No time for populism 

This week the price of Liquid Petroleum gas, the staple cooking fuel for a majority of Sri Lankans, went up by nearly 100%. The price of a 12.5 kg LP gas cylinder has been increased by Rs. 1,257 with immediate effect to Rs. 2,750. This comes in the wake of the Government ending price controls on essential foods the previous week. The Cabinet decision to deregulate prices for milk powder, wheat flour, sugar and LP gas has now made these commodities shoot up in price. The government also announced that it will be importing rice to reduce prices which had risen by more than a third in recent months.

It seems the Government is leaning the basics of economics on the job. One does not need to be a student of economics to know that artificial State-mandated price controls do not work. Anyone who has a memory or has at least read about the disastrous economic policies of the Sri Lanka Freedom Party during its tenure in Government from 1970 to 1977 would know that such price controls do not work. They produce lucrative black markets and turn average citizens who just want to get their basic rations into racketeers and criminals in the eyes of the law. If these policies failed in the ’70s when there was a greater State control of the economy then one should instinctively know that there is little chance of them succeeding today when the country’s economy has been opened for decades with free market forces determining the prices of commodities and services.

Another simple economic principle any one can understand is that one has to live within one’s means. Sri Lanka’s State expenditure has been colossal and used for non-economically productive sectors. Last week the Cabinet cleared the draft of an Appropriation Bill, which is the first stage of preparing a budget for the 2022 financial year. In an astonishing development next year’s Budget has reduced the expenditure on healthcare, during a pandemic when one assumes the healthcare sector needs all the assistance it can get. 

This is in contrast to the defence expenditure which has again been increased. The estimated budget deficit for 2022 is a massive 11.5 %. In simple terms, this means that even according to the best estimates of the Government, it will be spending significantly more than it expects as revenue. These are not sustainable numbers. The Government must take the corrective measures to decrease its spending. While all governments can be tempted to spend more on social welfare, granting jobs and building things that will get them credit with their electorate, if all that is done at the cost of the economy collapsing then the administration will eventually be the loser. This Government has an extraordinary mandate. It has the all-powerful executive presidency and a two-thirds majority in Parliament. With an Opposition hardly making a case for an alternative government, it is safe to say that the ruling regime is politically secure and has enough space to make less popular yet smart decisions that would be beneficial in the medium to long terms. As the recent price control fiasco has demonstrated, short-term populist moves eventually have to be reversed. It is therefore far more prudent to make the difficult decisions at the beginning rather than having to change course after facing predictably disastrous consequences at a later date.

In this light it is imperative that the Government curtail its spending. Other than in areas such as education, healthcare and basic State administration, the government must cut costs. It can curtail recruitment into the public sector especially stopping any politically-motivated job bonanzas the economy cannot bear. The military can be reduced to a size that suits peacetime. Right now its budget is larger than appropriations made in war time. Non-essential sectors should undergo reforms, closure or privatisation. Investments need to be made in sectors such as education and healthcare which provide social safety nets to the vulnerable sections of society and provide a sense of social justice. The Budget for 2022 offers an opportunity to demonstrate that it is capable of course correction and taking difficult yet prudent decisions.