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Sri Lanka’s former President Mahinda Rajapaksa says that the new government’s ambitious revenue expectations spelt out in the Budget 2016 presented in Parliament recently, is a portrayal of “gross fiscal irresponsibility” as in the case of the mini-budget presented in January this year.

Slamming a host of proposals included in the new government’s first full year Budget for year 2016, Rajapaksa said that “no responsible government will project a near 40% increase in tax revenue”.

“The gross fiscal irresponsibility displayed in the mini-budget earlier this year has continued in this budget as well. The government expects total government revenue to increase from an estimated Rs. 1,478 billion in 2015 to Rs. 2,047 billion in 2016 – a year on year increase of Rs. 569 billion. This increase was to come from a Rs. 300 billion increase in tax income and a threefold increase in non-tax revenue from an estimated Rs. 126 billion in 2015 to Rs. 378 billion in 2016,” Rajapaksa said at an event held at the Abhayarama Temple in Narahenpita on November 28.

Outlining further, he said that “projecting an increase of anything more than Rs. 50 to 100 billion in government revenue year on year should be done with immense caution”.

“The projected 300% increase in non-tax revenue in 2016 is obviously from the sale of the earmarked government owned entities which means there will be a sharp increase in non-tax revenue in 2016 and virtually nothing thereafter. It should be borne in mind that the tax and non-tax revenue for 2015 has also not yet been collected fully and it may well be that given the downturn in economic activity this year, the projected amounts may not be realised in 2015 – thus increasing the gap between the amounts actually collected in 2015 and the revenue projections for 2016. When the projected revenue fails to materialise, there will be cuts in expenditure. Since salaries and other such recurrent expenditure have to be met no matter what, the cuts will mostly be in capital expenditure,” Rajapaksa said allaying fresh fears.

Meanwhile, commenting on the controversy in the allocation of expenditure on education, Rajapaksa said that though Rs 186 billion has been allocated for education in 2016, two thirds of this amount is taken up by just one item – Capital Carrying Cost of Government Lands & Buildings – which means the year’s value of the government buildings and lands used for education.

“You cannot consider the present value of what has been built with past allocations to be an ‘expenditure’ item for the coming year,” the former President asserted.

He further charged that “while the budget provides extensive concessions to foreigners, it places considerable burdens on the ordinary people such as the vehicle emission tax, increase in passport charges, motorcycle, trishaw, lorry, handtractor and vehicle duties, licence fees, etc.”

 

Following is the full text of the speech delivered by the former President on 28 November 2015 elucidating his observations on the state of the economy and the 2016 Budget.

 

Venerable members of the Maha Sangha, clergymen of all other faiths, and friends, I was happy to avail myself of this opportunity to address you on certain matters that I consider important in the budget for 2016. Before we can speak of the budget, we need to briefly examine the overall economic situation in the country.

When I handed over power to a new government on January 9 this year, the economy was on a very sound footing. In the nine years of my government, the per capita income grew threefold increasing from 1,241 USD in 2005 to 3,654 USD in 2014. In the last five years between 2010 and 2014, the growth rates were 8%, 8.2%, 6.3%, 7.3% and 7.4% respectively. Even at the height of the war between 2006 and 2009 the average growth rate was 6%. Inflation was maintained at a low average of 6% during the five years from 2010 to 2014. The US Dollar was Rs. 131.05 when the year ended in 2014. It had been held steady at Rs. 127 – 131 from 2011 to 2014. Between 2006 to 2009 the unemployment rate averaged 5.9% and after the war it declined to 4.3% between 2010 and 2014.

There was a steady increase in foreign reserves from 2,735 million USD in 2005 to a record 8,208 million USD by the end of 2014.Government expenditure as a percentage of the GDP was 24.3% in 2006 and remained at an average of 23.8% during the war years up to 2009. From 2010 onwards there was a steady decline in government expenditure year after year until it was reduced to 18.2% in 2014.

Government debt as a percentage of GDP was 90.6% in 2005 when I assumed power and this too was reduced every year till it reached 75.5% in 2014 – the lowest level achieved in 35 years. The foreign debt component of the total government debt was 39% in 2005 and this was reduced every year till it reached 31.8% in 2014.Interest rates were held steady at around 7 to 9% from 2010 to 2014. When I assumed office at the end of 2005, the All Share Price Index was 1,922 and the market capitalisation of the CSE was Rs. 584 billion. By the time I relinquished office, the ASPI had gone up to 7,299 and the market capitalisation of the CSE to Rs.3,104.9 billion.

