The Budget 2018 outlined some of the key proposals in line with its long term economic development plan as given below.
Legislative Reforms: The budget has identified the key legislative impediments to the ease of doing business and the efficient utilization of Sri Lanka’s assets. Access to land has been a major hindrance to growth of investment, as is the access to labour, and affordable capital. The legislation governing land, labour, and capital will therefore be amended or enacted to improve access to factors of production to facilitate new investments and expansions. Particularly important are the repeal of the Underperforming Enterprises Act, amendments to the Shop & Office Employees Act, Land Restrictions and Alienations Act, and the introduction of new Bankruptcy Laws. These legislative amendments can go a long way towards enabling investment and economic expansion.
Vehicle Imports Duties: Import taxes on vehicles have long been a source of manipulation and graft. This has been due to the complexity of the tax structure, and the significant levels of discretion in administration of taxation. This has resulted in large levels of revenue loss for the government and has led to an uneven playing field in the vehicle market. In this budget a new duty structure has been introduced where the tax is based only on the engine capacity of the vehicle. This eliminates all room for discretion and treats all vehicles on the same basis. The duty brackets are based on a transparent, objective formula. It is positive to note that in this budget there is a broad effort to shift from ad hoc subjective taxation to taxation based on transparent, objective, rule based criteria.
Vehicle Luxury Tax: It is noted that in the process of shifting from an ad-hoc vehicle import tax structure to one based on a rules based criteria, there will be some initial price displacements. Furthermore, there may be some initial price declines for high end vehicles – therefore it is a positive move to include a luxury tax on the super-luxury vehicles in order to capture more government revenue while preserving social equity.
Tax declines on smaller vehicles: The decline in tax of some of the smaller vehicles will be a boost to first time car buyers, young families etc. But at the same time it is essential that we ensure the quality of vehicles imported are maintained – in this context the introduction of minimum emission standards and minimum safety criteria are important.
Electric Vehicles: The reduced duties for electric vehicles is a positive from an environmental perspective. By maintaining a significant tax differential between petrol/diesel vehicles and hybrids and electric vehicles will encourage people to switch to non-fossil fuel vehicles. The Budget ambition to convert Sri Lanka to a non-fossil fuel vehicle country by 2040 is commendable – the government will be taking the lead in this regard by converting to hybrid and electric by 2025.
Plastic Tax: The budget complements HE the President’s pledge to reduce Sri Lanka’s plastic usage by introducing a tariff on plastic raw material imports. This will incentivize the economy to reduce the consumption of plastic based products over time. At the same time, the budget has provided concessionary loans and subsidized machinery/equipment for the development of alternative products such as packaging material using biodegradable material like palm leaves, coir, and bamboo – this will also be a boost to local cottage industries.
Water Management: The budget provides a number of holistic supportive measures for water management. The Pavithra Ganga project will be a big boost to reducing waste disposal into our rivers. Similarly the measures to encourage rainwater harvesting and the de-silting of tanks will play a major role in water preservation, particularly in the context of the negative impacts of climate change. There are also proposals to protect and sustainably harness the potential of our lagoons, which can help create livelihoods whilst protecting our water resources. Finally, the proposals to enhance ground water monitoring will be very important to ensure our wells and other ground water supplies remain safe and usable for future generations.
Blue Economy & Fisheries: The budget gives a lot of emphasis to the sustainable utilization of Sri Lanka’s abundant ocean resources. There is significant support for the fisheries sector with subsidies for higher end fishing vessels including multi-day fishing boats and for the installation of modern on board cold storage technology. Almost 2 billion rupees has been set aside as new proposals for the development of fisheries harbours which would help reduce post-harvest losses and improve the supply side. These measures will help enhance Sri Lanka’s fish stock and will enable the country to take advantage of opportunities such as GSP +. It is also encouraging to note the shift to high value fisheries such as sea cucumber and aquaculture, which will ensure a better return on investments in this sector.
