Climbing out of the pit
Until quite recently, the annual budget presentation in Sri Lanka was a much-looked-forward-to event, not only among political circles and the business community, but among society itself. However, in the recent past, the hype associated with the budget presentation has died down and is now almost a non-event, relegated to being something that happens, just because it is supposed to by law.
In the not-too-distant past, the budget presented in November each year had a direct bearing on the day-to-day life of the people. From determining the price of bread to announcing grandiose development plans to prescribing daily wages, etc., what was preached was in fact what ensued across the country in the following year.
In recent times, however, this direct connection has been lost due to the disconnect between what is stated by the Finance Minister and what actually takes place on the ground. It is this disconnect that has killed the interest in the budget, which for all intents and purposes has now been reduced to a painful ritual of academic interest mostly for the benefit of the business community.
The budget, in its essence, has a four-stage cycle – namely, planning, approval, implementation, auditing – and it is almost always the case that things begin to go wrong in the third stage, while the fourth stage is more or less non-existent, save for a handful of private sector-driven initiatives that monitor the fulfilment of budget proposals. The findings of these organisations make interesting reading, with a mere 30-40% of budget proposals actually seeing the light of day on average in the past few years. This explains the public disinterest associated with budgets these days.
The cause has not been helped by the fact that there was no budget presented for the year 2020 at a time when the country has been facing its most serious economic crisis since Independence, due to the ravaging Covid-19 pandemic. To recall, the last presidential election was held in November 2019 and this was followed by the swearing in of a new Cabinet.
The previous United National Party (UNP) Government, taking cognisance of the presidential election that was to be held during the traditional budget presentation period, instead presented and approved an Appropriation Bill allocating funds for the election as well as for a six-month period after the election. However, the new Interim Government decided to go for a general election which was to be held in April, as the previously approved fund allocations were valid till the end of that month.
However, with Covid intervening, the election was postponed to August and up until 12 November, when the Finance Minister presented a new Appropriation Bill with retrospective effect covering the period from April to November, there was no allocation made for funds that were utilised during this period. This is probably the first instance such a bill was presented with retrospective effect. The only parliamentarian who called out the impropriety of the procedure adopted was the Tamil National Alliance’s (TNA) M.A. Sumanthiran, whose lone voice highlighted the state of the current Opposition in Parliament.
It is in this backdrop that Budget 2021 was presented last week. The last such budget was presented in late 2018 amid turmoil created by the sacking of the incumbent Government by the then President. The budget that was to be presented in November that year had to await the reinstating of the incumbent Government by the Supreme Court.
Just four months later, the April Easter Sunday attacks took place and for all intents and purposes, most budgetary estimates went haywire thereafter. According to research organisation Verité, only an estimated one-third of the budget promises actually materialised during the year, even though the trend in the preceding years was not much different.
One aspect that stands out in the Budget 2021 presented last week, as opposed to the ones before, is the absence of welfare measures for the public at large in the backdrop of the huge impact the pandemic has had on people across the social spectrum, as well as the disruptions caused to day-to-day activities of business entities, both big and small. Other than the extension of the debt repayment moratorium till next September, not much help has come their way.
The Government cannot afford to take its eye off the fact that non-performing assets (NPAs) across the financial system have now grown to nearly $ 3 billion and is bound to keep growing until long after the pandemic is brought under control. At the same time, many who depend on fixed deposit interest for survival are also facing difficult times. It’s a toxic recipe that can lead to socio, political, and financial upheaval and needs to be handled carefully. Therefore, a substantial allocation for economic relief in whatever form at the micro level seems inevitable.
Instead of relief, some of the measures announced have in fact caused more headaches for the already hard-hit private sector employees. One such proposal is the extension of the private sector retirement age to 60 years from the current 55 years. At first glance, it seems that the cash-strapped Government is baiting retiring employees to hang on for another five years, giving breathing space to the Employees’ Provident Fund (EPF) account which the Treasury probably hopes to utilise to fund development activities, considering the impediments to access foreign funding for such endeavours and thereby keep the deficit at a manageable level.
The biggest hurdle for the Government is to find ways and means of bridging the sizeable deficit of Rs. 1.5 trillion between state income and expenditure amounting to 9% of gross domestic product (GDP). With the main sources of income generation such as apparel exports, foreign remittances, and tourism still a long way from recovery, the road ahead is bound to be a bumpy one which inevitably will be made worse by waning interest in Sri Lanka’s development bonds – the last of which went undersubscribed.
The way out, at least in the short term, is to cut down on the trade bill through import substitution, but now this too has run into a storm with the European Union (EU) pressurising the Government to ease import restrictions, citing its commitment to free trade and World Trade Organisation (WTO) regulations. The EU has reminded the Government that it is the second biggest market for Sri Lankan exports and that one-way trade may attract review of various concessions granted to the country, such as the GSP+ facility which enables duty and quota-free access to European markets.
The trade balance in Sri Lanka’s favour in the years 2018 and 2019 amounted to over € 1 billion. It will no doubt be suicidal, especially given the focus on boosting the manufacturing sector to hedge EU market access on trade policy and the Government will sooner rather than later have to revisit its import restriction policy, which in turn is bound to affect Central Bank reserves.
The Finance Minister is on record that Sri Lanka has settled all its foreign debt obligations for the year 2020, which amounts to over $ 4 billion. What he did not mention is that we seem to have piled on more debt in the long term with additional loans being sourced simply to repay this debt. According to the Janatha Vimukthi Peramuna (JVP), nearly Rs. 5 trillion has been obtained in the last two years alone, including for debt repayment. On top of this, Budget 2021 has proposed to further raise the ceiling on foreign loans, which is not the best way forward.
Given this state of affairs, it was refreshing to hear President Gotabaya Rajapaksa informing the new Chinese Ambassador to Sri Lanka that what this country needed now was not more loans but more investment. That is the one and only way out of the pit that successive governments have dug for this country.