Budget 2022: Turning point for better or worse?

The overhang of what could be in store in the Budget 2022 is behind us and the country at large will in the next few weeks try to comprehend its implications, positive and negative. As per most observers, the Budget 2022 appeared to focus on some fundamental issues – better fiscal management, reforms, safety nets for the most vulnerable, improving the Balance of Payments and fully harnessing the potential of agriculture, manufacturing among others as well as the country’s strategic geographic location.

The Opposition, which has been exposing the economic mismanagement of the Government since assuming office, gunned down the Budget 2022 as a damp squib and failed to address the burning issue of soaring cost of living. The private sector’s initial reaction is mixed with more concerns and less enthusiasm. From a critical assessment, judging by some of the new policy measures, one doesn’t need a National Budget to announce those but could have been carried out in the ordinary course of good governance. However, in the coming days, the Daily FT, on its own as well as via our columnists, will shed more clarity on the actual implications of various proposals contained in the Budget.

On his part Basil did stress the Budget 2022 is futuristic. This is partly because some of the favourable indicators can be achieved only in three to five years. One example is the goal of increasing foreign reserves to $ 10 billion by 2027 from around $ 2.5 billion at present and reducing the budget deficit to 1.5% of GDP by 2027 from 11% at present. That apart, some of the policies and measures announced will have an impact only in the future with no immediate gain translating into the balance sheet of the Government. There is no denial even by the Finance Minister that a proper recovery of the economy and stability in the macroeconomic fundamentals can happen only by either 2023 or 2024 or beyond.

Though a milestone in his political career, Basil was handicapped in his maiden Budget presentation due to the very limited fiscal space following the sharp drop in revenue, rise in expenditure and a dangerous external reserves situation caused largely by the COVID pandemic. Nevertheless, given the challenging circumstances, immediate as well as in 2022, the Budget presented on Friday endeavoured to perform a very delicate balancing act. There will be winners and losers whilst the status quo of some sectors and communities is likely to remain precarious. The new proposal of Social Security Contribution of 2.5% on the annual turnover of over Rs. 120 million is likely to have the biggest impact as it aims to rake in a massive Rs. 140 billion.

It is refreshing to hear from the new Finance Minister that the focus is less on deficit financing, a strategy thus far since independence he claimed had resulted in many consequences. But no Finance Minister can escape the nightmare of reducing and bridging the budget deficit and Basil looked ambitious, at least in print, committing to a deficit of 8.8% in 2022 down from 11% this year. Such reductions have always been elusive annually. Given the gigantic task of effective implementation of Budget proposals and the COVID pandemic aftereffects still having a toll on the economy, achieving desired goals for 2022 and beyond will be most challenging.

However, the pragmatism and sincerity displayed by Basil is a good start. His taking head-on the perennial issue of reforming the 1.5 million strong public sector and State-Owned Enterprises (SOEs) is commendable. The only drawback was the proposal to extend the retirement age of public servants to 65. Though it has some merit in terms of dealing with Sri Lanka’s time bomb of fastest-ageing population in Asia excluding Japan, the bolder move could have been rationalisation. The extension is also double-edged, in the sense that it will lessen the natural attrition in the already-bloated public sector, which also has a large base of underemployed youth who sought refuge in a Government job.

As Basil emphasised, the 2022 Budget provides a medium-term framework to address multiple weaknesses in the country, rather than ignoring. Only time will tell how effective the Budget 2022 will be in overcoming the post-COVID challenges to stabilise the economy and kick-start a higher, inclusive socioeconomic growth. If Basil is keen to make a difference and, as some speculate, realise his next goal as future President, the onus is on him to rally all stakeholders. If needed, refine proposals based on constructive criticism and ensure effective implementation rather than bulldozing his – and the Rajapaksas’ – way. As Basil himself told Parliament on Friday, Budget 2022 can be a turning point. His and the Government’s mandate is to make it for the better of Sri Lanka and not worse.