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**************************** • Budget 2009 - Highlights (228 KB - jpg file) **************************** Economy gets socialist bent (07.11.2008 - Daily Mirror, SL) • Heavy import tax on items to promote local production • Budget slashes fuel prices, bus fares likely to come down President Mahinda Rajapaksa presenting his fourth budget yesterday clearly distanced himself from the neo-liberal economic policies of the past and introduced several measures to promote local industries giving a socialist flavour to the government’s economic policy. The highlight among the concessions granted to the people was the reduction of fuel prices –Diesel by Rs. 30, Kerosene by Rs. 20 and Petrol by Rs. 15 a litre. The government expects that the reduction of fuel prices would result in a 25% reduction in bus fares. The 15% VAT will be reduced to 12% from January 01. However the 20% VAT on motor vehicles, luxury goods and liquor would remain. The public servants cost of living allowance will be increased to Rs. 4,500 with a maximum Rs. 1000 increase. The pensioners’ cost of living allowance will be increased to Rs. 2000 with a monthly Rs. 530 increase. However the 10% levy on mobile and CDMA phones has been extended to landlines as well. It was proposed to increase the special commodity levy on imported milk powder from Rs.5 to Rs.15 a Kilogramme. The commodity levy on imported sugar will be increased from Rs.14 to Rs.16 a Kilogramme. The Cess on several imported items including chocolates and biscuits, leather goods, fruits and vegetables, ayurvedic products, sarees, sarongs and imported garments, fridges, fans and ceramic ware was increased. With regard to the high defence expenditure the President termed it as a “priority need” towards establishing a stable economic environment to restore democracy, consolidate human rights and achieve economic development. “This Parliament has fulfilled a tremendous social responsibility by giving the required approvals to incur such expenditure. Unfortunately, certain liberal members in the opposition and peace agents saw these as wasteful expenditure. However, we view such expenditure as a priority need towards establishing a stable economic environment to restore democracy, consolidate human rights and achieve economic development. People are committed to make any sacrifice to relieve our country from terrorism and restore a peaceful living environment, since they do not intend to permit their future generations to go through the same sufferings experienced for over 25 years. A country that is free of terrorism is also the prime need of private sector investors.” The President said his earnest plea to terrorists is to lay down arms and join the democratic process. “If not, they would be militarily defeated. “If not, they would be militarily defeated. Further, we should also take steps to conduct Local Government elections, and Provincial Council Election in the North. We should also take simultaneous action to implement our development plans on an urgent basis to re-build infrastructure facilities which had been destroyed by terrorists themselves in the North and also take immediate action to develop the North which remained neglected without any development for nearly 30 years.” Towards rebuilding the war affected areas the government will be introducing a Nation Building Tax. “As such I propose to impose a Nation Building Tax as a social contribution towards welfare of security forces, and to rebuild communities and infrastructure facilities affected by terrorism. This tax which would be 1 percent, will be applicable on the turnover on imports, manufacturing or services other than on the banking and financial sector, for a period of 2 years. In addition to the revenue collected from this tax, we will also seek the assistance of our friendly countries to obtain additional aid to implement nation building programs.” With reference to the GSP+ concessions of the EU he the President said: “It is unfair to engage in international trade and investment within a framework through which political objectives are tried to be achieved. As much as we do not permit terrorists to operate in the North at the cost of innocent people, we will also not permit other countries to accomplish their political agendas through our export industry. We are a proud nation that is not second to any developed country which respects fundamental rights, human rights, rights of women, respect labour laws, laws preventing the use of child labour, environmental laws, gender equality, election and civil rights.” “The Neo-liberal globalization process that was followed by our country for over 30 years, paid economic dividend only to a very small segment of our society. We were fast realizing that this process is unsuccessful. More than half of the GDP was Colombo based. Agricultural development was forgotten. Paddy fields were neglected. They were filled and used for other commercial activities. Rubber and tea cultivation was destroyed by permitting such lands to be blocked out and sold. The need to develop irrigation, highways, electricity, water supplies and rural development was also forgotten. In short, rural villages were so neglected and were made to distant from Colombo as though they were no longer a part of Sri Lanka. The country suffered a tremendous mental setback, realizing that not only the Government is unable to fulfill its primary obligation of being able to combat terrorism and bring about peace but that it has no will to construct even a rural road. Pushing aside the Professionals and the intellectuals of our country and using foreign consultants instead, became a habit. The public sector was pruned to a destructive level. Picketing campaigns by unemployed graduates became a common sight. Workers engaged in industrial actions due to closure of large factories such as those at Ambilipitiya and Thulhiriya. State Institutions such as the Food Department, CWE, Paddy Marketing Board, CTB , State Engineering Corporation and the Government Factory were being wound up. Alternate Institutions were being setup in place at Sri Lanka Customs, Inland Revenue Department, Railways and People’s Bank. Tax Amnesties that were introduced made a detrimental impact on the tax system. Large scale tax frauds took place. Banks such as Pramuka Bank, crashed. State revenue was low. Debt burden of the country increased having raised debt without building - up corresponding national assets,” the President added. Budget aims to suppress the people -- UNP The UNP Parliamentary Group, yesterday, decided to vote against the Budget calling it an indirect effort to pick people’s pockets using patriotism. The party said in a statement that the Budget was full of proposals that were aimed at robbing the people in many ways, starting with the shoes worn by school children; though it seemed there were many concessions given to boost local industries. “The Budget is not what the people expected - it has failed to give the concessions which they expected,” the statement said. The government has been cruel enough not to increase the salaries of the state sector and private sector employees, it added. The opinion of the UNP Parliamentary Group was that the budget was aimed at suppressing the people and establishing family rule. *************************** A Budget for war, taxes and challenges (07.11.2008 - Daily Mirror, SL) President Mahinda Rajapaksa delivering the budget speech in Parliament yesterday presented a record Rs.200 billion war budget to deal with the ongoing war in the midst of the challenges faced by the global financial crisis and recession. Government spending, according to the Budget Summary, is slated to rise to Rs 1191 billion in 2009 – though in his speech the President mentioned Rs 1719 billion (up from Rs 1016 billion in 2008), while revenues are forecast to increase to Rs 855 billion from Rs 709 billion levels in 2008. Domestic financing will contract marginally from Rs 184 billion in 2008 to Rs 183 billion in 2009. Foreign financing will however increase substantially from Rs 122 billion to Rs 153 billion by 2009. The President forecasts that the overall budget deficit as a percentage of GDP will decrease from 7% in 2008 to 6.5% in 2009. In rupee terms, however, the deficit has increased from Rs. 307 billion to Rs 336 billion in 2009, a rise of about 10%. On the economic front, he assured that the GDP growth will be maintained at 6.5% (though he states that it has averaged at 7%). He noted positively that per capita income had increased to from US$1000 in 2004 to US$2000 this year and with the unemployment reduced from 800,000 to 500,000, with 300,000 new job opportunities being created. The tourism, industries, leasing, insurance, construction and telecommunications sectors are amongst those set to benefit from a reduction of VAT from 15% to 12%, effective from January 1, 2009. President Rajapaksa stated