Budget 2017: Unwise move to reduce plantation lands for RPCs
Finance Minister reads the budget in Parliament
Budget 2017, it must be stated, is comprehensive in its coverage and includes almost all the key result strategies (and sub strategies) required for boosting economic development in Sri Lanka (SL) despite certain shortcomings.
The national development strategies suggested by this budget to achieve the goals and objectives are: a) strengthening democracy/governance, b) adoption of a social market economy with the private sector treated as the ‘engine of growth’, c) macroeconomic ( budgetary and monetary) stability, d) a suitable savings and investment climate, e) export development, f) granting ownership of land for farming and housing , g) the sustainability of the (natural) environment, h) improving social welfare (security), i) ‘de-bureaucratization’ or reform of the public service apparently to improve its efficiency and effectiveness, and j) measuring progress using key performance indicators. Two important strategies are, however, missing. One of them is controlling corruption to channel funds for development work. The other is ‘selling’ this practical set of policies to the people so that they will not reverse them at the elections. Some of these adopted nearly two years ago are regrettably still in the ‘rhetoric/talking’ stage.
Macroeconomic stability
At last corporate and income taxes are to be increased and the tax base is to be widened so the revenue from direct taxes could rightly go up to 40 per cent while revenue from indirect taxes could be reduced to 60 per cent to provide relief to the poor and middle classes from a heavy tax burden. While collecting higher revenue recurrent expenditure has to be held at a lower level leading to reduction of the rate of inflation; this is necessary to protect the purchasing power of households and reduce the cost of production of goods and services. These taxes and the fiscal incentives proposed, however, look complex and could lead to unnecessary ‘red tape’ for the ‘engine of growth’. A better and simpler alternative would have been a few amalgamated set of taxes and a uniform package of incentives across the board for all sectors.
Another problem in the fiscal area would be the massive losses suffered by state owned enterprises (SOEs) and the leakage of revenue due to corruption in the collection of various taxes and import duties as well as other duties; heavy bank borrowings by SOEs also may ‘crowd out’ the private sector from obtaining credit. The budget doesn’t appear to propose a positive solution to the losses by the SOEs. It is very clear that the SL bureaucracy cannot run businesses as it does not have the required management expertise for the simple reason that appointments are made on political grounds rather than on merit and the feeling that the Treasury will bail them out, if losses occur. So the answer should be a well- crafted, foolproof process of part privatization on the basis of public private partnerships (PPP); listing them in the stock exchange as suggested in the budget may not solve the problems mentioned above. The other leaks are due mainly to deep rooted corruption.
Poverty alleviation
In dealing with poverty alleviation, the budget says that 20 per cent of the population earn less than US$2 a day; actually it was a ‘vulnerability line’ (as it may go up or down when circumstances change) of 34.4 per cent of the population according to the World Bank or more than 7 million people. The rate of extreme poverty or those earning less than $1.25 according to a recent report was 3.2 per cent or about 700,000 people, while those earning less than $2.50 was 32.1 per cent of the population in 2012/13. The government needs to implement a special programme to give relief on the basis of the SDGs to the above mentioned 700,000 or so people in extreme poverty and those subject to disasters; this will enable the government to win badly needed prestige and popularity.
Today poverty is ‘multidimensional’ and not confined to the level of incomes. So relieving poverty requires multidimensional strategies, most of which are fortunately included in the budget.
Investment
It is estimated that SL needs to invest about 35 per cent of the gross domestic Product (GDP) which was about $82 billion as of 2015 to reach a growth rate of 7 or 8 per cent per annum. But the domestic savings rate has been low; it was about 23 per cent of GDP as of 2015. The resulting investment gap has to be filled mainly by foreign direct investment (FDI) as domestic investors would find it difficult to access not only the capital but also the global markets, the required technologies and management expertise, unlike the former.
Then, how could SL differentiate its enabling environment against other competing countries in a unique way to attract such investment? Could it be done only by improving governance, the Ease of Doing Business index and extending the incentives proposed in the budget? The external environment for FDI may become more negative due to an expected downward change in the level of corporate tax and an upward movement in interest rates in the US. So SL may miss out despite the above mentioned incentives proposed in the budget.
Foreign investors who are looking to invest in small countries like SL may seek efficiency and profitability from projects at the lowest risk possible. So differentiation of the country would involve lowering the risks that held back investment especially FDI during the last several decades; the required remedy is through improving and strengthening the enabling environment by solving the ethnic conflict through reconciliation, equal democratic rights for all, political stability and improved law and order conditions ensured by a new constitution. The government has already put in a significant effort on these as also proposed in the budget; in addition it may need to build a consensus in the country in favour of such changes and removal of other impediments like ‘red tape’, poor infrastructure, the complexity of labour laws and the acute shortage of the required technical and soft skills (like creativity, working in teams to reach targets and communication especially in English) required by investors. Some of these solutions are mentioned in the budget but fall short especially in the case of the system of creation of skills/education, the reform of which still appears to be in the ‘rhetoric’ stage.