Agriculture: The farmer insurance scheme based on a transparent weather index will be a boost to the rural farmer of Sri Lanka. This contributory insurance scheme will help ensure buy-in of all stakeholders in a fair manner and will help protect farmers from the increasing ill-effects of climate change. The budget sets aside Rs. 3 billion in this regard. Another successful measure to help stabilize farmer incomes is being supported in this budget – that is the 3 warehouses in Polonnaruwa, Ratnapura, and Killinochchi on trust receipt schemes. Farmers receive a “trust receipt” which they can cash in at a later date when prices are favourable. This financing structure is devised to avoid a situation where the farmer sells all his produce in one go when the market is flush with supply and prices unfavourable. It enables a farmer to smooth his or her income in spite of supply fluctuations.
Agriculture value addition: In addition to the measures to support farmer income such as the farmer insurance scheme and the warehouses operating on trust receipt schemes, the budget encourages greater value addition in agriculture. The proposal to tax backward integrated agriculture activities at a concessionary rate of 14% will encourage further value addition in agriculture. Furthermore, the proposal to exempt selected advanced technology agricultural equipment from NBT will be a boost to technological infusion in the sector. Finally, the Ran Aswanna and Govi Navoda subsidized loan schemes, at 6.5% and 3.3% interest rates, under the Enterprise Sri Lanka Credit Scheme, will enable SME farmers to invest in storage technology to reduce post-harvest losses, and also in machinery and equipment to mechanize agriculture.
Enterprise Sri Lanka: This budget aims to create a nation of entrepreneurs, where innovative business startups thrive in a competitive market economy. Access to affordable finance is a major impediment, and the Enterprise Sri Lanka Credit Scheme is a key initiative to address this problem. Rs. 15 billion has been ear marked for this credit scheme that provides interest subsidies of 50% to 100% for a range of ventures including value added agriculture (targeting investment in cold storage, warehousing technology, out grower farming, and mechanization), renewable energy generation for households, tourist establishments and industry. This will help bring to life the business ideas of all Sri Lankans, catalyzing investment and job creation in all corners of the country.
Development Bank: A Development Bank with an Exim window is also being set up with capital from the government and other financial entities. The bank will be dedicated to the provision of development capital in the form of long term loans, project lending, start up financing. There will be an Exim window as part of the Development Bank which will include key trade finance instruments and also provide in-house support on trade information and other supporting services for exporters and importers. This initiative will fill in a major void where Sri Lankan firms have lacked access to long term affordable capital to finance future growth.
Loans Without Collateral: One of the biggest impediments to development in Sri Lanka has been the fact that our financial sector has not been conducive to financing ideas. A young person with a great idea is unable to obtain a loan without having some asset as collateral. In addition to the proposal to implement a development bank, another initiative is the SME guarantee fund of Rs. 500 mn. This fund is being set up to enable SMEs with sound business plans to access credit even without collateral since the government guarantee will mitigate the risk to the lending institution.
Gender Empowerment: Sri Lanka’s economy has failed to create sufficient meaningful employment opportunities for women. The female labour force participation rate is around 34% whilst more than 50% of university graduates are women.
During the period 2018-2020 the government will support the development of several majority women owned companies, with grants and concessionary loans, along with the provision of non-financial support such as expertise in business development and connectivity to markets. Government support will include provision of equipment, guarantees for equipment leases, technical support for business, and financial management through subsidized consultancy programmes.
Women owned companies within the Enterprise Sri Lanka scheme will have a further 10% credit subsidy advantage viz. a 6.5% Jaya Isuru loan will be made available at 5.8%. Child Care Facilities: In addition to encouraging female entrepreneurship by helping set up several majority women owned companies and providing concessionary loan schemes to finance these ventures, the Budget also spells out measures to encourage broader measures to encourage women’s participation in the labour force. The importance of childcare facilities is another recognition of this need in the budget. Lack of child care facilities is a major factor since women tend to leave the labour force for extended periods during child care. By enabling child care facilities near the workplace, women can return to the work force sooner.
