The portfolio of finance has been considered too important to be left in the hands of anybody but the head of state. Such a policy sends a positive signal that the head of state takes personal responsibility for the health of the economy and takes sound decisions and corrective measures just as the head of a household does in keeping with the fatness of the family purse. Much is expected of a President as Finance Minister.
However, mixed signals make us wonder whether the economy is on the right track to success. The concerns are timely in view of the November 21 Budget, the third since the end of the war. The country had been recording a satisfactory economic growth rate even during the war but the much expected gallop in the post-war era has eluded us. The people told President Mahinda Rajapaksa and the military leaders they were even ready to die of starvation provided they won the war for them.
The sacrifice was made and the people now want to reap the economic benefits of victory. The eight percent economic growth which the country, according to the Central Bank, has recorded for the first six months of this year, has not translated into tangible benefits for the poor and the middle class, who expect a salary hike or some form of lessening of their economic burden in the Budget proposals. With the real economic benefits not trickling down to the masses at least at the rate they would have desired, the incidence of crime and corruption is on the rise underscoring a correlation between poverty and social maladies.
For this segment of society, their disposable income is diminishing and their standard of life is yet to see a quantum leap, though the government is quick to point to the per capita income which, according to the Central Bank, has crossed the US$ 2,300 mark. The indices of the stock market and its reputation as one of the best performing bourses in the world; the massive foreign reserves enough to sustain six months of the country's imports; and improvements in economic infrastructure, are touted as achievements of the government in the post-war period.
The fact that hidden behind the per capita income figures is the widening income disparity between the ordinary masses and the elite and a new class of super-rich with political patronage and ill-gotten money through corruption, smuggling and drug peddling is not spoken about. Also not mentioned are the allegations that the stock market is being propped up not only by the government's investment of the EPF money in selective stocks but also by the dumping of dirty money by drug lords whose enormities the Sunday Times detailed last week in its front page story and an inside-page news feature.
Even the much-hyped foreign reserves are little cause to be happy. How much of the reserves constitutes borrowings and how much constitutes earnings through exports and remittances from Sri Lanka's workforce overseas will help us understand the true picture. The IMF has pointed out that most of the reserves are borrowed funds and that the earned reserves are small.
How long can the country survive on borrowings from the IMF and money raised through high-interest-rate dollar bonds? Already, we have started to borrow more to pay the interest of the loans at hand. We hope the country does not end up like Greece. To bail out Greece, at least there is the European Union. In our case, expecting the IMF to write off the loans and the investors in our sovereign bonds to forego their returns may be wishful thinking. If we could keep in mind what happened to Argentina and other Latin American countries in the 1980s, it may be a deterrent not to go overboard with too much borrowing.
Our economic analyst has been highlighting the pitfalls of the government's economic and fiscal policies in a series of pre-Budget articles published in the past few weeks. In no uncertain terms, he has said the widening trade deficit is a serious concern for the balance of payments and he hoped policymakers would take corrective measures, especially to curb the out-of-control import bill. He says: "The widening trade deficit would grow in the next five months.
The projected trade deficit is around 8.5 to 9 billion US dollars. This is a huge deficit. It is about thrice what was sustained in 2009 and about 70 percent more than last year's record trade gap. This large trade deficit will cause a severe strain on the balance of payments. This is so, as remittances too are not expected to grow by the same extent as before and likely to offset less than two-thirds of the deficit, in comparison with an offsetting of about 80 percent of last year's deficit."
The government's economic trophy, the balance of payment surplus, is akin to a man in debt coming to a wedding in a borrowed Pierre Cardin suit, because the surplus comes through the large amounts of foreign borrowing and remittances of workers abroad.
But the government is moving ahead with an apparent Keynesian confidence - despite shaky external factors in the form of a Eurozone crisis and looming global recession -- that its high expenditure projects, the increasing tourist arrivals and the economic revival of the once-war-ravaged regions would generate jobs and income for the masses and create demand for goods and services. These in turn would increase productivity and lead to a healthy economic growth in the coming years. The next giga-project could be the Commonwealth Games if Sri Lanka wins the bid. Canvassing support for Sri Lanka, the President recently said in Australia that Malaysia boomed after the Commonwealth Games of 1998.
The projects-induced economic strategy may work in the mid and long term or may drag us into an economic crisis. But the masses from all walks of life - from farmers to university academics - expect immediate relief. The promises of a salary increase for the public servants remain only marginally fulfilled. In recent weeks, the government has increased fuel prices, triggering a chain reaction of price increases in many items. A minimum fare of a kilometre ride in the poor man's luxury vehicle, the three-wheeler, is now about 100 rupees. With no elections in the near future, the government may take some unpopular measures to keep the huge budget deficit to a manageable level - a requirement probably linked to the release of the next IMF tranche.
While the forthcoming budget should reduce the fiscal deficit and keep inflationary pressures in check, there is a need for salary revisions in the public services, much more expenditure on education and health, research and agriculture, among others. Much of this increased expenditure should come by pruning down wasteful and unproductive expenditure, cutting down conspicuous spending and reducing tax evasion. At the same time we believe the government needs to implement its long-delayed promise of giving a human face to the market economy. This means taking effective steps to eradicate poverty while carrying out mega-development projects and also measures to bring about a more equitable distribution of the country's wealth and resources.