Columns

Never has a Budget been prepared in as onerous economic, social and political conditions as the budget for 2022. It has been prepared in a context of a sharp revenue shortfall, rising expenditure and excess money printing. It has  been appropriately described as one of the trickiest budgets in Sri Lankan history.

Little prospect

The central objective of the Budget should be to rein in the large fiscal deficits of recent years. This is a Herculean task. There is little prospect of the budget proposals achieving financial stability and fostering an economic recovery.

Economic conditions

Economic conditions could hardly be more onerous. Unemployment and poverty are increasing. Food security of a large proportion of people is  threatened.  The trade deficit is widening and foreign reserves are perilously low at about US$ two billion, inadequate to meet essential import expenditure.

Social and political upheavals

The country is in the midst of a multitude of social and political upheavals that have been brought about by the deteriorating economic conditions, ill-advised economic policies, the mismanagement of the economy and the unscientific and impractical policy of suddenly switching to organic agriculture. These problems are likely to intensify in the next two months and in 2022. They pose insurmountable economic and fiscal problems.

Aggravated problems

While the economic difficulties, especially the severe foreign currency difficulties, are underlying reasons for the shortages and price hikes of food and essentials, the mismanagement of the economy by inappropriate and faulty monetary, fiscal, trade and exchange rate management policies have aggravated the severity of the problems.

Organic agriculture

The sudden switch to organic fertilisers has threatened crop production and livelihoods of farmers and caused mass protests country-wide. The inevitable reduction in crop production would strain the external finances further owing to increased imports of food and reduced tea and rubber exports. This is especially so as international prices of food, fuel and raw materials are increasing.

Limits of budget

Sri Lanka’s 2022 budget will not be able to provide reliefs to the public due to the shaky nature of the economy and woeful lack of fiscal space. It will not be able to provide reliefs to the public given the lack of financial resources. Yet, political motives rather than economic imperatives are likely to guide government expenditure.

Furthermore, there are increased expenditures that are not justifiable in a context when prudence in expenditure is vital.  For example, the already large deface expenditure has been increased by 21 percent in 2022. The decentralised budget allocation too has been increased to garner popular support.

In contrast, expenditure on education and health is inadequate. The prioritisation of expenditure should be towards the country’s developmental needs.

Budgetary expenditure

The appropriation bill has reduced total government expenditure by Rs 20 billion to Rs four trillion in 2022. This reduction has been achieved by reducing capital expenditure in most ministries. Nevertheless, the financial allocation for defence and security related expenditure has been enhanced by 21 percent from that of 2021.

The expenditure on health has been increased by seven million, while  expenditure on education has been reduced by Rs six million. Public expenditure is being contained by a reduction of capital expenditure, except for the development of rural infrastructure.

Fiscal deficits

In 2020 the fiscal deficit reached 14 percent of GDP, though by the manipulation of figures it was reduced to 11 percent of GDP. This year’s fiscal  deficit is likely to exceed 15 percent of GDP.

Crucial issue

The fundamental problem that must be addressed by this budget is the bringing down of the high fiscal deficits of recent years. Bringing down the fiscal  deficit to even seven percent of GDP is a challenging task owing to the rigid structure of expenditure and the current state of the economy that makes increased revenue collection difficult.

Fiscal objective

However key officials have made statements that the 2022 Budget will aim at reducing the fiscal deficit to five percent of GDP. This would be a huge achievement. They have said that the budget will make a ‘significant reduction’ in the country’s runaway fiscal deficit in 2022.

They have described it as a ‘non-traditional budget,’ The transformation is expected to be an increasing revenue collection. Treasury Secretary, Dr. S. R. Attygalle said “We are planning to reduce the budget deficit by a significant level. Maintaining a higher budget deficit is against the state’s fiscal policy.”

Dr. Attygalle said the Budget will curtail non-priority spending while maintaining funds for the Government’s development projects will remain unhindered.

“The Government’s policy is to reduce the budget deficit to 4.5-5 percent of the GDP. We are getting into that path of reducing the budget deficit by a significant portion while maintaining the government expenditure and development activities,” Dr. Attygalle said.

Revenue enhancement

The 2022 Budget is expected to achieve this fiscal consolidation by a revenue enhancing strategy rather than by expenditure cuts. We will have to wait to see what these revenue enhancing proposals are and how realistic they are in enhancing revenue and  reducing the fiscal deficit.

Conclusion

Unless the fundamental problem of fiscal consolidation is addressed, the economy will continue to be highly unstable. An economic programme that curtails wasteful and productive expenditure and finds ways and means of increasing revenue is imperative.

Final word

It is only a politically courageous and uncorrupt government with sound economic and scientific advice that could salvage our sunken economy.