Dr. Amunugama on Budget 2013

I would like to take this opportunity to refer to the concerns raised by the Leader of the Opposition and several other members of the Opposition, regarding the Government’s stand on the Supreme Court determination pertaining to the appropriation Bill for 1213.

You would recall that the Hon Leader of the House, at the vote for the second reading of the Appropriation Bill clarified to the House, that the appropriate time for this discussion is the Committee Stage of the Budget. Therefore, I would like to explain the relevant facts pertaining to the two sections in the Appropriation Bill to which the Supreme Court’s attention has been directed.

Honourable Speaker, the Supreme Court has directed its attention to two Sections. One is, Clause 2 (1) (b) of the Bill which authorises the Government to raise Loans in or outside Sri Lanka subject to specified annual ceilings. The second aspect is Clause 7 (1), which permits the Honourable Minister of Finance, subject to the approval of the Cabinet (Government) certain actions in the event of an unexpected fall in Government revenue or under expenditure in certain provisions.

Appropriation Bill for 2013

Honourable Speaker, the Appropriation Bill for 2013, is not the first of its kind in this Parliament. Over the years, Appropriation Bills have been presented to the Parliament using the same language and format and hence the 2013 Appropriation Bill is not an exception to this practice and procedure.

Mr. Speaker, and Honourable Members would note that the content of Clause 2(1)(b) of the Bill referred to in the Determination are identical, except for figures, with the provisions embodied in previous legislation enacted as far back as from the year 1961, and loans are presently raised adhering to the provision of respective applicable legislations. You would further observe that the proposed amendment in the Determination with regard to raising of loans to meet cash flow requirement and the conduct of regular Treasury operations is impractical.

Honourable Members would also note that the content of clause 7 of the Bill referred to in the Determination had been introduced in 1975, and has remained identical to date , with the addition of words ‘to meet any authorised expenditure’ in 2002 consequent to a determination made by the Supreme Court in 2002. It should be noted that the Ministry of Finance and Planning has not come across the application of this clause for a long period of time, underscoring that such provisions are generally of a ‘stand-by’ nature and are used only when grave circumstances so demand in an eventuality, to facilitate the management of public finance in the country.

You would note that the section 2(1)(b) of the Appropriation Bill 2013, as in the case of previous Appropriation Acts, specifies the maximum amount of loans to be raised whether in or outside Sri Lanka, on behalf of the Government. All loans are raised in terms of the provisions of various statutes subject to the ceilings specified in the respective laws and within the overall authorised limits specified in the Appropriation Act for the respective year. All these activities are managed by the Department of Public Debt of the Central Bank of Sri Lanka in close consultation and coordination with the General Treasury in terms of Annual Budget operations. Since all loans are serviced in accordance with the provisions of the respective special laws, debt servicing aspects will not be carried out under the Appropriation Bill.

Domestic loans

As far as domestic loans are concerned, under Section 89 of the Monetary Law Act No. 37 of 1947 (as amended), Central Bank of Sri Lanka provides Provisional Advances, on the basis that every advance shall be repayable within a period of not exceeding 6 months, and the total of such advance outstanding at any time shall not exceed an amount equivalent to 10 percent of the estimated Government Revenue in the Budget Estimates of the Financial Year in which they are made. Such advances are free of interest.

The Government also raises loans under the Local Treasury Bills Ordinance No. 8 of 1923(as amended) with a maturity not exceeding one year, subject to authorised outstanding limits under that Ordinance. The Public Debt Department of the Central Bank of Sri Lanka on behalf of the Government, conducts this operation through Primary Dealers recognised by the Central Bank. The Treasury Bills operations are conducted to meet uneven cash flow situations that arise from revenue lags and expenditure leads. Recognising such situations, the law requires that the Central Bank itself subscribes to such issues of Treasury Bills. However, depending on Monetary Policy considerations pertaining to domestic liquidity and money supply, the Central Bank also uses its holding of Treasury Bills to conduct monetary policy operations by trading (purchasing and repurchasing) such Bills. As the Central Bank, during the last 20 years has increasingly moved towards conducting monetary policy based on market instruments such as interest rates and exchange rates, the determination of yield rates of Treasury Bills is left to market forces, unless the Central Bank considers that an intervention is necessary, in an exceptional circumstance.

