Colombo Telegraph

A Rs 1.35 Trillion Hole In The Budget

By Kumar David

Prof. Kumar David

The government has tabled estimates of expenditure for 2016, the first reading of the Budget, and a short summary dated 9 October is available on the Finance Ministry website (Appropriation Bill for year 2016 approved by the Cabinet of Ministers). A deficit of Rs 1.35 trillion (million-million) is expected; at 11.8% of GDP this is appalling! The number is so large that it is more comprehensible in dollars – $ 9.51 billion at Rs 142 to a $. The job of finance minister Ravi Karunanayake and the government in the second reading on 20 November, the always much awaited Budget Speech, is to lay out proposals to bridge the gap.

Expected expenditure is Rs 1.94 trillion made up of Rs 1.31 trillion recurrent and Rs 0.63 trillion (630 billion) capital spending. Additional provisions of Rs 1.20 trillion have to be made for servicing the public debt, w&op payments and minor expenses. This (1.31+0.63+1.20) adds to a grand total expected expenditure of Rs 3.14 trillion. However revenue at prevailing tax and customs duty rates, plus expected foreign grants will total only Rs 1.79 trillion. (The 1.35 trillion deficit is 3.14 minus 1.79). The budget speech is when the government explains how it intends to trim expenditure, raise additional revenue and borrow heaps more money from domestic and foreign sources. It’s pretty grim and if expenditure rises (more recurrent spending or fresh capital projects) or if revenue declines (craftier tax dodgers or belt tightening lenders) the hole becomes deeper.

Yes the task is grim but there is no need to panic. If the government is prepared to take a long view and plan three to five years ahead it can evolve a strategy of economic recovery. Yes recovery is the right word because though in his final years the wily Rajapaksa claimed to have reduced consumer and wage earner hardship actually his regime was piling up now exploding problems. Nearly Rs 1.2 trillion or a horrendous 67% of revenue is earmarked for servicing the debt, mostly incurred by the previous government and inherited by this one. Another shocker will come when we get updated figures on how much of this is for servicing foreign debt; the previous regime and its moustachioed mafioso leader borrowed (and stole) with gay abandon. Now the task is to set the economy on a RECOVERY road.

In an interview with the South China Morning Post (19 Oct) finance minister Karunanayake urged China to let “bygones be bygones and help us by adjusting the payment terms of loans to make them bearable”. I have also done a cut-and-paste job of a part of the prime ministers statement in the House during the Interim Budget debate at the end of January. The gist, largely verbatim, is as follows.

“The state of public finances exposes the shady operations of the previous government. The façade of duplicity has to be removed and the actual position made known. The country has incurred many liabilities in recent years. (i) The previous government gave Rs 524 billion as Treasury Guarantees to commercial banks to implement infrastructure projects by state-owned enterprises (SOE). (ii) The outstanding debt of SOEs to the local banking system is Rs 593 billion. (iii) Foreign borrowings of SOEs at end-2014 was US $ 2.36 billion or Rs 308 billion for Puttalam Coal Power, Hambantota Port and Mattala Airport. According to provisional data the outstanding government debt at end-2014 was Rs 7.4 trillion, but if these three items are included it rises to Rs 8.8 trillion”. [Rs 8.8 trillion is 78 % of GDP]

A medium term (3-5 year) programme that avoids two mantras canvassed by parties with an axe to grid, the business classes, is imperative. Mantra 1 is that it must be an all export oriented effort and mantra 2 intones that it must all be left to the private sector. Both suggestions, in moderation, have a point but it is a balanced approach that is more to the point. Yes export performance is crucial not only to correct the foreign trade account, but also to generate revenue and create employment, but domestic concerns are, if at all, of greater concern. Yes the private sector is dynamic, efficient and can raise a great deal of capital on its own, but no ways should it be allowed the freedom of the wild ass or permitted to escape directive principles in respect of where the economy should be going.

I am aware that this is a centre-right government; the centre is its populist and democratic mandate, the right the strong business interests represented by the UNP and SLFP and propped up by the Muslim Congress. Therefore policy could drift anywhere from mild social democracy to anti-populist austerity. A social democratic thrust modulated by a commitment to growth is what it should be; that’s easy to say but the devil is in the details.

This government’s drift is still not easy to foresee. It could lean on mass action and civil society to thwart a chauvinist backlash against the war-crimes probe (Weerawansa et al have gone quiet; has the threat of a sound thrashing if they invoked mob violence scared the chauvinists?). If the government opts for this populist political response, it will also automatically move in social-democratic directions in economic matters. On the other hand the prime minister (the president counts for less) may shift into authoritarian gear mimicking Lee Kuwan Yew. The political trajectory somewhere between these limits that the prime minister may opt for will in turn set economic policy in respect of both domestic-to-export balancing and in modulating the legroom permitted for the private sector to do just as it pleases.

