Will Budget 2017 achieve inclusive growth?

The Sri Lanka Budget 2017 has come into play at a time when the world is being challenged with the appointment of a new President in the United States which led to a nosedive in the stock markets around the world whilst at home there is social uprising with protest campaigns virtually on a daily basis. 

In this background, for one to launch an inclusive growth-driven budget is prudent given that Sri Lanka was experiencing a high growth agenda post 2009 where unequal distribution of income automatically takes form, leading to a disgruntled nation.

Budget 2017

This is where the role of the Government comes into play with policy interventions such as inclusive growth in the macroeconomic agenda of the country. If not, the gap between the rich and the poor will further widen and result maybe even in a political backlash like what we have seen in many countries in the world. 

In this respect Budget 2017 had some key proposals that caught my attention - the Rs. 750 million allocated to 50% interest subsidy to SMEs with a specific criteria, the 15 export village proposal, special warehousing in Ampara/Kilinochchi/Mannar, doubling the university grant, the Rs. 1 billion for the MICE convention centre which is essentially targeting the SME sector in tourism, the dairy development zones, and on the tea industry a maximum of 5,000 acres by a standalone company, just to name a few. But the challenge is in implementing the proposals.

IG in Sri Lanka

Inclusive Growth (IG) means all sectors of the economy contributing to the overall growth of a country which in turn results in a substantial reduction in poverty. 

In simpler words, growth must be broad-based and inclusive where a larger part of the country is engaged in the development agenda. 

But a point to note is that a country can achieve all the Millennium Development Goals (MDGs) but yet not register inclusive growth due to the skewed pattern of growth that has not been properly distributed, which is what has happened in Sri Lanka. Hence the inclusive growth agenda is timely. 

It is important that a country highlights growth not only from its sheer pace but also from the pattern of growth which will in fact give a new image to a country.

For instance in the case of Sri Lanka where we highlight the 8% growth that we have been registering; it must also state the pattern of growth in different parts of the country so that a real view can be captured. To name a few Jaffna, Muttur, Kalpitiya, Moneragala or Mannar. It’s also important to note that Inclusive Growth refers to areas such as equality, equity and protection from markets and employment which are essential ingredients of a successful growth strategy of a country.

If growth does not happen in this manner it can become toxic and result in adverse behaviour that includes revolts and political backlash. 

IG the cause of terrorism, Aava?

Successive governments have been focusing on the top line where Sri Lanka has a pretty picture to boast. For instance in 1996, Sri Lanka reported that the overall poverty indicator stood at 24.3% while in 2002 it moved down to a 19.2% and in 2007 it went down to magical mark of 15.2% and then it came down to a magical 12% and today it is at around 7%.

However, digging deeper I unearthed some facts based on the 2003 and 2004 socio economic survey done. Access to pipe-borne water in the Northern Province was only 3.1% while in the east it records a 17.4%. The national average stood at a high 30.8%. 

Even though we cannot be proud of the national performance, the fact remains that for a majority of people who live in north east, life was not as comfortable as the people in the neighbouring regions. Given that inclusive growth was not possible until 2009, some argue there is a link between in inclusive growth and terrorism. 

Given the consumer confidence index spiralling down to a dizzy low of 46 as at end September 2016 and the strong share of voice on the cost of living may be we need to be alert about groups like Aava emerging in the north.

Aava (poverty-terrorism link)?

Even though there are counter arguments that countries that have an intermediate range of rights experience a greater risk of terrorism, there is no conclusive studies that have been done if it’s nurture or nature that fosters terrorism in a country. 

The former World Trade Organization Head Michael K. Moore once said, “Poverty in all forms is the greatest single threat to peace, security, democracy, human rights and the environment.” This I believe is an indication of the possible relationships that can exist. 

However, Alberto Abadie, Public Policy Professor at Harvard University’s Kennedy School of Government, says development aid is important but it is not clear that it is an effective tool for reducing terrorism, at least not in the short run which weighs heavily for a country to practice Inclusive Growth strategies to avoid a repetition of same in the history of Sri Lanka in the future.