Start Ups & the IT Sector: Technology based startups are a key driver of growth and employment in the global economy. The IT Initiative is the Government’s Angel Funding Scheme for the IT industry will entail Rs. 3 billion over a 3 year period. This can be used to finance local startups and enable collaborations between the industry and universities. Similarly, the Innovators to Industry (I2I) Programme will match innovators with industry and business operations who could use and commercialise their innovations and technology. When hired by the identified company, the government will provide 50% of the innovator’s salary and the cost of patenting.
Technology & Innovation: This budget will have a strong focus on creating an environment to foster innovation, technology and research, to drive a knowledge based economy. Product design engineering will support the development of new technology, and product innovations by supporting services in standards, training, and prototyping new inventions. This will be implemented through the Mechatronic Enabled Economic Development Initiative. Product development initiatives for the export sector will also have access to financing through the Export Market Access support programme. Funding will be increased to key R&D institutions such as COSTI which will be converted to NASTICA (National Science Technology and Innovation Coordinating Authority), the Centre for Robotics, and the National Intellectual Property Office.
The Export Sector: The cabinet approved National Export Strategy (NES) has identified 6 potential export industries including boat building, electronics, health and wellness tourism, spices & concentrates, IT, food & beverages.
These sectors have been identified after a stringent process and are earmarked as being the drivers of Sri Lanka’s export sector in the coming years.
The 2018 budget will support the NES implementation with fund allocations for key initiatives in the identified sectors. Beyond the NES sectors, special proposals have been identified for the gem & jewelry industry, the rubber sector, and coconut products, among others.
The Export Market Access Support Programme through the EDB will include financial support to fund pre-export processes such as insurance, marketing and promotion costs, intellectual property registration, and for product development and innovation.
These will be crucial steps towards Sri Lanka’s ambitions of doubling its current exports of US$ 10 billion and moving to become an outward oriented trading economy as it has historically been.
Driving Investment: A number of initiatives are being taken to improve the investment climate by facilitating the process of obtaining land, starting a business, construction permits, obtaining utilities etc. Several reforms are included, primarily relating to the infusion of digital technology in institutions such as the Registrar of Companies, the Land Registry etc. and integrating them to enable a seamless process for the investor. This will help Sri Lanka improve its position on the Doing Business Indicators as well.
One of the major impediments to FDI is access to suitable land in investment zones. A new zone is being developed as a new PPP model between the government and Thai company Rojana, where Rojana will invest US$ 500 million in developing the zone and bringing in investors and managing the zone, whilst Sri Lankan government will invest in the development of the infrastructure for the zone. The budget will support initial work on similar new zones as well.
Three Wheel Drivers: There are more than 1 million three wheelers registered in Sri Lanka, many of which are engaged in the provision of transport services to the vast majority of the population. The government believes in empowering this important group of people and recognizing their contribution to the economy.
Special concessions will be provided to encourage and incentivize the usage of electric three-wheelers, which would be a more environmentally friendly option. Regulations will be introduced that will ensure fair, transparent pricing, and safety from both the driver’s and consumer’s perspective.
An innovative proposal is included for three wheel drivers in tourist areas. The Sri Lanka Tourism Development Authority will initiate a programme where three wheel drivers will receive training in languages and basic local tour guiding skills. Successful drivers will then receive a “Tourist Friendly Tuk” sticker along with registration with the SLTDA.
13 Years of Education: An exam centric curriculum has resulted in a large number of students dropping out of school after Ordinary Levels. But this is because the education system has failed the students, not due to a failure of the students themselves.
The education system has failed to recognize the fact that all students have unique skill sets. These skills may extend beyond the traditional academic skills and would likely be in creative skills, technical skills, digital capabilities, and so on.
The 13 years of education policy recognizes the varied skill of students and ensures the opportunity for students to stay on in school after Ordinary Levels. Students can take up market oriented technical and vocational training programmes and skill development programmes, at the successful completion of which they will receive formal certification such as NVQ 4.
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