The budget is a portraiture that shows the country’s development path and the policy directions for the coming year. Legislature, executive and the judiciary which constitute the administrative machinery of any country, and also the general public are concerned, vigilant and awaiting for the budget. In short, the budget presents the next year’s work programme [...]

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The Sundaytimes Sri Lanka

National Budget: Some thoughts and issues

By Dulanii Liyanahetti
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File photo shows President Rajapaksa at the reading of the Budget last year

The budget is a portraiture that shows the country’s development path and the policy directions for the coming year. Legislature, executive and the judiciary which constitute the administrative machinery of any country, and also the general public are concerned, vigilant and awaiting for the budget. In short, the budget presents the next year’s work programme for the country with objectives and goals to be achieved and an expenditure statement of all the ministries including state independent agencies and also revenue proposals.

It is to be noted that if the funds are provided through supplementaries repeatedly and external sources outside the approved budget the respect and the dignified validity of a budget will fade away gradually and it will become a mockery and an event without much attention or interest. This allegation is aimed at the government, especially in the recent years. The Government has announced that the 2013 budget is “development oriented”. What does it mean? For a development oriented budget, investments should be increased substantially. Finances have to be met and resource allocations are to be made in the right direction aiming at the planned development goals. “Results based planning” and “results-based budgeting” are key concepts in this process in order to achieve success. The integration of the two subjects (finance and planning) is so important and that is why the two components are kept under one ministry and one secretary.

Sri Lanka achieved a splendid economic growth rate of 8% in 2010 and a further progress made to 8.3% in 2011. Due to natural disasters and manmade disasters like less efficient fiscal and monetary management, wrong decisions, environmental destructions, waste and corruption, increase in petroleum prices and the global economic slowdown the economic growth is expected to come down in 2012.

Next year should re-capture the previous momentum and the budget has to take the responsibility to frame the pertinent policies and take the country towards that cherished goal.

Savings and Investment

The development and economic growth could be achieved only through investment and to be precise, more and more investment on capital expenditure and capital formation. Savings are a primary source of investment.

The amount of national savings in 2010 has been Rs. 1,381,082 million which was 24.7 per cent of GDP. In 2011 it has increased to Rs. 1,448,000 million by 1.7 per cent. However, national savings as a percentage of GDP has declined to 22.1 per cent in 2011. Domestic savings have declined in 2011 by 6.8 per cent over the previous year. The total investment has been Rs. 1,545,769 million which was 27.8 per cent of the GDP in 2010. In 2011 it has estimated at Rs. 1,959,000 million and 29.9 per cent of the GDP. Government investment has been Rs. 347,218 million i.e. only 6.2 per cent of GDP.

These savings and investment ratios are not at all sufficient for a rapid economic growth. The national savings ratio has to be increased at least upto 35 per cent of GDP and same as for the investment ratio. Investment on capital expenditure would help to increase the existing capital stock of the country which symbolises the development. Setting of an investment strategy for economic growth is a prime concern of the budget.

Foreign Direct Investment (FDI)

In a country like Sri Lanka the government does not have sufficient monetary resources of its own for necessary investments. The local private sector is also not so strong to invest in large scale development activities especially in most needed infrastructure improvement. In the circumstances Foreign Direct Investments (FDI) are very crucial to achieve development targets to sustain the 8% growth and go beyond. Whatever said and done the FDI record of Sri Lanka is low compared to many Asian countries. The present savings and investment ratios as a percentage of GDP, to achieve the expected growth targets are not at all sufficient. Therefore, a better conducive atmosphere for investment should be created for local investment in general and FDI in particular. In the first six months of 2012 FDI amounted to just US$452 million.

FDI is decisive and critical to create more employment opportunities and induced development and economic growth. Exchange rate, interest rates and rupee value should be in stability to attract FDI. In February 2012 the Central Bank allowed the rupee to float and the rupee fell immediately by almost 20 per cent. Thus, this change of monetary policy helped to restore the balance of payments and foreign reserve positions to some extent.

