‘Sri Lanka needs a Public Financial Management Law’: Anoop Singh

17 Oct 2021

‘Sri Lanka needs a Public Financial Management Law’: Anoop Singh

17 Oct 2021

BY Imesh Ranasinghe In June 2021, Sri Lanka amended its Fiscal Management Responsibility Act revising its targets to the year 2030. In his speech in Parliament, Minister of Trade Bandula Gunawardena said an amendment was required as the sources of revenue to the government were at a standstill due to the pandemic. The Act, at the time it was initially approved in 2003, aimed to reduce the gross government debt to 85% of GDP by the year 2006 and reach 60% by 2013. It was also expected to maintain the budget deficit at 5% of GDP. However, the numerical targets could not be achieved due to various economical and political reasons, the said targets for 2013 and 2016 were revised by amending the Act by the former government and were again revised this year. In 2020, the debt to GDP ratio of Sri Lanka was at 101% and according to the World Bank, it is expected to rise to 115% in 2021 while the Finance Ministry expects a budget deficit of 8.9% in 2021 from the 7.9% in 2020. Speaking at a webinar organised by the Pathfinder Foundation, former International Monetary Fund (IMF) Resident Representative and former Director – Asia and Pacific Department Anoop Singh, explained how Sri Lanka should implement its fiscal architecture. Three pillars of fiscal architecture Singh who recently served as a member of the 15th Indian Finance Commission said that the 21st Century fiscal architecture is based on three pillars which are fiscal rules, Public Financial Management (PFM) Process, and Fiscal Institution. He added that in order to make these rules work, a Public Financial Management system that provides consistent reporting of the fiscal indicators is needed. “But there is one more important aspect for these three pillars and that is, you need an independent assessment mechanism or institution that provides assurance independently of the Government on the working of the other two fiscal pillars,” he said. Singe said that the Covid-19 crisis has certainly accentuated the problem of resource availability. It has been a “scissor” effect, where Government revenues have suffered across levels but the spending need has gone up. The former IMF official said that there is a need to raise the quality of public spending in countries. “As we have seen in the past 20-30 years, these fiscal pillars of architecture generally change after a crisis, So right now most countries in the western world, India and Sri Lanka find that their fiscal rules were made for a different global environment and the issue is how do we change them now,” he added. And therefore, he said it is a good time for Sri Lanka to relook at the architecture it has inherited, relooked at the architecture which was approved in 2019, and then set a new fiscal architecture. In July 2019, the Cabinet of the former Government approved the proposal made by late Minister of Finance Mangala Samaraweera to amend the FMRA, with a view to strengthening the responsible fiscal management, revising the existing Fiscal Regulation Framework inclusive of the Debt Rules, a Medium-Term Fiscal Framework, Operational Targets, an Automatic Correction Mechanism, Flexibility, Transparency, Accountability, and Oversight. Further, he said that debt and deficit targets in fiscal architecture are set in a way that makes for macroeconomic stability and market credibility. “My point is that these little rules need to be measured, made available, and assessed with certain institutions but the issue in countries like in India, where the public debt is over 90% of the GDP and in Sri Lanka where the Government debt is well over 100% of the GDP, if you look at the problem of liquidity which many countries are facing, In Sri Lanka gross foreign exchange reserves of the Central Bank are less than half of the debt service payments externally due over the next one year,” Singh said. He pointed out that the issue is in not just Sri Lanka but across the world, so he added that the existing fiscal framework needs to be reset. Moreover, he said that it is important not just to have the right institutions but the market and the world to see the fiscal targets set out to be consistent with the policies adopted. “For example, if you say our debt target over the next five or 10 years is 50% of the GDP, I believe this was the intention in Sri Lanka a few years ago. In India, the target was 60% of the GDP. The issue is more about are your policies consistent with those targets and more importantly are they viewed by markets as consistent?” he said. He said the three pillars in the whole architecture, it has fiscal rules which are supported and measured by the framework of Public Financial Management and finally, an independent institution called a fiscal council to monitor it but he added most importantly the policies must be consistent. Institutional reforms According to Singh, Sri Lanka needs specific institutional reforms which are needed to anchor the implementation of the new fiscal rules, for compliance with efficiency and reporting standards that would raise the quality of public spending, for meeting international commitment, and help secure market finance. Explaining the key institutional reforms Sri Lanka needs, he said the country needs a Medium-Term Fiscal Framework (MTFF), this is something that was already in progress. Also, he said Sri Lanka needs Public Financial Management Law, which is also