First glance at Budget 2021

Wednesday, 18 November 2020 00:00 -     - {{hitsCtrl.values.hits}}

Budget 2021 delivered few unexpected volleys yesterday with the macroeconomic situation, at first glance, appearing to be optimistically forecast by the Government. 

Prime Minister Mahinda Rajapaksa delivering the first Budget of the current administration expressed confidence of a strong rebound in 2021. In fact his expectation of 5.5% growth is marginally more optimistic than even the 5% rebound for next year forecast by the Central Bank in its latest mid-year projections several weeks ago. The Budget speech did not go into details of how Sri Lanka could so decisively reverse negative growth expected for 2020. 

The Central Bank has already said Sri Lanka’s growth is likely to contract by 1.5% in 2020, which is far more positive than projections given by the International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB), which put the figure at 4.5%-6% contraction. 

The Census and Statistics Department will only release the second and third quarter growth numbers in December but ratings agencies, including ICRA Lanka have projected that growth could have contracted by double digits in the second quarter. Hopes of a strong fourth quarter have also dimmed after the fresh wave that erupted in early October and have showed no signs of receding. ICRA Lanka has projected an 8% contraction for 4Q alone. 

Budget 2021 is also confident that public revenue will mirror the growth spurt hoped for in 2021 with the current 9.7% of public revenue expected to shoot up to 14.1%. This may prove to be quite challenging as the Government has also said existing import restrictions will be extended to next year and if COVID-19 numbers continue to increase across the globe that will have a serious impact on consumer demand. 

Key revenue earning sectors such as tourism are also expected to remain subdued, which the Budget acknowledged by stretching the debt moratorium on deadlines to September. Successive Sri Lankan Budgets are known for overestimating revenue and underplaying expenditure but with the uncertainty created by COVID-19 hovering over at least the beginning of 2021 such blind optimism could prove costly to macroeconomic stability and debt repayment. Even with these rosy numbers the gap between revenue and expenditure is listed out as Rs. 1.5 trillion. 

Clearly the Government is banking on its import substitution policies bearing fruit. But these will require Budget proposals to be underpinned by a raft of stronger policies, including but not limited to, improved competitiveness, higher value addition, diversified exports, tech-driven ventures, new markets and trade agreements to provide competitive advantage. 

Without a concentrated push from the Government on these fronts not only will revenue projections fall short but when the COVID-19 virus ends its run Sri Lanka may find itself losing out of the rewiring of global value chains.      

One of the key responsibilities of Budget 2021 is to reassure investors that Sri Lanka has a tight rein on its macroeconomic fundaments, or is at least attempting to put the house in order, to bolster confidence in securities and financial markets. It is too early yet to decide whether the policy document presented yesterday hits that mark. 

Undoubtedly, like every Budget before it, all depends on implementation for which the Government should establish strict oversight efforts underpinned by transparency. This would be the most landmark change of this Budget, if it actually happens.

 

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