Treasury Bonds which are of medium to long term maturity, are floated by the Public Debt Department of the Central Bank, in terms of the Registered Stocks and Securities Ordinance No. 7 of 1937, at the request of the Treasury, to meet Government borrowing requirements as permitted in the relevant Appropriation Act. The maturity and interest rates of these bonds depend on the medium to long term yield curve, assessment of the availability of liquidity at different maturities and government’s cash flow needs. These operations are also conducted through Primary Dealers recognised by the Central Bank. The rate of interest of Treasury Bonds is therefore market determined. Both Treasury Bills and Treasury Bonds also have secondary market transactions. As in the case of Provisional Advances, a fair amount of Treasury Bills and Treasury Bonds are floated to re-finance existing loans at maturity. Further, Rupee Loans are also issued under the said Registered Stocks and Securities Ordinance. However these administrative debt instruments are no longer issued as the country has shifted away from such instruments in the backdrop of financial sector reforms carried out since 1977, and only a declining stock of Rupee Securities remains under this category. Up to a 12.5 percent of outstanding Treasury Bills are also permitted for foreign investments as per a Monetary Board decision to reflect global integration of the country’s financial market. Hence, you would agree that loans raised in Sri Lanka to meet expenditure itemised in detail, in the Budget Estimates submitted to Parliament following the presentation of the Appropriation Bill and refloating of existing loans, are subject to complex operational processes but are carried out within Parliament approved ceilings, in compliance with the applicable statutes, and also well within the overall ceiling prescribed in the Appropriation Act for the relevant Financial Year.

Foreign loans

On the other hand, Foreign Loans are raised in terms of Foreign Loans Act No. 29 of 1957 (as amended). The Government raises such loans under 4 categories;

The first category consists of loans are raised from Multilateral Development Agencies such as the World Bank (WB) and the Asian Development Bank (ADB). The terms and conditions of these loans are common to all member countries, based on accepted categorisations. Selection of various projects and programs are determined through a consultative process between respective agencies, line ministries, and the Ministry of Finance and Planning under the guidance of the Cabinet of Ministers. Such projects and programs and the related financing arrangements are reflected in the Annual Budget Estimates submitted to Parliament.

The second category involves Government borrowings from well-established bilateral Government development agencies. The terms and conditions of these loans are determined by such bilateral government development agencies and are common to all countries eligible to borrow from such agencies. Currently, Sri Lanka borrows from Japan International Cooperation Agency (JICA), Economic Development Cooperation Fund (EDCF) of Korea, Saudi Fund for Development (SFD), OPEC Fund for International Development (OFID), Kuwait Fund for Arab Economic Development (KFAED), Kreditanstalt for Wiederaufbau (KfW) etc.

The third category consists of borrowings from EXIM Banks of various governments i.e. India, China, Korea, USA, Malaysia, Hungary and Japan (JBIC) and reputed credit agencies which lend for project financing. The maturity structure, interest rates and other terms of such loans are negotiated through an intensive process under the guidance and approval of the Cabinet of Ministers. The term-structure of such loans also varies from project to project, depending on the socio-economic benefits and gestation periods of such projects

It should be noted that as the Sri Lankan economy has graduated to a middle income country status exceeding its per capita income well beyond US$ 1,000, the available concessional funds are fast depleting. In fact many Scandinavian and European countries no longer provide outright grants and concessional loans to Sri Lanka as the country is no longer a Less Developed Economy (LDC). They lend through export import banks and their terms are largely market guided. The available funds from UN Agencies such as the World Food Program (WFP) are also no longer accessible unless in very exceptional circumstances. Concessional funding from ADB (ADF) and World Bank (IDA) are also on the decline. Middle income country status and the post conflict situation would further reduce the access to concessional funding and outright grants. Therefore, a greater flexibility in loan operations should now be recognised more than before.

Each foreign loan is examined by the Monetary Board of the Central Bank as required in terms of the Monetary Law Act on monetary implications, with special reference to debt servicing capacity and Balance of Payments. All loan agreements are approved by the Attorney General and a final Legal Opinion is issued by the Attorney General, confirming inter alia compliance with the laws of Sri Lanka, which is a pre condition to make a loan effective. All foreign borrowing agreements are executed after having obtained the approval of the Cabinet of Ministers and the special authorisation by His Excellency the President, in terms of the Foreign Loans Act.