being developed, to be an overarching legislator statutory act that governs how fiscal rules are measured. “You don't want a situation where you say your fiscal deficit target is 3% of the GDP but don't have a framework that defines what is revenue and spending to get a deficit target consistent with the reality,” he said. He added India has a similar problem after the country set a deficit target of 3% of the GDP. The economist said if the Government is able to finance subsidies by a state-owned enterprise that is not formally a part of the general Government, its spending will not show up as a deficit until it runs out of money after which the Government steps in to bail out the SOE. So, he said when the Government transfers resources for the SOE bail, it is not shown as a current expenditure but as a transfer to the public sector unit, and in some cases, it is shown as a capital expenditure. “So the issue is you have to be sure that you have a system whereby you define what is revenue and spending. Ensure all enterprises, units, local Government institutions and SOEs, if their spending is going to be covered by the central Government, eventually, it must be a part of the central Government,” he added. According to him, it was the important point India has been facing where the country’s finance minister, in her last budget speech, made it very clear and recognised the problem. “In many countries, I see this manipulation of fiscal data and detracting it from using the fiscal rule makes sense,” he said. Further, he said any fiscal rule has to be based on a medium-term consolidation path, “There is no point saying your target is ‘X’ for the next year. The market wants to know what is the medium-term plan and what are the policies that will take you there,” he added. Also, he said there should be escape clauses that would be consistent with the current Covid-19 crisis which is so severe as virtually no country in the world had developed escape clauses from the rules that were consistent with the Covid-19 crisis. Fiscal council “Finally, coming back to the point of the independent mechanism report, it needs oversight by the parliament and the independent fiscal council. Many countries that have fiscal rules have found out that unless they have an overarching legal framework, it is very difficult to define consistently over time the roles and responsibilities of the key stakeholders,” Singh said. He said Sri Lanka should establish a high-level expert group, to draft a PFM law for submission to parliament after due consultation. He added evidence from the countries which have fiscal councils that such a council compliments the issue of the fiscal rule and there is more market credibility to have the rule if it is assessed independently by an independent council. “Countries have put together either a stand-alone fiscal body or an independent body under parliament with the powers to access whatever records of the Government,” he said. However, he pointed out that it is only an advisory council and it has no conflict of interest with the enforcement of the rule, that is prerogative of the Government, the National Auditor, and the Parliament but will be publicly assessing the compliance which helps the process to move ahead. Revenue ratio “When I was asked to join India’s 15th Finance Commission, the issue was how to spend and what to spend on, how to devolve revenues from the central to states and the local bodies, Sri Lanka has the same issue. Given where India's revenue is, India needs a revenue commission more than it needs the Finance Commission,” he said. So he had suggested a Revenue Commission in India that will raise its law tax revenues. “Unless you have the revenues, it’s very difficult to spend in the areas the country needs to spend on,” he added. Singh said even before the Covid-19 pandemic Sri Lanka’s tax revenue ratio has gone down over the past few years. He stressed that if Sri Lanka has a low revenue ratio at 10-11% of the GDP, it is impossible to meet the expenditure needs regardless of what it will be spent on. Moreover, the economist said that the revenue ratio as an instrument is not a formal pillar among the three pillars of fiscal architecture but it almost comes first. Based on international studies done on India, he said it had shown that India has a significant tax gap and added that the tax gap tries to measure what should be the tax capacity given based on where the country is. Given India’s economic and social structure, he said the common conclusion in India was that there is a tax gap of about 5% of the GDP which means given India’s structure its tax ratio needs to be 5% higher than the actual. “Sri Lanka is about the same, it should be at least 15% of the GDP which is still low but if there is a tax gap of 5%, it is a serious issue,” he said. He said in Sri Lanka the recent drop of VAT rate significantly increased this gap and added that the reason why tax ratios are low in countries like India and Sri Lanka is that they don’t tax the rich and exemptions provided to them take away from the tax base. According to him, the revenue potential can be met by less distortive and more efficient and streamlined taxes, tax broadening and reducing exemptions, and a more progressive system over time to ensure a system of equality.

Kapruka

Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!

‘Sri Lanka needs a Public Financial Management Law’: Anoop Singh

‘Sri Lanka needs a Public Financial Management Law’: Anoop Singh

More News..