And so, the 2015 Budget was passed by a two-thirds majority as expected, while the committee stage debate on the various ministry votes continues. However, did the Budget lack credibility, and was public accountability of public finances and its prioritisation of expenditure questionable? It contained much of the broken promises of last year in what [...]

Editorial

Holes in the Budget

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And so, the 2015 Budget was passed by a two-thirds majority as expected, while the committee stage debate on the various ministry votes continues. However, did the Budget lack credibility, and was public accountability of public finances and its prioritisation of expenditure questionable? It contained much of the broken promises of last year in what appeared to be a ‘cut-and-paste’ job from Budget 2014.

The large reliance on foreign funding is clearly unhealthy. It would only increase the country’s indebtedness beyond a safe threshold. There is little prospect of achieving the fiscal deficit target of 4.2 per cent of GDP even by increasing the liabilities of the Government to banks.

As the Budget debate progressed, the Prime Minister moved an amendment to the Budget, increasing expenditure and the borrowing limits of the Government. The amendment increased the Government’s expenditure by Rs. 356 billion and raised the Government’s borrowing limit by Rs. 440 billion. This added substance to the common view that the final out-turn of the Budget would be very different from those presented in the Budget by the President as the Minister of Finance a fortnight ago. This is a grave erosion of public accountability of public finances — a fundamental principle of any parliamentary democracy.

The divergence between budgetary figures and out-turn, year in and year out, has eroded the credibility of the Budget as a cornerstone of the Government’s economic policies. It is a pity that this Budget cannot be taken seriously as an accurate statement of Government expenditure and revenue if nothing else, and that the all-important process of fiscal consolidation would have to await better times.

The prioritisation of Government expenditure leaves much to be desired owing to the disproportionate allocation of funds to ministries and over-expenditure on large physical infrastructure projects that have left inadequate fiscal space for vital developmental expenditures on education, research, technical and tertiary education, health care and protection of vulnerable groups in the population such as, for instance, the increasing proportion of the elderly.

This Budget’s financing of the deficit through foreign borrowing would aggravate the county’s indebtedness. The Central Bank says that during the first six months of the year, the overall fiscal deficit of Rs. 371.8 billion was financed mainly through foreign sources, which accounted for 65.1% of the total financing requirement.

The Central Bank has pointed out that the Government must remain committed to fiscal consolidation to enhance the welfare of the citizens. “Fiscal management in 2014 remained challenging mainly due to the shortfall in Government revenue percentage of GDP despite Government expenditure being maintained as a percentage of GDP during the first half of 2014 in line with the budgetary estimates,” it says. There is no reason to believe therefore, that the Budget proposals would bring about a significant increase in revenue to bridge the fiscal deficit adequately. This then, is one of the most serious concerns of the Budget for 2015.

China fund: Use it with accountability
One of the most significant global financial developments of recent times has been China’s initiative to establish an infrastructure development bank – The Asian Infrastructure Investment Bank (AIIB). Its significance goes far beyond its impact on infrastructure development in Asia, including Sri Lanka. It would change the worldwide financial landscape; China’s influence in the region would grow in leaps and bounds and the influence of economically developed countries in international finance would decline.
China’s motivations for initiating the new bank are manifold. For some time now, China has been disappointed with the slow pace of reforms and governance of global institutions like the International Monetary Fund (IMF), World Bank and Asian Development Bank that are dominated by American, European and Japanese interests. Many countries like Sri Lanka would share those views.

Although it is too early to predict the AIIB’s precise impact, China’s emergence as a world power and economic giant would be supported by activities of the bank. These very reasons have made Western nations and pro-US nations like Japan, Australia and South Korea lukewarm in welcoming the initiative. The new bank will allow China, which has enormous capital, to finance expensive infrastructure projects in the Asian region with few questions asked about human rights and the like to the great delight of many Asian leaders.

For Sri Lanka, the post ‘war’ period has seen heavy investment on physical infrastructure development with Chinese funding and technology. There are areas like rural infrastructure, power generation, transport development, irrigation and fisheries that require more investment. Social infrastructure, education, and health also need greater investment. These are areas that could benefit from the Chinese initiative. But the danger is when these loans turn into equity if they cannot be honoured and China becomes part-owners of things Sri Lankan. The terms and conditions of lending and the costs and returns of the investment therefore must be uppermost in decision-making — an area where there clearly is a deficiency at the moment.

While recognising the significant role that this initiative could play, one has to be mindful that it is not an entirely altruistic initiative. No doubt China is motivated to establish this bank owing to its surplus resources of finance and its technology and labour that could be utilised in infrastructure development of the Asian neighbourhood. The AIIB will also allow China a greater role in the economic development of the region commensurate with its growing economic strength and will enhance the country’s political and economic influence in the region.

While China’s self-interest on lending priorities is inevitable, leaders in recipient countries must ensure that borrowed funds are spent wisely and the repayment of loans is from the direct and indirect returns of infrastructure investment. It is a truism that large capital expenditures breed corruption and larger amounts of finance breed greater and greater corruption.

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