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(Repeats with no changes to the text published on Friday)

ECONOMYNEXT – Sri Lanka’s 2023 budget scheduled to be presented on November 14 is likely to focus on much delayed reforms but compromise on bold policies anticipated to put the crisis-hit economy back on track sooner due to political expediency, analysts and economists say.

President Ranil Wickremesinghe, who is also the finance minister, will present the first full year budget of his government on Monday November 14. He is expected to announce more taxes including wealth tax, some initial reform plans for state-owned enterprises (SOEs) and the plans to minimise budget deficits in line with the International Monetary Fund (IMF)’s conditions in return for a 2.9 billion, four-year loan.

Wickremesinghe has already announced a raft of tax reforms including raising value added tax (VAT) from 8 percent to 15 percent as well as raising personal income tax rates while reducing the tax threshold.

“We expect some new taxes including wealth taxes as many of the key taxes are already brought in,” Dimantha Mathew, head of research at Colombo-based First Capital, told EconomyNext.

“On the expenditure side we may not see much. He may talk about restructuring of state-owned enterprises and it is going to be a reform-oriented budget as they do not have money for a welfare budget. The key concerns of the budget will be how far the budget deficit could be reduced and how fast we can reform SOEs.”

The island nation under the previous government led by ousted president Gotabaya Rajapaksa aimed for a welfare budget for 2022 to address the impact of COVID-19. However, analysts say, his badly conceived tax cuts in 2019 and the ill-advised chemical fertilizer ban pushed the country into its present economic crisis, though the country’s financial situation was already strained when he took over.

Tough choices

Wickremesinghe will have to tackle a bloated and inefficient public sector, record low tax revenue collection, waste of government resources, increasing brain drain, falling foreign exchange revenue, high borrowing costs, sovereign debt default, stubbornly high inflation and high government expenditure.

However, the president is likely to be crippled by a parliament in which he does not have enough lawmakers from his own party to back his policies.

Wickremesinghe is the leader of center-right United National Party (UNP) which has only one lawmaker in the 225-member parliament.

His erstwhile rivals in the centre-left and nationalist Sri Lanka Podujana Peramuna (SLPP) are now backing him after they were ousted following a wave of public protests from May-July this year against their failed economic policies.

The SLPP at the time was against IMF conditions, privatising state assets, shrinking the government sector, allowing markets to determine the rupee and interest rates and a private sector-led liberalised economy.

“I would see the budget as in the right direction. But I am not sure if it is going to be bold enough not to make compromises based on the political reality,” Sirimal Abeyratne, an economics professor at University of Colombo told EconomyNext.

“It will try to meet the requirements of the IMF but those are not the IMF demand, but ours. The budget should also ensure a proper implementation mechanism to have all Sri Lankan citizens’ real time data assessment on their income.”

“This data is not only just for tax purposes, but also for other purposes as well. So that the government knows who has the wealth, who should be supported, and who should be given social security benefits.”

System change

The budget also comes at a time when an increasing number of people are demanding a “system change” with regard to governance and reforms in the parliamentary process.

People have been demanding a cut down of “unnecessary” government expenditure and an end to wasting tax money on “white elephant” projects. They have also demanded an investigation into former president Mahinda Rajapaksa’s family which is accused of being involved in corruption and misappropriation of public funds.

The Rajapaksas have rejected the allegations, while Wickremesinghe has resisted such demands by the protesting public. Instead, his government started cracking down on protests, rights groups say.

Economists expect Wickremesinghe to not upset the apple cart.

“On the expenditure side, there have been a lot of compromises throughout history with politicians using tax money for their benefits. You can’t have ad hoc policies. You have to have an overall approach on this,” Abeyratne said.

“For example, just take roads near Colombo schools. You can see many vehicles owned by the government are used to transport students and those drivers are also government resources. This is robbing of tax money. There is no accountability. There is no transparency and nobody is questioned on this.

“So on the expenditure side, there has to be a top to bottom approach. From politicians to the bottom level, they should prove the tax money is used wisely and not wasted and everybody pays taxes,” he said. (Colombo/Nov11/2022)

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