The forth category of borrowings are raised from foreign financial markets, under the Foreign Loans Act No. 29 of 1957 (as amended. Foreign currency denominated Sovereign International Bonds are issued in international markets, with the participation of internationally reputed financial and legal advisors and fund managers selected through a competitive bidding process. All related contractual agreements are entered into by the Central Bank of Sri Lanka and the Ministry of Finance and Planning with the approval of the Attorney General and the Cabinet of Ministers. Such borrowings are all within the overall ceiling specified in the relevant annual Appropriation Act. The tenure and interest rates of such loans depend on the size of the loan, market conditions and the international sovereign country rating. These ratings are given by internationally reputed rating agencies having examined the country’s economy and finance as well as the relevant legal provisions to operate in international capital markets.

Honourable Speaker, you would agree, that debt raising and its management is a continuing process that involves complex operational aspects and warrants a fair degree of confidentiality, which cannot be maintained unless operational freedom is fully secured. Hence, obtaining prior approval for such transactions or seeking ratifications for transactions already concluded is not practical and is likely to have an impact on the national interest and economic stability, since it is likely to have implications on the continuous operations that are being carried out with checks and balances.

Reporting coverage

I am sure that the Parliament would appreciate that during the past several years the Ministry of Finance and Planning, has expanded its reporting coverage in the report published in terms of the Section 13 of the Fiscal Management (Responsibility) Act No. 03 of 2003, providing a comprehensive coverage on the conduct of public finance and associated Government accounts and financial statements duly certified by the Auditor General. In addition to this report a separate report is also submitted to the Parliament together with the submission of Budget Speech in compliance with the Fiscal Management (Responsibility) Act. This Fiscal Management report consist of the Fiscal Strategy statement in compliance with section 4, 5 and 6 and the Budget, Economic and Fiscal Position Report in compliance of section 8 and 9 by the Hon. Minister of Finance.

A mid-year Fiscal Position Report contains the performance of Government revenue, expenditure, cash flow operation and borrowings during the first four months of the year. This report also provides updated information, depending on the availability information, price development, foreign aid, Government debt and official reserves. This report is issued by the Minister of Finance and Planning under the section 10 of the Fiscal Management (Responsibility) Act, which requires the Minister of Finance and planning to present the Mid-year Fiscal Position Report to the public and thereafter lay it before Parliament. All these reports have been submitted well on time and Parliament has not made any adverse remarks on these reports. A greater appreciation on these reports has also been received from the international financial community and general public.

Public finance and Parliamentary control

Honourable Speaker, there is no doubt that the Constitution stipulates that Parliament shall have full control over public finance. In doing so, I am sure that the forefathers did not expect what was proposed in the Determination. That responsibility is vested in the Government through different legislation enacted by Parliament in respect of revenue, borrowing, debt servicing, and expenditure authorisation. Hence, these are time tested provisions, used by successive Governments as being essential for the effective management of Public Finance. Operations carried out in terms of such Acts are subject to scrutiny by the Parliamentary Committees On Public Accounts and Public Enterprises (COPA and COPE). Appropriation Bill is also one such arrangement through which the Parliament authorises limits on expenditure as well as borrowings, for each year. Successive Government’s therefore have come to parliament, following a well-established tradition, practices and legislative process to get the Parliamentary sanction. The Budget process, conduct of public finance, and its multifaceted operational aspects have been carried out within that framework.

Therefore, Mr. Speaker, if every decision envisaged in Section 2(1)(b) of the Appropriation Bill, is to require the prior approval of Parliament, it is a reflection that Parliament itself is called upon to engage in routine operational aspects of the Government and the powers vested in the Cabinet and respective Ministers by the President would serve little purpose. In modern Governments, delegation subject to proper reporting and accountability, has been recognised for greater efficiency. As we all know, transactions connected with public finance are an ongoing process as explained earlier and take place on a daily basis. If this Determination eventually leads to default payments of salaries, pensions, contractual obligations and debt services, owing to pre occupation in micro management, the entire country will have to face consequences to which the Government is ultimately answerable. It should be noted in this country every successive government has maintained the credibility of honouring debt obligations, both domestic and international, as well other contractual obligations and public accountability.

