Budget 2021 : A good or bad kettle?

Originally appeared on The Morning

By Dhananath Fernando

Then school principal of my alma mater, late Rev. Fr. Bonnie Fernandopulle used to mentor students through the use of anecdotes and examples. One of his favourite questions for students he was mentoring was: “Do you know the difference between a ‘good kettle’ and a ‘bad kettle’? They both look the same. They both sound the same. They both serve the same purpose of boiling water. But only time will tell which one is which.” He used to say: “It is not the ‘term-end exams’ nor the ‘semester-end test’ that are the difficult tests of life. The ‘test of time’ is a test that you, as students, should train yourselves to face.” I hold this advice dear and remember it up to date.

One year into a global pandemic calls for a litmus test on the effectiveness of our economic policies and the presented “Budget 2021”. This will help one evaluate where Sri Lanka stands in the “test of time’ metric. 

The Annual Report of the Central Bank of Sri Lanka (CBSL) for 2020 provides some statistical insight for evaluation. Our economy has contracted by about 3.6%. Our debt-to-GDP ratio has increased above 101%. Government revenue has shrunk from about half a trillion rupees. Revenue as a percentage of GDP has shrunk to 9.3% from 12.6% in 2019. The present revenue-to-GDP ratio is among the lowest for countries at our level of development. This would induce us to print more money in the near future, while additionally we have printed about Rs. 650 billion. By contrast, in the year 2019, Sri Lanka printed only about Rs. 4 billion. The two lockdowns and the mounting economic woes that the island has been facing for decades have led us to where we stand now. These figures do not come as a surprise. The end of 2020 left all of us with severe concerns and reasonable estimations of the country’s sorrowful performance of the year.

The 2021 Budget presented Sri Lanka with a good opportunity to take necessary measures to curb the approaching economic downturn. Looking back at the Budget, five months later, it is somewhat evident that we could have done better in certain policy areas.

This column previously highlighted two main loopholes in the 2021 Budget. One was the inadequate allocation of resources and the lack of a solid plan for healthcare services to combat Covid-19. The second was a credible action plan on debt servicing challenges for Sri Lanka. It was evident that without combating Covid-19, mitigating the impact on the economy will be difficult. Some sentiments expressed by members in Parliament questioned the need for the resources for vaccines which were produced by some other countries and highlighted the need for making Sri Lankans guinea pigs for vaccines by multinational pharma corporations. It was personally alarming for me to watch business leaders speaking at budget discussion forums with excessive emphasis on their respective businesses with no regard extended to the larger economic adversity at hand.

As a result of these poor policies and mitigating strategies, we are now in the midst of a raging third wave of the virus. This continues to affect the economy, proposed budget promises, and businesses adversely. Simultaneously, the global demand for vaccines has skyrocketed. Therefore, it is evident that Sri Lanka will have to wait for some time to receive the required amount of vaccines.

The 2021 Budget did not successfully address Sri Lanka’s problem of debt servicing. The only thing concealing the severity of this issue is the burden placed on the country’s healthcare sector at the moment. 

Moreover, Sri Lanka faced international pressure in terms of human rights violations coupled with geopolitical tensions which brings its own economic constraints and impact. As stated by the Central Bank Annual Report 2020, the destinations of more than 60% of our exports are the US, India, Japan, Australia, and the European Union (EU). All these nations have expressed concerns over Sri Lanka’s reconciliation efforts. 

Unlike the first-time shocker of the Covid-19 pandemic, after one year, some countries have made progress even with gigantic challenges. So from the perspective of investor sentiment and businesses, over time, the innovators and early adaptors, who are good to do business in the region and globally, are getting noticed. The attention and priority we received in the initial Covid-19 wave from investors, businesses, local donors, international donor agencies, and the rest of the world may not return during this new wave. Especially if our  policy decisions lack foresight and common sense. The current story published on PublicFinance.lk is that only 6% has been spent from the Yuthukama fund which was set up for Covid management and the availability of Rs. 1.7 billion remaining as the balance is just one example. The fund was supported by many Sri Lankans, and now, local and international companies may doubt the seriousness of our efforts.

We are between two hard choices which will have equally bad negative consequences. Minimising the mobility of people impacts our economic activity but increasing the mobility affects the Covid-19 spread which hits back again on the economy and people’s livelihoods. We need vaccines to control the spread of the virus but we should be able to get the vaccines first, while also balancing our foreign exchange. Economic policy formulation and execution is a team sport. It is not only the right policy but also the execution that matters. Even if we have a good execution team, if we are implementing the wrong policy prescription, the results won’t stand the test of the time. Unfortunately, five months after the Budget 2021 none of our policies nor our policy execution was able to stand the test of time. It is not only the Budget for 2021; the previous budgets and our economic policy over the years have failed to make a positive impact. We should pause for a moment and think about which sort of kettle we are. Are we a good one or a bad one? We should ask ourselves: “Have we been able to stand the ‘test of time’ with the economic policy we have been practicing?”

