29 November, 2021

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Budget 2022 & The Economic Crisis: Can The Latter Be Resolved?

By Laksiri Fernando

Dr. Laksiri Fernando

It is extremely unlikely that the present budget could resolve the evolving national economic crisis, not to speak of the political disorder emerging out of it. In fact, during the Parliamentary debates on the second reading the main oil refinery, Sapugaskanda, became closed-down due to the depletion of crude oil. This is part of the foreign exchange problems of the country the present Budget has unfortunately not even attempted to resolve.

Instead of obtaining crude oil and refining them to produce fuel requirements of the people, now the Ministry of Energy is ready to import petrol, kerosene, and diesel for higher prices. At present, there are severe shortages of all these items in addition to gas in the country.

To obtain crude oil from Nigeria, as previously agreed, the Ministry required around $ 2.5billon (from May) until December. The Central Bank understandably has not been able to give these dollars as foreign reserves were limited to around $ 3 billion. The government, however, has allowed the Minister of Energy, Udaya Gammanpila, to obtain refined oil (crude oil perhaps later) from Oman (3.6 b) and India (.5 b) on foreign loans and deals amounting to $ 4.1 billion.

Unplanned and haphazard foreign loans are not a solution to the fuel crisis or the foreign exchange crisis. These are the results of indecisions, wrong decisions, or reversal of decisions perhaps a reflection of differences or rifts within the government. It is primarily for the foreign exchange crisis that the budget 2022 does not offer any solution, although it boasts about ‘challenging the challenges.’ To give an initial example, the following is the view of the Minister of Finance, Basil Rajapaksa, on ‘foreign exchange reserves.

“The government of HE the President Gotabaya Rajapaksa, expects to create apart from a foreign exchange reserves a number of other reserves. The first of which is the reserve of water, food, and energy, which are created through the land, water, and the renewable energy which are gifts of nature.”

He states the above, just before the section on ‘Identifying Potential Exports’ on page 15 of the budget speech. Does he think that creating foreign reserves are like reserving water, food, and energy? Perhaps he is correct considering the shortages of food, fuel, energy, or even clean water in the country at present.

Requirements of a Budget

A budget in a country like Sri Lanka should address three main balance sheets in the economy. This is common to many countries but given the crisis in all three spheres in Sri Lanka, the balance of State’s income and expenditure should not be the only focus.

The three requirements are: (1) The balance of payments to mean the country’s foreign (dollar) income and expenditure, deficit, debt, aid, and loans. The exchange rate is also important. (2) The balance of trade to mean the country’s exports and imports, trade deficit, nature of exports (primary, secondary, or tertiary). And in Sri Lanka’s case, the status of tourism and export of labor etc. (3) The State’s expenditure and income in detail, with proper breakdowns on capital and recurrent expenditure; on social welfare, investments promoting development; direct and indirect taxes; profits and losses of state enterprises etc.

It is customary for all of us to call a budget, the ‘budget of the government.’ But it is of the State, the people being the main stakeholder. Under democracy, the government merely is the officeholder or the servant.

When one goes through the ‘Budget Speech’ or the ‘Annexes,’ the necessary information on the above three aspects of a proper budget, the identification of problems in all three areas, and genuine proposals in resolving them are pathetically absent. That is another reason why the present budget is far from being able to resolve the present national crisis. The budget speech of the Minister was like a ‘Throne Speech,’ more rhetoric than a genuine analysis. The balance of payments or the balance of trade are not properly covered. There are obvious structural defects in the budget, the budget planning and presentation.

The attached annexes are limited to four titled as: ‘Summary of the Budget (2021-2022),’ ‘Gross Borrowing Requirements,’ ‘Revenue Proposals 2022,’ ‘Expenditure Proposals,’ and ‘Taxation.’ Most of the tables are quite callous and some do not give even the totals! These are complied by the Department of Fiscal Policy and others. The ‘Summary of the Budget’ itself proves the main criticism of this article, no data on balance of payment or balance of trade. The summary is mainly limited to the (government) ‘revenue’ ‘expenditure’ and proposed ‘financing.’

Summary

Let us take the ‘summary of the budget’ on its face value. The table also gives ‘estimated’ figures for 2021, correct or not. The figures are given as if the deficit is already fixed. That cannot be the case and any burden from this year would go to the next year of the present budget.

