The Sri Lankan Government plans to introduce a new Public Financial Management (PFM) Bill as part of ongoing reforms for the International Monetary Fund (IMF) programme. Set to be implemented by the end of December 2025, the main purpose of the bill is to increase accountability and transparency surrounding PFM in the country.

Why should anyone care about a bill that, in essence, mandates the reporting requirements and responsibilities of Government institutions and officials? How does this affect the lives and well-being of the public? 

The answer lies in the economic crisis that the country underwent only a few years ago.

Sri Lanka has been grappling with fiscal indiscipline for a very long time. Even though it is the backbone of good governance and financial health of a country, to this day, best practices of PFM have not been the country’s strong suit. 

The Asian Development Bank (ADB) notes that Sri Lanka scores poorly on PFM, with respect to oversight, transparency, and public participation in the budget process. The country has weak systems for auditing and reviewing financial activities by the Government, and there is restrictive access to reports on public funds. All in all, politicians have ample discretion to make unchecked fiscal decisions with little to no accountability for the consequences.  

In 2023, the IMF conducted a detailed assessment of PFM at the request of Sri Lankan authorities. The assessment found that Sri Lanka’s public finances had deteriorated due to several key issues: the Government not collecting enough revenue, its spending structure being too rigid, and its PFM system being weak. 

The report also highlighted the lack of strong legal frameworks and poor enforcement of existing laws, as well as a lack of transparency in financial processes and incomplete budget coverage. According to the ADB, additional problems include inefficient public investments, gaps in fiscal data collection and reporting, and limited ability of various Government agencies to analyse data and implement policies effectively.

These weaknesses eventually contributed to the Sri Lankan debt crisis. The IMF Governance Diagnostic Assessment states that the crisis has highlighted long-term fiscal governance issues which have exposed the nation to high levels of corruption risk. Despite the existence of the Fiscal Management (Responsibility) Act (FMRA), governments have struggled to maintain fiscal discipline.

What was the Fiscal Management (Responsibility) Act?

The next question is, how did things get so bad? After all, it is not that Sri Lanka had no legislation that covered the administration and reporting of public finances. The legislation that currently governs PFM is the Fiscal Management (Responsibility) Act No.3 of 2003. The act outlines the need for a medium-term fiscal policy, the Government’s fiscal policy targets, budget preparation, and so on. 

The FMRA sets out certain fiscal targets that the Government should adhere to. Originally, the act prohibited the budget deficit from exceeding 5% of Gross Domestic Product (GDP) from 2006 onwards. However, with subsequent revisions to this limit, the budget deficit has consistently exceeded it even up until 2022. In fact, the limit has been breached 18 times between 2003-2023.  

The FMRA also sets limits on the total liabilities of the Government. The original act set the limit at 85% of GDP by 2006 and stipulated that Central Government debt should not exceed 60% of GDP by 2013. However, these limits were later revised up to 80% in 2013 and the timeframe was extended to 2020. When the timeframe was breached, in 2021 it was further extended to 2030.  

Therefore, it is clear that even though there has been legislation in place that sets out targets and procedures governing PFM, these have been largely ignored or overlooked. The purpose of such fiscal rules, which is to limit discretionary fiscal management, is lost when it can be easily undermined by Parliament.

What is the Public Financial Management Bill?

The proposed PFM Bill seeks to right the wrongs of the past and bring more transparency and accountability to public finances and reporting. Much like the FMRA that it is set to repeal, the PFM Bill sets out fiscal targets as follows: the primary expenditure ceiling should not exceed 13% of GDP and the total Government guarantees should not exceed 7.5% of that year’s GDP.

To minimise deviation from targets, the proposed PFM Act is specific as to when the Government can deviate from fiscal rules. The bill also outlines the responsibilities of officials such as the finance minister, secretary to the Treasury, and chief accounting officers in reporting and monitoring. The bill further proposes an effective computerised system for carrying out the functions of the General Treasury and the functions specified in this act. 

The Government will be completing the rollout of the Integrated Treasury Management Information System (ITMIS) with the ADB’s technical assistance. 

To further improve transparency, the authorities will prepare a fiscal strategy statement for 2025 by end-June 2024 and a medium-term reform strategy and action plan, scheduled for publication by the end of this year. The authorities have also assured the IMF that they will ensure the consistency of future bills with the PFM law. 

However, there are notable points of concern in the proposed bill as well. For instance, the bill states that in the event of non-compliance, the minister of finance should submit to Parliament a report containing reasons for non-compliance, an updated framework, and a plan to return to compliance. 

This raises concerns over the severity of consequences of non-compliance and the incentives for compliance. Given that the whole reason for the failure of the FMRA was non-compliance with the targets, this would benefit from a stricter framework. 

Concerns have also been raised over the apparent relaxing of public procurement procedures. According to the PFM Bill, the minister of finance may, with concurrence of the National Procurement Commission, name State-Owned Enterprises (SOEs) which can be exempted from complying with procurement guidelines.  

Corruption in public procurement remains high in Sri Lanka, an issue that has been raised even by organisations such as the IMF and the ADB. High levels of political engagement in the selection of procurement winners, poor contract management, limited transparency, and a lack of oversight of procurement processes and outcomes can be identified. This process will benefit from vigilant oversight and strict guidelines. 

Further, given the number of revisions made to target limits in the FMRA over the last two decades, there is a question as to how easily revisions can be made to the PFM Bill should the authorities fail to meet the targets. Will the new bill also meet the same fate as the FRMA? 

Sri Lanka has faced significant financial challenges, largely due to ineffective management. The resulting economic crisis highlighted the need for better financial management. The PFM Bill aims to address these issues with more comprehensive budget coverage, stronger controls, and greater transparency.

While there is room for cautious optimism, the key to success will be effective implementation and continuous oversight. Hopefully, this new legislation will help Sri Lanka achieve a more stable financial future.

(The writer is a Research Assistant at Arutha. Arutha is a Colombo-based policy think tank focused on economic research and communication with a special interest in public debt and taxation. Its economic civic education initiative, Default LK, was established during Sri Lanka’s first-ever sovereign default in 2022)