Since the change of government, there has been a palpable downturn in the economy. Work on many development projects was halted. Not a single new development project has been initiated since January this year.  Foreign reserves declined from 8.2 billion USD to 6.4 billion USD in a matter of months.  The Rupee depreciated from Rs.131 to the Dollar at the beginning of January this year to around Rs. 145 today. The IMF has indicated that economic growth this year could decline to 5.5%. The tea and rubber industries are in the throes of an unprecedented crisis. The bumper paddy harvest which should have been cause for a national celebration instead turned into a tale of woe for the cultivators who were unable to sell their paddy for the guaranteed price announced by the government.

The ASPI went down below the 7000 mark after the change of government and has remained largely stagnant hovering around this mark with no momentum. The market has remained bearish rather than bullish. Foreign holdings of Sri Lanka government securities have gone down from Rs. 452 billion at the end of December 2014 to Rs.303 billion by the third week of November this year – a drop of more than one billion USD indicating a lack of confidence in Sri Lanka’s future prospects. This depletion of foreign reserves has the potential to cause a balance of payments crisis in the near future.

During 2015 the new government issued foreign currency bonds valued at a total of 2,150 million USD at an average interest rate of 6.5%. This is equal to the cost of all three phases of the Norochcholai power plant, the Hambantota Port, the Mattala Airport, and the Southern Expressway up to Matara all put together. Yet not a single development project has been initiated by this government. All the money borrowed from overseas at unprecedented rates of interest was for consumption and meeting day to day expenses. In October this year, the limit on issuing treasury bills was increased from Rs. 850 billion to Rs.1,250 billion and the government continues to print money with reckless abandon.

All this has been happening in a situation where there was a sharp decline in the price of crude oil since the beginning of this year from an average well over 100 USD between 2011 and 2014 to below 50 USD throughout 2015.

Petroleum is our biggest single import item and the halving of prices was a substantial saving for the economy. Coupled to this is the fact that rains have been abundant throughout this year further reducing fuel imports for electricity generation. The coal power plant too has been in uninterrupted production and there has been a substantial saving on energy costs this year. Despite such favourable conditions, the government has placed the country in the throes of an unprecedented crisis due to economic mismanagement. The new government’s first fully fledged budget for the year 2016 comes in such a context. This budget seeks to make certain radical changes which raise serious concerns. I wish to highlight some of the most harmful proposals as follows:

  1. Foremost among the budget proposals that I am unable to agree with is the sweeping programme of privatisation. Strategic government owned entities such as the Norochchcolai power plant, the hydro electricity plants, the Ceylon Petroleum Corporation, operations of the Hambantota and Colombo ports, the Katunayake and Mattala Airports the Water Supply and Drainage Board and all such bodies are to be brought under one public quoted company, the shares of which will be sold to investors on the stock market and this mega company is to operate as a profit making business. I believe that public utilities like water, electricity, transport and fuel supply should not be run as profit making businesses, but as services to the people. Charges for these services should be fixed with the wellbeing of the public in mind. Therefore I am opposed to the privatisation of these strategic government owned entities. I wish to remind this government that the people of this country have not given their approval for any privatisation of these assets and on that basis, I wish to caution possible acquirers of such state assets, that a future government will not hesitate to vest the ownership of such assets in the people once again.
  2. According to the budget proposals, certain named non-strategic enterprises in which the government holds equity such as Lanka Hospitals, Hilton Hotel, Waters Edge, Grand Oriental Hotel and Mobitel are to be sold off to the public outright. These are profitable enterprises that contribute to the non-tax revenue of the government. I see no reason why these enterprises should be sold off other than the present government’s insatiable thirst for quick cash.
  3. I also cannot agree to the proposal to allow land to be given on long leases to foreigners without the taxes introduced by my government. The last time the UNP government liberalised land ownership, the Galle Fort and a good part of the Southern coastline passed out of Sri Lankan hands. This kind of policy may bring in some foreign exchange in the short term, but will have serious long term implications.
  4. Another unacceptable and potentially catastrophic proposal is to liberalise the import of cheap tea to be blended and re-exported. This will cause an immediate decline in the demand for locally produced tea. Hundreds and thousands of small holders and estate workers depend on the production of tea in this country. The proposal to allow the importation of tea will benefit a few tea exporters, but will deprive hundreds of thousands of people of their livelihood. Solutions have to be found for problems like the high cost of production and low productivity without destroying the tea industry.
  5. I am also opposed to the phasing out of the fertiliser subsidy and the free school uniforms by issuing vouchers and giving cash grants instead of the fertiliser and the cloth. Both these can be categorised as production subsidies. These are not consumption subsidies. The fertiliser subsidy had a lot to do with making the country self sufficient in rice.
  6. I am also opposed to bringing new recruits to the government service under a contributory pension scheme from 2016 onwards. The pension is a privilege that the government servants enjoy and it should continue. My government wanted to create a completely new contributory pension fund for private sector workers, but without amalgamating or in any way touching the existing EPF or ETF. The present government however, wants to amalgamate the EPF and ETF and create a contributory pension fund out of it for private sector employees. Nothing of the sort should be done without the concurrence of the private sector trade unions.

