No fiscal discipline pre- and post-elections
Sri Lanka’s political structure encourages fiscal myopia, and will continue to do so if the authorities are blind to politicians’ extravagance with (our) tax money and loans borrowed for (our) welfare.
This was the case for a professional debt management office as stated at a panel discussion at the First Capital Securities’ Mid-Year Economic Outlook report in Colombo last week.
In an analysis provided by Executive Director Verite Research Dr. Nishan De Mel, a panelist at the discussion, he stressed the need for a professional debt management office. “It is a critical element in which our country rating can be managed,” Dr. De Mel added.
It will be responsible for day-to-day management of the government’s debt and will be tasked with carrying out its debt management policy of curtailing financing costs over the long term, taking account of risk, and managing the total cash needs of the Treasury in the most gainful way, in both cases consistently with the objectives of monetary and any wider policy matters, he told the Business Times on the sidelines of this event.
The Finance Ministry also has plans to establish a debt management unit, Treasury officials had recently said. The repayment of loans obtained for the Hambantota Port, the Mattala Airport, and the Expressways began in 2015. This January the debt was up by 34 per cent. Almost 70 per cent of this debt included the interest payments. The Government was compelled to spend more than the amount of loans it borrowed, to pay off the large amount of commercial foreign borrowings obtained by the previous regime, and their swelling interests.
Dr. De Mel said that the country is borrowing to pay interest which doesn’t do much for spurring growth.
The cost to GDP ratio which is an indicator of long term economic growth is increasing. Sri Lanka is at 26 (out of 30) position with 79.3 per cent. Japan is at number 1 and the US is at 30. A study by the World Bank found that emerging countries whose debt-to-GDP ratios exceeds 64 per cent, annually slows growth by 2 per cent.
There are certain structural problems which notably influence the GDP growth of the country, Dr. De Mel said noting that the country has arrived at the middle income status without the hardware and the software to stay in this spot. “We don’t yet see any kind of steps taken to restructure the country’s economy in a way that aids it to move forward from this middle income state that we are in currently,” he said.
In an interesting perspective, he said that people become very pessimistic about the political leadership and parties. “Any change (in government) is an opportunity to latch onto some hope. The impending new situation is going to give an optimistic view. It’s called the virtuous cycle of positivity. We saw this after the war and the virtuous cycle of positivity was that an optimistic view was fed into the economy after the war despite the government not doing anything different (than they did before the end of the war).”
There is a case of no fiscal discipline pre-and post directions, he said. Dr. De Mel said that for the first half of next year there will not be much of fiscal discipline.
So long as politicians see fiscal wastefulness as a prerequisite for re-election, they will delay the hard decisions about tax hikes and spending cuts, and go on to overfishing the revenue pool, analysts said.
Dr. De Mel said that there is a shift towards maintaining low inflation and not necessarily targeting growth by the Central Bank (CB). “It is a complex debate. The tussle over whether CB independence will be resolved after the ne Monetary Law is passed.”
Dimantha Mathew, Director, First Capital Holdings PLC in his presentation noted that a hung parliament will be the outcome of this election.
“With the current electoral system, no single party is likely to obtain a majority to form a government. A majority government has been formed by a single party only on a couple of rare occasions in history, where there has been extreme popularity. In such a situation, similar to previous occasions, we are most likely to see multiple political parties getting together to form a government. Though multi-party government usually leads to slow decision-making, we are most likely to see President, Government and Provincial Councils controlled by a single party, or a single party together with minority parties, which may provide some stability,” he added.