Budget potluck?

AFTER many weeks of arguments, protests and discussions Budget 2016 was passed over the weekend with expected aplomb. But it will bring only s short respite for the Government as it grapples to limit expenditure, repay debts, stem a depreciating currency, encourage foreign investment, increase revenue and tackle protectionism. 

Sri Lanka’s coterie of economists have been speaking with one voice during the Budget debates and their voices are being heard, though possibly not by those in power. Efforts to reduce State expenditure and improve productivity suffered an early demise when public officials led by doctors demanded perks such as vehicle permits be kept unchanged. This along with a slew of other adjustments have already weighted Rs.35 billion onto the Budget even before it was passed. The back and forth between the various camps of the National Government left many bewildered about the casual disregard for fiscal consolidation being called for by people with an actual knowledge of the economy. 

The subsidies and salary increases promised by the Government on top of very generous reductions in direct taxes mean the Government will continue to struggle to increase revenues and reduce expenditure. Given global realities exports are expected to struggle in 2016 and with the U.S. rate hike, liquidity in international commercial markets will continue to deplete. This means that any borrowing done by the Government will have to be at higher rates, leading it to borrow more at home, which will in turn crowd out the private sector. Such a measure would also increase interest rates, which is a natural tool used to tighten monetary policy. In fact many economists have already warned that the Government cannot delay its fiscal consolidation period any longer as Sri Lanka has to gear up to repay an estimated $4 billion in borrowings by 2018, making fiscal consolidation the first priority of the Government. 

A bailout plan of sorts has already been looked at by the Government. Prime Minister Ranil Wickremesinghe told parliament recently the possibility of borrowing more from the International Monetary Fund (IMF) has already been looked at even though an official request has not yet been made. However, many economists have argued against this, pointing out that borrowing more from easy sources would only worsen the tenuous fiscal situation. Austerity measures though are not favoured by the Government, which instead prefers to hope for more foreign investment, tourism and remittances to keep itself from sinking. 

Though the Government has tentatively looked at liberalising some parts of the economy in Budget 2016 it has also been met with early signs of displeasure.  International Economist Prof.Razeen Sally last week insisted the Government had to introducea Competition Bill during the first half of 2016, which would have across the board approach to cutting red tape, improve the business climate and improve the climate for producers and consumers, not just big business but small entrepreneurs as well. 

He pointed out the pushback from local companies that do not want to deal with the competition would pick apart the potential of the Budget. He also called for a Comprehensive Omnibus Trade and Foreign Investment Bill and not selective measures and this should have a negative approach that means liberalising everything except what it specifically excludes. Bold moves the Government may not have the backbone to see through. 

As the National Government continues to struggle to put the right people, in the right places, with the right system, Sri Lankans will have to prepare for a rocky 2016.