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Finance Minister Mangala Samaraweera presenting Budget 2018
A budget is a short-term financial plan
Finance Minister Mangala Samaraweera’s Mangala Budget (Maiden Budget) was presented to Parliament last week. A budget is simply a one year financial plan of the government. But modern budgets have become a medium-term enterprise for governments in the sense that they are linked to the government policy a few years before and a few years hence.
In the case of the present Government, the Budget for 2018 is a midpoint financial plan that would take forward its policy from August 2015 till about 2020. If the Government is successful in getting re-elected in 2020, as per the policy document Vision 2025, the policy package presented in the Budget 2018, will be a part of a long-term enterprise continued till 2025.
Challenge of satisfying many diverse groups
Presenting a budget at this point in time would have been a difficult task for Mangala. That is because there had been three constraining factors that had limited his freedom of coming up with a prudent budget. One is that his Government will have to face at least three elections in the next three-year period. Hence, the Budget should satisfy the ordinary citizenry.
Another is that it should satisfy the two main coalition partners of the Government, the UNP section and the SLFP section, which harbour two different visions about the future of the economy. The UNP follows an economic policy based on knowledge, competition and seamless integration to the world economy to deliver prosperity to Sri Lankans. The SLFP, on the other hand, follows a policy that would first look after the national economic interests and think of global integration only later. Keeping these two factions satisfied through a single budget is obviously a Herculean task.
The third constraining factor is to keep the opposition criticisms of the Budget at a manageable level. The basic criticisms will come from JVP and the group that calls itself the Joint Opposition or JO. JVP has already condemned the Budget as being a neoliberal one and JO has labelled it as an IMF copycat.
The difficulty for Mangala would be to field speakers from his side to effectively defuse these ideological positions. That cannot be and should not be done by humiliating the critics as is being done in Parliament today. Such arguments should be countered by solid facts as was done by Senior Minister Sarath Amunugama in his speech in Parliament recently (available at: https://www.facebook.com/100010230071841/videos/539506386400359/?id=100010230071841&hc_ref=ARTIMiQ-YpLn8ufFOFITZbMULhkMi6v_F1NVhN9Dgv8ISzQ0R9JMDPVChbGGEIl_3wM&pnref=story).
The Blue-Green Economic System
When presenting the Budget, unlike his predecessors, Mangala exuded confidence in what he was reading. It did not appear to viewers that he was reading a text prepared for him by someone else. It was short and to the point. Both offensive bashing of the previous administration and colourful eulogising of the achievements of the present administration had been kept to a minimum.
The entirety of the budget speech had been used to present the case for a new theme in budgeting, namely, the establishment of a ‘Blue-Green Economic System’ in the country. It also gives a different connotation. That is, the economy to be developed in Sri Lanka in the future is a joint effort by both the Green party and the Blue party.
Greening the economy should not be a fashion but a passion
Bold pronouncements about greening an economy is a popular fad today. It permits an administration to win that group of people who firmly believe that greening an economy a must to its side. At the same time, it helps an administration to hide its own weaknesses, howlers and deficiencies from the watchful eyes of the people. Thus, if an administration is not sincere about its pronouncements, they are forgotten even before the sound waves of such pronouncements dissipate in the air.
Another problem for such long-term policies is the possibility of the policy getting reversed by an administration which is not very friendly to environment, as is the present case of the United States. Hence, it is advisable to adopt two strategies to make it a reality.
One is the appointment of a change-leader from within the Government to carry it forward. He should empower civil society organisations so that they could thwart any attempt at reversing the policy by a future administration. The other is reaching consensus about the need for greening the economy among the rival political parties which have the prospect of forming a government in the future. If this is not done, the green side of the policy theme will become dysfunctional.