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Budget 2021 : Ignoring the elephant in Parliament

Originally appeared on The Morning

By Dhananath Fernando

Doesn’t the ‘pandemic budget’ have to be about the pandemic?

When I was an undergraduate, I used to borrow lecture notes from my senior batchmates to study for exams. As I was engaged in many other extracurricular activities, including in the students’ council, I often missed lectures and used to self-study with the assistance of my friends. In local universities, there is a collaborative learning session called “kuppiya” and this was my main source of learning. For one course unit, I borrowed lecture notes from a senior batchmate and got his assistance, and sat for the exam.

During the exam, I realised that most of the questions asked in the paper had not been in my notes and I hardly knew any answers, especially for the main sections of the question paper.  At first, I thought I had been given the wrong exam paper by mistake. Then I thought it was a mistake by the examiner and that it must be the same for all my batchmates. After the exam, when I inquired from my friends as to why the questions in the exam paper were not covered in the lecture notes, I realised that the notes that I had been referring to from my senior batchmate was prior to a syllabus revision. The exam paper that I wrote had been set for the new syllabus. Sometimes we miss the obvious facts.

I was reminded of this incident from years ago when I was evaluating the Budget 2021, which was presented to Parliament last week. Have we ignored the big elephant in the room: The fact that we are navigating our way through a Covid-19 world? That we are passing through an unprecedented time locally and globally? To what extent does our budget address and cater to the new normal is a matter for discussion.

Presenting a budget when a global pandemic ravages our economies and societies is undoubtedly a challenging task. I would like to congratulate the Government and the Minister of Finance for all the hard work put into the proposed budget. However, as with any policy proposal or annual budget, there will be praise and criticism.

Relating the budget to the new normal COVID-19

A big component the Budget 2021 lacked was its compatibility with the Covid-19 pandemic at hand. The obvious expectation was to know how we are to sustain operations in the country at its full capacity until we get access to the much-anticipated vaccine. The second expectation was on the financial allocation for PCR testing, contact tracing, and preparation to purchase the vaccine, as well as the distribution of it to our Sri Lankans citizens. According to global news stories on vaccines, it looks like the pandemic is going to continue till at least early 2021.

Furthermore, the main vaccine manufacturing pharma companies have revealed that the current vaccines have to be stored at low temperatures. Therefore, it is vital that we have resources such as refrigerators and necessary equipment when the vaccine is ready. Otherwise, it is likely that the process gets delayed. Sri Lanka already has refrigerators and cold storage bottlenecks. This is one main reason why we can’t store perishable food items from farmers to the consumer.

This is evident in the recent stories we heard of how farmers had to throw away unsold harvest and how consumers complain about higher prices at the same time. In addition, we need a strategy to prioritise testing, vaccine distribution, and meet our ever-growing healthcare needs at hand.

Fiscal consolidation and market-based solutions

One positive in the Budget 2021 is there are no grand-scale expenditure schemes such as salary hikes or special allowances. However, it is obvious that even if our budget deficit is expected to be at 8.9% of GDP in 2021, the Government does not have the spending space or borrowing power. In such a situation, the ideal option is to go for market-based solutions and allow the market to come up with solutions organically, rather than the Government trying to intervene, which in turn would make things more inefficient and complicated. That is one reason this column highlighted the Budget 2021 as a golden opportunity for reforms. 

These reforms are essential to make markets operate and make them competitive so that productivity will be higher and the waste will be lower. Cutting regulatory barriers and market entry barriers have to be the main focus when we don’t have deep pockets to spend money. That was a key promise made by His Excellency the President during his Independence Day speech on 4 February 2020.

Priority should have been given to how the country is going to settle its external debt. A clear methodology and plan to ensure debt sustainability too should have been pronounced. This would have provided markets with positive signals. Whether we have received any assistance from our neighbouring countries or how our strategy is expected to produce the expected results should ideally have been made. A clear statement on this would have cleared many doubts from markets.

The overall macroeconomic numbers the Government expects to achieve – such as price stability of 5%, a debt-to-GDP ratio of 70%, and reducing the budget deficit to 4% from the expected 9% – are in the right direction. How the Government is to achieve this in the midst of a global pandemic with its same old strategies, however, remains a mystery.

According to budget promises tracking by Verite Research (www.budgetpromises.org), only 29% of the promises in the Budget 2019 have been fulfilled, while most of it remains unsolicited and 8% have been broken. This is not different from previous budgets, as most have been wish lists without a detailed strategy and in-depth thought, making implementation difficult.

Whether we have done the right contextualisation of the Budget 2021 with Covid-19 in mind is my main concern. Effective implementation of budget proposals will depend on how they are streamlined to meet the demands of the new normal. My wish is that when the budget proposals meet the unavoidable challenges of these extraordinary times, the Government won’t be rudely surprised as I was in learning the syllabus I revised was outdated.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.