SL must follow Pakistan

Whilst accepting the importance of Inclusive Growth in a country, we must note that Sri Lanka has to pay almost eight billion dollars in debt servicing within the next three years. With the IMF stipulations coming into play, we have no option but to drive reform and hence the only way out is to ride the wave of hurt in the next two to three years so that Sri Lanka can once again become competitive like what Pakistan is doing as we speak. 

The billion dollar question that one can challenge now is that if this strategy in fact works against the principle of Inclusive Growth. The answer can be yes. But it’s only in the short term as, in the long term this will trickle down to the next strata of the socio economic landscape just like what the world saw in Chile during the Pinochet regime.

Governance – key issue for six years 

Brand Finance, the originators of the valuation, has been mentioning to Sri Lanka that for the last six years (post 2009), the drag on the nation brand building initiative was on the pivot of ‘Governance’. As at now India is at a commanding $ 2,026 billion, Bangladesh at $ 170 billion and Pakistan with a blistering correction last year with the IMF reforms touching $ 128 billion, leaving Sri Lanka trailing in the South Asian region at $ 74 billion. 

Brand Finance in its reports has mentioned that a slight correction on this front in the last five years would catapult the overall value of brand Sri Lanka that will result in better quality investment being attracted, higher value tourists coming into the country and Sri Lanka exports picking up better value globally. 

Budget 2017 – skill development 

The Budget acknowledging the 100,000 required by the tourism industry, 60,000 by the textiles and apparel industry, 400,000 by the construction industry and a similar number by the cinnamon and other key industries was a positive note. 

The recognising of the vocational training institutions and vocational training colleges to meet this task was very timely given that the quality of talent I see in the colleges is very strong. The extending of sectors to gemmology, lapidary, jewellery batik and bamboo industry was a strong move. 

Health – driving inclusive growth 

A key point that was highlighted by Indian Home Minister P. Chithambaram was the number of people that get treated by the Government of India, which must be also taken into account when discussing the concept of inclusion in a country. 

I guess on this front Sri Lanka can take the high ground with the country being ranked first in the world in the area of health and survival indicators, given the existence of National Hospitals across the country with over 700 hospitals and almost 70,000 beds available. 

Does inequality matter?

While one can argue on the importance of inclusive growth from a very private sector perspective, it’s sometimes important to have some degree of inequality, the logic being that it means there is a sense of reward for enterprising individuals and those who are innovative in their behaviour.

In fact it can force a person to repeat one’s behaviour and drive for a new economic order, like for example a youth from Horana who earns over Rs. 200,000 a month by doing caricatures for a global newspaper. 

However, this must be regulated so that this inequality will not result in a widening gap that causes destructive behaviour like land grabbing and avoiding the payments of taxes to name a few. 

Role of ADB and WB 

If one analyses a country’s portfolio, the areas where funding is required initially is in energy, finance, transport and communication which are essentially large-scale infrastructural projects. 

Once a typical country progresses to middle income status, then the need for such traditional lines of support will decrease as there will be many private sector institutions that will come into the funding mechanism. 

Hence it will be more prudent for organisations like ADB and World Bank to drive a smoother inter phase between regional and local government level as well as focusing on driving trade between countries supporting governments in bilateral and multilateral trade agreements.

This can also generate stronger inclusive growth within a region especially in South Asia where inter-regional trade is at a low ebb of around 5.3%. 

Next steps 

While Sri Lanka is going through drastic change having to absorb external shocks, the real challenge is how the Budget 2017 proposals will be implemented by the Government machinery in the backdrop of the issues faced in the last Budget. The ethos of the public and the private sector working together will sure assist the process but policy implementation will have to be by the public sector.

(The author has been involved in preparing the National Budget during the period 2005-2009 and is a former Chairman of the Sri Lanka Export Development Board and Sri Lanka Tourism. Currently he heads the largest retail chain in Sri Lanka.)