that since the tax administration was not modernized to suit present times, this has caused an issue. He therefore proposed to introduce a “people-friendly tax system” that is suitable to the needs of the country “whilst also using international experiences.” The President proposed for the appointment of a Presidential Task Force to prepare proposals to implement this mechanism from the year 2010. The preparation of a National Tax Policy was proposed as result of the tax base giving got eroded as a result of various tax concessions granted since 1977 to promote investment. In this respect it was noted that there is a need to strengthen the Inland Revenue Department and the Customs to carryout this task effectively and thereby link tax administration with institutions that promote investment s such as the Board of Investment, Export Development Board and the Industrial Development Board. The President observed that due to lack of recent revisions in personal income tax slabs, he proposes to make liable for taxation three slabs of Rs 400,000 each and a further three slabs of Rs.500,000 each. The tax burden will, he states, reduce by about 5% and provide relief to about 400,000 people who are liable to pay PAYE tax. The government has proposed to offer further relief on tax on interest income by extending the existing 2.5% rate to higher threshold of Rs.1 million from the earlier Rs 600,000. This will help improve the savings of pensioners and middle class earners.A new Nation Building Tax of 1% on imports, manufacturing and services other than those in the banking and financial sector is to be introduced for a duration of 2 years to finance the welfare of people and institutions in the North and East affected by terrorism as well as the welfare of soldiers’ who have died in the war. The Ports and Airports Levy (PAL) is proposed to be increased from 3% to 5% to assist in construction of six ports and a second international airport. With relevance to electricity and water tariffs, a Rs.30 monthly discount was offered to those consuming less than 90 units of electricity and a Rs.20 monthly discount for consumers using less than 15 units of water. The President proposed to allocate Rs.300 million for this relief. On an agricultural note, activities under Maga Neguma (electrification, water and credit schemes, housing, ICT centres etc.) will be expanded and Rs 13,515 million is allocated to this. For the Gama Neguma programme, about Rs 16,420 million has been allocated to the Ministry of Nation Building for rural roads, electricity, drinking water and small irrigation works. He allocated a further Rs 8000 million (at Rs 2 million per Grama Niladari division) to assist a revival of village development. The President is also allocating 3 bags of fertilizer per acre to farmers using organic materials under a guarantee by farmer societies in addition to prevailing assistance. In his incentives for dealing with foreign exchange earnings, he proposes Rs 1000 million to providing financial incentives to exporters to find new markets in the light of the world economic scenario. Reductions in fuel and electricity charges (petrol decreased by Rs 15 and diesel by Rs 30) are also expected to help the garment, porcelain, leather and tourism sectors to compete better. In the tea sector, he proposes a reduction in price to Rs 1000 of a 50 kg bag of fertilizer for tea smallholders and reduce income tax by 15% on revenue from tea packets exported weighing less than 1 kg. ************************** Budget 2009 : A Question of Taxes (07.11.2008 - Daily Mirror, SL) Commenting on the speech delivered by President Mahinda Rajapaksa in Parliament yesterday as the budget for 2009, the President of the Federation of the Chambers of Commerce and Industry of Sri Lanka (FCCISL) Kosala Wickremanayake said that “over-all it’s ‘good’ budget.” The most encouraging feature of the budget is that it encourages local industries by increasing taxes on imports. “The reduction of the Value Added Tax is also a most welcome feature. The negative aspect of the budget is the introduction of a new tax, which is the Nation Building Tax that will greatly affect businesses. What should have been done was the introduction of a surcharge, rather than a new tax. The President has tried to balance the budget by taking into consideration the local and international situation,” he added further. NDB Stock Brokers Manager Waruna Singappuli said that the main feeling of the budget for 2009 is that the Government has tried to promote local industries, rural development and give relief to consumers via the VAT reduction. The negative aspects of the budget include the introduction of the Nation Building Tax of 1% except for the Banking and Financial sectors for two years. This will impact businesses on a large scale. President of the Chamber of the Construction Industry in Sri Lanka (CCISL), Surath Wickramasinghe said that, at a glance the budget appears “to be more broad based and comprehensive than previous budgets”. The Budget Deficit which was 10% in 2004 has now been reduced to 7%, and Government borrowings reduced from 100% to 85%. Furthermore, the reduction of VAT from 15% down to 12% is commendable. Many incentives are given for power generation and export promotion, which is hoped will also include Professional Services and for Furniture Manufacturing, are encouraging. Wickramasinghe also regretted the fact that despite representations by the CCISL, the Budget has not made a policy decision to facilitate Public/Private Partnerships to promote viable Mega Projects in Urban Regeneration, Infrastructure Development etc. “We proposed a Special Fund to provide ‘Seed Capital’ to ‘kick-start’ a few projects of national importance to maintain a sustainable flow of work for the Construction Industry,” he added. LAUGFS Group Chairman K.H. Wegapitiya said that, “it’s a good move by the Government to strengthen assist local entrepreneurs to enter the rural sector. By increasing taxes on the imported dairy related goods and others will definitely help local businesses to emerge and develop.” Speaking on the introduction of the new Nation Building Tax, Wegapitiya said that ever since Sri Lanka, “gained her independence nobody has built this nation. It’s a good move, provided that the monies collected are utilized in the process and do not end up in different areas.” Group Chief Marketing Officer Dialog Telekom, Nushad Perera said that, “it’s a people friendly budget, where the masses are benefited. The allocations made to the north and east development and rehabilitation work is a significant factor in strengthening the economy.” Former President of the Federation of the Chamber of Commerce in Sri Lanka Nawaz Rajabdeen referred to the 2009 Budget as the ‘people’s budget’. “This is a balanced budget and is aimed to give relief to the people where the majority is engaged in the agricultural sector. The increased import tax on importation of the fruits and vegetables demonstrates the Government’s path of initiative in developing this area. The reduction of diesel by Rs.30 will benefit the masses and the reduction of Petrol by Rs.15 is acceptable as it will not affect the masses. It is also the first time that any government is giving more concentration to develop the Small and Medium sector,” Rajabdeen added. “I believe the budget in action is a fairly good one, fulfilling most of our expectations. Especially in concerned regions such as agriculture, local industries and increasing sales. The reduction in fuel, power and kerosene is believed to facilitate the industry in a huge manner, due to the prevailing financial crisis. As members of the chamber, we also expect for some good adjustment in the exchange rate, in order to maintain a good export market,” said Eassuwaren, Chairman, Eswaran Brothers Exports (Pvt) Ltd. “I am quite happy with the budget due to the fact of decrease in the global fuel prices, VAT and most importantly the local industries, which enables the survival of segments like textiles and mercantile. The budget is believed to basically prove effective in reviving perspectives and encouraging optimistic outlooks among the people, hopefully a benefit to the advertising industry,” said Ajay Singh, CEO, Gray Worldwide - Colombo. “I am quite satisfied with the budget when it concerns the fuel prices, but the effects are yet to be seen,” commented Dileepa Jayaweera, Joint Managing Director, Triad Advertising. “The present budget does definitely promise a lot to industries, with its reduction in the apparel sector and agriculture, with is believed to promote local cultivation and trade involving dairy products, the reduced VAT of 15% to 12% also helps in making prices of goods and services affordable to the public. In addition the budget also proves effective in providing a release to income earners, in regard to their personal tax to be paid. However the steep side that I witness of the budget is the