Vigilance on Budget challenges

Much analysis has been done on Budget 2021 and one consistent theme that has emerged from the discourse is that for the most important policy document of the Government to be successful, it must be underpinned by broader reforms as well as legal and regulatory frameworks. 

From attracting investments to managing the deficit, there is possibly even more emphasis on oversight and achieving targets in this Budget than its previous avatars. This is mostly because there is much more riding on this Budget given Sri Lanka’s growth challenges, COVID-19, debt sustainability and reputation of routinely missing targets. 

In its latest report, international rating agency Moody’s on Monday said it expected the Government to face challenges in rationalising Government spending and delivering fiscal consolidation post-coronavirus, as a large interest bill, rigid public sector wages and subsidies and transfers keep recurring Government spending elevated. 

They were particularly concerned that a 28% increase in revenue was too ambitious and growth was unlikely to rebound by the 5.5% outlined in the Budget given persistently low domestic and international demand.

The dilemma between delivering on ambitious fiscal consolidation targets and supporting economic recovery will continue to weigh on Sri Lanka’s credit profile ahead of significant and recurring external debt-servicing requirements through 2025 with Budget deficits to remain 8% or above beyond 2023.

Policymakers will no doubt be tempted to dismiss the Moody’s report but it does highlight the gaps that the Government needs to keep a close eye on if it is serious about meeting what is spelled out in the Budget. 

Clearly the achievement of this projected medium-term macroeconomic path is contingent on implementing reforms, particularly as COVID-19 has created an opportunity to review macroeconomic policies and set appropriate policy priorities and long-term development goals for the country.

The Government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation. However, the maintenance of quality standards of domestically-produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long term. This is imperative to boosting Sri Lanka’s competitiveness because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports. Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector. If Sri Lanka is to achieve the high growth predicted in 2021, it has to have improved access to international markets, so trade negotiations with existing and new partner economies must continue. Moreover the Government will also have to identify competitive advantages to attract foreign investment into new dedicated zones established for the pharmaceutical and apparel industries, which will require separate policy attention.

A range of proposals from expanding capital markets to establishing a development bank will need more groundwork from policymakers. Private sector representatives have also pointed out the need to take on reforms for labour, subsidies and State-Owned Enterprises (SOEs) to deal with systemic issues that will need even more careful handling in a COVID-19 backdrop. It is therefore time to roll up the sleeves and get to work.