Furthermore, the administration of the EPF should not be moved out of the Central Bank.

It is with profound disappointment that I also note the fraudulent manner by which the government has tried to convey the impression of increased spending on education. Though Rs 186 billion has been allocated for education in 2016, two thirds of this amount is taken up by just one item – Capital Carrying Cost of Government Lands & Buildings – which means the year’s value of the government buildings and lands used for education. You cannot consider the present value of what has been built with past allocations to be an ‘expenditure’ item for the coming year.

The approach of the budget is not consistent with the ideology of the SLFP even though the SLFP is supposed to be a partner in this government. Historically, the SLFP (with the exception of the 1994-2001 government) had built up national assets and placed trust in local entrepreneurship. The selling off of valuable state assets and enterprises has been the practice of UNP since 1977. After I became President in 2005, I halted all sale of state owned assets and the selling lands to foreigners. No true member of the SLFP or progressive UPFA member can support this unbridled liberalism that make our nations dependent on the West for survival. We must build a production based economy and promote domestic entrepreneurs to the maximum and help them compete and win in the global economy. This budget like all UNP budgets has placed trust on foreigners and imports.

While the budget provides extensive concessions to foreigners, it places considerable burdens on the ordinary people such as the vehicle emission tax, increase in passport charges, motorcycle, trishaw, lorry, handtractor and vehicle duties, licence fees, etc. The pledge to add the Rs.10,000 allowance to the basic salaries of public servants has been sidestepped. If the Central Bank were to curtail its foreign exchange market intervention, many traders expect further sharp declines in the value of the Rupee. With the depreciation of the currency, the debt levels of the government will soar and rising inflation will lead to a higher cost of living and higher interest rates, resulting in macro-economic instability. With banks being asked to exit the leasing industry, there may be an unnecessary increase in vehicle leasing costs. The move to guarantee all deposits of all finance companies will place an unacceptable burden on the Central Bank which in turn has the potential to destabilise the entire financial system.

The gross fiscal irresponsibility displayed in the mini-budget earlier this year has continued in this budget as well. The government expects total government revenue to increase from an estimated Rs. 1,478 billion in 2015 to Rs. 2,047 billion in 2016 – a year on year increase of Rs. 569 billion. This increase was to come from a Rs. 300 billion increase in tax income and a threefold increase in non-tax revenue from an estimated Rs. 126 billion in 2015 to Rs. 378 billion in 2016. Projecting an increase of anything more than Rs. 50 to 100 billion in government revenue year on year should be done with immense caution.

No responsible government will project a near 40% increase in tax revenue. The projected 300% increase in non-tax revenue in 2016 is obviously from the sale of the earmarked government owned entities which means there will be a sharp increase in non-tax revenue in 2016 and virtually nothing thereafter. It should be borne in mind that the tax and non-tax revenue for 2015 has also not yet been collected fully and it may well be that given the downturn in economic activity this year, the projected amounts may not be realised in 2015 – thus increasing the gap between the amounts actually collected in 2015 and the revenue projections for 2016. When the projected revenue fails to materialise, there will be cuts in expenditure. Since salaries and other such recurrent expenditure have to be met no matter what, the cuts will mostly be in capital expenditure.

Hence what we are looking at is yet another year without any development at all. Even foreign funded projects will not get off the ground if the government does not have the money to pay the 15% upfront local component. Despite an attempt to create an impression of a populist budget with reductions in the price of gas and several foodstuffs and lower income tax rates, the budget as a whole is guaranteed to drag the country backwards. The Achilles heel of this government is fiscal and external sector management, which has placed the entire country on a ticking fiscal and balance-of-payments time-bomb.

Thank you.