Feeding folks or exporting for dollars

Enhancing export earnings and encouraging corresponding production drives is desirable for the reasons already noted; there can be no argument about that. Production of exportable commodities and processing of agricultural output for export is part of the answer and planning to benefit from the Trans Pacific Partnership is wise. The problem is that obsession with exports is accompanied by considerable ideological baggage. A stock in trade is anti working class legislation euphemistically called ‘labour market reform’ (easier firing, curbs on collective bargaining and trade unions, physical and legislative hostility to strikes). Strangely there is greater pressure to implement such measures in the third-word than in the West. Anybody familiar with labour laws and employee protection in California knows that no investor will touch Lanka with a barge pole if this scenario were replicated here.

Two other items of ideological baggage often associated with an export oriented paradigm are preferential or nil taxation for foreign investors and removal of all capital controls. Extreme export orientation is necessarily accompanied by heavy reliance on foreign investment and a frame of mind driven by this obsession overwhelms policy makers – FDI is slowing down so the panic is worse. Recall an extreme case, the Pinochet military dictatorship in Chile, standard bearer and poster child of neoliberalism, called Washington Consensus in polite circles. Though exports and overseas investment played a big role in China’s take-off, the country set aside even greater resources to yank 300 million (President Xi claims an improbable 600 million) people out of poverty and to take modernisation deep into the hinterland and landlocked western regions. The CCP, for all its dictatorial character, is also a balancing act in which millions of workers and the huge peasantry exert influence at grassroots levels.

Populism will have to provide this counterbalance in Lanka to curb unconditional surrender of the UNP-SLFP-SLMC to big business. However, apart from the ideological dimension there is the straightforward matter of the product mix of national output not only to earn foreign currency but also to satisfy people’s needs. Food security is one, Lanka is not strong except for rice and marine products; nutrition and protein deficiency another; and the dilapidated state of much of the national housing stock is a shocker. Resources have also to be set aside to improve deplorable public education and healthcare and to build a suburban railway in and around Colombo.

The last three are economic issues, not welfare and infrastructure matters only. An educated and healthy population improves output and man-hour and petroleum savings from eliminating the gigantic traffic snarl-up in Colombo and environs will enhance productivity. My bottom line is that there is a lot more to do than a naïve obsession with export orientation. One other crucial matter is that policy makers and planners in Lanka completely neglect or are hostile to the informal sector. However, this sector of the economy is nimble, productive and generates large amount of employment. Economic policy must include recognition, credit facilities and regulatory assistance for this sector. A national planning framework with a light touch, staffed by intelligent people not bureaucrats, a big if, can do much to guide the government. Leaving it to the invisible hand of the private sector is playing blind man’s buff.

The state must assert itself

I have in mind more than the conventional triple-task of managing interest rates, exchange rate and capital controls. Lanka’s experience of the Rajapaksa state pushing people around has been revolting, but fortunately the public understands that a greedy dictatorship is not the same as the guiding hand of the state in setting directions of growth. The citadels of Asian capitalism – South Korea, Taiwan and Singapore – were the pioneers; China and Vietnam were late comers to the concept of the state directing private, public-foreign and public-foreign-private development models. None is to be copied blindly; each case is a candidate for bottom up thinking. However the directive paradigm common to them all is compelling. Of course the state can get it all wrong; Megacity plans promise lucrative projects for business but will impact adversely on the poor; and most of Rajapaksa’s grandiose state-led infrastructure ventures were sheer madness. So I repeat, there is no substitute for case by case bottom up thinking.

Some of my ultra-left friends still hanker after a Soviet style state-owned economy, but do they not recall that Lenin and Trotsky were thorough going pragmatists? I have just finished Michael Pearson’s biography of Inessa Armand, Lenin’s girlfriend, and here is an abbreviated quote:

“Lenin realised (late 1918) that worker control in factories was not successful. He shocked the left but was facing the facts. The first thing many workers committees had done was to vote themselves big wage increases. He did the unthinkable and ordered the creation state managers supported by managerial boards”.

And in the Red Army, desperately fighting the civil war, Trotsky rued that operational plans were drawn up by men “who could not even read a map”. Pearson reminds us:

“Trotsky called back officers of the regular army; reintroduced saluting; dissolved soldier committees; and brought back pay scales and privileges. The result was anger from the troops and a howl of outrage from the left. After a tough start Trotsky’s policy won battles. Lenin backed him since winning in the field was more important than socialist theory”.

The moral of this is, hard nosed social democratic pragmatism must take precedence over ideology, left or right, in crafting economic policy at the present time.

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