Budget is fundamentally imbalanced, charges Eran

The structure of the Budget has a fundamental imbalance, says UNP Parliamentarian Eran Wickramaratne, sharing his views on the forthcoming Budget.The former banker and corporate executive points out that nearly 40% of the country’s Budget is in three ministries controlled by members of the Rajapaksa family. He further notes that the country is spending nearly 90% of the revenue only on debt services, adding that the Government keeps borrowing money not to finance development but to pay debt.

Wickramaratne also warns that sustaining high growth rates in the next decade will be a challenge.

Following are excerpts of an interview:

Q: What do you think about country’s present economic situation?

UNP MP Eran Wickramaratne

A: Post 2009 the economy has gone from 5% to 8%. That was to be expected because there is a peace dividend. The north east economy was brought into the main economy and that also helped the growth. But we seem to be running out of steam very quickly, because from the 8% growth we are coming down to 6% in 2012.

The issue is the sustainability of the growth rates. Sustaining an 8% growth rate is a huge challenge because the investment gap is very large. Savings rates are low. You have to attract Foreign Direct Investments. When you take the capital output ratio in Sri Lanka, we are talking about four to five billion dollars of investments for a year. The best we could have done was a billion dollars. Therefore sustaining high growth rates in the next decade will be quite a challenge.

Lots of games are played in terms of numbers and ratios by this Government. In year 2000 we had about nine billion dollars of foreign currency borrowings. In 2009 it went up to 18 billion dollars. By the end of this year, the figure will be close to 27 billion dollars. The concessionary funding has dropped drastically and commercial borrowings have gone up significantly. The country is moving more and more into vulnerability on debt. We could get caught in a debt trap.

In defence, the Government says the debt is less than 80% of the GDP. But it is in the composition of the debt where the problem is. The foreign currency debt is rising rapidly. It used to be negligible at 5% some years ago but at the end of this year it may be closer to 50%.

When we talk about Government debt, we talk about what the Treasury directly borrows. But really the vulnerability of debt has been in terms of all debt taken by the Government and Government institutions. This is a little trick played by the Government. A Government institution such as a State bank goes overseas and borrows money. At the end of the day it is foreign debt. But it is not consolidated in the accounts. This simply means that the Government can borrow through institutions and still manage the ratios.

The other factor is that you can provide a guarantee even to a non Government bank and ask them to borrow. Strictly speaking that is also Government debt. How you manage the ratios is that when you give a guarantee, it is not a direct exposure; it is a contingent exposure. If we look at countries in Europe such as Spain; the countries that had troubles, they have had huge GDP ratios of 130 and 140. Our defence is that, we say our debt is only 80% of the GDP. The problem with Sri Lanka is transparency.

Q: What are your views about the forthcoming Budget?

A: Before we talk about the forthcoming Budget, there are some important facts that I would like to talk about. Article 141 of the Constitution says that Parliament has full control of the Budget. But Parliament does not really have full control. For example Parliament does not have a Budget Committee or an Appropriation Committee. We know about the Budget when the Appropriation Bill comes and subsequently when the Finance Minister presents the Budget in the House.

The Budget debate will go on for two to three weeks without a Finance Minister in the House. The Finance Minister will appear on the first day of the Budget presentation and he will appear on the last day to give his concluding remarks.

If we take the Sri Lankan Constitution, it says any ministry not allocated to someone is by default on the President and therefore, technically the President could retain any ministry. If we take the spirit of the Constitution, the President and the Finance Minister should be two separate individuals. If Parliament is supreme on finance and the Parliament can’t hold the Finance Minister accountable in the House, how can the supremacy of Parliament be exercised?

We are discussing the Budget in the House, without a Finance Minister. There is no Budget Committee or an Appropriation Committee, so with whom are we going to discuss the Budget? In Sri Lanka it is like the Government presents the Budget, the Opposition can talk about it as much as they want, but at the end of the three to four weeks the Government get it approved.

Not only for the Budget, we have a consultative committee structure which is extremely weak. In Scandinavian countries and the United States consultative committees are very strong. You can get amendments done and in some instances legislation can come out of the process.

If we take the area of financial accountability, COPA and COPE are the two watchdog committees in Parliament. Unfortunately these committees are reviewing post facto and not before. These committees review facts once the expenses are made.

The Auditor General being appointed and removed by the President is also a serious problem whereas financial accountability is concerned. In countries like Australia, New Zealand and the United States, the Auditor General is an officer of Parliament. But Sri Lanka the Auditor General is appointed and removed by the President.

The Appropriation Bill says the country’s expenditure is Rs. 1,335 billion. The debt repayment bill will be Rs. 1,290 billion. The Government is asking Parliament to approve 1,290 as borrowings.

