By Maheesha Mudugamuwa
When promises are not fulfilled, what is the need for a budget every year? This is the question asked by almost every citizen of the country. Governments over the years have made endless promises during the annual budget presentation in Parliament, but in reality, only half or even less were fulfilled during the past many decades. Whilst having no national Budget presented for 2020, the country’s citizens are now once again awaiting a national Budget for 2021 this week. The Appropriation Bill for the year 2020 was passed in Parliament last Thursday (12) without a vote, and is due to be presented to Parliament by Prime Minister and Finance Minister Mahinda Rajapaksa on Tuesday (17); the subsequent budget debate will continue until 10 December. The Budget is being presented to Parliament at a very uncertain period, mainly due to the economic crisis faced by the country as a result of the Covid-19 pandemic. Economic indicators According to Trading Economics statistics, the inflation rate in Sri Lanka remained unchanged at 4% in October 2020, the same as in September. Food inflation slowed to 10% from 11.5%, reaching a five-month low. In contrast, non-food cost increased 1.3%, after a 0.9% rise in September. On a monthly basis, consumer prices edged up 0.1%, after a 0.7% rise in September.
The Central Bank of Sri Lanka (CBSL) kept its benchmark interest rate unchanged at 4.5% at its October meeting, saying economic recovery is expected to pick up speed despite the latest increase in coronavirus cases.
The CBSL cut interest rates by a total 350 basis points since May last year, when the deadly Easter Sunday attacks triggered a slump in investment and tourism; this was followed by the coronavirus pandemic in early 2020. The Standing Lending Facility Rate (SLFR) was also held at 5.5%.
The Services PMI (Purchasing Managers' Index) in Sri Lanka edged down to 54.3 in September of 2020 from 56 in August, but still pointed to strong growth in the services sector, as the economy gradually returned to pre-pandemic levels. Sri Lanka had no tourists in September 2020, the same as in the previous five months, due to the termination of all passenger flights and ship arrivals into Sri Lanka from 18 March 2020 amid the coronavirus pandemic.
Budget 2019 unfulfilled
Since, as mentioned earlier, no budget was presented for 2020, let us evaluate the promises made in the Budget 2019.
The Budget 2019 promised something for everyone; from the allocations for religious development to allowances for persons with disabilities, housing loans for newly married couples, international scholarships, housing loans for expatriates, and many more, to including allocations for the Light Rail Transit (LRT) Project, development of school infrastructure and Rs. 25 billion for the development of university infrastructure, building an arts and crafts village for female convicts to the construction of new fisheries harbours in Point Pedro and Pesalai, and many others.
Nevertheless, as pointed out by a think tank based in Colombo, around 29% of the proposals in the Budget 2019 were fulfilled.
According to the “Budget Promises: Beyond Parliament” platform of Verité Research, the progress of over 40% of the budget proposals were undisclosed while around 8% of total promises were broken. Another 8% of proposals were fulfilled at a substantial level while 2% of the promises were fulfilled partially.
The promises made in the 2019 Budget that were not fulfilled included the amending of labour laws to allow part-time, flexible hours, and home-working, etc. to facilitate more women becoming active participants in our economy; removing the minimum employment requirement imposed on companies engaged in IT (information technology) services to be eligible for the special additional deduction of 35% on the salary expenses incurred; making it mandatory for all entities manufacturing or importing single-use plastics (as defined by the Central Environmental Authority) to register with the Ministry of Industry and Commerce before 1 September 2019; allowing a deduction on corporate tax worth 50% of the salary cost of the mandatory three months of maternity leave granted to mothers; and revisiting and simplifying the licensing mechanism for the processing of desiccated coconut and coconut chips.
According to Verité, in 2019, the platform tracked 37 promises worth Rs. 100,875 million from the 2019 Budget. According to it, there is a divergence from what is communicated in budget speeches to what is implemented, in both expenditure proposals and policy proposals. Their analyses found that many expenditure proposals have its allocations reduced every year. In 2019, 41% of the policy proposals tracked by the platform were not implemented.
Unfavourable backdrop
“The Government is going to present the Budget for 2021 against the background of a weak global economy and challenging domestic fiscal conditions exacerbated by the Covid-19 pandemic, and therefore, an effective oversight of the budget implementation process for the Financial Year 2021 would be vital,” stated Verité Research Assistant Analyst Lahiri Jayasinghe at an online briefing recently.
Commenting on the economy being affected by Covid-19, senior economist and former CBSL Deputy Governor Dr. W.A. Wijewardena said the local economy has been severely affected by the global economic downturn at a time when it was already suffering due to the failure of successive governments to take concrete actions to strengthen the economy, and the impact of the Easter bombings last year.
“All macroeconomic indicators have been falling and the economy has been stagnating. The budgets have not been managed well even though the past governments promised to bring down the budget deficit to 4% of GDP (gross domestic product),” Dr. Wijewardena stressed.
CBSL Monetary Policy Consultative Committee Chairman Prof. Sirimal Abeyratne predicted, while speaking to The Sunday Morning on an earlier occasion, that the world economy will go into recession this year and the Sri Lankan economy, which is also integrated with the global economy, will have to face its consequences.
“Unlike the previous global financial crisis, which had no effect on developing countries like Sri Lanka because of the capital inflows coming to developing countries from developed countries, all countries will be hit by what is happening in the world now,” Prof. Abeyratne stressed.
He said that the Sri Lankan Government is taking both monetary policy and fiscal policy measures to mitigate the impact of the virus on the economy.
“Typically, the governments take short-term measures which are called monetary policy stimulants and fiscal policy stimulants. Monetary policy stimulants create more money and make credit cheaper with reduced interest rates, while fiscal policy stimulants, in addition to increasing government spending, stimulates aggregate demand. Rich countries have come to the limit of monetary policy restraints. Developing countries, while they have some space to cut down interest rates, have fiscal policy limitations. Literally, both worlds are facing limitations.”
Meanwhile, speaking to The Sunday Morning, Advocata Chief Operating Officer (COO) Dhananath Fernando said the current financial situation in Sri Lanka is tight, as debt servicing cost and expenses have gone up because of the health crisis with the additional moratorium given by the Government.
“It is more likely to get worse in the coming couple of years as well. If there is a vaccine, then they will have to spend money for the vaccine too. At the same time, our income has been reduced. Since people are not earning because of Covid-19, they pay less taxes; and even before Covid-19, the Government had given tax concessions to boost the economy,” he said.
This would mean the Government has a rocky road ahead in ensuring they stick to their Budget 2021 promises whilst also tackling the impacts of the Covid-19 pandemic.