The Sri Lankan government’s commitment to progressively reduce the budget deficit to 5% of GDP in 2012, as outlined in Parliament during a reading of the 2010 budget, cannot be trusted, a top economist told the Business Times this week.
Deputy Minister Sarath Amunugama presenting the budget
Principal researcher at the Point Pedro Institute of Development Muttukrishna Sarvananthan said the budget deficit cannot be reduced to 5% of GDP without downsizing the public service and the armed forces and privatizing state owned enterprises such as the Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), National Water Supply & Drainage Board (NWSDB) and the Sri Lanka Transport Board (SLTB). Since the government has no plans of privatizing, Dr. Sarvananthan said there is absolutely no likelihood of attaining the budget deficit target set by the Finance Management Responsibility Act (FMRA).
According to the FMRA of 2003, the budget deficit was supposed to have been reduced to 5% of GDP by 2005. Dr. Sarvananthan said that according to the government, the original target could not be met due to the 2004 tsunami and the consequent rise in public expenditure but that it will attain the budget deficit target of 5% of GDP by 2008.
Dr. Sarvananthan said using the tsunami as an excuse was hollow because the bulk of the post-tsunami relief and reconstruction expenditure came from foreign donors. In any case even by 2008 that target was not met and it was conveniently forgotten. Dr. Sarvananthan said the promise of reducing the budget deficit to 5% of GDP by 2012 is just to get the suspended International Monetary Fund (IMF) tranches released which the government achieved this week.
Once again, he said this regime has hoodwinked the citizens and the world at large. “I wouldn't be surprised if the government's next excuse for not attaining the budget deficit target of 5% of GDP is the withdrawal of the GSP+ facility by the European Commission. This government is extremely good at inventing excuses and scapegoats.”
Dr. Sarvananthan said he feels that the Presidential Tax Commission is yet another ruse. “This government is not interested in reforming anything. It lives day-by-day on short-sighted opportunistic policies. Remember that evolving solutions to enduring political and economic problems cannot be made like instant noodles.”
The government also announced that they were targeting 8% growth for this year but Dr. Sarvananthan said the target of 8% real GDP growth in the medium term falls far short of the potential that could be achieved in a post-war situation as in Sri Lanka. Almost all the countries that have emerged out of a prolonged internal civil war have achieved double-digit growth in the short and medium terms. “It is a shame that Sri Lanka does not envision such a target,” he said. “The low growth target itself is an indication that the reduction of the budget deficit to 5% in 2012 is hollow because indeed if the budget deficit target could be achieved by 2012, then as a corollary the GDP growth target should have been over 10%. The government has exposed its duplicity by setting contradicting targets for GDP growth and the budget deficit.”
Economist and senior lecturer at the University of Colombo Sirimal Abeyratne told the Business Times that the 2010 budget clearly shows the government’s keen interest in reducing the budget deficit from 9.8% of GDP in 2009 to 8% in 2010. He said this is set to be achieved with a higher growth of revenue than that of expenditure and postponing wage hikes next year.
Prof. Abeyratne said it is an achievable target, provided the government sticks to the expenditure outlays proposed in the budget. Government revenue is likely to rise in 2010 due to the anticipated economic recovery and growth spurt. Prof. Abeyratne said this growth spurt is a combined effect of open economic policy prevalent during the post-1977 period and the end of the civil war in 2009. “However, it is we who can make this growth spurt faster or slower and sustainable or short-lived.
On the other hand, the government has not come up with massive expenditure hikes contrary to what was seen in the past few years. Statistically it is obvious that with a significant increase in GDP, the budget deficit as a percentage of it, can go down.” However, he said what is lacking in the current policy environment and not in an annual budget document, is a deliberate effort to address the fundamental weaknesses in the country’s budgetary management.
This applies to both the revenue and expenditure sides. “What will be achieved beyond 2010 depends on how serious the government is in addressing the fundamental weaknesses in budgetary management and how sustainable the growth spurt is.”
Sri Lanka’s commerce chambers hail the 2010 budget
Sri Lanka’s top most Chambers of Commerce expressed optimism about the government realising its short medium and long term objectives as Tuesday’s budget 2010 is supported by necessary strategies.
The President of the National Chamber of Commerce of Sri Lanka Lal de Alwis told the Business Times that the government’s 2010 budget was encouraging as it has focused on Small and Medium Scale Enterprise development with comprehensive policy initiatives which will benefit the local industry. The budget has given a medium policy framework with the intention of reducing the budget deficit and the public debt as a percentage of the GDP he said.
He noted that increased budgetary allocations for the continuation of infrastructure development projects of the entire country giving priority to rural sector will contribute immensely towards economic growth increasing investments and creating employment opportunities. He welcomed the government‘s initiative on public sector co-operation in investment on development projects as another positive move. Mr. Alwis said that the action taken by the government to make the public sector more efficient in working close collaboration with the private sector is beneficial for the country.
“However, the government also should have a contingency plan for development projects to have the confidence of the private sector,” he said. A proper mechanism should be implemented at various levels in the administration to ensure the effective implementation of plans and strategies to achieve the stated objectives.
It is also essential to ensure effective and timely use of funds, both grants and loans towards various infrastructure projects, he added. In a statement, the Ceylon Chamber of Commerce says, the government has pronounced its policy direction on many areas such as the role of the private sector in investing in diverse product and service sectors, Taxation reforms, export promotion, state enterprises, higher education, public administration etc. The Chamber looks forward to the early implementation of the policies outlined in the budget and urges the government to involve the private sector at an early stage of implementation. The chamber expressed the confidence that once these measures are implemented and consistency prevails, it will boost investor confidence and promote growth. Further, improved systems and procedures will also enhance the competitiveness of enterprises.
The Business Chamber of Commerce was of the view that the endeavour made by the government to control inflation is a socio-economic development of crucial importance to the country. President of the Chamber Shabbir A.Gulamhusein noted that the government should adopt effective methods and systems to ensure that due revenue are collected and corruption and fraud eliminated. Management in loss making state utilities should be improved so as to minimize or eliminate losses, he said.
He welcomed the government’s initiative aimed at re-organising state machinery to respond to private sector investment proposals. Vice President of the Federation of Chambers of Commerce and Industry Kumar Mallimarachchi pointed out that the budget has announced a good policy framework and direction to accomplish the development needs of the country. Its policy direction on tax reforms, higher education and export promotion is commendable, he said. The budget has placed high emphasis on infrastructure development covering urban and rural sectors, SME development and private public partnerships for development initiatives, he added.