Greening will not increase prosperity but expand its quality
However, greening an economy does not expand the prosperity frontiers of a nation. In fact, it imposes an immediate economic cost in the form of impeding the growth process. Countries in the developing world, therefore, considers such policies as a luxury at the present stage of economic development. Hence, there is a general aversion to the adoption of green policies. But, such policies improve the quality of prosperity of the peoples of a nation.
To the extent they contribute to alleviating global warming and other associated issues, such policies being adopted by general consensus will improve the quality of the global prosperity as well. Since green policies are a part and parcel of the developed world today, there is a likelihood that developed countries would impose trade sanctions on countries that do not follow such policies.
Since Sri Lanka’s main export market is in the developed world, it behoves the country to get ready to join the green club with suitable measures at this moment. In this sense, greening the economy is a far thought-out policy strategy in the present Budget.
Tapping blue ocean resources will open new opportunities
Blueing the economy is a new concept for Sri Lanka. It has a modern management strategy denotation as well. A blue ocean strategy, coined by W Chan Kim and Renee Mauborgne of the famed business school INSEAD in their 2005 book ‘Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant,’ enables a firm to make super profits by entering a market which has so far not been chartered by anyone or by an insignificant number of rivals.
The vast blue ocean around Sri Lanka very well fits to this strategy. Unlike green policies, exploitation of the vast blue ocean will help Sri Lanka to enhance its prosperity immediately. The development of harbour facilities, getting connected to the rest of the world through naval routes and harvesting the massive ocean resources will help Sri Lanka to create prosperity for people in the near term.
Analysing the success of past budgetary policies is a must
A budget also has to be evaluated not in terms of what the Minister has presented in the Budget speech (available at: http://www.treasury.gov.lk/documents/10181/470884/budgetspeech2018E.pdf/9a9b081b-a709-418f-88ee-64f397db6ab4). It has to be evaluated in terms of the past budgetary policies which are linked to the present budget.
A budget should bring about an analysis of the past policies, how far they have been achieved, if not achieved, the reasons for same and what corrective measures should be taken to rectify them. It has been in the practice in the budget speeches delivered in the recent past not to make this analysis in the budget speech itself.
However, it could be found in three other documents, the Annual Report of the Ministry of Finance for the latest year available (in the present case it is for 2016 which could be accessed at: http://www.treasury.gov.lk/documents/10181/12870/2016/c36d6610-d6e7-4b1c-ab35-238a4db56b88), Mid-Year Fiscal Position Report 2017 (available at: http://www.treasury.gov.lk/documents/10181/12882/2017/855362d8-5946-4bdc-962d-fce5faa53ce4) and Fiscal Management Report 2018, presented along with the Budget for 2018 (available at: http://www.treasury.gov.lk/documents/10181/12876/Fiscal+Management+Report+-+2018+English.pdf/71375d9b-4984-4d78-b7f7-075c55734c52).
All these three reports are in fact a eulogy of what the Ministry has done and not helpful for readers to make any assessment of the success or otherwise of the country’s immediate past budgetary performance. Even the Central Bank does not make an analysis of the budgetary achievements in Sri Lanka by proposal by proposal.
Damning findings by Verité Research
In the absence of any official evaluation, it has been left to a private think-tank, namely, Verité Research in Sri Lanka, to keep a track of the budgetary promises. In terms of the latest Budgetary Track Report released in October 2017, of the Budget promises for 2017, as at the middle of the year, a very disappointing picture has been painted (full details in graphical form are available at: http://www.budgetpromises.org/en).
Of 37 budget promises for 2017, the fate of about a little more than a half has been in the dark room, since no information has been disclosed. Another 14% has been taken out, while the implementation of about 32% has been behind the schedule. According to the analysis, only 3% has been progressing or ahead of schedule.
Though it is a right to information era in Sri Lanka, only about 38% of the spending agencies have been responsive about releasing the data on the progress of the budget promises. The balance 62% has been closed, obstructive or resisting. Thus, in terms of the openness of the budgetary process, Sri Lanka is ranked very low (available at: https://www.internationalbudget.org/budget-work-by-country/findgroup/group-data/?country=lk).