introduction of the new tax code, which had to be, I my opinion much avoided. The new change might induce a lot of stress and vocation from various business fields. This aspect of the budget is something I prefer could have been omitted,” said M. B. Ismail, Partner, SJMS Associates. “The prevailing budget could be referred to as fairly satisfying, despite it’s failure to address some current problems. It would have been much of gratitude if the infrastructure segment was further brought into consideration, encouraging public-private partnerships which would have proved effective to improve the private sectors in collaboration with the government. However, looking on the brighter side, concessions in fuel prices, measures taken to help industries such as farming and dairy goods might enable an increased import of raw materials. In regard to the Plantation industry I would like to appreciate that differ offered for loans by 6 months that definitely proves effective in uplifting the sector, despite its current crisis. Further the decision on Hydropower plant is also creditable but however would have been much better if the incentive was taken to make it an available asset countrywide. On the whole, I would like to comment on the budget as something that fairly satisfies the people yet does not really take an initiative in solving the country’s much prevailing problems,” said Prof. Lakshman R. Watawala, President - Institute of Certified Professional Managers. ************************** Analyst comments by Dr. Harsha De Silva, Lead Economist, lirneasia (07.11.2008 - Daily Mirror, SL) The budget 2009 looks like an exercise to confuse people. On the one hand the Government seems to want people to believe that the cost of living will come down because of the reduction of VAT by 3 percent and the marginal reduction in fuel. But, on the other hand numerous duties and cess taxes have been imposed on imports along with a two percent increase in the Port and Airport Levy (PAL) and the new Nation Building Tax of one percent. The revenue proposals clearly indicate that the loss in VAT is more than offset by the new taxes. However on a more important note, it seems as if the Government is desperate to save the precious dollars they are left with as the theme of this budget seems to one of "full steam ahead with import substitution"; albeit a failed policy of the past. With debt repayments bunching up in the near term, export income slowing down with falling tea and rubber prices and the slowing global demand for other exports combined with the difficulty in obtaining dollar funds even at high rates seem to be having a serious impact on the Government finances with nowhere to go but back to the days of import controls in the guise of helping the domestic producer from milk, to fans to cars. The imprudent action of the Government to try to once again peg the rupee at 110 levels by introducing unheard-of import restrictions like a 200 percent margin on vehicles cannot be sustained and will cause severe damage to the productive capacity and the efficiency of the economy. On the deficit, it is ironic to say that it is being held at some arbitrary 7 percent by drastically cutting capital expenditure to accommodate massive overruns in the current account. Taking a longer term view, what we need at the moment are reforms to provide opportunities for more investments in agriculture, education, transport and utilities without attempting to hold onto everything and end up not even making the meager investments that are planned in every budget. Sri Lanka cannot grow at the necessary 10 to 12 percent a year with an "inward looking" and "import substitution" economic policy to defeat poverty. The longer we take to realize this, the longer we will remain to be poor, no matter how incredible the budget tricks appear to be! ************************** Budget to assist local enterprises, fuel prices down (07.11.2008 - The Island, SL) Budget at a glance • Public Servants cost of living allowance increased from Rs 1,000 to Rs 3,500 • Cost of living allowance given to pensioners increased from Rs 1,440 to Rs 2,000 with effect from January 1 • A Nation Building Tax in turnover on imports, manufacturing or services other than on the banking and financial sector for a period of two years • Special monthly allowance paid to servicemen engaged in action increased from Rs 3,000 to 5,000 • Present 15 per cent VAT decreased to 12 with effect from January 1, 2009. This will bring immediate relief on tourism, industries, leasing, construction, insurance, telecommunication and production sectors. The 20 per cent VAT on motor vehicles, luxury goods and liquor will continue • Import duty on wheat grain increased from 6 per cent to 10 per cent • A 15 per cent CESS imposed on agricultural produce similar to black gram, kurakkan, cowpea and sesame seed • The Special Commodity Levy in imported milk powder increased from Rs 5 to Rs 15. • The Special Commodity Levy on imported sugar increased from Rs 14 to Rs 16. • A CESS of Rs 25 on one kilo of rubber latex and Rs 4 on one kilo of tea imports • A 25 per cent CESS on imported maize and animal feed • A 5 per cent CESS on paper imports • A 15 per cent CESS on all imports of furniture • A CESS of Rs 200 per kilo on all imported footwear, hand bags, belts and other leather goods and exempt all raw material required for manufacturing of such products locally from import duty and VAT • CESS on polythene and plastic increased from one per cent to 5 per cent • Increase CESS on ayurvedic medicine imports (amount not specified) • Increase existing CESS on all imports of fruits and vegetables (amount not specified) • Increase CESS on sarees, sarongs, readymade garments and material imported for local consumption by 50 per cent • Increase of CESS on the import of fridges, fans and ceramic ware by 50 per cent • Increase of CESS on chocolates, biscuits and sweets by 50 per cent • A 100 per cent increase of CESS on all handicraft imports • A CESS of Rs 10 on a kilo of imported salt • Children between one and five years of Samurdhi families to receive Rs 200 milk subsidy each • Places of religious worship, schools and voluntary organizations to receive Rs 100 million to promote Mathata Thitha programme • Rs 6,000 million allocated for Mihin Air revival and construction of Weerawila airport • Rs 950 million to improve universities • Income tax payable by any Sri Lankan professional serving a company or partnership based in Sri Lanka earning foreign currency restricted to 20 per cent • A 10 per cent telephone levy applicable to mobile and cordeless phones extended to fixed telephones • Port and Aviation Levy increased from three to five per cent • Setting up of a Presidential Task Force to prepare a National Tax Policy for implementation from 2010 The fourth Budget of President Mahinda Rajapaksa presented in Parliament yesterday emphasized the need to assist local enterprises while giving relief in a small measure by reducing the prices of diesel by 30 rupees per litre, kerosene by 20 rupees and petrol by 15 rupees. The national economy was dependent on imported fuel consumption but that trend had to be changed. The prices of petrol, diesel and kerosene could be further reduced in the future. Public servants were given an additional Rs.1000 cost of living monthly allowance while government pensioners were given Rs.560. The monthly allowance paid to soldiers engaged in action was increased from Rs.3000 to Rs.5000. The festival advances of public servants would be increased from Rs.2000 to Rs.5000 while the advance to purchase school books for children of public servants was increased from Rs.1000 to Rs.2500. The distress loans were also increased from Rs.5500 to Rs.7500. The fertilizer subsidy was retained and President Rajapaksa said the government would continue to foot 96 percent of the cost of fertilizer by giving the farmer a 50 kilogram bag of fertilizer at Rs.350 as the present cost of a bag was Rs.6000. The Value Added Tax would be decreased from 15 to 12 percent to provide substantial relief to tourism, industries, leasing, construction, insurance and telecommunication sectors and also to the entire production sector. However, the 20 percent VAT on motor vehicles, luxury goods and liquor will continue. The present telephone levy of 10 percent to cordless and mobile telephones will be applicable to fixed telephones as well. The Ports and Airport levy will be increased from 3 to 5 percent. A new nation building tax of 1 percent imposed on the turnover on imports, manufacturing or service other than on the banking and financial sector for a period of two years. Personal income tax for those earning annual income of Rs.300,000 was exempted while income exceeding this limit is taxable at rates ranging form 5 percent to 35 percent under different income slabs from Rs.400,000 giving relief to about 400,000 people who are liable for PAYE tax. Interest income of people