Originally appeared on The Morning
By Dhananath Fernando
Budget 2022 must be the first step to getting the fundamentals right
As Lee Kuan Yew famously said: “Sri Lankan elections are an auction of non existing resources”. Over the years, our annual budget speech and promises have not been different. A long wish list of proposals skewed towards expenditure is read by the Minister of Finance. In between, some policy decisions and revenue proposals are pronounced
A few weeks after a massive media focus, the budget is forgotten and everyone goes into deep slumber. This again gets the attention of next year’s budget. The same cycle follows, as some senior ministers fall asleep during the budget speech and wake up again for the traditional tea party generously sponsored by taxpayers.
According to the analysis by Verite Research on PublicFinance.lk, of 34 proposals from 2020 (Verite has analyzed 34 selected proposals in the absence of a budget speech in 2020), only 4% were fully completed. On 50% of the proposals, information is not disclosed even to track whether the projects are progressing. Even in the 2019 Budget, only about 32% of the budget proposals were fulfilled.
Most financial analysts and financial sector professionals provide comprehensive coverages on the budget speech along with insights. Generally, it’s a time when vehicle owners and potential buyers get stressed. It is also commonly known that liquor and cigarette prices increase, and some relief packages in the form of subsidies for people get announced during the budget speech. So far, the budget speech is kind of a festival where people and businesses look for relief. That shows the level of government intervention that exists in Sri Lanka. In an ideal system where the market economy works, decisions cannot be surprises nor ad hoc, enabling people to have time to adjust and the price determining the allocation of resources.
Traditionally, parliamentarians who support the government say that: “It’s the best budget post independence,” and the opposition says: “It’s the worst budget post independence,” as the microphones get directed by the media for comments on the budget.
The budget this time is crucial for Sri Lanka. As per the numbers reported by authorities and independent analysts, it is clear we are short of money for detailed expenditure proposals and for daily operations.
86% of our tax revenue goes for salaries and pensions of state workers, and more than 100% of our revenue goes for our debt servicing.
So as Lee Kuan Yew commented on our elections, most of the budget promises are just mere statements. It’s just a feel good statement or the auction of non-existent resources.
This time it’s different because we are already inside the eye of the storm. This storm is the worst economic crisis post independence.
Credit rating agencies have downgraded us, limiting our access to international finances, and we have about $ 22 billion of debt servicing for the next five years to be paid with just less than $ 2.5 billion in our reserves, as of 5 November 2021.
As we highlighted in this column post Budget 2021, it missed the elephant in the room, ignoring the debt crisis and the Covid-19 healthcare crisis. Even most of the business tycoons in most industries did not have the courage to point out that the last budget lacked the policy mechanisms of addressing the brewing economic crisis. Instead, they only looked inwards and failed to look beyond their interest without realising that we are on the same ship. There is very little meaning in demarcating our own territory when the entire ship is sinking.
So we have arrived at a new cycle with a more serious situation, along with a further credit rating downgrade and more disincentives for exporters. The recent new rules on converting export proceedings will impact exports negatively. First, the exporters are paid a rate of Rs. 203 for each US dollar (USD) they bring, while the market rate is about Rs. 235 per USD. On the other hand, for importers, a USD was sold at Rs. 203 when the market rate is Rs. 235. So, we have fueled more imports and discouraged exports on exchange rate. Secondly, imposing controls on converting export proceedings will make life difficult for exporters to do business. Already exporters suffer from USD shortages and supply chain issues. Current policies just double the weight on their shoulders.
There were heavy social media criticisms on the response by the Finance Minister on a budget related question. A journalist asked: “What benefits do you expect to announce for the people?”, to which he responded: “We may have to take from the people”. The reality is that the poor people who spend a higher percentage of their income on food have been greatly impacted by the increasing food prices caused due to the global commodity bubble. This has been made worse by the implementation of the Modern Monetary Theory implemented by our policy makers. So, taking from the poor will be difficult. At present they are mainly taxed through indirect taxes.
Accordingly, this year’s budget has to be the first step to getting the fundamentals right. If we start auctioning non existent resources, this budget would lead us towards the direction of a looming crisis, making the situation even worse.
Since the budget is now out, we can do an evaluation and make a judgement on the direction of the economy.
(This article was written before the budget speech)
Sources:
CBSL, Annual Reports
https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/wei/WEI_20211105_e.pdf
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.