Business Times

Provincial class budget, inward look

By Kajanga Kulatunga

Investors who eagerly awaited a substantial budget may have to wait a bit longer. True to form, the government has unveiled a provincial class driven budget that has a markedly inward bent. Coming off the back of the strange "underperforming enterprises" legislation, the budget does not allay fears of private enterprises, nor provide a framework for the advancement of innovation. Instead, it is full of socially acceptable "niceties", short on comprehensive corporate tax reform, but even more alarmingly promotes a beggar-thy-neighbour currency policy driven by the false hope of benefits from an export driven economy.

Infrastructure spending, especially on roads and electricity are amongst the best policies that have been outlined. Those for numerous domestic airports are unwarranted. Infrastructure spending has a multiplier effect throughout the economy where it benefits employment and capital spending in the short term, and reducing input costs in the longer term. While it’s great politics to play class warfare by defending redistributionist policies aimed at the provinces, they are too little and have the potential to be hijacked by charlatans of varying hues. Proposed recommendations on smallholder farming won't help with overall productivity, but should help alleviate access to credit by individuals.

The inability to promote hybrid vehicles by altering the tax rates on vehicles was a major disappointment as the outlay for crude oil could be halved within five years. A focus on food self sufficiency of a selected few items is laudable, given the high protein and nutrient content of the said items. The devaluation of the rupee was the most disappointing outcome from the budget. Sri Lanka faces the risk of adopting a dangerous policy of continued currency depreciation to support exporters without tackling the productivity growth and other uncompetitive aspects within the economy. This policy will eventually end up harming everyone. As the rupee continues to weaken, imports will become more expensive driving inflation higher, all the while hoping that there will be an upshot via higher exports and jobs. After all, it's a policy that has paid off in spades for all South East Asian countries, especially China. The failure, as with any policy with this rosy outlook is that the next decade may not look anything like the previous two. Amongst the potential important trends, two in particular will cause economic problems in a devaluing currency regime;

The growing irrelevance of cheap labour - even in China, the land of cheap and productive labour par excellence, some manufacturers (e.g. Foxconn) are increasingly turning to the use of robots in order to remain competitive. As technology and robotics increasingly take over a greater array of tasks in a world where capital spending can be funded by near zero interest rates from much of the developed world, economic policies such as ours become ineffective. Simply put, will multinationals still feel the need to build factories in countries like ours, if the labour component of manufacturing falls to the same level as, say, the labour component in agriculture? In such a scenario, not only will the disparities in wealth between nations increase, but also, worryingly, the disparities between those that own the factors of production, and directly benefit from the productivity gains (shareholders), and those aiming to sell their physical labour.

Second, the question of whether the US will become energy independent - The US has been increasingly tapping and finding methods to access natural gas within her own borders using new technologies. This has the potential of turning the world's largest consumer of oil and gas to become a net exporter, a remarkable turnaround within such a small time period.

We still live in a US$ denominated world and when the US current account deficit starts to improve, someone, somewhere, usually will lose out. With a high deficit the US has been importing goods assembled by cheap labour pools like those within our shores. But, what would happen in a future where a lot of robotised manufacturing moves back to the US, and other major export destinations of Sri Lanka, while they also stop importing oil? How would Sri Lanka then get the dollars needed to finance international trade and imports? It would have to be by selling assets and/or services to American savers and consumers, at a very different valuation on the $US than the one that currently prevails.
The budget feels very retro in style and substance without bold thinking for the decades ahead. Taking development to the provinces is both necessary and commendable, but it would be more powerful through innovation, not vitriolic divisiveness.

(Kajanga is an Investment Specialist, based in Sydney Australia. You can write to him at

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