If we take revenue we are spending nearly 90% of our revenue only on debt services. The structure of our Budget has a fundamental imbalance. The Government keeps borrowing money not to finance development but to pay debt.

If we talk about the expenditure estimates, there is no major shift in terms of what the Government has been doing over the last four five years. For example, 21.69% of the total expenditure is on Defence and Urban Development; 6.66% is on Economic Development; Ports and Aviation is another 10%. This structure has not really changed from 2010 to 2013. Nearly 40% of the country’s Budget is in those three ministries. It is no secret who controls these three ministries. The other two big items are Ministry of Public Administration and Home Affairs and Ministry of Local Government and Provincial Councils, taking 10% each.

According to the Appropriation Bill, spending on education and higher education will be less than 5% of GDP. Education is 2.84 and higher education is 2.09, totalling 4.93. Last year the figure was 4.5%. Health is also the same. Last year it was 6.11% and this year it will be 7%. Basically there is no structural change in the forthcoming Budget.

On the other hand, we are investing in hard infrastructure and not in soft infrastructure. In hard infrastructure, the returns are going to be in long term. It will not help with the funding of the Budget.

The other factor is that when we look at the foreign debt component, ultimately we repay with foreign receipts, which has to come through exports. Our exports have come down from 35% in 2000 GDP in to 17% in 2011. This is a big problem. There has not been enough focus on export competitiveness.

Q: Isn’t it because the Government’s focus is on increasing domestic production?

A: The Government is getting confused between domestic production and domestic consumption. We must all be for domestic production. Even in a future UNP administration, we must support domestic production. But we must not be confused between that and domestic consumption. What we should be proud about is domestic manufacturing and domestic services, but our market has to be global.

Unfortunately, the global economy taken a reverse and therefore, with our markets largely being in Europe and the United States, that structure of the market is not going to change. We should obviously diversify our market. But we talk about the next decade. Then it is a difficult thing to do.

Take GSP Plus. We said we didn’t need it. The reason we didn’t need GSP Plus was that the Europeans were trying to exert undue pressure on us at that particular time. But we haven’t applied for GSP Plus even now. I heard the loss to the country is more than one billion dollars so far.

One of the areas in which we are severely underperforming is human resources. Meanwhile, for us to produce goods and services for a higher level, we need to produce complex products. You cannot still produce handicrafts and expect to raise living standards. There is something called a complexity map for countries and Sri Lanka is dropping in that. One primary reason for this is that our education levels are dropping and our investment in education is dropping.

Q: Why has Sri Lanka failed to attract Foreign Direct Investments?

A: The problem with FDIs is due to the soft factors rather than the hard factors. What are the soft factors? One is inconsistency of Government policy. Second is uncertainty about property rights (private property).

This Government is trying to promote a ‘statist economy’. If we take the top 10 corporations, such as SriLankan Airlines, Petroleum Corporation, and Electricity Board, which are losing money running into hundreds of billions of rupees, their losses dwarf the stock exchange. Who is paying for these losses? It is the public who has to pay for these losses.

Corruption is also a major factor in this. Unfortunately nobody talks about these things. There is ‘rule of men’ rather than ‘rule of law’. We have to go behind individuals and then figure out about rules and laws. Who has been convicted against corruption? We haven’t had a single conviction against corruption in this country. The conflict between the Executive and the Judiciary will be another setback for this country.

Q: How much of last year’s Budget has been implemented so far?

A: I don’t know. We will get a report probably in the coming week on the current performance. Until then I am unable to comment on that.

Q: Given the present economic situation in the country do you believe the Government is in a position to grant a salary increases?

A: If you really believe that human resource is the most important resource and if there is a political will, yes certainly there is opportunity. The problem is, can the Government find the money to do this? I see two options; one is to cut the investments in some other field and utilise the money to increase salaries.

The second option is to cut down corruption and wastage. According to Prof. Indraratne, in 2007 the corruption and wastage was 7% of the GDP. When this is translated into rupees and cents, it comes to a large number. We can utilise this money to increase salaries. If this Government really want to invest in salary increases, it can. But it has to have the political will to do so.

Q: What measures will the Government take to increase the revenue?

A: Nearly 85% of all our revenue is indirect taxes. I think they will go down that route because it is the easiest, especially in terms of collection. The issue is that indirect taxes have an inflationary effect. It is the lower income earner much more than the other than will get affected. There was a significant matter; with regard to the individual household, the expenditure of food items was 37.6 in 2006/2007 and today it is 42.3%. You can see a 5% shift in food items. People are spending more on food and indirect taxes will begin to bite. This trend will continue.

Unfortunately today the significance of the Budget is lost. Those days we would only know what the increases will be on Budget day. But now we know lots of increases already. Budgets in recent years have been quite a joke. They increase prices before the Budget, on the day of the Budget and after the Budget.