Economic management suffers from lack of compliance

Monday, 13 March 2023 00:25 - - {{hitsCtrl.values.hits}}

Verité Research publication looks at “Can new laws on public finance overcome the current problem of Government not complying with the law?”

The most recent Insight published by Verité Research highlights that economic management in Sri Lanka suffers from a lack of compliance – by the bureaucracy and by the Parliament – to the existing laws and rules of the country. It shows that this has been the case for at least 20 years.

It said the Government of Sri Lanka proposed introducing a new law to establish stronger rules on public finance management. But the analysis shows that the problem for Sri Lanka is not simply a lack of laws, but the ability for the highest levels of Government to flout the laws of the country with impunity, and/or change those laws when they become a constraint to irresponsible decision making.

In September 2022, the Government proposed a new Public Finance Management Act. This is presumably based on a diagnosis of the IMF that more and better rules would help. The IMF practices a policy of non-transparency with regard to the prior actions that it requires a Government to take before receiving board level approval – therefore the precise recommendations of the IMF are not known.

This Insight by Verité Research suggests that the IMF diagnosis could also be misplaced: “The analysis shows that the core weakness in Sri Lanka is not the lack of rules but the lack of compliance. To be effective, any new law will need to contend with this problem of governance.”

This is exemplified by the analysis of the existing Fiscal Management (Responsibility) Act, adopted in 2003. Verité Research shows that three rules of the FMRA have been consistently flouted.

• Rule on budgeted deficit: FMRA limits the deficit (amount by which Government expenditure exceeds revenue) to 5% of estimated GDP in any given year. But the actual budget deficit violated this rule every year in FMRA’s 20-year history

• Rule on Central Government debt: FMRA introduced a limit for Government debt and laid out a pathway to reduce it over time. However, successive governments simply altered the deadlines to achieve reduction and ultimately drove a path of increasing rather than reducing the debt

• Rule on treasury guarantees: FMRA limited the increase in Treasury guarantees that could be provided by the Government. Instead of complying, the Government repeatedly made the rule more lenient in 2013, 2016, and 2022, and increased the Treasury guarantees at will

Adopting fiscal laws with rules normally serve as a tool for anchoring confidence and improving public finance management. In the case of Sri Lanka, however, failure to comply with the existing laws suggests that more of the same (as possibly recommended by the IMF) is not likely to be the solution.

To recover confidence and build the economy, Sri Lanka may need deeper diagnostic and more robust correction mechanisms with regard to the crisis of governance.

Access the latest Insight by Verité Research at https://www.veriteresearch.org/publication/does-sri-lanka-need-more-rules-or-better-compliance/