who retire on amounts they invest up to one million will be reduced to 2.5 percent from the present 10 percent. Electricity consumers using less than 90 units will get a monthly discount of Rs. 30 while consumers using less than 15 units will get Rs.20 discount and more than 350,000 electricity consumers and 150,000 water consumers were expected to benefit from this discount. As the import of fruits and vegetables had caused a heavy threat to agriculture, the import cess on fruits and vegetables will be increased while the import cess on sarees, sarongs, ready made garments and material by 50 percent to encourage the local manufacturer. The import cess on chocolates, biscuits and sweets would be increased by 50 per cent as an incentive to local manufactures while taking steps to regulate standards of such imports with immediate effect to ensure they do not contain melamine. A new import levy of Rs.5 to Rs15 per kilogram for powdered milk was imposed to encourage the local dairy farmers while the low income families in the Samurdhi category and plantation sector with children of one to five years would be given a monthly allowance of Rs.200 to enable them to purchase milk for children. Cess on import of fans. refrigerators and ceramic ware would be increased by 50 percent and the cess on footwear, handbags and other leather goods will be Rs 200 per kilogram while raw material imports for manufacture of those goods would be exempted from the cess. An import duty of Rs.10 per kilogram of salt will be introduced while a levy of Rs.14 to Rs.16 per kilogram of sugar will be introduced to encourage the cultivation of sugarcane and manufacture of sugar locally. A 25 percent cess on imports of maize and animal feed applicable to all importers including those in the BOI regime was also introduced. ************************* President speaks in Tamil (07.11.2008 - The Island, SL) President Mahinda Rajapaksa, delivering his fourth budget speech in Parliament yesterday (6), spoke twice in Tamil when mentioning the rehabilitation of the North after its liberation from the hold of the LTTE. Mentioning the human elephant conflict, he said the elephants had to be saved, "but not these elephants" pointing towards the Opposition benches where the UNP members were seated bringing laughter to even those among the UNP group. When he came into the House amidst cheers from the Government benches, Tamil National Alliance Leader S. Sampanthan rose to protest about the war in the North, but Speaker W. J. M. Lokubandara ruled Sampanthan out. He was seen leaving the chamber after that with other TNA Members. UNP and Opposition Leader Ranil Wickremesinghe came into the House halfway during the President’s speech but the Opposition members were present in their numbers. At the end of the budget speech President Rajapaksa was seen smilingly talking to some Opposition members and he waved his hand at the JVP’s K. D. Lalkantha, who, too, returned the smile and was seen saying something to the President. In the Speaker’s gallery, Defence Secretary Gotabhaya Rajapaksa and Chief Minister of the East Sivanesathurai Chandrakanthan, governors of the provinces and the Diplomatic Corps were among the prominent figures present. There was tight security in the parliamentary complex and its environs. ************************** Relief to middle income earners, pensioners - by Devan Daniel (07.11.2008 - The Island, SL) The 2009 Budget proposals of the government seek to provide relief to middle income earners and pensioners. Withholding tax on interest income up to Rs. 300,000 was exempted last year and a 10 percent tax on interest income up to 600,000 was reduced to 2.5 percent. The government proposes to extend the 2.5 percent tax on interest earned amounting to Rs. 1,000,000 which could also deter depositors banking their hard earned money with unlicensed financial institutions and give more value to their savings already eroded by inflation. The government also hopes to revise the PAYE tax structure which is expected to reduce the tax burden by 5 percent. "This will provide relief to around 400,000 people who are liable to PAYE tax and more people are likely to volunteer pay taxes consequent to the lower tax," President Mahinda Rajapaksa, who is also the Finance Minister, said in his Budget 2009 Speech. Senior Partner of Chartered Accounting firm, Gajma and Co, N. R. Gajendra, said that this is a positive inclusion as he believes the government ought to provide more relief at a time when the world was engulfed in a financial crisis. Gajendra, who is a popular resource person for many post-budget seminars organised by chambers and other civil society groups, told The Island Financial Review that the reduction in VAT to 12 percent from 15 percent could have a positive effect on prices with many goods and services expected to reduce with the downward revision of VAT. "However, the increases to Cess for various imported items and the continued use of the Nation Building Tax (NBT) could almost negate the real benefit of the reduction in the VAT rate. "It might be more practical to leave Cess and NBT alone and just reduce VAT by 1 percent to 14 percent, it would almost lead to the same result," he said. The government proposes to uplift domestic industries with a part of the Cess revenue while the Cess it self is expected to decrease domestic demand for imported goods which can be substituted with local goods. However, for an Imports dependent country, the short term consequences could be painful although long term benefits are plausible. Wheat, milk, sugar, rubber latex, maize and animal feed, paper, furniture, foot wear, hand bags, belts, polythene and plastic, ayurvedic medicines, fruits, vegetables, clothing, electrical appliances and salt are some of the imports ear marked for increases in Cess and unless domestic production can meet demand it could have inflationary pressure on price levels. However, the proposal provides duty concessions on imports of raw materials which add value to the country’s exports. The government hopes to address the balance of payment deficits by expanding the export basket and boosting exports. Budget not exciting Gajendra said the budget was not dramatic as most people expected it to be with no major changes to laws, or reforms being announced. "The budget proposals are not exciting but it is a budget that is focused on developing the rural economy and SMEs," Immediate Past President of the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) Nawaz Rajabdeen. "The future is in agri-business and this budget gives the industry a chance to grow by encouraging local farmers to grow, which they would not with cheaper fruits being imported into the country, such as papaya," he said. "The way fuel prices are to be reduced aptly demonstrates that this budget is not for the rich or the corporate but for the ordinary man, SMEs and the rural economy." Diesel prices are to be reduced by Rs. 30, petrol by Rs. 15. Diesel powered vehicles transporting goods and has a direct impact on prices. He welcomed the proposal to give local companies BOI status where possible so that they can be encouraged to set up businesses in rural areas, as soon as government can provide infrastructure facilities. E. M. Wijetilleke, Secretary General/CEO, National Chamber of Commerce of Sri Lanka (NCCSL), said his first impression of the budget was that it is conducive to the development of the rural economy. The NCCSL and FCCISL will deliberate on the budget today. A chance for reconciliation? President Rajapaksa called on the LTTE to lay down their arms and embrace democracy and said the government was committed to reforming former members of the rebel outfit and absorbing them into society. He announced a Rs. 3.5 billion allocation for the North where 80,000 homes would be built among other livelihood restoration programmes. "This is a positive sign," Gajendran said. "We can assume that the government made such an allocation only because it expects some reconciliation to take place with hostilities ending soon." ************************** The Budget – Good or for Bad ? - by Raja Arabewela (08.11.2008 - Asian Tribune) A significant feature in this Budget for the year 2009 is the massive Defense expenditure. The president wishes to do this regardless of the great increase of the budget deficit and the global recession in order to “establish a stable economic environment to restore democracy, consolidate human rights and achieve economic development as a priority need”. The government obviously expects, to finish the war soon, to hold Provincial and Local elections, to establish democracy in the North and to start on long overdue development work. Apart from the ups and downs of the various taxes, a highlight in the budget is the reduction of fuel prices. Here, the reduction of Rs. 15 per liter from petrol may not have a big impact on its’ users but the kerosene and diesel users and the society in