Digital public service needed to revive economy after COVID-19

The Pandemiconomic Impact: Insights from ACCA finance professionals

Sri Lanka can avoid a catch-22 situation by making a strong push towards a digital public service with the government having to perform conflicting roles of reviving the economy amidst saving lives from the COVID-19 pandemic and containing the budget deficit and government debt whilst saving livelihoods of people, says ACCA Member Suren Rajakarier.

The government imposed strict lockdowns which contained the spread of the pandemicavoiding the disastrous experiences some developed countries have had with COVID-19. However, the lockdowns brought the economy to a standstill. To make matters worse, lockdowns beyond the island’s shores impacted exports, tourism, and expat remittances. The state has rolled out monetary and fiscal measures to stimulate economic recovery including a small business credit package worth Rs50 billion through the banking system and an allowance of Rs5,000 to low-income daily wage households.

“A digital push in the public sector will complement the fiscal and monetary stimulus measures ensuring that the economy is better placed to recover,” Rajakarier says.

According to ACCA, it had taken only a few weeks to transform a crisis that was a supply shock predominantly affecting mainland China into a worldwide demand and supply shock that threatens to push the global economy into recession.

There is uncertainty about the scale and duration of the crisis.

Economic uncertainty will prevail globally until the development and mass production of a COVID-19 vaccine. A lot depends on the effectiveness of public health measures across the globe, and the ability of governments to keep their economies liquid.

Sri Lanka will find it difficult to continue providing stimulus.

“There’s a catch-22 situation. The government must provide a stimulus to revive the economy, but deficit financing will be a challenge with tax revenues already falling,” said Rajakarier, Partner and Head of Audit at the Sri Lanka offices of global audit firm KPMG.

Government revenue amounted to Rs1.9 trillion in 2018 or 13.3% of GDP. Taxes account for nearly 90% of government revenue, the largest contribution coming from VAT, a consumption tax.

Before the pandemic, the government announced sweeping tax cuts to revive the economy impacted by the 2019 Easter attacks. These tax cuts would have resulted in revenue losses estimated at 2% of GDP in 2020.

“The government believed 2020 would bring a consumption-led economic revival. This would have offset the revenue losses,” Rajakarier says. “Unfortunately, the pandemic hit us.”

Reduced economic and business activity during and after the COVID-19 outbreak is bound to result in lower direct and indirect taxes. The government had also announced grace periods for the payment of taxes such as VAT, Stamp Duty, WHT and other income taxes which will further dent revenue in the short term.

However, the government has to continue spending, compelled to support public health services and provide financial support for households and businesses.

The World Bank has pledged a $128 million loan to help combat the pandemic while China will lend $500 million but Sri Lanka has considerable debt repayment commitments averaging $5 billion until 2022. With global liquidity conditions tightening, the government will look to more domestic borrowings. Half of Sri Lanka’s Rs13 trillion debt as at end June 2019 was domestic borrowings.

Which is why Rajakarier is of firm view that the government must think beyond the stimulus as the pandemic will change the global economy.

Behaviour and consumption patterns have shifted the world over. Retailers and many others have been forced to look at e-commerce and healthcare providers are turning to online services more than ever before.

More companies are transforming to be digital in various functions like sales, purchases, payments and even bookkeeping. Locally, some listed companies have been able to finalise audited year-end accounts remotely so that investors have timely information, as some auditors also have implemented an electronic audit process.

“The economy is starting to make that slow shift towards a digital economy, but that can only materialise if the government takes the lead,” Rajakarier says.

For instance, while most banks and retailers provide digital online services, a large share of the population is not connected, and the cost and quality of Wi-Fi services are not favourable.

One way to revive consumption is to provide the infrastructure for e-commerce and ensure some entities do not break the circular flow of economic activity, by enforcing cost reduction and pay cuts, whilst benefitting from the situation, Rajakarier says.

Then businesses can generate more turnover and profits to retain their employees, repay the banks once the debt moratorium period ends,and also contribute to the State by way of taxes.

“In this regard, a digitally enabled public service will improve efficiency, transparency and is critical to improving business confidence”.

Filing taxes, trade documentation and licensing should be automated and other government services should be accessible online so investors and business will get the confidence they need to navigate these uncertain times. “In short, take the inefficiencies and corruption off the system and enable private enterprise to flourish,” Rajakarier says.