The gross neglect of the FMRA

Given the IMF presence and closer inspection of the current situation, one cannot help but ask how we ended up here in the first place. What started during the week as positive news has slowly turned its sentiment as many are reminded of outsiders tough prodding that an independent nation-state would rather do without. It begs the question, were our authorities so grossly unaware of the state of public funding affairs, or do we lack the necessary means of disciplining ourselves? The reality is much more sinister. 

Sri Lanka passed the Fiscal Management (Responsibility) Act (FMRA) in 2003 with the goal of assuring sound fiscal management practices and increasing transparency and responsibility in public financial administration. The FMRA requires the government to keep fiscal discipline by meeting income, expenditure, and debt management goals. Despite the legislative mandate, there have been several cases of FMRA noncompliance, resulting in major fiscal challenges for Sri Lanka. 

The FMRA’s first important budgetary limit is the budget deficit. The legislation specifies that the fiscal deficit should not exceed 5% of GDP. This cap exists to keep the government from spending more than it makes and amassing debt. If the government fails to meet this restriction, it may result in higher inflation and slower economic development.

The public debt is the FMRA’s second important budgetary limit. According to the legislation, the public debt should not surpass 80% of GDP. The quantity of money owed by the government to creditors, both local and international, is known as the public debt. If the government surpasses this limit, investor trust will suffer, as will the cost of financing and interest rates. The Act also requires the government to develop a Medium-Term Budgetary Framework (MTBF) with a three-year rolling spending plan and income forecasts. 

Despite the existence of the FMRA, Sri Lanka has struggled in recent years to reach its fiscal goals, and noncompliance with the Act has become a significant problem. Sri Lanka’s fiscal imbalance increased to 9.6% of GDP in 2019, well above the FMRA goal of 5%. The country’s debt-to-GDP percentage also exceeded the FMRA ceiling of 75% in 2019.

Non-compliance with the FMRA is a significant problem in Sri Lanka for a number of causes. For starters, a large budget imbalance and public debt can cause a variety of economic issues, such as inflation, currency depreciation, and decreased private investment. Second, noncompliance with the Act can erode investor trust in the country’s economic management, resulting in lower levels of foreign investment and higher financing costs. 

Finally, noncompliance with the FMRA may restrict the government’s ability to provide important public services and infrastructure expenditures in the long run. Noncompliance with the FMRA by Sri Lanka has also had a detrimental effect on the country’s credit ratings.

Regular violations of the FMRA and changes to the Act to suit fiscal profligacy erode the executive’s trustworthiness. Parliament, too, has repeatedly failed in its duty to hold the government responsible for such failings. These transgressions erode the trustworthiness of the organisations that are supposed to provide authority.  Therefore, it is this culture of impunity and sweeping under the rug that allowed such gross violations of existing laws, and laws in place to prevent this that were deliberately broken and ignored. 

While it is prudent to assume we do not straight jacket ourselves with solutions to problems that do not exist, Sri Lanka has proven time and time again to be the proverbial child with their hand in the cookie jar. Today, we have the IMF on its 17th visit agreeing to set us straight. The 18th time may not be as kind.