Sri Lanka will continue to spend more than it earns. While the Finance Minister made much, quite reasonably, of putting a stop to seven decades of financing national budgets through borrowing, his 2021 estimates are that spending will be more than double that of income this year. The 2022 Budget expands public expenditure to LKR3,912 billion with a revenue target of LKR2,284 billion (50% higher than expected revenue in 2021).
While next year’s deficit gap appears lower in comparison to this year’s, the reality is that the quality of the revenue proposals including the medium-term timeframe to realise them, as well as the prolongation of the global COVID19 pandemic, guarantee a shortfall in the revenue forecast, while government spending inevitably spirals in response to a rising import bill particularly as the rupee inexorably weakens.
Even pre-pandemic, successive governments consistently over-estimated the anticipated revenue and under-estimated actual expenditure, to present a rosier-than-reality picture and to massage the budget deficit ratio downwards.
Curiously, the Minister’s targets have a timeframe of 2027, when the term of his government ends in 2025. Why? Is it beyond the realm of possibility that the life of an unpopular and flailing government may be extended through the device of adoption of the Constitution under preparation; or referendum; or simply Executive diktat, disregarding legality and legitimacy? The maelstrom of health, economic, and political crises may provide the government with grounds for invocation of the ‘doctrine of necessity’.
Export-Driven Economy
The Finance Minister’s answer to the crisis of a dependent capitalist economy structured for more than four decades around the export of ready-made-garments and bulk tea, and inflows of migrant worker remittances – predominantly through women’s waged labour – and receipts from tourism, is to diversify and intensify export-led growth. Sri Lanka’s main export markets have been the United States of America and the European Union (mostly apparel), followed by the Middle East and Russia (mostly tea).
In deference to the election manifesto and nownational development policyof President Gotabaya Rajapaksa, replete with references to a “people-centric economy”, the Budget Speech promises LKR1 billion for the development of rattan, clay-based products, brass, lacquer, masks, coconut shell, jewellery, stone carving, flax fibre, and Dumbara mat weaving; as well as investment of another LKR1 billion in handloom and batik production with the expectation of an export income of USD1 billion by 2025.
Textiles and apparel, gems and jewellery, rubber and rubber products, value-added tea, coconut and coconut products, fish and fish products, spices, processed food, fruit and beverages, ornamental flowers and plants, electrical and electronics manufacturing, boat manufacturing, and engineering products and services are apparently the new frontiers for export development. Services such as tourism, the information technology industry, business-process-outsourcing, and ports and aviation are to be expanded too. The catch is that this inventory is familiar. It finds repetition in past Budget Speeches[xi]. However, there has been little to show for it.
Import Substitution
The top three countries of origin for imports into Sri Lanka are China (22%), India (19.2%), and the United Arab Emirates (6.4%). To conserve foreign currency outflows, the government targets development of national industries in the areas of organic fertiliser, renewable energy, dairy milk, sugar, and medicines. However, all of these require inputs (that is, imports) from abroad. These are increasingly unavailable as banks lack the foreign currency to sell for purchases from abroad; shipping and logistics costs soar; and the rupee tumbles in value, exponentially increasing the import bill, and making the cost of domestic production unviable. Further, almost halving of allocations to industrial development in 2022[xii]controverts a genuine intention to reorient the economy towards broadening and deepening domestic, especially manufacturing, production.
Local and Rural Development
Looking ahead to prospective local government and Provincial Council elections, and to securing political advantage for governing party politicians, the government’s expenditure proposals include allocations for “development projects” at the local level.
LKR3 million is allocated to each one of the 14,021Grama Niladharidivisions across the nine provinces of the island. A village forum, consisting of religious leaders, community leaders, government officials, and local politicians, is to determine its use. Likewise, LKR4 million is allocated to 4,917 local government (pradeshiya sabhas, urban councils, municipal councils) institutions. There is no elaboration on the process or participants in the determination of its use.
While the Finance Minister claimed that the uniform allocation is evidence of non-discrimination based on political affiliation, the situation as he well knows, is that the vast majority of these seats and institutions outside of the Tamil-speaking majority North and East, are currently controlled by the ruling Sri Lanka Podujana Peramuna and its allies. Although modest in relation to the cost of construction even before kickbacks are factored in, these funds are primarily for electoral ends, rather than to “strengthen the rural economy”.
The annual district development budget allocation to each Member of Parliament is increased from LKR10 to LKR15 million. While all parliamentarians regardless of party affiliation receive the same amount, as the government enjoys a near 2/3 majority in the current Legislature, most beneficiaries are government supporters. There is no rationale for an identical allocation when districts vary in size of population, geographical and resource characteristics, and socio-economic indicators. However, having these funds allow parliamentarians to be seen as personally delivering some improvements in their electorates, in association with their local political agents who are vying for provincial and local government seats.
Still, even with the additional allocation of over LKR19.8 billion to the 335 Divisional Secretariat divisions in the 25 districts, for rural livelihood development projects, all the above put together is matched by the whopping LKR85 billion diverted to the Office of the President for hisGama Samaga Pilisandara(‘Dialogue with the Village’) political outreach programme. Those who participated asked for local roads and public bus services, potable water and electricity supply, mobile telephone and internet connectivity, minor irrigation schemes to irrigate their fields, human-elephant conflict mitigation, and so on. Instead of routing allocations through the existing State institutions and agencies, the intent is to personally associate Gotabaya Rajapaksa with these initiatives in preparation for his re-election campaign in 2024.