As for red tape, although the budget correctly proposes improving the Ease of Doing Business ranking, it does not suggest a clear cut method of remedying the long delays in the approval of investment projects by the Board of Investment. What about plans for a ‘one-stop-shop’? Indonesia has started one recently.
There are also no positive proposals for rationalizing the complex labour laws, assuring at least congestion-free city roads and a steady supply of quality electricity in the near future.
In the case of the system of education, what needs to be done is firstly revision of the syllabuses to teach the so-called ‘STEM’ subjects (science, technology, engineering and mathematics) plus ethical values, management, ICT and of course English; professional management though not mentioned in the budget is an essential input required for the effective conduct of public and private affairs in SL. A channel of instruction in the English medium may also have to be started to bring the children of various communities together both to promote national integration which is necessary to attract investment and to improve badly needed English proficiency. Training in skills should normally start at secondary school level (values at primary level) and not at university level as implied in the budget which also talks of scholarships to undergraduates for foreign studies. Will they return to the country, once they complete studies?
As for the projects that should be started by investors, manufacturing should be promoted not only to produce more goods and services for export but also to create sufficient well-paying jobs to absorb the excess employment in agriculture (over 28 per cent of total employment, some encroaching into forest reserves since land availability is limited, creating problems such as landslides, floods and a human–elephant conflict) to improve agricultural productivity; manufacturing could also absorb the excess employment in the bloated public service for the same purpose and also dissuade people, especially women leaving for work abroad often under harsh conditions, while children back at home are often neglected and abused. The investment projects proposed are referred to as ‘thrust’ industries, a bygone concept. The private sector investors will opt for projects that yield the maximum benefits for them and not industries selected by the government.
Agriculture
There isn’t enough land available for large scale, commercial agricultural projects proposed. Most of the cultivable land is occupied by farmers, particularly of the subsistence type (45 per cent of holdings being less than ¼ acre out of some 3.3 million holdings, according to the Census of Agriculture-2002; currently this number may have increased due to fragmentation) and the rest are forest reserves which are fast dwindling. According to the FAO (2010) the forested area in SL was 29 per cent of the extent of land in the country; primary or genuine forests occupied only 9 per cent of the forested area. So the proposal to set up large scale commercial plantations may have to be reconsidered. In the meantime why is the extent of existing plantations to be reduced? This foolish proposal will reduce economies of scale or productivity and hit SL’s main exports of tea and rubber badly.
Therefore the alternative left is to carefully consolidate the size of the farmer-holdings after giving land ownership as most of them are held on lease from the state (which is the current owner) under restrictive conditions; these seriously limit agricultural productivity (about $1000 per agricultural worker in SL compared to more than $10,000 in Malaysia and more than $76,000 in Singapore, in constant 2005 numbers, World Bank, 2014). This is the main reason for the poverty of millions of people in SL and the inequality of incomes. Those who leave agriculture due to the consolidation will have to be given jobs in manufacturing and service-oriented projects; such a carefully crafted programme could also offer benefits more quickly to the poor than the long term ‘trickle down’ effects of the rest of the development strategies/policies proposed.
Exports
According to the budget, the main strategy of expansion of export earnings ($10.5 billion vs. imports of $18.9 billion in 2015) is entering into trade agreements. It should be the other way around. SL’s major export problem is that it doesn’t have sufficient capacity to produce more goods and services for export because investors particularly FDI have been bypassing SL due to various risks, to invest in East Asian economies, which have now reached great heights of prosperity. The other point that has to be made is that export competitiveness is very low in SL mainly due to a heavy ‘anti export bias’ created by high import tariffs. The budget unfortunately says that such tariffs will be ‘simplified’. This does not mean downward revision. In other words tariff protection of domestic investors will continue. Therefore competition among firms will be low leading to low investment expansion and weak innovation to add quality and value to goods and services to satisfy especially high end customer needs; competition and higher productivity constitute the key to higher export competitiveness; SL’s rate of Total Factor Productivity or the efficiency of all sectors has been a low average of -1.48 vs. India’s 1.28 and Singapore’s 1.34 during 2010-2014.
Finally the budget promises development strategies with potential for success despite certain shortcomings which have to be corrected. It is up to the government, though weakened by being a coalition with a large unwieldy cabinet of ministers, to find means of working together closely for focusing more on smarter and passionate implementation of the key result areas (KRA)/ strategies, besides coping strongly with corruption. While doing this the government must also motivate the ‘engine of growth’, the officials and the people. In addition it has to support this effort by appointing at least senior officials on merit with integrity and professional managerial capability to achieve efficiency and speed of implementation.