Optimistically, the table gives the revenues first. Accordingly, the (estimated) revenue for 2021 is Rs. 1,561 billion, and for 2022 it would be 2,284. An increase of Rs. 723 billion. This could be the case (hopefully) given the new taxes introduced, and not implemented taxes of the last budget reintroduced. The estimated expenditure of the last budget was Rs. 3,387 billion and this budget is 3, 912. Of course, it is not a big increase, given the present crisis, but it is doubtful that it would be sufficient to alleviate the stagnating economy. On the other hand, the Keynesians might argue to increase spending and stimulate the economy.

For example, in the last budget, the domestic deficit was Rs. 1,826 billion. In the present budget 1,628 billion without a big difference or a purpose. The most important in a developing country is not so much the budget deficit, but how you plan to finance the budget deficit, and most importantly how you plan to spend the public funds. It is important that the expenditure on provincial councils is increased from Rs. 1,085 billion to 1,218 billion. While this is marginal, these go like other expenditure to recurrent matters such as salaries, wages and necessary goods and services.

Sri Lanka is within this vicious cycle of subsistence budgeting. Public investment is limited to Rs. 581 billion in the last budget, and to Rs. 931 billion in this budget. Considering the inflation, this increase is nothing much, and most important is how even these amounts are spent, and what for.

The way the deficits are financed is also dubious or problematic. In the 2021 budget, Rs. 978 billion expected from foreign sources as gross borrowings and loans. In the present budget, Rs. 1,016 billion are expected from the same sources. The table, also (not so clearly) reveals is the amounts that the country must pay back Rs. 536 billion in the last budget and expected Rs. 866 billion in the present budget. The same goes for domestic obligations in borrowings although not of that gravity.

‘External Budget’

The main crisis that Sri Lanka facing is in respect of what I would call the ‘external budget.’ This means the trade deficit, balance of payment deficit, depleted foreign reserves, exchange rate and the external debt. On these matters, no tables or accounts are given in the annexes. Even in the budget speech very little attention is given, however with unbelievable targets and figures. This is limited to two pages, 73 and 74.

It may be correct to say, as the Minister has stated, exports of the country reached $ 10,028 million by last month (October). This undoubtedly shows the potential. Therefore, his target of $ 11,900 million for the whole year can also be reasonable. However, his target of limiting import bill to $ 18,900 million for the year is an underestimation given the present ‘open’ policies of the government. Thus, the estimated trade deficit of $ 7,000 million for the year is also an underestimation.

Most questionable are his predictions for 2022 and beyond. He says,

In 2022, a trade surplus is expected amounting to around USD 1,000 million, including from tourism, ports, and IT export services and I have spelt out policies and measures in this budget speech to increase it to USD 8,000 million in 2027.” (p.74).

Even if the trade deficit could be limited to $ 7,000 million this year, by any luck, how come that in 2022, a trade surplus of $ 1,000 could be achieved? It would be a miracle. It is true that the Minister has ‘spelt out’ some policies and measures promoting tourism, ports, and IT export services. Revenue from foreign employment also could be added. Yet a trade surplus of $ 1,000 million next year would be unachievable realistically. A budget should be realistic and not idealistic.

It is customary in today’s budgets to formulate projections for the future beyond the budget year (2022). However, these projections should be realistic based on data, careful analysis, and realistic estimates. Increasing the trade surplus therefore to $ 8,000 million in 2027 appears just rhetoric to deceive people or deceive oneself. Under the circumstances, it is difficult to believe that the present budget could resolve the present national crisis outlined in my previous article (Sri Lanka Heading for Serious Crisis) in the areas discussed and others.

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Latest comments

  • 4
    0

    Rajapaksas are doomed with the country.

    Best way forward for Rajapaksas is to have a parliamentary election in 2023 July. SJB and others will win it and form a government. But they too will be unpopular by the 2024 presidential election giving NR an easy win.

    The country is anyway doomed.

    • 4
      0

      “Instead of obtaining crude oil and refining them to produce fuel requirements of the people, now the Ministry of Energy is ready to import petrol, kerosene, and diesel for higher prices. “
      This is incorrect. It is in fact cheaper to import refined fuel from Singapore (as LIOC does) instead of processing crude oil in an antique refinery stuffed with overpaid political deadwood. Gammanpila himself said so in parliament. There are just so many people you can stuff into a government enterprise before it becomes uneconomical. It is ironic that the it is the exponents of statism that have realized the situation.

      • 1
        0

        OC
        The answer would have been to upgrade the refining process and fine tune the cracking. It was rather overdue, and very little was done in the past several decades.

