2016 Budget proposal

Review
Individual Assignment

Course name and No

: MBA51023 Business Economics

Course Facilitator

: Mrs. S. Amarathunga

Student name

: Ms J.C Dassanayake
1

Registration No

: MBA/2015/091(Batch 9/Group B)

Introduction
The new governments first full-year budget, for the fiscal year of 2016, was being presented
to the Parliament of Sri Lanka by Finance Minister Ravi Karunanayake. It is the first Budget
of the unity government formed by the UNP and SLFP under President Maithripala Sirisena
and Prime Minister Ranil Wickremesinghe and the 69th Budget overall. The new budget was
subject to various revisions and amendments which resulted in an introduction of a revised
budget for the first time in Sri Lankan political history.
The purpose of this report is to provide an in depth review about six key proposals introduced
under the new budget 2016. Under each of the key proposals the macro and microeconomic
effects to the economy are discussed in detail.
PROPOSAL 1 - Company Registration Fee : Every company registered with the
Registrar of Companies will be subjected to an Annual License fee of: Private
Companies Rs 60,000, Public Quoted Companies Rs 500,000, Other Rs 100,000
(Including companies non functioning) and payable to the Registrar of Companies
Voluntary liquidation of a company: Rs 250,000/- will be charged on liquidation
REVIEW
The impact of this policy to the economy can be explained under the following categories.
Investment
The effects of this proposal will subject to rise in the long term and not in the short term.
When the annual license fee is increased, there will be a negative impact to the startup
companies or small scale enterprises. As they are not yet established as the quoted companies
the increased license fee can be a huge blow to the survival of the company. When the startup
companies get discouraged the number of new entrants to the economy will also decrease.
This can create huge negative impact to the new investments on enterprises resulting in a
decline in the overall investment level.
Further the sole trader businesses that are focusing on converting their businesses to private
limited companies will get discouraged due to the license fee. This will decrease the number
2

of newly registered companies threatening the long term production of the economy and
expansion to new markets.
When a voluntary liquidation fee of Rs250, 000 is charged companies would be reluctant to
liquidate their companies unless and otherwise it is mandatory to do so. This is a fair proposal
for quoted companies. However when it comes to sole trader and other small scale businesses
operating at a loss, this proposal would further weaken their current position and they would
get bankrupted.
Unemployment
With the introduction of the company registration annual fee the number of new company
registrations and the number of sole traders willing to expand through converting to private
limited companies would eventually drop. With the decrease in expansion in companies the
production would decrease and there will be no employment generation in the economy.
Without any employment opportunities the unemployment would rise creating a negative
impact to the economy.
PROPOSAL 2 - The Government has proposed price controls on six essential items
including Mysoor Shal (Rs. 190/kg) , potatoes (Rs. 145/kg) , onions (Rs. 155/kg) ,
chicken (Rs. 480/kg) , packeted wheat flour (Rs. 95/kg) and dried chillies (Rs.
355/kg).
REVIEW
The impact of this policy to the economy can be explained under the following categories.
Aggregate supply
When government imposes a price ceiling for essential items such as dhal, potatoes, chicken
etc. it would result in a lower price for consumers. The consumers will increase their
consumption by increasing their aggregate expenditure. This would enhance the aggregate
demand for these essential items.
However when the prices are lower than the equilibrium price the producers will get
discouraged to supply more to the economy. This will result in an excess demand situation
where the aggregate supply would be lower than the aggregate demand.
3

Inflation
Due to the low price the suppliers will be discouraged to supply more. Further the suppliers
will hide the products to be sold at a higher price to the consumers. As these items are
essential for the consumers they would be willing to purchase these products at whatever the
price set by the suppliers. The product quality will also be at a lower level as the producers do
not have an incentive to supply more. Ultimately the consumers will end up buying products
of low quality at a black market price which is much above the controlled price. The
economy would experience an inflationary situation.
Unemployment
When producers restrict their output and do not expand production, the level employment
generation to the economy would also decrease leading to increased unemployment.
PROPOSAL 3: The government has proposed to remove the tax imposed on leasing
of land to foreigners, ensure applications for foreign investment are completed to
commence business within 50 days and create an investment friendly environment
through the introduction of Foreign Exchange Management Bill (FEMB).
REVIEW
The impact of this policy to the economy can be explained under the following categories.
Foreign Direct Investment
With the tax exemption and the relaxation of laws and procedures for foreigners would
increase the foreign inflows to economy. The foreigners would be encouraged to invest more
due to the hassle free process and tax exemptions. These increased foreign direct investments
would positively impact the economy with expanded production.
Unemployment
When foreigners invest more in our economy and start up new companies this would create a
lot of employment opportunities for the economy. With more and more new business ventures
the production and service level would expand thereby generating more employment
opportunities. This will reduce the overall unemployment level of the economy.
5

Economic growth
With expanded production, increased employment opportunities with increased foreign direct
investments the economy would move towards growth and development. When more and
more foreign companies startup their production in Sri Lanka the competitiveness of the local
companies would also increase resulting in improved quality levels. With improved economy
the peoples standard of living will also be improved.