Public Finance
Now, how is all of this to be financed? As the Budget Speech explains, government revenue in Sri Lanka as a percentage of the size of the economy (as measured by gross domestic product) has been in decline since 1999. In 2020, it slumped to 9.2%, whereas Malaysia and Thailand are at over 20%. “Government revenue has come to a level which is insufficient to cover the day-to-day recurrent expenditure”, the Minister starkly announced. Almost 58% of government revenue is absorbed by salary payments to thepublic sector workforce that grew to 1.528 million (in a labour force that shrunk slightly to 7.999 million) at the end of 2020.
While the Minister spoke of “structural change” to reverse the decline in government revenue, there was nothing in the Budget Speech that amounts to the radical reforms required to re-orient an economy with an undiversified and low-value addition export base, and heavily reliant on imports for everything from energy to food to raw materials in light manufacturing. Indirect taxes (on consumption of goods and services) which penalise the poor constitute 78% of total government tax revenue. This government, like its predecessors, evades tax reforms to shift the burden from the poor to the rich through direct taxation of income and profits, and maintains the corporate tax rate at the relatively low level of 24%.
Enhanced tax compliance; administrative reforms to the Inland Revenue Department; increasing sin taxes on alcohol and tobacco; confiscation of excess profits made by Perpetual Treasuries in the 2015 government bond scam; and squeezing public spending, does not amount to a solution to what the Minister described as “an unsolved economic problem”: closing the yawning gap between export income and import expenditure.
Public Spending and Public Sector
To curb spending by government departments, the Minister proposes to issue warrants for expenditure on a quarterly basis, instead of annual warrants for expenditure. The effect of this will be to slow down capital expenditure by State institutions and enhance the Treasury’s capacity to redirect those funds over the course of 2022. In any case the State sector apart from the military, is starved of allocations for development projects. State agencies with assets of interest to the private sector will have to seek equity capital in return for divestment of control and management to mobilise funds for development activities.
State-Owned-Enterprises, of which there are 527, have historically been subject to political interference and chronic mismanagement by regime cronies, and are a massive drain on the public purse (LKR75 billion in Treasury transfers) as well as sink for bank credit (LKR920 billion) in 2020 alone. The top five loss-making entities are the Ceylon Electricity Board; the Ceylon Petroleum Corporation; Sri Lankan Airlines; the National Water Supply and Drainage Board; and the Ceylon Transport Board. However, the Minister’s only response is that a “multi-disciplinary consultative committee” is to be constituted to “propose a strategic way forward”. In other words, another report destined for the long grass.
Playing on the electorate’s antipathy to traditional politicians, fuel allowances to Ministers (and government officials) are marginally reduced; and the qualifying period for a pension for parliamentarians and the President is increased from five years to 10 (two terms). However, the enormous charge on salaries to military personnel numbering more than317,000 (as of 2018)is ignored, as any reduction in numbers and down-sizing of scale, spread, and scope of its activities would run counter to the President’s belief in their efficacy for any task or role from COVID19 management to green agriculture, and undermine the patriotic credentials of politicians on both sides of the House.
The Minister of Finance had harsh words for the public administrative service, which has been routinely faulted by Ministers for the disaffection of the public with the government, owing to “rigid laws and regulations, and lengthy and outdated administrative methods and procedures”. This is significant as public officials from top-to-bottom in the public, State corporation, and semi-government sector, have been a solid core of support for the Rajapaksa’s since 2005. In fulfilment of the election manifesto pledge,100,000 persons from low-income households were recruited to the public sector in 2020; as were 60,000 unemployed graduates.
The public service should not be “an impediment” to the “productive economy”, he said. It should be “efficient and effective” and become “courteous and client-centric”. His ideas to turn this around are a mishmash of New Public Management theory including digitalisation of public services; a “Client’s Charter”; Key Performance Indicators in appraisals – to the distribution of motorcycles, imported of course, to field officers (as done once before in 2014 in the run-up to the presidential election the following year).
Debt Burden
Sri Lanka’s unsustainable burden of debt is crippling public finances at a time when government should be spending more and not less, to protect employment and livelihoods and provide relief to millions in destitution. In 2021, the government drew down foreign exchange reserves to honour debt payments of USD2 billion. In 2022, January and June respectively, loans of USD500 million and USD1 billion are due.
“[I]nterest expenditure on public debt has become the single largest expenditure item in the budget”, the Budget Speech grimly observed. To be more precise, out of every LKR100 in government revenue, almost LKR30 is siphoned to service the interest on public debt. Or to take another yardstick, out of every USD100 earned from exports of goods and services, USD33.50 is gobbled by debt-servicing.
Public debt is equivalent of 102% of national income. External or foreign debt as a proportion of total debt stock has reached almost 50%, the Minister noted. The depreciation of the national currency by LKR1, increases the debt stock by LKR50 billion, he claimed. As theSri Lankan rupee lost 10.1% of its value against the US dollarbetween January and September 2021, one shudders to do the math.
The Minister was quick to blame the previous government for borrowing USD6.9 billion in between 15 months alone. Indeed, Verité Research confirms that Sri Lanka’s total debt stock rocketed by42.8% between 2015 and 2019 but estimates that 89.8% of that increase is due to the interest cost on accumulated past debt, that is, incurred by its predecessors including the Mahinda Rajapaksa government between 2005 and 2014.
Missing Women