general, could feel the reduction should the benefits trickle down as expected. Although the government expects a 25% reduction in bus fare, the bus operators are already up in arms against it. It is interesting to see how far they can go down with the effect of increase in taxes of other needs of the trade. Even the cost of most goods could and should go down with the lower transport costs. But again, people will have to keep their fingers crossed and hope for the best. It is the earnest hope and expectation of the general public that not only the bus and train fares to go down but also a reduction of the cost of almost all the consumer items due to the lowering of the diesel cost. There again it is a matter to see how the interference of import and other taxes may come in to play. The reduction of VAT from 15% to 12% of course will give a boost to the sectors like tourism, construction, industries, telecommunications, insurance and leasing etc. The soldiers engaged in action, government servants and the pensioners are given a boost by the increase in cost of living allowance and the salary advances. The levy of import taxes on a wide range of goods may have a considerable effect of the consumer. While some levies may affect the general consumer, the others may affect only the consumers of ‘luxury’ items. Some of the goods affected include imported food items like fruits, vegetables, milk powder, sugar, chocolates, biscuits, grains, salt, maize, animal feed etc, leather goods like shoes, bags, belts etc, readymade clothes like, sarees, sarongs etc, household goods like fans, fridges, air conditioners, ceramic ware etc, rubber goods like bus and other tyres, and polythene and plastics. The Nation building tax of one percent too could add to the woes of the consumer. According to the government these taxes are imposed in order to reduce imports and to encourage local industries. It is a matter to see how this import restriction may affect the international trade. But, if the local farmers and industrialists take the advantage of this situation and take steps to increase local productions it could have long term benefits to the country as a whole. The government says that this budget is aimed at defense, establishing peace and industrial and social development. It expects people to grow more and produce more agricultural and industrial goods when the existing prices go up. The government hopes it inevitably will be so, as and when the people see the opportunity. They hope and expect that way because they are the government. Meanwhile the opposition says it is ludicrous to believe so without establishing the right environment by doing the ground work necessary for such development. Again, that is because they are the opposition. So it is left for the common man, the consumer to wait, observe and experience the outcome of these proposals of this budget. ******************************** Nation building tax to affect all businesses (08.11.2008 13:30 SLT - lankadissent.com) The nation building tax will be applicable to every business that earns a daily income of Rs. 1,000 or more, said Commissioner General of Inland Revenue S. Angammana. Speaking at a seminar at the BMICH in Colombo yesterday (07.11.2008), Mr. Angammana said he was unhappy that VAT has been reduced and a new nation building tax introduced through Budget 2009, with Inland Revenue Department given responsibility of its execution. Even small businesses like cycle repairers and barbers will come under this tax, and it will be a formidable task for the department to administer it, he said, adding however, that as public servants, they are duty bound to collect the tax revenue. Also addressing the seminar, Finance Secretary Sumith Abeysinghe said the nation building tax has been imposed temporarily only for a two year period. The government intends to earn Rs. 15,000 million per year from this tax and utilize the revenue earned to rebuild the areas affected by terrorism, he said. **************************** Business for Peace Alliance (BPA) welcomes development strategies (08.11.2008 - The Island, SL) The proposals for the coming year include strategies to develop rural and national infrastructure and incentives for domestic producers. The business for peace alliance (BPA) said in a statement welcoming the 2009 budget. The BPA hails the proposed regional infrastructure development projects and believes that such investments will lead to regional inclusivity and empowerment in the process of economic development, a cause that the BPA has been advocating since its inception in 2002. In this sense, the development of Galle as a world heritage city is commendable. It is hoped that the development of the Galle harbour will benefit not only tourism but also inter-regional trade and commerce. It is expected that the proposed increase in cess taxes on imported items such as furniture, leather products, garments and ayurvedic products will have a positive impact on domestic production, especially the regional SMEs. The removal of import taxes on raw material for leather and handicraft industries is a positive move directed at encouraging domestic production. However, the BPA emphasizes on the need to make appropriate technology, access to the market, and infrastructure available for SMEs in order to yield the anticipated positive outcomes. The reduction of VAT and the raising of tax brackets are seen as an encouraging move towards the development of SMEs. On the other hand, the BPA hopes that the moves proposed by the government to encourage domestic production do not signify a return to the contested import substitution policies. The BPA hopes that the proposed steps to bring down the cost of living are sustainable and long-term oriented. In light of the present financial crisis and the impending economic depression, it is crucial that these measures are adhered to while new measures are introduced. However, the proposed cess on consumer goods, food items and animal feed and the Nation Building Tax may offset these measures. The network of regional business leaderships welcomes the proposed measures to make public administrative services more accessible. It is hoped that these simplified services will be extended to regional businesses so that delays in processing business services can be avoided. As an organization representing the voice of the regions, the BPA is pleased that more resources will be available for the development of regional universities and commends the proposed measures to improve and introduce ICT and facilities and facilities for learning the English language at the rural level. However, the network hopes that the government and the implementing bodies take the necessary measures to ensure that these programmes do not become dysfunctional in the face of the many challenges that they will encounter in the process. The immediate development of the Eastern Province is vital for the SMEs in the conflict- affected regions to actively take part in the development process. The BPA points out the importance of providing special incentives for the MSMEs in the East to restart their businesses. The implementation of the proposed rehabilitation and redevelopment plans for the Eastern Province should include SMEs in the area, especially those in construction. The proposed improvement of facilities and funding for research and development is long overdue. While the dividends of economic growth and economic opportunities must be extended to the backward and conflict-affected regions, it should be borne in mind that a peaceful environment and return to normalcy are vital conditions for all regions to equally participate in the development process. Bringing about a lasting solution to the country's conflict is essential for all communities to enjoy the benefits of sustained economic growth. **************************** Construction boom has not benefitted local organisations - Surath Wickramasinghe (08.11.2008 - The Island, SL) The boom referred to in the Budget of 9% growth in the Construction Industry is due to the Mega Projects undertaken by the Government over the past few years in the Power, Ports, Tank Rehabilitation and Construction, Road Sector, Tsunami Re-construction of Housing and Infrastructure, Maga and Gama Neguma etc. Most of these projects are Foreign Funded and undertaken by Foreign Consultants and Contractors, or the Projects are given to Government Organizations for implementation. Consequently, the local Private Sector Consultants and the majority of the Small and Medium Scale Contractors have not benefitted by this impressive growth and are facing severe hardships, said President of the Chamber of Construction Industry Ar/Plnr Surath Wickramasinghe. In the Budget 2009, out of the Rs. 370 Billion allocated for Capital Expenditure at least 50% will be for the 50,000 Housing programme for the Defence Personnel, new Ports and Airport Development, Urban Development and other