2011 Budget to stimulate growth:

Lanka on track to become a 'first-tier'country - Dr. Sarath Amunugama

*Emphasis is on the 20m citizens

*Poverty to be reduced to 5%

*Per capital income to be doubled to US$ 4000

By Uditha KUMARASINGHE

Senior Minister of International Economic Corporation Dr. Sarath Amunugama said the main objective of the budget 2011 is to stimulate growth so that this momentum is carried into the next five years. If the country can achieve an average of eight percent growth in the medium term that would again change the history of Sri Lanka. Dr.Amunugama in an exclusive interview with the Sunday Observer said the debate should be how that growth can be stimulated to pass its benefits throughout the country. The whole focus of the budget is not to accommodate 1.3 million public servants but accommodate over 20 million citizens in the country.

Q: How would you describe budget 2011?

A: Sri Lanka is now on a growth path. If you take 2010, we would have achieved a GDP growth of eight percent. Also this is achieved through all round growth. For instance agriculture grew by 7.2 percent and industry grew by eight percent while the service sector recorded a growth rate of 8 percent.

The difficult period when we had to face oil, food and financial crises is now receding. So the main objective of this budget is to stimulate growth. If we can achieve an average eight percent growth in the medium term that would again change the history of Sri Lanka. We are no longer a least developed country. We are now a middle income country. So we have to set the targets appropriate to a growing middle income country. We are hoping to go upto US$ 4,000 per capita income which should put us in the league of countries like Malaysia and Vietnam which are now recognised as countries with strong and growing economies.

It is very important that we safeguard this take off stage. We have done well in 2010. We have to make a consistent effort upto 2015 to keep our country on the growth path.

Q: The Opposition says the budget provides no relief or concessions to the common man. Your comments?

A: When the economy grows, more and more people get money into their pockets. Our debate has been derailed into whether public servants are getting a salary increase or not. The question is not that. The question is that a large number of Sri Lankan citizens, those who are poor and in the outstations are earning much more. Take paddy for an example.

We had a record growth of paddy last year. Paddy production in Maha season increased by 10.3 percent. We have produced 2.63 million metric tons of paddy in that Maha season compared to the previous year. This was caused by good weather conditions and the production of the North and the East coming into the market. In Maha season, paddy was cultivated in 4,424 hectares in Northern province.

In the Eastern province, 150,696 hectares were cultivated. This means more money is going into the hands of farmers. They earned 15 to 20 percent more than what they did the previous season.

If we take tourism all hotels are fully booked. Youth in the tourist trade who only got periodic work in the past now get a regular salary.

In Hikkaduwa they get Rs. 14,000 as service charge and Rs. 10,000 as salary. We get about Rs. 3 billion foreign remittances particularly from the people who work in the Middle and Far East. That money may come through the Central Bank as foreign exchange. But finally it goes into the village. Nobody talks about it. A vast number of people get a monetary advantage when the economy grows at eight percent.

That is the real distribution of wealth. We have to look after the public service as well. But the whole focus of the budget is not on accommodating the public service but accommodating the public at large. There are 20 million people in this country. The public servants comprise about 1.3 million. We should put the emphasis on the 20 million citizens who need regularly get an increase in income.

A survey shows that poverty has declined to seven percent in 2010 as against 15 percent in 2006. This means the money that was directed to the rural areas is beginning to pay off. The Government under the Gama Neguma program has allocated Rs. 1 million to each Grama Niladari division for local infrastructure development. The Gama Neguma program has completed 72,000 small projects at a cost of Rs. 28,000 million during the last four years. The people may be amazed to see the number of concrete roads that have been constructed in the country. We have to focus on growth and the benefits to poorest of the poor. Today the public servant in Sri Lanka is a privileged person. We are maintaining the Samurdhi program and a large amount of money has been allocated for it this year as well. We are also continuing the fertiliser subsidy while poverty relief allowances have been increased. In addition, groups like the Ranaviru families and schoolchildren have also been accommodated in this budget. So the emphasis is on growth and that will lead to a wide distribution of wealth in the disadvantaged areas. I think the debate should be on how we stimulate that growth so that the benefits will be for all the country and not to one particular group.