        • 3
          0

          S.J,
          State enterprises (the Sugar corporation is another example) rarely invest is upgraded technology, headed as they are by time-serving political henchmen with no understanding of how these plants work.

      • 3
        2

        Old,
        My understanding is that the refinery was shut to hand over the refining works in future to India. You cannot import diesel & patrol if you don’t have money to buy crude. This means no money to coal and kerosene either. This is why Sunil Hindnitty explained in Kandy that soon the country will plunge into total dark without any source to light. There is solution in leaving the problem with India. India wants some monopoly in Lankawe. China has many. It is described US got it in LNG. So, India, to be in phase with other competitors, wants exclusive license to supply gas products to Lankawe. Iran, UAE, Saudi, Qatar all denied giving any loan for Oil. India is ready to give Lankawe any kind of loan to achieve such a deal. The advantage India has here is it has 99 tanks in Chinabay, 85 not yet developed. LIOC has a network already. If India gets this deal, at least for five years, this Oil-loan problem will not reappear. But for the rooster India, the hen Lankawe never allowed to step on. India doesn’t know to make a deal with Lankawe. So, at the end China will win the monopoly supply deal of oil products. But with that loan, every year China the Shylock will cut a pound of meat from Lankawe thigh, until it faces ultimate death.

        • 1
          0

          Malli,
          LIOC already imports its petrol from Singapore at 20% less than the local price. The government puts a tax on imported petrol to keep Ceypetco going.

        • 1
          0

          Dear M,
          There is another angle to this from an objective viewpoint.
          The Sapugaskanda oil refinery produces 37% of furnace oil and naphtha, 19% jet fuel and kerosene, and 43% for the production of 14% petrol and 29% diesel.
          The demand for furnace oil by ships and CEB, and jet fuel by aircraft, has dropped so much that the storage of these (37%) builds up taking over the available storage tank space. Even the CEB requirement of fuel oil has decreased for the next two/three months as reservoirs are full and hydro generation is highest.
          On average, 2.32 barrels of crude oil is required to make one barrel of petrol and diesel in our refinery. In October, a barrel of crude oil was at $ 85, diesel at $ 93 and petrol at $ 95. To purchase 2.32 barrels of crude oil, it cost around $ 197. Hence, import the finished product to save foreign exchange, is justified, in the short term of 50 days.
          This is a temporary patchwork for the $ crisis.

    • 3
      0

      GATAM,
      I come in only because I saw NR, in your comment.
      … giving NR an easy win.
      You make me shiver!
      Could you have mentioned someone with an upstairs?

  • 3
    2

    Dr. Laksiri: The bankrupt US Government has printed USD 9 trillion in the past 2 year of Covid-19 bailout hoax. So too the EU has printed billions for Covid-19 bailouts!

    The IMF recently lent $100 million to GoSL to buy Pfizer vaccines, although the Sri Lanka is one of the most vaccinated countries on the plane! Why?. IMF and the Washington Consensus is subsidizing corrupt Pfizer which made USD 45 billion profit in the first quarter of 2021!

    The entire global financial system is a ponzy scheme with Central Banks money printing. That is why El Slavador has made Bitcoin official. The US Dollar will crash soon as it is worth nothing but the US uses its Global Reserve currency status to print trillions for so-called Covid-19 “Bailouts” Much of this printed money has gone to hedge funds like Black Rock to asset strip around the world in poor countries in the GLobal SOuth whose economies were crashed by the Covid-19 narrative.Black Rock funds Adani and Ambani too to asset strip. But Modi finally realized the game and backtracked on the 3 farm bills that would benefit Corporate Agribusiness and Adani and their US backers.

    • 3
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      From Covid -19 to CoP 26 so-called global Health and Climate Emergencies, keeping people in fear, lock downs, with forced vaccine mandates while preaching Democracy (ha,ha, ha), and Crashing economies and asset stripping them is part of the great Covid-19 global Re-set to Make Euro-America Great again and destroy the rise of Asia as the Growth Hub of the world.
      Sri Lanka which is run by US citizens Goat and Basil Rajapakse, and where religion has been weaponized to Divide, Distract and enable colonization – to benefit the biggest Rogue state in the world that has also weaponized the Sinhala Buddhis Diaspora is of course a basket case. Money printing is the least of our worries!
      US Citizens Basil and Goat are selling Kerawelapitiay power plant, lands and ocean mineral and fisheries resources, destroying energy security and national soverignty and core principles of modern world system like “Self-Determination” of colonized peoples, territorial integrity of countries etc. as Sri Lanka is now part of America’s Full Spectrum Dominance (FSD) and Over the Horizon (OTH), project to control countries through cyber hybrid martime trade war data and info and policy capture with AI All this to re-boot the crashing US empire and its paper money castles and Euro-American global hegemony and destroy China and the rise of Asia..

