Prime Minister Ranil Wickremesinghe (FILE PHOTO) Pic by Chandana Wijesinghe

Prime Minister Ranil Wickremasinghe presented Sri Lanka’s  medium term policy framework to the Parliament yesterday in his capacity as the Minister of Policy Planning and Economic Affairs.

The following summarizes the expected areas that will be addressed in the upcoming 2016E fiscal budget, to be presented on 20 November 2015, together with the medium term policy framework In order to build a better economic environment and a better economic foundation, following areas of the Sri Lankan economy will be improved in the medium term

  1. Competitiveness in the domestic market
    2. International Trade
    3. Investments

Further, the economy is expected to be built  on  the principle of the knowledge based social market economy which will be built on social justice principles that will also focus on

  1. Availability of global opportunities for education
  2. Strengthening of the health system to face health concerns of the 21st century

Medium term objectives – by 2020

1. Generating 1mn job opportunities
2. Enhancing income levels
3. Development of rural economies
4. Ensuring land ownership to rural and estate sectors, the middle class and Government employees
5. Creating a wide and strong middle class Areas of concern for growth

Converting the economy from a non-tradable economy to a tradable economy: exports to GDP fallen to current 15% levels (from 30% in 2000)
Relatively low tax to GDP ratio: fallen to 10% of GoSL income in 2014 from 19% in 2003
Reducing high income disparity levels in the domestic economy: 43% of Sri Lankans earned ~US$2 per day in 2014
Provincial GDP contribution: Northern province contributes only 4% to GDP vs. 45% from the Western province

Medium term targets and policies

1. Fiscal Consolidation by reducing the fiscal deficit to 3.5% of GDP by 2020 from current 5.8%
2. Equity via reducing regressive taxes : current direct to indirect composition is 80% : 20% and is expected to be reduced to 60% : 40% by 2020
3. Strengthening the tax management process by removing tax holidays and benefits
4. Removal of taxation that is based on past earnings (considered an impediment for business growth): Removal of the once and for all taxation process, which paved way for greater debate
5. Increase regular income flows from Sri Lankans working abroad : by providing tax free concessions for all earnings from outside Sri Lanka
6. Social aspects of the economy: enhance the allocations made for education and health and to face welfare and health measures of an ageing population in Sri Lanka (Reason: Institute of Policy Studies [IPS] projects 25% of Sri Lankans to be above 60 years of age by 2030)
7. Initiation of the medium term investment methodology: with adequate attention to State-Private Partnerships
8. Future economic potential of Sri Lanka: not focused on labour only, but also on innovation and productive growth

Action plan

State Owned Enterprises (SOEs) Reform

  • A State Holding Corporation Limited (SHCL) to be formed, under which all state owned entrepreneurial enterprises would be under, built along the lines of Temasek Holdings of Singapore, to successfully manage state enterprises
  • Efficient managers to be employed to run the SOEs and corrupt employees / politicians involved to be dealt accordingly

• Create a Public Wealth Trust (PWT) to pass on the shares of these enterprises to the people

  • Treasury Secretary and the Central Bank Governor to act as custodians of PWT. Other members of the PWT management will be nominated by the constitutional council
  • The board of PWT to be answerable to the Parliament
  • A Public Enterprise Act to provide the legal framework for the above
  • Local and global investors to be invited to participate in equity in these ventures by incorporating private sector style efficiency measures
  • Government’s non-strategic stakes in entities such as The Lanka Hospital Corporation (LHCL) and in hotels to be divested

Structural Changes to the Central Bank

Exchange Control Management and Employees’ Provident Fund (EPF) to be taken out of Central Bank’s purview to operate more independently

Create a New National Pension Fund

  • Amalgamate EPF and Employees’ Trust Fund (ETF) to create a new national pension fund worth Rs.1.7tn
  • A committee consisting of members of the civil society, unions and chambers of commerce to supervise the new pension fund

Increasing Foreign Investments

  • One off taxes such as the Super Gains Tax (SGT) will not be continued w.e.f from 2016 (however, remaining two instalments due in 4Q2015E will not be waived off)
  • Underperforming enterprises within the Underutilized Assets Act to be revitalized and to restore justice
  • Encourage investments that will generate employment
  • New laws to provide ownership of land to registered investors without being affected by the Land Restriction and Alienation Act
  • Enter into trade agreements with India and China to increase market access
  • Re-implementation of EU GSP+ concessions to enter into EU markets

Restructure Key Investment Promotion Agencies

  • The Board of Investment (BOI), Export Development Board (EDB) and the Sri Lanka Tourism Authority (SLTA) to be restructured by 2018 to facilitate the global and local investor
    participation process
  • A Special Purpose Vehicle (SPV) to be created for the purposes of attending to infrastructural development initiatives
  • A Central Procurement Secretariat to initiate all state purchases to overcome corruption

Tourism Development

  • Attract higher spending tourists (spending US$100-150 daily from current US$40-50) and encourage tourists to stay longer
  • Develop necessary infrastructure starting from airports and the ports and ensure every port and airport would become profit yielding ventures

Megapolis Development and Economic Zones

  • Greater metropolis between Negombo and Bentota to be developed for better economic activity
  • Western province megapolis to be one of the major infrastructure initiatives
  • Special economic zones to be created in identified areas of the country
  • To create a special financial and business hub in Colombo

Initiate an International Trade Policy Framework (ITPF)
An International Trade Agency to be initiated for this purpose

Reviving the Rural economy

  • Establish 2,500 state rural development centers via grouping of many villages under one development center that will have access to fully equipped rural economic market units
  • Build rural infrastructural facilities from village roads to fairs through a village level development programme.
  • Large scale agricultural enterprises to be built where farmers can be members to initiate competitive export oriented agricultural market and a review process
  • Agricultural sector reforms to be done via formation of a fully-fledged Agro Marketing Authority (AMA)
    •  Fisheries ministry to focus on a similar initiative for the fisheries sector
  • Reviving Paddy, Tea and Rubber industries
    •  Process of Government purchasing of paddy to be restructured whilst introducing an agricultural insurance scheme

Empower 3mn citizens to become land owners

  • To provide ownership of houses for those who have been living on state owned rented houses for over 10 years
  • Estate workers who have been living in line rooms for more than 10 years to be provided with a small land and a house
  • Middle income housing developers to be given state land and tax concessions to build housing schemes with other amenities. A low interest based loan scheme to enable the middle class and the Government workers to facilitate their housing procurement need to be introduced.
  • Government to initiate rural housing projects by setting the background for the construction of 500,000 new houses in rural, semi-urban areas by 2020.

Courtesy: CT CLSA Securities (Pvt) Ltd.