Finance Minister Mangala Samaraweera presenting Budget 2019
Speculation that Budget 2019 will be an election budget
Prior to the presentation of the Budget 2019, there was wide speculation that it would be an election budget. There were at least two elections in the pipeline and the expectation was that Finance Minister Mangala Samaraweera who is now called ‘Khema’s Boy’ would naturally succumb to the pressure of his party colleagues to fill the Budget with sweeteners to appease the voters. This has been the hidebound tradition in Sri Lanka ever since it became independent from the British.
A ruling party would just sit on the economy and other issues for the best part of its rule after an election and suddenly wakes up from a deep slumber when an election comes around the corner. There is a belief in the political circles that by filling the purses of voters with cash or other handouts, the ruling party can hide its inactivity and coax voters to re-elect them. As I had argued in my previous article in this series (available at: http://www.ft.lk/columns/Budget-2019-should-not-fall-into-the-pitfall-of-being-an-election-budget/4-673869), this is a failed strategy from both the political and the economy’s point.
Politically, it is a failure because the opposition parties would foil the government’s move by promising to double what the government has promised. From the economy’s point, it becomes a failure because the economy would not be able to sustain them within the limited resources it has. Yet, people have been brainwashed that it is the duty of the budget to give them relief and the budget time is marked by a heavy build-up of such expectations in them.
Thus, immediately after the presentation of Budget 2019, an island-wide survey conducted by PepperCube Consultants for Daily FT had revealed that about 97% of the people surveyed had expected the Government to provide relief to them through the Budget. As such, the Budget presented by Khema’s Boy would have disappointed them since it did not contain consumption-oriented direct sweeteners.
Election budgets have bags of reliefs
A budget becomes an election budget if it presents a ‘bag of reliefs’ to ordinary consumers. That bag usually contains common consumer items like sprats, onions, dhal, kerosene and canned fish, to mention but a few. The prices of these items are artificially reduced through a reduction in import duties meaning that they have been previously increased by the imposition of higher duties. Accordingly, the duty structure is manipulated by the government to gain an advantage at elections. Thus, they become a relief only temporarily because after some time, the government which is unable to continue with the relief package will have to reverse the price reductions.
In this manner, the bag of relief has only an announcement effect for the time being. Over the passage of time, the relief disappears and only the bag remains, but now it is empty and waiting to be filled by a rival political party. This has been the cycle which Sri Lankans had gone through at every election in the past.
Khema’s Boy had inherited a sick economy
The Budget 2019 is not an election budget in this sense. Instead of reducing prices artificially, it has sought to divert resources from consumption to investment, a strategy which Sri Lanka should necessarily follow at this stage of its economic development.
Khema’s Boy had inherited a sick economy whose sicknesses had been manifest from around 2013. This had eloquently been highlighted by the World Bank in its Sri Lanka Development Update 2019 released about three weeks ago.
Budget 2019 has taken a forward look at the economy and made proposals for the future growth of the country. In that way, Khema’s Boy has broken tradition and it should be a new tradition which all future finance ministers should follow
Behind its diplomatic language, it had delivered two strong messages to Sri Lanka’s policy authorities. One was that the deteriorating economic performance which the country had started as from 2013 will continue without an appreciable recovery till 2021. The other was that the country’s declining labour force and labour productivity would have a negative effect on its growth potential in the next two to three decades. The gist of these two messages was that Sri Lanka should take immediate measures to arrest and reverse this trend if it was to realise its goal of becoming a rich country within the next few decades.
Failure to maintain economic buoyancy after the end of the war
Immediately after the end of the war, there had been ‘significant buoyancy’ in economic activities in the country raising its average annual growth rate to a level above 8%. However, the economic strategy adopted by the country during that period as well as in the few years following had basically concentrated on establishing an economic system based on the domestic market for growth and prosperity.
This was manifested by the low emphasis given to exports that declined as a ratio of the Gross Domestic Product or GDP as well as the global exports. Since the domestic market placed an effective limitation on the expansion of industry, the country could not sustain this high growth beyond 2012. The period thereafter saw a drastic fall in the growth rate recording nearly a half of what had been attained previously.
The new Good Governance Government that came to power in 2015 could not arrest the declining trend and it further slipped from 5% in 2015 to 3.1% in 2017. The best estimate for 2018 has been that it would hover around 3% and continue to falter in the next three year period. Meanwhile, the low performing exports and rising imports caused a massive trade deficit of about 90% of export earnings. Since it could not be financed out of traditional sources like the income on sale of services to foreigners and remittances received from migrant workers, the country’s foreign exchange earnings were lower than the foreign exchange outlays. This caused the Government to borrow more to repay loans which in turn augmented the foreign debt stock. The ultimate result was the rupee coming under pressure for depreciation.
The sorry state of Sri Lanka’s public finances
The public finances were also not in good shape. Though there was a marginal improvement in government’s revenue, the recurrent expenditure was stubbornly high. It was mainly manifest in interest payments on domestic and foreign loans that had been raised by successive governments in the past. These interest payments had increased as a ratio of GDP from 4.8% in 2015 to 5.9% in 2018.
