Political pressure and populist measures in budget development

At the time of the end of the civil conflict in 2009, Sri Lanka was poised to build on its development story, which was uneven since independence. However, many stakeholders today have been made to be concerned about policy issues rather than the flourishing economy. The advent of the National Government succeeding the nine-year Rajapaksa rule has bought forward this dilemma that has transcended to the prevalent uncertain environment.

The change of government always leads to uncertain times as Sri Lanka has been a nation that has witnessed many policy shifts during each transition of Government. This is something to expect in this Budget as well. As the Finance Minister termed it, “a revolutionary Budget”.

Despite the pre-Budget hype, on most occasions none of the proposals have been able to successfully deliver on a formidable long-term sustainable development story of Sri Lanka. Competitive political pressure coupled with political survival had forced many governments to deliver populist budgets regardless of its impact on sustained economic development.

The development story of Sri Lanka has been a tale of missed opportunities, policy errors and characterised by slow adjustments to internal and external shocks. In comparative to the East Asian Tigers such as South Korea and Malaysia, Sri Lanka has been derailed due to the environment associated with a welfare state bought forward by competitive political pressure and in the inability to formulate an amicable solution to the then surging ethnic tensions. Further, the delay in the liberalisation process also hindered in gaining a significant breakthrough in comparison to the peers.

In contrast, the new Government policy should now focus attention on the rule of law, bureaucratic red-tape, incompetence and lethargic attitude of public officials and policy uncertainty in order to attract foreign investments and drive investor sentiment. There seems to be strong evidence that the new National Government led by President Sirisena has made strong advancements towards building on the damaged international relations that existed under President Rajapaksa. Unsavoury allegations of human rights against Sri Lanka bought forward by certain countries, has been subtly dealt, through a co-sponsored resolution inclusive of an accountable domestic mechanism.

Despite the success on a diplomatic front, the country is facing numerous challenges. At the time of writing this article, Sri Lankan exports have dipped 19.5% in August. On a cumulative basis, the trade deficit has increased by 5% to $ 5,412 during the first eight months of 2015. Further, the country’s currency has stumbled amidst the switch to a floating currency system backed by minimum intervention from the Central Bank.

The decline in commodity prices has led to the decline in the prices of tea on a global scale, dampening the demand from major markets such as Russia and Middle East. Ceylon Petroleum Corporation (CPC) and SriLankan Airlines along with Mihin Lanka have accumulated close to Rs. 100 b in losses over the past five years. On a global front China’s growth rate has slowed after a decade of strong growth. Sri Lanka has also been a victim of the outflow of capital by investors from emerging markets on expectation of the anticipated increase in interest rates by the Fed.

In spite of these challenges, the new National Government has also resorted to a wave of populist measures as proposed in the Interim Budget, days after the election of President Sirisena. The Government-sponsored price reductionsof essential items has kept inflation low.Additional measures have been the pay hike of Rs. 10,000 for State workers and guaranteed prices for certain crops. Further, the PAYE tax threshold has been increased. This has led to the increase in the purchasing power of the low to mid income segments. This led to the boom in vehicle registrations as well a strong demand for imported goods. The main arrears of revenue measures used to finance the deficit has been borrowings andtaxes on the high income segments, such as entities with profits in excess of Rs. 2,000 m and fixed taxes on sectors such as telecommunications, alcohol and betting and gaming.

On the contrary, the Government expects to receive the GSP+ benefit along with the lifting of the fisheries product ban by the European Union. Further, a more transparent management mechanism of SOEs and management of construction projects has also been implemented to better manage projects and processes. Also measures have been taken to keeping in line with the mandate for good governance on account of reclassification of SOE debt under GoSL debt

The writer believes strongly in the nation’s welfare measures in improving the quality of life. However, the next Budget should be the starting point that aims to implement tough decisions that will reduce the state burden and drive industry productivity, paving the way to bring forth sustained development. Certainkey measures already proposed and new measure that would need implementation, include the following:

• Increasing investment expenditure rather than consumption expenditure (e.g.education, infrastructure, ICT, etc.)
• Providing performance based incentives to State workers (e.g. ESOP)
• Restructuring state enterprises as public listings while retaining state control to promote investor appetite, operational excellence and reduce state debt burden
• Create a level playing field through transparent auction process for state contracts and projects.
• Drive private sector job creation
• Participate the private sector in all levels of the education sector
• Increase export and domestic industry productivity driving efficiency and effectiveness. This can be achieved through investments into education, trainings and by attracting FDI.
• Introduce a pricing formula for fuel and electricity tariffs based on global market prices; relieve the treasury, Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) of any additional financial burden
• Begin a five year plan to remove the guaranteed price schemes in the tea and rubber industries through value addition measures driven bytrade agreements. Encourage crop diversification measures by plantation companies. In addition, implement the productivity based salary schemes.
• Increase capital market growth thorough listing state enterprises and proving incentives to overseas companies listing on the Colombo Stock Exchange.
• Broadening FDI appetite in Sri Lanka through the introduction of new financial products such as REITS, minimise bureaucracy and providing long-term tax incentives
  
   

The above measures are only a minute amount in abroad spectrum of tough decisions that must be implemented to drive sustained development. Government stability is important during such decision making and some measures such as a 4½-year unhindered term of Government, taken during the enactment of the 19th Amendment creates a pathway towards such advancement. Measures have also got to be taken to prevent corruption, formidable electoral system and crossover of MPs that create Government instability.

[The writer is the Assistant Manager – Capital Markets at Candor Equities Limited Sri Lanka. He has aBEng (Hons) in Chemical engineering Honours degree from the University of Nottingham, United Kingdom and a MBA from University of Colombo. He is also a Chartered Financial Analyst. He can be reached via email on [email protected]. The views expressed in the article are solely of the writer and do not constitute an opinion of the company.]