Honourable Speaker in this background, the Government is of the view, that it is not advisable to compromise the operational freedom provided in 2(1)(b) in the Appropriation Bill since it has far reaching implication on the management of the economy and finance.

It should also be noted that although Article 123 of the Constitution requires the Supreme Court to stipulate which Article in the Constitution should be complied with, to pass the Bill as it is, this Determination is silent on the same. However, in view of the total impracticability that stems from the incorporation of suggested amendments in the determination that make the Government to require obtaining approval of the Parliament for each and every loan transaction and considering the far reaching implication on the conduct of public finance and furthermore that the Appropriation Bill is an annual authorisation for borrowing and expenditure, the Government considers that the Parliament should recognise the flexibility accorded to the Government to conduct public finance whilst at the same time be aware of the concerns raised by the Supreme Court.

However, considering the extensive coverage, including public finance related information, given both in the Annual Report of the Ministry of Finance and Planning, and periodic reports which are prepared in compliance with the reporting requirements prescribed in the Fiscal Management (Responsibility) Act, and since the Hon. Judges have also noted that adequate information about such loans are not included in such reports, greater details of transactions relating to clause 2(1)(b) will be disclosed in the Annual Report of the Ministry of Finance and Planning. As regard to clause 7, it should be noted that this clause was incorporated in the Appropriation Bill in 1975.

The Ministry of Finance and Planning have not come across of the usage of this clause. Successive Governments have managed fairly heavy expenditure involved in even national security under trying conditions. The general practice in incurring unauthorised expenditure is to take approval for supplementary estimates from Parliament. However, if there is unexpected fall in the Government Revenue in unmanageable magnitudes or authorised program need more expenditure which could be financed from a non-performing vote elsewhere it may serve as a useful contingent instrument to manage unforeseen circumstances. Nevertheless, the use of clause 7(1) required the approval of the Government (Cabinet) and hence, it is always a collective decision of the Cabinet. However, Honourable Speaker the Government sees no reason why such action could not be placed before Parliament for ratification and an amendment is so proposed.

In this background, Honourable Speaker, I wish to place on record that the issues raised by concerned citizen groups and the views expressed by the Supreme Court in this determination regarding the appropriation Bill of 2013, the Government would like to place on record that due recognition of the practicability for the Government to function must also be recognised in the Budget making process by the Legislature. Therefore, we have proposed two amendments, to the Appropriation Bill 2013 and I hope that the Parliament will extend its full support to adopt these two amendments to ensure, greater fiscal accountability.

Macroeconomic aspects

Honourable Speaker, I would also like to refer to some macroeconomic aspects that must be recognised and deliberated in a Budget Debate, since in addition to legislative responsibilities vested in the Parliament the most important aspect is the control over public finance. Traditionally, we blame each other in these debates and concentrate on mundane issues, sometimes wasting our productive time, for almost one and a half months. What is important however, as legislators and representing people in this country, is the conduct of Public Finance, to focus more seriously on the underlying financial and economic considerations of the Budget.





We are all aware, that the world is in an economic crisis. The most advanced economies have gone into a recession. One major concern is however, running high deficits and also underfunded banking and financial systems in those economies.

Those countries are also debating the manner in which such crisis can be managed and bring about sustainable solutions to maintain economic stability. In the United States there is a major debate to address what is called a “fiscal cliff” which involves raising taxes and cutting expenditure to bring about some meaningful solution over time. The 17 member European Union is struggling to bail out their troubled sovereign governments. Economic growth in neighbouring India has slowed down and the Government is making several attempts to introduce reforms, to regain the lost growth momentum. China is also experiencing a moderation in their growth and examining various measures to revive their development activities. The global economy is also confronted with high oil and commodity prices that have made countries to adjust to a new economic order in terms of food and energy prices and consequential adjustments in living conditions.

Honourable Speaker, it is in this background, that at least us 225 members in this Parliament, should look at our Budget. We may have political differences and hence different solutions, some probably prefer more centre-left policies, and bring revolution to address economic challenges.

Economic development

Our colleagues from the TNA, are still not focusing on the Budget, development, national integration or peace and continue to harp on old agendas which will never bring any satisfactory solution to the people that they represent. People, whether they are from north or south, want equal opportunities for education, health and employment. And that is why economic development is crucial. It is not an ideology based models but the models based on hard reality, and that is probably where this Government has succeeded. We have created wide range of infrastructure; such infrastructure is not only for urban townships and commercial activities but also to create a revolution in irrigation water agriculture and the environment.