The corollary of all these adverse developments was that the Government’s contribution to capital formation, a necessity for Sri Lanka to accelerate its economic growth, could not be increased beyond 5% of GDP. Hence, the burden of delivering prosperity to people had squarely fallen on the private sector. This was the challenge which Khema’s Boy had faced when he presented his first Budget for 2018 and the truncated Budget for 2019 covering only an eight-month period. As such, he did not have the luxury to appease the voters with an election budget for this year. He had therefore designed the Budget 2019 to further consolidate the budgetary discipline which he had introduced earlier. It is a disappointment to many relief-loving voters but a necessity in the context of the current state of Sri Lanka’s economy.
The need for an innovation-inspiring budget
I had warned Khema’s Boy in an article published two weeks ago that Budget 2019 should be an -inspiring one (available at: http://www.ft.lk/columns/Budget-2019-should-be-an-innovation-inspiring-budget/4-673402). All previous budgets in Sri Lanka had been consumption-oriented budgets. The low priority that had been given to inventions and innovations had resulted in Sri Lanka getting trapped in a low growth spiral. Accordingly, the country’s annual average economic growth during the whole of the post-independence period had been at around 4.4%. Though there had been some instances of better performance in selected years, they all had been temporary gains that could not be repeated continuously.
This low growth spiral had made Sri Lanka a laggard among its peers in the region. The main reason for this low growth had been the use of low technology for production which in turn had led to low productivity. Hence, the Budget 2019 had sought to create a pool of entrepreneurs who are innovative and who could do contribute to economic prosperity through private sector growth. The purpose of promoting Enterprise Sri Lanka had been the creation of a critical pool of innovative entrepreneurs.
Development of a knowledge-driven, skilled society
To produce the future entrepreneurs and the workers for a technology-based economy, it is necessary to develop a knowledge-driven, skilled society. This has to be started from the school level and for that purpose, education should undergo a complete overhaul and quality enhancement program. Noting this requirement, Budget 2019 has allocated funds for the improvement of school laboratories, class rooms, libraries and teacher training facilities. In addition, students are to be trained not in isolated pigeon-hall type streams but in combined ones.
The traditional approach to student improvement has been to improve the skills of students in selected science streams covering science, technology, engineering and mathematics, known as STEM. However, the weakness in STEM has been that it denies students to become creative individuals without exposure to Arts. Therefore, the current trend has been to develop both the science and arts skills among students known as STEAM or as the Budget 2019 had pronounced it, STEM+A.
A budget becomes an election budget if it presents a ‘bag of reliefs’ to ordinary consumers. That bag usually contains common consumer items like sprats, onions, dhal, kerosene and canned fish, to mention but a few. The prices of these items are artificially reduced through a reduction in import duties meaning that they have been previously increased by the imposition of higher duties. Accordingly, the duty structure is manipulated by the government to gain an advantage at elections. Thus, they become a relief only temporarily because after some time, the government which is unable to continue with the relief package will have to reverse the price reductions. In this manner, the bag of relief has only an announcement effect for the time being. Over the passage of time, the relief disappears and only the bag remains, but now it is empty and waiting to be filled by a rival political party. This has been the cycle which Sri Lankans had gone through at every election in the past
In this, students are helped to develop both sides of their brain, namely, the subtle and the intuitive sides, by allowing science student to learn arts and art students to learn science. Once this program is implemented at the school level, universities will have to offer combined degree programs with multiple disciplines. Universities in Thailand have already ventured into this business.
Best students to get scholarships to study in world’s best universities
Budget 2019 has proposed to provide scholarships to the best performing students at the GCE (AL) Examination to study in the best universities in the world. This is a good move because this strategy had been adopted in Malaysia in 1980s and 1990s by Mahathir Mohammed to create a pool of skilled youngsters to take Malaysia to the next level of science and technology. The present Budget has started it in a very small way with only 14 scholarships in the first year. But it will soon catch up with the participation of both the private sector in Sri Lanka and foreign donors in the program.
In addition, the Budget has proposed a loan scheme for those who are to study in any private sector higher learning institution in Sri Lanka. This will help all those who are denied a place in a State university, though qualified to enter a university, because of the limitation in university places.
Unemployed arts graduates to receive apprenticeship in private firms
The most remarkable proposal in the Budget has been the action taken to bring arts graduates to the mainstream in the economy. Since their skills are inadequate for private sector jobs, they remain unemployed for long periods. Eventually, when the issue becomes acute, all successive governments have absorbed them to the public service even though there are no job vacancies in the public sector. The result has been the swelling of the public sector, on the one hand, and reduction of the productivity in the sector, on the other. Furthermore, it has unnecessarily augmented the Government salary bill as well.
Hence, in the Budget 2019, it has been suggested to provide apprenticeship opportunities for 1,000 unemployed graduates in private firms where their monthly allowances would be paid by the Government for one year until they are absorbed into the relevant private firms. This will certainly provide a viable and sustainable solution to a chronic issue faced by Sri Lanka.
An important requirement in the proposed program is that private firms should be attuned to accept these graduates as a resource to be developed and the graduates should have a mindset to work hard for their future career development. Thus, the promoting agency of this scheme, which has so far not been named, should have a pre as well as a post dialogue with both the employers and the apprentices. If this fails, the country will not have a permanent solution to the unemployed graduates’ problem in the country.
A budgetary tradition to be emulated in the future
All in all, the Budget 2019 has taken a forward look at the economy and made proposals for the future growth of the country. In that way, Khema’s Boy has broken tradition and it should be a new tradition which all future finance ministers should follow.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected])