing or services other than on the banking and financial sector for two years

Personal income tax to be introduced in three slabs of Rs. 400,000 and a further three slabs of Rs. 500,000 each. Accordingly personal income tax burden will be reduced by 5%

The 2.5% tax on interest income is to apply up to an income of Rs. 1 million.

Paddy cultivators using organic fertiliser and material such as hay to be provided three bags of fertiliser per acre under a guarantee issued by a farmer society.

A 50kg bag of fertiliser for tea small holders to be given at Rs. 1000.

Fuel prices - diesel reduced by Rs. 30 per litre, petrol by Rs. 15 per litre and kerosene by Rs. 20 per litre

Public servants granted a Rs. 1000 cost of living allowance. The allowance for public servants increased from Rs. 3500 to Rs. 4500 per month with effect from January.

Festival advance for public servants increased from Rs. 3000 to Rs. 5000.

Cost of living allowance for pensioners increased by Rs. 560

Losing out on tea

Chairman, Tea Advisory Committee of the Industries Ministry, Rohantha Athukorala said that Sri Lanka loses Rs. 1.9 billion due to declining production.

One of the key issues in the tea sector is the declining output. In the last three years the output has declined from 316 million kgs to 304 million kgs in 2007. A decline of 1.8% in national production will result in a loss of 5.5 million kgs of tea and at 2007 FOB price of US$3.29 per kg will be equivalent to US$18.1 million. In rupees its almost 1.9 billion.

The budget proposal on reducing the price of a 50kg bag of fertiliser to Rs.1000 to ease the financial burden of tea small holders is commendable as the small holders account for almost 70% of the tea production and with the proper use of fertiliser the declining trend can be somewhat arrested, notes Athukorala.

However, the balance output comes from the corporate sector and the key issue is that almost 90% of the Old Seedling Teas (OST) are over 60 years old and the Tea Research Institute (TRI) says that OST over 60 years old would be largely emaciated through wood rot, pest/disease damage and thus low in bush vigour.

Athukorala pointed out that if replanting does not happen as a matter of priority the corporate sector output could decline drastically and that this has to be addressed in the 2009 plans. He further said that the current replanting in the corporate sector is only 0.7% and TRI had recommended an optimum level of 2% with 3% being the ideal. "But the issue is that it costs over Rs. 2 million to plant one hectare of tea with the financial rate of return being only 13.4% with the break-even being after the 14th year after replanting," added Athukorale.

Athukorala however commended the reduction of income tax from revenue earned from exports of tea packets to 15% and the removal of cess on tea packets and tea bags. He said this will help increase the value added tea sector immensely but urged the speedy setting up of a state owned company as in the budget proposal that will intervene in the Colombo tea auction, and also establish a government to government linkage with countries like Iran and China to stabilise market prices in case the global turmoil continues.

Summary of the Budget

Rs. Bn.

	2007	2008	2009
		Revised	Budget
Total Revenue	565.05	709.35	855.00
Tax Revenue	508.95	643.48	779.14
Income Tax	107.17	138.29	166.70
Taxes on Goods and Services	328.60	396.74	464.78
Taxes on External Trade	73.17	108.44	147.66
Non Tax Revenue	56.10	65.87	75.86
Total Expenditure	841.60	1,016.70	1,191.67
Recurrent	622.76	743.39	823.51
Personnel Emoluments	214.16	243.89	268.36
Interest	182.68	215.93	250.44
Subsidies and Transfers	147.45	170.41	196.02
Other Goods and Services	78.47	113.16	108.70
Public Investment	229.27	278.19	370.77
Other	(10.43)	(4.88)	(2.61)
Revenue Surplus(+)/Deficit(-)	(57.71)	(34.04)	31.49
Budget Deficit	276.55	307.35	336.67
Total Financing	276.55	307.35	336.67
Total Foreign Financing	131.41	122.78	153.55
Net Foreign Financing	100.91	97.73	123.02
Foreign Borrowings Gross	165.02	189.04	222.52
Debt Repayment	64.12	91.32	99.50
Foreign Grants	30.51	25.06	30.53
Total Domestic Financing	145.14	184.57	183.13
Net Non Bank Financing	111.31	158.87	165.63
Net Foreign Currency Domestic Financing	3.40
Net Bank Borrowings	12.37
Other	18.06	25.70	17.50
Revenue/GDP %	15.8	16.0	16.4
Tax Revenue/GDP %	14.2	14.6	14.9
Expenditure/ GDP %	23.5	23.0	22.8
Recurrent Expenditure/ GDP %	17.4	16.8	15.8
Public Investment/ GDP %	6.4	6.3	7.1
Revenue Deficit(-) or Surplus(+)/ GDP %	(1.6)	(0.8)	0.6
Budget Deficit/ GDP %	7.7	7.0	6.5

Revenue proposals for 2009

Proposal Rs. (Mn)

Economic Service Charge 1,000

Personal Income Tax (500)

VAT (45,351)

Excise 7,000

Nation Building Tax 15,000

PAL 24,000

Import duty and cess 25,000

Telephone levy 2,500

Special commodity levy 1,500

Total 30,149

Gross borrowing requirement -2009

Total receipts other than government borrowings Rs. 907.8 bn

Total payments including debt repayments Rs. 1,715.3 bn

Provision for advance account Rs. 7.5 bn

Risk provision Rs. 25 bn

Total gross borrowing requirements to be recorded
in government accounts Rs. 840 bn

Of which total debt repayment Rs. 475 bn

©Leader Publications (Pvt) Ltd.
24, Katukurunduwatte Road, Ratmalana Sri Lanka
Tel : +94-75-365891,2 Fax : +94-75-365891
email : editor@thesundayleader.lk