PROPOSAL 4: Stamp duty on credit cards for local purchases will be removed and
stamp duty for foreign purchases will be increased to 2.5 percent.
REVIEW
The impact of this policy to the economy can be explained under the following categories.
Aggregate expenditure
With the removal of stamp duty on credit card purchases the level of aggregate expenditure
would increase as the consumers would increase their spending now. The purchases of local
products would increase creating an increased demand for local products. The consumers
purchasing power expands.
Aggregate supply
With increased credit card purchases and increased demand for local products the motivation
of local producers to produce more would expand. With increased production the economy
would prosper in the long term. With the increased stamp duty for foreign purchases the
number of foreign purchases would decline thereby encouraging local producers to produce
more to the market. Further the outflow of funds to foreign economies would be reduced and
the inflow of money will be circulated inside the local economy itself expanding the
consumers purchasing power.
Bank loans and advances
When the credit card transactions of consumers increase the banks will be positively affected
as the sale of credit cards would increase. Further the credit card interest income and penalty
7

fees would add up to the income level of banks. Therefore the banks can give away this
increased income in the form of loans or invest in other securities and yield an income. This
will facilitate the expansion of fee and commission based income.
However the from the consumers point of view the consumers will get indebted by
purchasing unnecessary items for their daily consumption. Further the local producers and
banks will get together and lure customers to increase their credit card purchases by way of
discounts and promotions. Finally the consumer will end up with unbearable debt and will
have to sacrifice their personal assets to cover up the debt.
PROPOSAL 5: The government proposed all the employees salaries need to be deposited in
a bank account.
The impact of this policy to the economy can be explained under the following categories.
Deposit mobilization
When all the employees both private and public sector receives salaries through bank account
would enhance the deposit base of banks. When large sum of funds are deposited in the ban
in the form of salaries the banks can uses them as an investment and earn an income.
This would encourage the people to save as the salary is not received to the pocket directly.
The people can manage their salary well and increase the savings level.
The increased income of banks will be circulated through the economy in the form of credit
creation thereby increasing the money supply of the economy.
Aggregate demand
When money supply of the economy expands due to the increased deposit base of banks, the
people would have more money to spend thereby increasing their spending power. People
would increase their spending on goods, services and also would demand non-financial
securities such as shares and debentures.
Investment
When people start to purchase more and more bonds the prices of bonds would increase. Due
to the negative relationship between bond prices and interest rate the rise in bond prices will
8

be coupled with a decline in interest rates. When the interest rates decreases the cost of
capital for investments would decrease and investments become more attractive. This will
lead to an expansion in the investment level of the economy.
Economic growth
When the investments in the economy increases due to the drop in interest rates and
expansion in aggregate demand, the aggregate output would increase leading to an expansion
in the economy.
Due to the expansion in economy new employment opportunities will be generated in the
economy. Local Entrepreneurs will be encouraged to startup new companies and expand
production. The people in the economy will experience an improved standard of living.

PROPOSAL 6: As an initial step towards digitalization the government proposes to establish

200 digital classrooms by the end of 2016 and 1000 digital classrooms by 2017.
REVIEW
The impact of this policy to the economy can be explained under the following categories.
Knowledge gap
Digitalization is the process which had been practiced in many countries which had positively
changed the data collection and data processing methodology resulting in the generation of
additional revenue and value producing opportunities. Through such a process, Sri Lanka
would be in a position to reach the next level in technological advances to be in par with
many other developed nations of the world with regard to Information Technology. In simple
term we had observed that internet connectivity has a positive impact on economic growth.
In order to expand the knowledge economy and reap the benefits of knowledge sharing the
digital classroom concept can be introduced. Under digital classroom the knowledge gap that
arises due to the lack of necessary knowledge on certain subject areas and concepts can be
diminished by accessing the knowledge of different professionals, scholars in different parts
of the world.
9

Brain drain
Even though the initial cost of setting up digital classrooms will be high due to the lack of
digital infrastructure and other facilities, the benefit that can be gained from these digital
classrooms is long term oriented.
The main reason for the skilled people to migrate from Sri Lanka is to go for better
universities and better employment opportunities. If the country can be developed with digital
infrastructure, better employment opportunities and access to foreign university education,
the brain drain can be reduced significantly.
Further when people do not leave the country and pay large amount of money to foreign
countries (Cash outflows), they can be saved within the country itself by expanding the
digital classroom concept.
Economic growth
The proposal to establish digital classroom is a timely decision to keep abreast with the rapid
evolving technology. In order to be par with the world standards, the digital classrooms
should be managed by the top key professionals of the country. Digital classrooms give the
benefit of transferring knowledge among scholars and intellectuals across different
boundaries.
Proper implementation of digital classrooms in the top universities in Sri Lanka and among
other educational institutes will expand the use of digital classrooms. This will lead to an
expansion in the economy in the long run.

10

Conclusion
As per the proposals explained above, illustrations have been given as to how each proposal
will impact to the economy as a whole.
Based on the analysis it is apparent that 2016 budget proposals create both positive effects as
well as negative effects to the economy. Sri Lanka's budget for 2016 included several liberal
measures but also many seemingly senseless interventions that may boomerang. The budget
contained the various give-away to many communities: farmers, fishermen, housewives,
private and government employees etc.
The budget takes some steps in the right direction, but overall, it can be considered as
providing a mixed effect to the economy. There were no shocks as in the interim budget
earlier in the year, but the extent and timeframe over which reforms will be implemented is
crucial.

11