Think of the Moragahakanda Irrigation Scheme, we have mobilised US$ 300 m to divert water to the North and certain parts of the eastern province. This water will feed the ‘Iranamadu Tank’, in addition to several un-irrigated areas in the North Central Province. From Iranamadu the Jaffna Kilinochchi people will have drinking water from a water scheme which is now in the procurement stage with nearly US$ 300 m investment. Consider the diversion of the Deduru Oya, with an investment of US$ 49.6 m. this is done by local funds and this project will irrigate most of the un-irrigated lands in the North Western Province and bring 27,000 acres of land under cultivation. Uma Oya, will divert water to the South and feed the Ruhuna Pura water supply scheme which is now under construction with an investment of US$76.3 Million. These schemes will also generate medium sized hydro-electricity.

The Government has also committed to implement Yan Oya, over 30 major irrigation schemes are also being rehabilitated. These are only one set of projects in this 2013-15 Budgets and think of the economic transformation in those rural areas which are still struggling due to lack of regular water supply. Looking at the benefits environmental change, think of what Gal Oya has brought about to Ampara. That is what irrigation can bring about, all over Sri Lanka.

Honourable Speaker, I will not go into details of all sectoral investment activities that have been reflected in the 2013 -2015 medium term development framework for which the 2013 Budget has given a ‘big push’.

Budget deficit target

Let me dwell on at least on one serious macroeconomic aspect. The 2013 Budget has committed to a Budget deficit of 5.8 percent of GDP – the lowest ever since 1977. We have committed to this, having proved ourselves that deficits can be reduced without cutting welfare and development spending. The Government has not privatised any enterprise either. This year, in 2012 we are pleased to announce, that despite many challenges and particularly with the drought, the Government has kept the deficit target of 6.2. The deficits of double digits are a thing of the past. The same is proved for inflation, same is proved for unemployment and poverty. Shouldn’t the Minister of Finance and Planning take the credit for it?

Look at the struggles other countries are making to bring the deficit down, they are going through painful, unstable, violent paths. This has not been the case in Sri Lanka. Look, at the banking system here, all the banks are well capitalised and remain sound. Non- performing loans of all banks remain below critical levels. The banking system does not remain vulnerable which is also not the case in many other countries today. Shouldn’t the Central Bank take the credit for this? They have performed well, in terms of their regulatory responsibilities. Many of you spoke about Debt. Our Debt to GDP ratio has fallen to about 80 percent of GDP. Our intention is to bring this below 70 percent of GDP. This can be done only by maintaining a higher economic growth of well above 6 percent, gradual reduction in Budget deficit and managing well distributed debt portfolio, not only in terms of domestic and foreign debts but also in terms of proper maturity structures. This is what the Government has done in the last several years.

While the Government has reduced the debt to GDP to 80 percent of GDP, most of our debts are payable over 15 – 20 years time. Out of the total debt stock, only 0.13 percent is payable within one year, and 54 percent is payable over 15 years. Therefore taking the entire debt stock and dividing that by this year’s GDP is not going to give a justifiable indication of economic health for us. Debt to GDP ratio matters for countries where, the Debt is payable in the shortest period of time we don’t have such risks. Further, we don’t have commercial or other debt instruments which are on demand. Even the commercial loans the Government has raised are now at 10-year maturity instruments. They are currently trading around five percent though we raised this at around seven percent. This improvement is because the Sri Lankan economy remains buoyant and reflects a positive outlook.

The Government’s entry to the international capital market has established a benchmark, for the country’s, financial sector internationally. Following the issue of Sovereign Bonds by the Government, the Bank of Ceylon and the private sector have lined up their entry as well. The leading corporate sector and the development banks are expected to move in this direction. When this happens, excessive demand for borrowing from domestic banks will decline. When that happens, small and medium sector’s access to finance will improve and that is how the economy will move.

Therefore Mr. Speaker, the attempt by the Government to systematically bring down fiscal imbalances excessive borrowings, public debt, money supply, inflation and unemployment are economic aspects that every one of us in Parliament must value. And this Budget must be viewed in the context these positive outcomes although all the risks and problems in Sri Lanka cannot be resolved with just one single Budget.