Investment and development-oriented Budget - CCC

The Ceylon Chamber of Commerce (CCC) welcomes Budget 2016 for its measures to boost private investment and promote inclusive economic growth. Budget 2016 has shown a commitment to enhancing private sector participation in the economy through Public-Private Partnership (PPPs), to rationalize State expenditure, undertake much needed reforms in pensions, subsidies and welfare, and renew focus on the competitiveness of agriculture and small enterprises.

The Chamber sees reasonable congruence between the policy statement by Prime Minister Ranil Wickremesinghe on November 5 and this Budget, indicating a consistent economic vision for the country. The Chamber also said that the revenue targets in this Budget are ambitious, and achieving them will be critical to build confidence in the fiscal consolidation effort.

Private sector

One of the key features of Budget 2016, which the Chamber sees as a positive step, is the greater involvement of the private sector across a range of economic activities.

This includes, inviting private sector participation in railway services for goods and tourism; a role for private investment in infrastructure projects; private management of Export Processing Zones (EPZs); and private investment in tertiary education and vocational training.

These will open new opportunities for firms and bring in greater efficiency to the economy, without burdening the State. Some critical areas impacting the investment climate, which the Chamber had been advocating for some time, have also been resolved in the Budget.

Taxation

Most notably, the removal of the tax on land leases by foreign nationals and allowing freehold if certain investment criteria are met, will encourage FDIs. The opening of unused and underused State land for private investment is a welcome move as access to land has been consistently cited as a constraint in Sri Lanka's investment climate. The easing of regulations on inward remittances and proposed reforms to make exchange management more practical are also positive for investment.

The Chamber welcomes the reduction in corporate tax rates, as it helps expand overall private sector activity. Simplifying tax returns and simplifying the overall tax code can encourage compliance.

The digital identifier can be used to enhance compliance and track tax-payer transactions. There are concerns on the ability to maintain a lower tax regime in the event that the tax base does not expand as envisaged.

The estimated 38% increase in revenue is ambitious, considering trends in the past - 7.7% increase in 2013 and 5% in 2014. Sri Lanka is now more exposed to international capital markets than before, and global investors and rating agencies will be closely watching the fiscal consolidation effort.

A slipping on the Budget deficit will no doubt impact credibility. On the direct-indirect tax ratio, there continued dependency on regressive indirect taxes and this appears inconsistent with the Prime Minister's policy statement. Budget 2016 estimates show that next year too the ratio will remain at roughly 80:20 rather than a relative shift towards direct taxation.

The Chamber also welcomes moves towards greater digitization of the overall economy and encourage more transactions to take place via formal banking channels. The proposed voucher scheme for school uniforms, with the introduction of a new digital identifier, are important steps to achieve greater efficacy of welfare transfers to citizens and preventing leaks. Over time, the government should extend this to other government payments, as electronic administration can bring in accountability, and continuous monitoring of any government payment.

Agriculture

The nature of Budget 2016's focus on the agriculture sector marks a distinct and important shift. A significant move is the change in the fertilizer subsidy, which was fraught with problems, and the granting of a direct cash grant to farmers to buy inputs of their choice.

Rather than previous strategies of ad hoc handouts to boost the rural agricultural economy, which has had limited success, the focus of the Budget to promote agri-entrepreneurship, value addition, technology adoption, and reduce post-harvest losses by setting up cold-storage warehouses, are positive steps. The agricultural sector, while employing 30% of the workforce, produces less than 10% of GDP. The new measures can provide the opportunity to transform this.