construction related work which is most welcome and will benefit the Construction Industry and we hope the work will be distributed in a fair and just manner to both the Public and Private Sectors. It is regretted that despite representations by the Chamber of Construction Industry, Sri Lanka the Budget has not made a policy decision to facilitate Public / Private / Partnerships to promote viable Mega Projects in Urban Regeneration, Infrastructure Development etc. We proposed a Special Fund to provide Seed Capital to "Kick-Start" a few projects of National importance to maintain a sustainable flow of work for the Construction Industry; specially, at a time when there is a drop in the demand for Commercial and Real Estate Development. Collection of the Construction Industry Guarantee Fund Levy as a Withholding Tax has been introduced without specifying the use of the Fund for Development of the Industry. This fund should be further broad based to provide Seed Capital to initiate Urban Regeneration in Cities and Infra-structure Projects, he said. *************************** Another budget has come and gone (08.11.2008 - The Island, SL - Editorial) The focus of President Mahinda Rajapaksa's fourth budget presented to Parliament on Thursday is on the development of local industries. Among the measures it proposes to achieve that objective are an increase in import duties on a number of selected items and incentives to local producers. Boosting local production to ease the country's dependence on imports is a step in the right direction. However, the baby must not be thrown out with the bathwater. In restricting imports, a balance is called for, especially as regards essential food items. It has been proposed that the existing Cess on all imports of fruits and vegetables be increased. This may work well on paper; an increase in the imported apple prices should lead to an increase in demand for, say, the locally produced mangoes. But, reality may be different. We may end up unable to eat either cheap imported apples or Sri Lankan mangoes whose prices are exorbitant. The same goes for vegetables such as potatoes and onions. Imports have, no doubt, taken a heavy toll on the local production but they help regulate prices and compel local producers to improve the quality of their goods due to competition. The biggest threat to local farmers comes not from imports but from the middleman who exploits both the producer and the consumer with impunity. Lack of storage facilities, too, has adversely affected the local producers. Most of their produce perishes unless it is disposed of for a song soon after harvesting. Regulation of imports should be done carefully. The United Front government (1970-77) bungled by banning them and the UNP government which came to power in 1977 blundered by liberalising imports at the expense of local industries. Today, the country has become a dump for cheap and even useless imports including kites! The proposed strategy to control imports seems to make some economic sense but regulations must not be overdone. It needs to be reviewed from time to time and adjustments made. The world economic crisis has jolted the government into granting concessions to the local industries such as garments and tourism directly affected by the currency depreciation and liquidity problems in the developed countries. Among the measures adopted to help them is the deferment of loan repayments by six months for the enterprises earning foreign income and maintaining the current level of employment, a reduction in the CEB fuel adjustment levy and provision of furnace oil at concessionary rates. The tea industry, too, has got concessions in terms of subsidised fertiliser and tax reductions. It is hoped that the proposed State venture to make interventions in the Colombo tea auction will stand the local tea growers in good stead. However, the budget does not propose a meaningful programme to look after the interests of the Sri Lankan expatriate workers who contribute over $ 2,500 million to the state coffers annually. There is only a proposal to appoint local agents of the State banks in the countries where they work to facilitate the inflow of remittances. Their money is tiding the country over in these hard times and they therefore deserve a better deal. It behoves the government to consult their representatives and provide them with maximum possible relief for the services rendered. They are defending the country on the economic front as the troops on the battlefront. The armed forces personnel deployed in the conflict zone also deserve much more than a 5000-rupee allowance. Their commitment and sacrifices are priceless. The budget is not without some relief. The State sector employees' CoL allowance has been increased by Rs. 1,000 and the middle income earners in the public sector have stood to gain from the revision of the tax slabs, though the amount exempted from tax remains Rs. 300,000. The government claims about 400,000 PAYE tax payers will benefit from the revision. However, those who are living on interest income from their savings have got a substantial concession in that their income will be exempted from taxes up to Rs. 1,000,000. Pensioners have got only a paltry sum by way of a CoL allowance increase. The reduction of VAT from 15 per cent to 12 per cent––except on motor vehicles, luxury goods and liquor––will grant benefits across the board. Technically, this should bring down Cost of Living, albeit marginally, if benefits are passed on to the consumer. However, the proposed increases in Economic Service Charge and Port and Airport Levy are bound to trigger a process of price increases. What their actual impact would be has yet to be determined. It is a matter for happiness that the government has at last realised the country's tax system is seriously flawed and lacks transparency. Tax concessions are being showered on various people haphazardly for want of proper coordination among institutions such as the Inland Revenue Department, the Customs and the Board of Investment. The poor tax administration has led to scams amounting to billions of rupees and the proposal to appoint a Presidential Task Force to prepare a national tax policy and implement it by 2010 is certainly welcome. Similarly, the government ought to concentrate on raising its revenue through direct taxes by rationalising tax collection without depending on increases in indirect taxes in a highly inflationary situation. Reducing indirect taxes is the way to bring relief to the entire populace. The Nation Building Tax to raise funds for welfare of security forces and rebuilding purposes, however salutary it may be, will complicate the existing tax structure and render its administration extremely difficult. As for development, the government is without mega projects to boast of in the preset budget except the Weerawila airport which has so far failed to get off the ground. Another big investment is going to be made in the grounded Mihin Air. And care should be taken to ensure that funds so allocated will be properly utilised. Now that SriLankan, which under a foreign management did not cooperate with the fledgling budget airline, is under State control, Mihin Air stands a better chance of making a comeback and offering an affordable service to the public. The piece de resistance of the budget is the reduction of fuel prices at long last––diesel by Rs. 30 per litre, kerosene oil by Rs. 20 per litre and petrol by Rs. 15 per litre. This cannot be considered a budget relief in that petroleum prices should have been brought down much earlier and announcement to that effect made by either the CPC Chairman or the Minister of Petroleum Resources exactly the way the prices were jacked up. The President obviously sought to gain some political mileage by making that announcement himself. Above all, the government must ensure that transport costs including bus and train fares will be revised accordingly. The government has, to its credit, managed to keep the budget deficit at 6.5 of the GDP or at Rs. 337 billion. The economic growth which stands at 6.5% looks impressive, given the country’s effective military campaign against terrorism and the chill wind of recession blowing from the Occident, though there is certainly much room for improvement. **************************** A mixed bag Budget for 2009 (09.11.2008 - The Nation, SL) With very little ceremony and many traffic blocks, the UPFA government’s fifth Budget was presented in Parliament on Thursday (06.11.2008) laying out the government’s plans for income and expenditure in the year 2009. The Budget proposals unveiled by President Mahinda Rajapaksa who also holds the Finance Minister portfolio, brought mixed reactions; some expectations were fulfilled while some were not. The reactions varied, with some parties claiming that the budget had brought a lot of relief to the public, while others said it was an attempt to hoodwink the