Budget blues and welcome showers

It was a welcome shower on Thursday evening in the city of Colombo, providing at least some coolness amidst dusty and warm evenings. Showers were also experienced in other parts of the country, in varying degrees and at various times.

However, the devastating drought still persists and affected populations across the island are complaining that cash (or in-kind) relief against loss of farming income has either not reached them or is insufficient. The Government is reportedly spending billions of rupees on relief.
These thoughts crossed my mind while listening to a conversation between Kussi Amma Sera and her 18-year-old son visiting from the village. “Amme, apey gam-wala hari puras-ney wathura nethi hinda. Lin walath wathura nehe,” her son said, sipping from a cup of morning tea. “Putha, Colombo wathura thiyenawa. Meka ara ‘Colombata Kiri – Gamata Kekiri’ kathawa wagey,” his mother interjected, while preparing a string-hopper and kiri-hodi breakfast.

“Aney Amme, mey kale budget eka neda? Aeikisi kathawak ney paththere?” asked the son. “Ehe-mai, ehe-mai … wena wena puras-ney ratey thiyena hinda, budget gana no katha,” she responded.

Kussi Amma Sera’s son who was spending time with his mother during the August school vacation has a point. There hasn’t been much discussion on the budget which normally gets into the media by around July each year when the Finance Ministry begins collecting data from ministries, government departments and state corporations on requirements for the financial year 2018 (January to December).

While this official process has already begun, it has not attracted media attention owing to journalists having many other things on their plate – droughts and flash-floods, public protests over various issues, the dengue epidemic, ministers attacking each other and in the process providing juicy fodder to newspaper readers and, in recent weeks, revelations at the Central Bank ‘bond-scam’ Commission which resulted in public calls and the eventual resignation of former Finance Minister and later Foreign Minister, Ravi Karunanayake.

Welcome showers over the week may have also rejuvenated the authorities, with the Finance Ministry on Thursday announcing a series of pre-budget relief measures including reducing taxes on vehicles and providing low-interest loans to small and medium-level enterprises.
While newspapers carried ‘smiling’ pictures of the Finance Ministry’s ‘A’ team – Minister Mangala Samaraweera, State Minister Eran Wickremaratne and Treasury Secretary R.H.S. Samaratunga – on Friday, the team has its work cut out and a daunting 2018 budget presentation ahead, in November.

Tax revenue is going to be challenging with corporate earnings falling across the board over the past two quarters with the population battered by floods on one side and drought on the other. Insurance payouts to affected businesses and individuals have increased.
Agriculture-based companies are feeling the pinch while companies in the consumer durables’ business find purchasing power eroding as people don’t have extra cash on their hands.

While all this leads to a very challenging budget for 2018 for the ‘A’ team, also on its plate is unravelling the mess left behind by the under-fire former Finance Minister who ran the Treasury coffers with his own set of advisors often with confrontations with senior Treasury officials, including Dr. Samaratunga. Like movie re-makes, budgeting has also gone through ‘re-makes’ particularly on some tax decisions that were challenged in court. Due to either over-enthusiasm, legal and administrative issues, tax proposals were nipped in the bud leading to an erosion in tax revenue. A case in point being that the long-overdue Nation Building Tax amendment was approved only a few weeks ago and comes into retrospective effect, more than 15 months later (effective date — April 2016).

Also connected to budgets is the long-drawn Inland Revenue Bill which is being amended after concerns raised by the Supreme Court. The bill has drawn other criticism over the role played by the International Monetary Fund. The fund has used its ongoing concessional lending package to Sri Lanka as leverage to insist on controversial changes in the tax structure and administration.

The private sector is like Oliver Twist with a “give me more Sir” call to the Government which has cut tax holidays and tightened the screws on concessions as it battles tax revenue shortages and slippages, facing yawning budget deficits and phenomenal bills to pay foreign lenders, most of which are carried forward from deals by the former regime.

This is Samaraweera’s first budget and the Samaraweera-Wickremaratne duo seems to have a fairly decent balance of political realities cum economic realities, with Eran’s inclusion providing better depth at the top in terms of proper budgeting processes unlike in previous budgets. The ‘A’ team needs to be cautious in trying to implement tax proposals in the budget (in desperation to get revenue quickly) without the required gazette notifications and sanctions of Parliament which were serious issues in 2016.

As far as some budget numbers are concerned, the 2018 budget revenue is expected to rise to Rs. 2 trillion from Rs. 1.6 trillion in 2017 but spending is also seen rising to Rs. 3.4 trillion from Rs. 2.7 trillion in 2017.

One may call it innovative or a necessity. Whatever it might be, changes are coming into next’s year budget with zero-based budgeting in which previous liabilities will not be carried forward.

Spending needs from ministries for next year must also be accompanied by output targets with KPI (Key Performance Indicators) to comply with the performance, officials say.

The budget, according to Treasury officials, would give priority to ongoing and foreign-funded projects where KPI based-measurable outcomes are identified for each project. The focus on next year’s budget is to lend more support to ‘doable’ projects with clear timelines, financial prudence and better accountability levels.

All this is fine. However, while the Government expects the economy to grow faster in 2018 at 6 per cent and inflation to stabilise at 5 per cent, the political challenges are enormous in making these scenarios happen particularly with a serious review of the SLFP-UNP Government of cohabitation due in December.

Which way the winds will blow is anybody’s guess. And, in the absence of astrological predictions (where have all our favourite astrologers gone?), my future is set in listening to Kussi Amma Sera’s often spot-on, crystal ball-like predictions and home-spun theories on which way the economic pendulum is swinging.