This week will be crucial for the Government on two fronts. On one hand, this week will mark the first year since President Gotabaya Rajapaksa came to power, and on the other, the Government will present the first Budget of its term, which is expected to put in place its policy priorities.
Information so far in the public domain suggests that much of the Budget will understandably be defined by COVID-19 and the macroeconomic challenges facing Sri Lanka. With the hope for a positive fourth quarter disrupted and looming debt repayments next year, the Government has decided to keep the restrictions on imports largely intact, go bullish on import substitution and use the Budget to attempt improving market confidence.
The uncertainty facing the entire world and Sri Lanka in particular is the reason why it is imperative that Budget 2021 sets very clear policies along with a credible implementation framework. The latest World Bank South Asian Outlook report released last month estimated Sri Lanka’s deficit for 2020 to be an eye-watering 11%, higher than the 9% projected by the Finance Ministry.
Earlier this month ICRA Lanka warned that Sri Lanka’s growth could contract by as much as 8% this year, far higher than the projections by international organisations. Given Sri Lanka’s high debt repayment obligations for next year it is imperative that there are significant fiscal consolidation measures outlined in the upcoming Budget.
This is all the more important as the Government has so far steadfastly refused to entertain an agreement with the International Monetary Fund (IMF). This is the right of the Government but it should then set in place a framework for reassuring and winning investor confidence on par with what would be given via an IMF agreement.
A run-of-the-mill Budget may find this tough going as Sri Lanka has a poor track record of sticking to goals, especially on the revenue side with successive budgets failing to hit their deficit targets over the past few years. The previous Government targeted reducing the deficit to below 4% by 2020 but failed dismally to do so. Putting Sri Lanka’s fiscal house in order is all the more important because the toxic combination of COVID-19 and debt is not something limited to just 2021. Sri Lanka faces significant debt repayments for most of the next decade, which will be accompanied by sporadic balance of payment pressures. This means sound fiscal policy will be needed to attract investors, bolter reserves and raise funds from international financial markets. This is a precarious situation that could have deep consequences if it is not taken seriously by the Government. Having more fiscal space will also assist the Government to increase desperately needed welfare and social protection measures. COVID-19 is expected to drive unemployment to new highs with the number of near poor expanding exponentially. Already there is plenty of evidence that more and more people are being gripped by hard times. Therefore the Government must have additional funds at the ready to support these vulnerable communities and reduce the stresses that can cause social unrest. For most of his first term President Gotabaya Rajapaksa and his Government have been on the back-foot, battling the dire COVID-19 impact. But Budget 2021 presents a chance for them to change the game, go on the attack and set the stage to achieve the economic progress so richly touted from rally stages a year ago, if they choose to do so.