masses with minor reductions in some sectors and massive taxation when it came to others. The Nation took to the streets after the budget proposals were unveiled, to gauge the response of a wide section of the public and service providers to the 2009 Budget. Food and clothing Although the 2009 budget eased the burden of the cost of living of the masses through reductions of some commodities, and by providing some allowances, it also accommodated an increase in taxes for some services and essentials which severely impact two basic necessities; food and clothing. The budget accommodates : • A 50% increase on import CESS on chocolates, biscuits and sweets • 50% CESS on sarongs, sarees, ready made garments and material imported for local consumption • A special commodity levy on imported milk powder from Rs. 5 to Rs. 15 per kilogram and on imported sugar from Rs. 14 to Rs. 16 per kilogram. The Nation spoke to the general public who will be the most affected by these changes. Clothing The 50% rise in tax imposed on imported material, sarees, ready made garments and sarongs has shocked a majority of the public. An increase in these essentials would mean that most imported clothing, even those things imported from the South Asia region will go up in price. The Nation spoke to Iliyas Sulaiman, proprietor of Reshma Trade Centre in Pettah. Sulaiman deals with a great deal of imports, especially sarees and asserted that this increase in the import levy will cause a big price adjustment. “It is unfair to have a 50% increase on these items, since it causes not only the saree prices but every other item to increase eventually. Fabric is essential even if one just wants to have one’s garments sewn. To have imposed an increase in import duty on that too, would undoubtedly mean that any type of dress or clothing will now be more expensive,” he explained adding that therefore the prices of sarees and other imported materials in his shop will definitely rise because it’s a large percentage. “Earlier importing fabric was duty free. Therefore, it was easy to handle small price fluctuations. But now even the limited amount of sales that we have will be lost”, complained Sulaiman. A saree that would have usually been priced at Rs. 2,000 will now be increased to about Rs.3,500. “This is a very big increase and would definitely not interest a customer. But there is nothing to be done since it is not in our hands,” he explained. Shivani Jayawardane, 38, is a socialite who wears sarees and other Indian clothing often. She said that it is not only at parties or gatherings that most women wear good imported sarees. “Even if one does not wear saree often, this increase in levy is unfair since the tax is on fabric too. Most of our fabric, even the cheapest kinds, are not manufactured in Sri Lanka. It will automatically raise prices of a simple dress or even a blouse. This does not sound practical at all”, she asserted. Food An increase of import duty on wheat grain and wheat flour is bound to cause heartburn for the public, once again. Bread, buns and many other bakery items will be affected due to this levy. However, the General Manager of ‘Perera & Sons’, Parakramma Dasanayake, told The Nation that they are satisfied with the reductions that the budget has accommodated this year. “It is a very progressive budget report and I am happy with it”, he said. Dasanayake asserted that there will be no price change at the moment in the Perera & Sons outlets. “If the wheat flour price rises also, there won’t be a problem because the fuel prices have come down. We can therefore offset the prices”, he said. The 2009 budget also reports of an increase of import taxes on chocolates, biscuits and other imported confectionaries. “These steps are imposed to promote local production and to encourage the public to avoid spending on imported items”, the sales manager of a leading supermarket pointed out. He added that most of the supermarkets have a great deal of imported goodies, since the public demands them. However now that these prices will go up, he hopes the public will appreciate the local products. “It is not that nobody purchases the locally made chocolates; it’s just that many prefer the variety and quality of imported chocolates”, the sales manager explained. He added that hopefully there will be more of a variety in local chocolates now, to meet the demands and standards the public wants. Fuel and transportation Although for over a period of four months the price of a barrel of crude oil has been declining in the world market, the Government did not take any steps to reduce the prices of fuel and provide relief to the consumers. This created a heated discussion across the country and the Minister of Petroleum and Petroleum Resources Development, A.H.M. Fowzie was compelled due to public pressure to reduce the prices of fuel. However, the much discussed affair of reducing fuel prices, was fulfilled up to some extent through the budget. And, although it is not a colossal reduction, many nevertheless heaved a sigh of relief when the prices were brought down; diesel by Rs. 30, petrol by Rs. 15 and kerosene by Rs. 20 per litre. With the reduction of fuel prices, everyone expected bus fares and other expenses involved in transportation, to reduce. As expected, the minimum reduction in bus fare was one rupee. The bus owners’ associations however do not seem to be too pleased with the alteration of bus fares. Bus owners not happy “We strongly object to the lowering of bus fares since this was not a decision taken through approval or agreement. We do not object to the concession which the public is offered, only to the manner in which the price alteration was implemented violating the national policy,” said the President of the Lanka Private Bus Owners’ Association (LPBOA) Gemunu Wijeratne. The national policy on bus fare alterations was implemented in 2002, and is known as the, ‘fare policy for bus transport service.’ “When the prices of fuel were reduced, we agreed to cut down the bus fares in adherence to the national policy. But somehow, without even an official discussion or prior notification, the National Transport Commission (NTC) has taken steps to decrease the minimum amount of a bus fare by one rupee,” stated Wijeratne. He further added that this was a violation of the national policy since the policy mentions that prior to alterations or implementing such alterations of bus fares, required the approval of the private sector representatives is necessary. He also added that although the NTC claims the new fare alterations applies to the prevailing minimum bus fare of seven rupees to be reduced by one rupee, which makes the minimum bus fare to be six rupees, it does not support the methods of bus fare alterations in the national policy. “The fare alteration cannot be applied to the prevailing minimum bus fare,” he pointed out. While considering bus fare alterations, a calculated minimum bus fare is rounded up to a full number. The last time when a price alteration was implemented, the minimal amount for bus fare was Rs.7.42. “So we decided that the minimum bus fare should be Rs.7,” stated Wijeratne. The fuel reduction of the budget, in comparison to the prices before, is about 10%. So the calculations show that the amount which has to be reduced from a bus fare is only 74 cents, from the minimum bus fare. So, according to the national policy, the minimum bus fare should be Rs. 6.68. “When this amount is rounded to a full number it is only Rs.7. Thus, the price reduction of one rupee as stated by the NTC, cannot be applied to the prevailing minimum bus fare,” explained Wijeratne. He also accused of the Government and the authorities responsible for the transportation sector, for not providing them with any concessions. “Although the fuel prices have been reduced, only one third of this reduction affects the bus sector. We have only received a minor concession which we have fully transferred to the customers,” pointed out Wijeratne. He remarked that on one side while the Government provides them with a fuel concession of about 10%, they have increased the taxes on imported vehicle spare parts by 30%. “All the vehicle spare parts are imported. This clearly shows that the Government has only attempted to hoodwink the public by providing a minor reduction on the fuel, and laying a double burden on them in another way,” asserted Wijeratne. He emphasised that the Government and its authorities responsible for the transportation sector have not considered the bus owners at all, and apart from heavy taxes laid on spare parts, making it hard to maintain a vehicle, the Budget also has increased the prices of some essential food commodities which makes it difficult to exist. “The authorities and the Government should understand that the transportation sector also should have some profits to survive. But the way it is going, we do not expect that we would be able to survive under this unbearable cost of living and other expenses, for long,” he added. He also accused that even though they provided the public with some relief, the other transportation modes e.g: the trishaws or lorries, have not taken any steps to reduce their charges. “The Budget provided a little relief to the masses by bringing down the prices of fuel. So, we will definitely bring down our fares,” said trishaw driver C.K. Upul, and added that although he cannot set a particular reduction price, he would be approximately charging about Rs. 20 less than the prior charge per mile. He said that since the path has been opened to bring down transportation prices, he would be definitely bringing down his rates. “Many accuse us of charging high rates and not reducing the prices when the fuel rates reduce. I cannot talk on behalf of all the trishaw owners, but most of my fellow trishaw drivers also have reduced their rates now,” he asserted. Gihan Dulakshana is a food vendor and he is a daily bus traveler. “The reduction of the bus fares is not at all sufficient! I travel at least three times to Pettah each day, and it costs about Rs. 50. So what change will this one rupee reduction do?,” he questioned. He said that if the bus fares were reduced from at least one, two, or three rupees it would have been significant relief for commuters. Housewives speak Speaking with the Past President of the Housewives’ Association, Manel Pathirana about the Budget for the year 2009, she complained that the reduction in the fuel prices was not satisfactory. “For marketing and business transactions people are in need of fuel, and of course that’s where transportation comes in. It completely affects the transportation of goods if fuel prices fluctuate and the reduction in the budget certainly is not enough. There is not much relief from the burdens that we had to bear previously,” she complained. She also stressed on the fact that she doubts that the prices of other essential items would be reduced or ever come down. “It is always a case of waiting to see the outcome. I heard that the taxes imposed on imported saris have been increased and certainly for those who wear them all the time, it is truly difficult,” remarked Pathirana while recalling an incident which occurred a few years back when Laksala was assisted by the Housewives’ Association to implement a plan on introducing locally produced saris. “They were looking for new designs but there was hardly any response for the hunt for novel designs. Somehow the plan didn’t work out and absolutely nothing was gained” she said. Pathirana said that she firmly believes that it would be much better if certain products could be locally produced. Speaking of also the prices of vegetables, she said that it is important to learn and do home gardening which would produce fresh and better goods, rather than having to pay a higher price and get something that might even be out-dated. **************************** Budget to improve local production but not macro-economic equilibrium (09.11.2008 - The Nation, SL) The external environment has improved with the decline in oil prices and food prices. Oil prices declined from $147 to $67. Several food items which we import have also come down in price. This is good news for both cost of living and current account of the Balance of Payments. Despite the drop in oil prices our oil bill will be $3,000 million next year according to the budget speech. The President in his Budget Speech referred to 6.5% as the growth rate for next year. In the face of declines in export prices and the disruption caused by the war in the north we would be lucky to achieve such a rate. Further if the recession in the West were to worsen it is unlikely that we could achieve such a rate. As previously the economy will be driven by public expenditure which will increase from the previous budget figure of Rs.835 billion to rs. 1011.6 billion an increase of Rs 176.6 billion or 21% which is more than the current rate of inflation of 20%.Government tax revenue will be Rs.855 billion so the overall deficit will be Rs. 337 billion. Economists would say that the inflation adjusted budget deficit has gone up marginally. But actual expenditure has a habit of increasing beyond the budget level although the budget refers to a 2% cut. Containing the Recurrent Expenditure of the government is very vital to contain the deficit in the current account of the budget which should in the normal course be a surplus not a deficit at all or at least zero. This means that the government is dissaving and reducing the national savings. Capital expenditure will be Rs 368 billion which will be spent on development of infrastructure projects. The deficit in the budget has to be raised by borrowing in addition to rolling over existing debt. So the gross borrowing requirement will be Rs.840 Billion. But the domestic savings of 17.8% last year constitutes only around Rs.600 Billion. So the government will have to either borrow more externally in addition to rolling over existing foreign debt or it will have to borrow money from the Central Bank and the banking system which economists call “printing money”. A measure of fiscal policy in terms of fiscal deficit as a percentage of GDP provides no indication of whether the government is pumping demand into the economy or not and how much it is. Economists refer to budget deficits having a multiplier effect on income and aggregate demand which leads either to higher inflation and/or a worsening of the current account deficit of the balance of payments. The medium term fiscal consolidation which traced a fixed path for fiscal policy in the years ahead has had to be abandoned owing to the war. One hopes the war can be concluded soon. The budget deficit / GDP ratio does not give a true picture of the impact of different kinds of expenditure on incomes and aggregate demand. Nor should the public be lulled into a false sense of complacency because the deficit/gdp ratio is projected to come down. Recurrent Expenditure will go up and although the President expects a cut of 2% on the budgeted figures the trend has been otherwise for there are supplementary estimates during the year which boost up expenditure. Now for some good news in the budget. It provides protective duties and cesses to support local industry and animal husbandry. We can increase our production of rice, vegetables, fish as well as sugar and milk and that would relieve some pressure on the balance of payments on current account of the balance of payments in the light of the need to pay a larger oil bill and bill for fertilisers. Some manufactured goods like shoes, footwear, boats and textiles will also ease the balance of payments pressure by increasing exports or import substitution. But increasing the burden of taxes on private sector businesses will have a negative impact on a private sector reeling from high interest rates and reduced availability of credit when inflation is still high and also paying comparatively high rates of corporate tax and high levies by way of tariffs, cesses and VAT. It is the private sector investments that produce productive growth for the public expenditure on the war and public services will not increase production. Government capital expenditure will take time to increase aggregate supply. In the meanwhile public will have to put up with still higher inflation induced by extra demand although some relief will be awarded by way of lower imported prices for oil and food. Public finances must play a critical role in achieving macro-economic equilibrium in the form of price stability and balance-of-payments equilibrium, both of which have eluded us. But for how long can we ignore these factors. The internal inflation will not only affect investment decisions of the private sector but it will add to the current account of the balance of payments deficit. Seeking to reduce imports through direct controls and high duties has not been too successful in the past and this is where there is a case of depreciation of the rupee. The other countries which are our markets and which are competitive with us in our exports like India and Kenya have depreciated much more than the 2% we depreciated. It is very necessary to depreciate at least to the same extent if we are to continue as an attraction for foreign investors to invest in the bond markets and the stock markets for they would be getting much more rupees for the same amount of dollars that they invest here, which should provide an attraction. It would attract the tourists also not to mention the protection given to our tea and other exports. Without stability, and the confidence of future stability, businesses and individuals cannot plan effectively for the long term. This damages investment and savings. And without higher levels of productive investment, the economy’s full potential will not be released. ****************************** -
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