Inward-looking budget
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Despite being a gloomy morning, the three friends had gathered under the margosa tree for their regular Thursday ‘gossip’. They were there after buying ‘maalu paan’ from ‘Aldoris’, the ‘choon-paan karaya’, after some banter with him as he came down the lane.“Aya-weye honda deval thiyanawa. Ekak thama aanduwe kattiyata rassawal dekak karanna puluwan eka (There are some good proposals in the budget. One is allowing state workers to do two jobs),” said Kussi Amma Sera.
“Ei kaata-hari rassawal dekak karanna avashya. Aanduwa baara gannawada jeevana viyadama godak wedei, eka hinda rajayata weda karana ayata egollange padiyen jeevath wenna be kiyala (I wonder why one has to do two jobs. Is the government admitting that the cost of living has risen and a state worker cannot survive on the salary paid in government service?)” asked Serapina.
“Wenna ethi (Maybe),” noted Mabel Rasthiyadu, adding: “Eth meka honda vedak. Ethakota rajya sevakayo dosthara gollo wagene, poudgalika weda karana kattiya (This is a good proposal as state workers get the same recognition as state sector doctors who are allowed private practice).”
“Thava honda deyak thama, pita-rata ape aya evana dolaraya-kata, rupiyal dekak dena eka (Another good thing is giving Rs. 2 for each dollar remitted by a Sri Lankan migrant worker),” she added, as the other two nodded in agreement.
As I watched the trio discuss the budget, the phone rang. It was my jolly-mood economist friend, ‘Sammiya’ (short for Samson) on the line, most probably calling to discuss the same topic.
Yes it was, as I answered the call. “I say, this is an interesting budget. I would call it an ‘inward-looking’ budget,” said Sammiya. “What do you mean,” I asked
“Well most of the proposals are linked to increasing local production and manufacturing, reducing the reliance on imports,” he said. “Yeah… come to think of it, that’s true. There is a whole new reliance on local production and output to also increase raw material for exports, particularly garments,” I said. Last week the garment industry welcomed a proposal to set up a fabric processing plant in Eravur in the Batticaloa district.
According to apparel industry officials, last year Sri Lanka imported 255,437MT of fabric both for the export-oriented apparel manufacturers and for the local market. The import bill for this fabric was US$ 2.2 billion. The establishment of the Eravur Fabric Processing Park will help reduce imports of fabric as apparel manufacturers would be able to replace a part of their imported fabrics with fabric sourced locally, they said in a statement.
“I think the government has been guided in the budget by the need to save foreign exchange, as the foreign debt burden rises and we have to repay over $4 billion in interest and loans next year,” he said. We then discussed various other proposals in the budget before winding up.
An inward-looking budget focusing on local production and input and reducing imports, is not a bad idea in a crisis-hit economy struggling to earn foreign exchange. However, the quality of production needs to improve to cater to adding value to export products; there should be sufficient production to meet local and export processing demand and finally, prices must be competitive.
Local raw material costs should not be higher than imported raw material — similar to a situation in the food market where imported food from India (due to the scale of production) is often cheaper than food produced in Sri Lanka. This is one of the reasons why local farmers are protected as their costs of production are high in this region.
But depending solely on local production (many concessions have been offered in the budget to boost local production and output) is not going to assuage Sri Lanka’s main trading partners. Such a warning came on Thursday from the European Union (EU).
In a statement, it expressed disappointment over the current import restrictions in Sri Lanka saying trade is not a one-way street and the restrictions impact business with the rest of the world. “The current import restrictions are having a negative impact on Sri Lankan and European businesses and on Foreign Direct Investment. Such measures impair Sri Lanka’s efforts to become a regional hub and negatively impact Sri Lankan exports by constraining the import of raw material and machinery. We recall that a prolonged import ban is not in line with World Trade Organisation regulations,” it said.
Many benefits were provided in the budget to boost local production and the manufacturing sector. For example, tax-free concessions for five years were given to individuals and companies engaged in farming including agriculture, fisheries and livestock farming.
Then investments exceeding $10 million with potential to change the landscape of the economy, in the areas of export industries, dairy, fabric, tourism, agricultural products, processing and information technology were provided with concessions under the Strategic Development Law regulations.
Loans of Rs. 500,000 at an interest rate of 4 per cent were offered as start-up capital to support young men and women, to launch their own businesses.
In the dairy industry, the government said it wants to reduce the cost of imported milk and increase the reliance on local milk production. In an effort to encourage more production, the budget offered a loan scheme of up to Rs. 500,000 at an interest rate of 7.5 per cent per annum for the purchase of dairy cattle, setting up of ecofriendly cattle sheds and purchase of equipment for small and medium-scale dairy farms.
The government said it wants to gradually reduce the foreign exchange amounting to more than $300 million per annum (Rs. 55 billion) on milk imports by increasing local production.
Was there anything significant missing from this year’s budget? There was no clear direction on how the government hopes to manage the COVID-19 pandemic for which billions of rupees are required for health services which include quarantine facilities, testing and wage-support schemes for those who live below the poverty line or have lost jobs and need a financial handout.
While the estimated state revenue for 2021 is Rs. 1,961 billion, expenditure at Rs. 3,525 billion and the deficit at Rs. 1,564 billion, there are some concerns that spending was under-stated and revenue (mainly from taxes) was over-stated.
As I put this ‘column to bed’, substituting the phrase ‘putting the newspaper to bed (print)’, Kussi Amma Sera brought my second mug of tea, saying: “Aya-weya hondai (The budget is good).”
I nodded, while reflecting on the need for a more realistic medium and long-term budget perspective as the pandemic continues to ‘bite’ the economy and the reality stares us in the face that Sri Lanka cannot continue import controls for too long.