Q: What are the main aims of the tax reforms proposed in the budget 2011?

A: When the growth process takes place, we have to review all the existing laws. Many of the laws were brought into place when we were having a financial crisis. For example, we can take laws which relate to foreign currency, foreign exchange and banking. All were geared to save the country from the ill effects of an out flow of very valuable foreign exchange. That scenario has been completely changed now.

We have a surplus in our foreign reserves. In fact it is putting pressure on the rupee. But we are not allowing that. Under the new situation of growth and comfortable foreign reserves, we have to change the laws accordingly. This means that a new tax system will also come to reduce corporate and individual taxes and widen the tax net.

Our tax system is based on voluntary declaration. If tax rates are very high, people tend to dodge. Far reaching concessions have been given while individual and corporate taxes have come down. Some taxes have been abolished. There has been a consolidation of several taxes. Because the private sector has been complaining that they have to pay taxes at several points. They don't mind paying but they want to have one consolidated tax. There is a need for a more efficient tax regime which has the ability for private companies to borrow direct from abroad and also to invest abroad. All these are envisaged in the taxation changes.

Q: What are the benefits of the proposed tax changes?

A: By reducing these taxes, we feel that the revenue will increase. We can widen the tax net. A lot of people who were reluctant to make proper declaration will now be able to do so as the taxation rates have been reduced. There have been a lot of exemptions for the people in the low and middle levels. For an example the current tax rates on personal income ranging from five to 35 percent has been reduced to four to 24 percent. Tax free threshold has been increased from Rs. 300,000 to Rs. 500,000. Tax slabs have been increased from Rs. 400,000 to Rs. 500,000. The concessions have been given to the lower end.

Q: What are the objectives of these tax changes?

A: One is a simplified tax system and a low tax regime. Secondly to have a taxpayer friendly system. Thirdly reducing and removing some taxes such as the debit tax. The banking sector can lend on much more long term objectives as reduced taxes have been introduced to the financial sector. Small and medium enterprises have been exempted from some of the taxes and the economic service charge has been taken away. Tax incentives have been given to increase tourist spending and encourage value added exports, research and development. Incentives have also been given to encourage new technology based industries and easing foreign exchange controls to facilitate more foreign exchange inflows.

Q: Several taxes will be abolished. How is the Government going to meet the shortfall?

A: If there is an overall and medium term growth in the country,more wealth will be created. If seven to eight percent growth is achieved,there is a natural increase in the GDP. When there is more wealth,there will be more eligible taxpayers both corporate and personal.

They will be able to pay more by way of taxes on their earnings. The quantum of taxes paid will go up due to increased earnings and concessions given. Therefore we are anticipating a better revenue collection from a larger area from which taxes will be gathered.

Q: Sri Lanka aims to achieve a per capita income of US$ 4,000 by 2016. How realistic is this target?

A: Our economy took over 25 years from 1977 to 2004 to increase the per capita income from US$ 300 to US$ 1,000. During the past five years, we have doubled it despite adversities. The per capita income this year is expected to be around US$ 2,375 in comparison to US$ 1000 five years ago. That is a spectacular increase. Now we have to continue this eight percent growth trajectory. If that is so, we will be able to achieve this target. We are very confident that can be done.

Q: What are the steps taken to encourage investments and exports through the budget?

A: We want to make exports and imports 60 percent of the GDP compared with the present 50 percent. We want to encourage exports and also domestic value addition. In order to achieve that aim, duties and taxes on machinery, equipment and raw materials have been reduced. Income tax for industries with domestic value addition in excess of 65 percent will get a reduced income tax of 10 percent from the present 15 percent. The income tax of all export companies will be reduced from 15 to 12 percent. The income tax on profits of domestic manufacturing enterprises will be reduced from 35 percent to 28 percent. All these incentives are to encourage the export sector. In addition to this, specific concessions have been given to promote IT, BPO services and the gem and jewellery industry.

