Bipartisanship is a rare occurrence in Sri Lankan politics. But this week in Parliament the minority Government’s attempt to amend the Vote on Account and raise the borrowing target is going to require votes from the opposite side of the House. The outcome of the vote could have both economic and political flavours and is therefore important.
It is no secret that the Government’s finances are in a mess. The Finance Ministry has already said that not only was the Budget deficit for 2019 estimated at 7%, once the Rs. 367 billion sought to repay overdue bills of the former Government are met, the deficit could expand to as much as 7.5%. The Government’s amendment to the Vote on Account will also seek Parliamentary approval to increase the debt ceiling from Rs. 721 billion to Rs. 1,078 billion.
The pressure from this deficit will be increased given the stimulus package that has been rolled out by the Government with significant reductions in a wide range of taxes. The Government is, of course, confident that once the General Elections are out of the way and a stable Cabinet is appointed, the economy will take off with revenue targeted to increase from the second quarter onwards. The expectation is that a strong Government with a clear mandate in Parliament will be good for business.
This is likely to be the case and with interest rates trending down there is added impetus to invest. However, the stimulus comes at a cost to macroeconomic fundaments, which will be a factor for debt repayments. When the Government heads to markets, as it will inevitably have to after the General Elections, to raise funds for the estimated $4.8 billion debt that needs to be repaid in 2020, the strength of Sri Lanka’s macroeconomic situation will matter.
The Government’s efforts to get debt moratoriums from India and China will have limited impact because the bulk of the country’s debt portfolio is from international capital markets, which cannot be deferred. However, it may be possible for the Government to use the moratoriums to engage in much-needed debt restructuring to smoothen out the high payments years that span till 2030 and create space for policy changes to record higher growth. At the end of the day the only solution for debt is high growth.
But sustained economic growth will have to come with structural reforms that the Government could struggle with but remain essential. Public sector and State Owned Enterprise (SOEs) reforms, labour market reforms including attracting more women to the workforce, having more targeted social welfare spending, and further liberalising the economy and making it more competitive by linking it to global value chains are some of the reforms that will have to be undertaken by the Government. These have proved difficult in the past and given the Constitutional changes planned, the Government will have a brimming plate once elections are over.
This week Parliament will be interesting in terms of which parliamentarians will vote across party lines to help the minority Government amend the Vote on Account (VoA). It is likely that these votes will come from the United National Party (UNP) but specifically who will cast their vote will be interesting to spot. The Government has clearly set its sights on a two-thirds majority but electorally that is very difficult to achieve. Previously Prime Minister Mahinda Rajapaksa set his two thirds majority with a large crossover from the UNP. It could be the Rajapaksa strategy once again.