Tracking the progress of the Budget is important
Of course, Mangala is not responsible for this poor budgetary performance but he cannot ignore it. He has to now put in place a suitable mechanism within the Ministry to track the progress of the budgetary promises, identify deviations and take remedial measures to put the process back on track. At the end of the Budget speech, he has promised to do so. If this promise is broken, then, the rest of the promises in the Budget too will be broken.
This writer recalls that in the good old days when he was at the Central Bank, the process of budget implementation, progress review and taking remedial measures had been fairly streamlined. The Appropriation Act was passed by Parliament in the second week of December. Before the end of the year, a circular was issued by the General Treasury informing all the spending agencies of the budgetary allocations made to them, the targets to be achieved and the time plan of implementation of the proposals. This was strictly followed by the Secretary to the Treasury himself. In this way, a fair progress of the budgetary implementation was achieved by the Ministry.
Both Minister Mangala Samaraweera and State Minister Eran Wickramaratne will have to see that such an effective mechanism is put in place to ascertain the implementation of the key proposals made in the Budget.
Savouring in small gains
Sri Lanka’s budgetary sector had made some small gains in 2016 about which the Government cannot and should not be complacent. One such small gain has been the increase in the revenue base faster than the consumption expenditure of the Government, also known as recurrent expenditure, excepting the interest payments. As a result, the deficit in the primary account of the budget, that is, revenue of the Government minus recurrent expenditure without interest payments, has declined from 2.9% of GDP in 2015 to near zero balance at 0.2% of GDP in 2016.
This has been the combined outcome of three developments. One is the containment of the consumption expenditure at 14.8% of GDP in 2016 from 15.5% in 2015. The second is the higher level of interest payments in 2016 compared to 2015. As a result, the non-interest consumption expenditure declined from10.8% of GDP in 2015 to 9.6% in 2016. The third has been an increase in the revenue of the government from 13.3% in 2015 to 14.2% in 2016. But whether this favourable outcome could be further consolidated and converted to a surplus will depend on the Government’s ability to further contain the non-interest consumption expenditure on the one hand and to increase its revenue continuously over the years to come, on the other.
This is the challenge faced by Mangala though his initial Budget estimates for 2018 has given him a small surplus in the primary account at 1% of GDP. If this is to be attained in 2018 and continued since then, his Budget implementation machine at the Ministry has to work day and night to keep the Budget on target and his Cabinet colleagues should extend their full cooperation to him for maintaining those targets.
Drawbacks should be rectified
In my view, Mangala should not be complacent about this type of small gains. This is because the bigger issues faced by him are much more challenging than this. The Central Bank in its Annual Report for 2016 has highlighted some of the budgetary drawbacks which the Government should fix on a priority basis (p12).
The first is the need for implementing structural reforms in tax administration. The second is containing the consumption expenditure of the Government within manageable levels. The third is to keep interest payments low and resolving the issue of the accumulation of the commercial borrowings from external sources. Thus, the Central Bank has advised the Minister of Finance that a national consensus should be built on sustaining the fiscal consolidation through timely implementation of urgent fiscal and structural reforms.
A good politician can be a good economist too
Mangala, who is now caught up with the dilemma of resolving the long-term prudent economic goals with short-term political objectives, may remind himself of a statement reported to have been made by veteran leftist politician, Dr. Colvin R. de Silva.
It is said that Colvin had remarked to a friend that a good politician can never be a good economist and a good economist can never be a good politician. Does it mean that what society has to expect is the combination of a bad politician and a bad economist? Surely, Mangala has to prove that Colvin was wrong and his Budget has laid the foundation for same. But, it is the responsibility of his Cabinet colleagues to walk the talk.
In the next part, we will analyse the soundness or otherwise of the proposals made in the Budget for 2018.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at [email protected].)