Q: Can you explain how agriculture will benefit from the budget?

A: The Agriculture sector has been showing a very good recovery in the domestic and export sectors. If we take export agriculture, tea production has been increased by 26.2 percent as compared to the same period in 2009. Prices at the Colombo Tea Auction remains high. Rubber production has been increased by 8.2 percent. All categories of rubber registered the highest ever price in Sri Lanka. But there has been a deterioration when it comes to coconut production.

Paddy has become a success story. Today we are self sufficient in rice. The FAO has warned of an impending food crisis. Sri Lanka is very fortunate that we are now in a position to face a crisis of that nature. At present flour prices have gone through the roof.

But we have been able to survive all that because rice consumption has gone up and flour consumption has gone down.

As I mentioned earlier, when there is growth in these sectors, more money will come into the hands of the people whose livehood is agriculture. We should not forget that 65 percent of our tea is produced by small and medium scale farmers.

Q: Any special measures through the budget to speed up development in the North and the East?

A: There has been no development in the North and the East during the past 30 years due to the terrorist activities. Now the Government is paying special attention to develop those areas particularly infrastructure development the earlier phase of demining and checking of people is now coming to an end and more and more people are going back to their villages to commence productive enterprises.

When there is development in agriculture, infrastructure, tourism and fisheries, people in the North and the East will also benefit. There is a 50,000 housing program sponsored by India and large investments on rehabilitation and resettlement.

Q: Why did the government bring highly paid government servants under the PAYE tax net?

A: Though the tax system has been revised, we have to remember low and middle income taxpayers are exempted on the amount which they are liable to pay. All citizens of this country should be brought into the tax net without discrimination.

These are people who are earning a certain income and above. It will be standardised and everybody will have to pay those taxes. When there is so much of activity in the private sector and people who have contributed to our economy or remitting funds to this country by working abroad, all those should be treated equally.

Q: Is the country on track to a growth rate of around eight percent as per this budget?

A: We want to look at the following targets. Our total investment to be increased 30 to 32 percent in the medium term from the present 25 to 27 percent. This would enable us to go for the eight percent growth target. Poverty is to be reduced to 5 percent from the present 7.6 percent while per capita income is to be doubled to US$ 4000. We should also promote international trade by improving the investment climate. These are our key objectives.

Q: What is the main aim of establishing a citizens' pension and Insurance Fund?

A: Retirement benefits were restricted to the Government sector. If there was a demand in the private sector,they should also be given some of these benefits. Today for one public servant, there are roughly six in the private sector. We have to safeguard their interests as well.

It is a contributory scheme. They will have to pay two percent and the company will also have to pay two percent. This will give some security after they retire from work. This is some sort of retirement benefit.

Q: What is the significance of having the new International Monetary Cooperation Ministry?

A: Today the Sri Lankan economy is integrated with the global economy. As we saw in the past whenever there are changes in the global economy, it impacts immediately on Sri Lanka. So we have to look at those trends and make the best use of whatever assistance we can get to help in this development. Economic assistance is a very complicated thing.

For an example selection of projects, funding of projects, getting most advantageous terms for the country, in keeping up our contacts and good relations with international monetary institutions. These are all burgeoning global institutions.

We also need to improve our image in the financial and investment field. Because this is very highly competitive situation. There are about 150 countries in the world which are competing for investments. So we have to project our image and promote Sri Lanka as an investment destination. A part of the responsibility of this Ministry would be to continue these contacts and further build up our image like a "first tier countries" like Vietnam, South Africa and Malaysia.

We also must get our place as a "first tier country" in the growth of the global economy.

Q: There are allegations that the Government is drafting budgets on the dictates of IMF. Your comments?

A: This is utter nonsense. Economists in the IMF and the Finance Ministry, media, private sector think tanks, they all think that certain changes have to be made to improve our economy based on the science of economics. If that is so, we can say that we are not under the influence of IMF but even the IPS under Dr. Saman Kelegama has given the same recommendation. These are recommendations regarding economic growth. The Government has to consider and adjust accordingly.