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short run, and have perished themselves along with their corporates in the medium to long run. World Com, Enron, Satyam, AIG and Lehman Brothers are some examples for corporates that went bust where false financial reporting had played a major role in self-destruction. And one important point is that these have been large empires, for example, Enron reported revenues of US$ 111 b way back in 2000 before sinking itself. To put things in perspective, Sri Lanka’s economy in 2012 was just US$ 60 b.
In Sri Lanka, there is a rising school of thought – at least among some quarters of the academia and general public – that the presented numbers of economic performance are tainted. The present article is an attempt to bring out a few prominent examples that reinforces this phenomenon, using numbers reported in various recent financial and economic reports.
CBSL forecasts
According to the forecasts(Refer Table: 1) of the Central Bank of Sri Lanka (CBSL), growth is accelerating, per capita is rising exponentially, inflation is coming further down, fiscal operations are improving substantially. And the country is planning to report a positive BoP current account and become a net lender to outside world with national savings exceeding investments by 2016. If things happen the way authorities predict, well and good – the country would become the wonder of Asia!
There are natural trade-offs in economic management. Macro variables do not operate in a vacuum. Each and every macro variable cannot report favourable results in the medium to long term persistently even in an ideal scenario. Any plausible economic model that generates forecasts will have to accommodate this as a matter of fact. On the other hand, it appears that the country is not on a strong standing to deliver on these forecasts for structural savings-investments, external and fiscal sector reasons. For detailed analysis, refer: ‘Can Singapore Chinthana work for Sri Lanka?’ http://www.dailymirror.lk/business/features/37208-can-singapore-chinthanaya-work-for-sri-lanka.html and ‘Are we poised to become the ‘Wonder of Asia’?’ http://www.ft.lk/2013/05/22/are-we-poised-to-become-the-wonder-of-asia/.
Exchange rate
projections in 2011
The numbers above, therefore, seems optimistic. And in the past, CBSL proved its optimism beyond reasonable doubts. (Refer Table 2: Implied exchange rate calculation)
The table above computes the implicit exchange rate (last row) used by monetary authority in its annual report 2011. The total nominal GDP value and GDP per capita in US$ terms extracted from the annual report are used to compute the exchange rate forecasts of the monetary authority. Accordingly, the implied exchange rates are declining from 121/US$ in 2012 to 114/US$ in 2015?
Actual revenue vs. projected revenue: Continuous downward deviation 2009-2013
It has been observed that the tax revenue forecasts have been overly optimistic in the recent budgets. Figure 1 indicates the revenue projections as presented in annual budgets from 2009. Every year, the actual revenue has come down compelling the point of start for the contemporary budget to be low. Despite the continuously declining revenue trajectory, the estimates show a steep increase in revenues for the coming years for each budget year. This reflects a consistent (adverse) deviation from the stated path, negatively affecting budget credibility.
2012 revenue numbers:
are they plausible?
The Central Bank of Sri Lanka’s (CBSL) annual report 2012 placed the tax revenue to GDP at 11.1% as against Ministry of Finance (MoF) figure in 2012 of 12%. A close look at these numbers reveals that in the previous years, these figures were compatible, unlike in 2012.
In 2012, it is noted that the tax revenue figure shown in the summary of fiscal operations in the MoF annual report is different from the figure shown in the cash flow statement in the same report. These figures are expected to be similar everywhere as they are accounted on cash basis – rightly; these figures have been similar in the previous annual reports. One may wonder whether an inflated figure was shown on the face of the main operations section – so that a better tax to GDP ratio could be arrived at – whilst the financial statements that come under the scrutiny of the Auditor General showed the correct figure that reconciles with the CBSL figure.
It could be reasonably expected that the CBSL would have obtained the figure from the Treasury in preparing its annual report. It is further noted that all the government publications now resort to the 12% tax revenue to GDP ratio for 2012, which is calculated based on a contentious numerator. See Table: 1)
Revenue transparency: 
Is it deteriorating?
In the past, even during the peak of war in 2009, the MoF released government revenue data on a monthly basis. All 36 monthly data points had been issued from 2009-2011. However, for 2012, data was issued only for 09 months. In 2013, up to mid December, only April monthly revenue had been issued, cumulative revenues were published for the months of April, June and September. And interestingly, the cumulative revenue up to June 2013 was even below that of 2012. However, this has been reversed by the September quarter cumulative figure. The MoF anticipates an unprecedented growth of an exponential nature during the 4th quarter to meet its budget target.
One could argue that the issues pertaining to credibility discussed above could possibly have legal implications on policy makers if they are challenged in the courts. Without a formal conclusion, I will stop with a quote from Abraham Lincoln, which may be extremely important in the present day context.
“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.”
(The author invites a constructive dialogue for improvement in economic management of the country and can be reached on [email protected].)