The top 10 recipients of FDI account for 68 per cent of the total where only two countries – China and Hong Kong are there among Asian countries. Statistics show actually a downward trend in FDI for Sri Lanka compared to 2009. More importantly, the confidence and trustworthiness among investors have to be established, enhanced and guaranteed in order to attract FDI. The budget can and should play an incisive role to turn the economy in the right direction in this regard.

Medium Term Budgetary Framework (MTBF)

The government has introduced and is implementing a Medium Term Budgetary Framework (2012-2015) through the budget with a futuristic approach for budgeting to establish a planned process of allocating resources instead of ad hoc budgeting. Actually the MTBF is being implemented since 2006-2009, then 2009-2012 and now 2012-2015. It is high time to make a serious assessment and an evaluation on achieving expected growth rates and MTBF’s objectives since 2006 in the key sectors of the economy. MTBF was to help to increase the efficiency of the budgeting process, compare among various sections and prioritize of the allocation of resources in favour of achieving accelerated development goals. However, quality budgeting with a realistic approach, stern commitment and conviction of the budget implementors are of paramount importance under any circumstances to implement the decisions, rules and regulations under the present system of devolution of power and fiscal decentralisation.

The government has carried out a series of sectoral consultations to obtain the proposals from a cross section of the people at the budget preparing stage, which is good. This process has been developed as an annual event. Implementation of such a system, negotiations and dialogue with various ministries and provincial government representatives can bring fruitful results. However, the basic issue would be, how far these interrogations are reflected in the final outcome i.e. in the budget proposals. Going back to previous years, a review is worthwhile in this regard. How far the previous decisions of the President were implemented? Unless results are not realised and effective, this annual attempt could prove only a passing phenomenon.

Macroeconomic Indicators

Out of the macroeconomic indicators, fiscal deficit, debt problem, trade deficit leading to balance of payments and government revenue are focussed for serious attention. Continuous increase in negative trade balance will affect the balance of payments of the country unfavourably. The trade deficit reached $9.7 billion at the end of 2011. The predicted figure at the end of 2012 would be a massive one (around $10-11 billion). In this unsafe condition of increased trade deficit, the Government has to tackle this problem through a sound fiscal policy and fiscal discipline. It is a matter of reducing import expenditures and increasing export income. In short, a fiscal stimulus is sine qua non.

Revenue

Government revenue including grants is extremely low compared with international standards. Sri Lanka’s revenue collection is around 15 per cent of the GDP whereas it should increase at least up to 20%. In certain instances essential government expenditure exceeds the revenue collection. In a situation of this nature the government becomes helpless in spending on capital ventures leading to growth. Total revenue (minus grants) in 2010 was Rs. 817.3 billion, and the provisional figure for 2011 is Rs. 934.7 billion. The estimated figure for 2012 is Rs. 1.1 trillion. This shows the country’s poor revenue status which needs to be increased. Newspapers have revealed under-invoicing the goods when they are exported, corruption in VAT refunding invoices which caused huge losses in state revenue. This is only a tiny fraction of waste and a result of corruption wrongdoings. Though the GDP has increased, amount-wise revenue collection and per capita income have not kept pace with increased GDP. This shows a hiccup on the part of revenue authorities.

Reducing poverty and achieving Millennium Development Goals (MDGs)

As agreed under the UN system, Sri Lanka has to achieve MDGs by 2015. It has been reported that Sri Lanka is well poised to meet these millennium goals. The available data show that with the higher growth rate in the past two years the poverty head count ratio has come down from 15.2 per ceny in 2006/2007 to 8.9 per cent in 2009/2010. However, regional level disparities (provincial), sectoral disparities (plantation sector) exist as highlighted in the MDG country report for 2008/2009. Also some argue that the effects of the country’s growth have not trickled down to the village where the majority of the population lives as the Western Province’s contribution to the national economy was around 45 per cent in 2010 and the growth appears to be an imbalanced one. Therefore, regional development is vital for a balanced growth.
Attention of the budget proposals is needed to change the direction of resource flow and achieving the rest of the MDGs by 2015. The setting of goals and time frames are important as the target year is approaching fast.

Inflation/COL

These two indicators are inter-related and inter-woven and also directly related to day-to-day living of the people.
The budget is for the people and of the people. Therefore, people expect possible concessions and some form of reliefs from the budget. It is a reasonable preposition from the point of view of the people. However, the government managed to keep the inflation at a single digit level basically through the monetary policy of the Central Bank. Besides the official inflation rate, general opinion and complaint of the public is that high inflation and high cost of living have brought difficulties for living.
Inflation figures show that though the price index increases the rate of inflation has come down to a single digit in the last three years which is a good sign as far as the living conditions are concerned. Keeping the inflation in check is favourable for investment and growth. Under a regime of increasing budget deficit, it is difficult to reduce inflation as expected. The monetary policy of the Central Bank would face challenges in the process. It is a dichotomy between fiscal policy and monetary policy. However, monetary policy has a direct role to play to curb the inflation.

The budget has an indirect role to play in order to manage or keep the inflation at permissible levels.

Inequal income distribution and its effect on the sustenance of growth

Even if a country has achieved satisfactory economic growth, under poor income distribution, people are not benefitted and it can even create a social unrest. Therefore, policies to trickle down the increased income to the lower strata of the society are necessary. This is a just and right requirement of economic development. Income inequality has risen over the years, a major contributor to poverty. As a result the gap between rich and poor has widened. Income inequality hampers growth and improved equality can help to sustain growth. Both human capital and physical capital could be enhanced through corrective measures of reducing income inequality and disparities at macro level. Debt Burden Growing debt problem is another area that has to be focussed attention in the budget. The following figures have been published in the Central Bank Report (2011).
Country’s debt:- 2008 – Rs. 3.5 trillion, 2009 – Rs. 4.1 trillion, 2010 – Rs. 4.6 trillion and 2011 – Rs. 5.1 trillion (provisional)
The recorded percentage of debt increases from 2008-2009 is 15.95 and 2009-2010 – 10.30. External debt as a percentage of GDP is 43.3. Any government has to take loans, but the large majority should be investment/productive/development loans. If the loans are mainly for consumption purposes or unproductive ventures the country has to suffer and repayment of loans becomes a grave problem. The total debt of the country has increased from Rs. 3.6 trillion in 2008 to Rs. 5.1 trillion in 2011 (provisional) by Rs. 1.5 trillion or 13 per cent. Furthermore the increase in foreign debt is more prominent. The budget has to analyse and take remedial actions at its preparatory stage.

Public debt outstanding shows an increased trend which is detrimental to the country and it affects the people in the long run. Debt servicing is a huge problem for the country extending it for the future generations as well.
The attention of the budget has to seriously focus on this aspect.

Monetary and Fiscal policies

Both monetary policy and fiscal policy should be development oriented and assured economic growth. Monetary policy is governed by the Central Bank and the fiscal policy is basically governed by the General Treasury/ Ministry of Finance. High and continuous inflation is harmful to economic growth. Central Bank takes measures to curb inflation and maintain the economic stability through its monetary policy regimes. Fiscal policy is aimed at stimulating economic growth to higher levels. Taxes, revenue and government expenditures come under fiscal policy regime. A better and sound coordination between monetary and the fiscal policy is crucially important and the two closely be inter-related in order to achieve a higher economic growth.

The budget deficit has to be met through domestic borrowings (non-bank and bank) and foreign loans. Excessive budget deficits tend to depreciate exchange rates, money printing and subsequent increase of prices and cost of living.

The fiscal deficit target for 2012 was fixed at 6.2 per cent. As the economy is progressing slowly this target seems to be difficult to achieve. To achieve this goal an efficient fiscal management is vital. Increasing government revenue, curtailing unnecessary imports and increasing export income are extremely decisive for fiscal consolidation.

The budget is the key policy document of the Government in power of a country that is moving. In short it places the Government’s development strategy and plan before the country with revenue and expenditure proposals to solve the prevailing socio-economic problems in order to take the country forward in the right direction.

Therefore, the harmonising of the above two effectively with a futuristic attitude is a herculean task.

(The writer is a Lecturer in
Economics attached to the
Department of Social Studies at the Open University of Sri Lanka)




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