  • 8
    0

    Budget should be a unifying call on all to move forward. Basil’s unfortunate remark on the tourist industry stakeholders, was totally unacceptable.
    …Quote from Industry: “I can say on behalf of the tourism industry, the industry people are very disappointed with the statement made by the Finance Minister, that when things got bad we came BEGGING. There is a lot of hurt,” said the industry expert.
    https://www.dailymirror.lk/business-news/Tourism-stakeholders-hurt-and-disappointed-with-govt-sentiments-towards-industry/273-225045
    Add to that the lack of direction and coherence is seen when the Prez speaks.
    https://www.lankanewsweb.net/66-special-news/97647-President-Gotabhaya-asks-to-get-rid-of-any-officials-who-keep-requesting-chemical-fertilizers-here-a
    ………..it is difficult to believe that the present budget could resolve the present national crisis…..
    So it is not only the Budget but the whole puerile approach of this govt. to the pressing problems, does foretell disaster.

  • 6
    3

    It is not worth talking or analysing this budget. Thanks to Prabaharan who silenced his Gun battle to expose the true face of the Sinhala political leadership. Easter Bombing is a good lesson than the LLRC Commission or UNHRC resolutions. If you don’t still understand who are the enemies of this island you are an anti buddha.

    • 4
      2

      A
      “Thanks to Prabaharan who silenced his Gun battle to expose the true face of the Sinhala political leadership.”
      Great. You have a strong sense of black humour.
      Keep entertaining.

  • 2
    1

    Why just stop with surplus of 1000 and 8,000 million, add a few more zeros to make it look good. When public is promised of rice and Parippu from moon, why not make surplus in Billion instead of Million.

    • 2
      3

      “Why just stop with surplus of 1000 and 8,000 million”
      That is because he only a foggy mind of what to expect in 2024,2025 election. So he painted a very rosy picture for 2027. In the campaign, they will repeat this lie and try to come back to power. If they lose, in 2027, they will blame the new government dismantled their setup . Today Old King said that Yahapalanaya obtained lot of loans but did not construct anything. We don’t know where the Ranil modaya is to reply for this. When Ravi took over FM, he blamed he had no clue of from where and where the Chitanta Aanduwa had obtained loan. So may sources, but not documented in the files. It was Ranil who saved the Royal out of all those frauds.

  • 2
    1

    Budget figures haywire ?
    ……The government has decided to make the graduates who were recently recruited to the public service permanent and to pay them a salary of Rs. 41,000.00 State Minister of Provincial Councils & Local Government, Roshan Ranasinghe mentioned this addressing today’s (24th) parliamentary session……
    See this :
    http://www.adaderana.lk/news/78661/graduates-recruited-to-public-service-to-be-made-permanent
    These ad-hoc decisions add more to the expenditure and the budget becomes meaningless.

  • 2
    0

    The average voter is not interested in the budget, the only concern being price rises due to import & excises duty, which directly effects their daily life. Even stealth taxes, which may or may not be incorporated in the budget, are not in the mindset. Nobody, not even the opposition, are questioning the massive budget allocation for the military in peace time. Comparatively, the allocation for education, health, public transport, social services & economic development, are insignificant, yet nobody questions because we expect those who have been elected to govern the country knows best. From the days of Premadasa’s ‘useless gam udawa’ monuments to white elephant projects of the Rajapakses, from airports to conference halls & sports grounds, public funds have been squandered. When pet projects run out of cash, supplementary budgets are hurriedly forced through & funds borrowed from foreign loans at commercial rates, which the public has hardly any knowledge of. So, the budget is farce, a sham that is required annually by the constitution.

    So, the question, ‘The Economic Crisis: Can The Latter Be Resolved?”, certainly not by this lot, & not until we have people with integrity running the country, which may not be in my lifetime.

    • 4
      0

      ….Nobody, not even the opposition, are questioning the massive budget allocation for the military in peace time…….
      Because the military is a ‘holy cow’ and the word ‘Ranaviruwo’ is above the highest honour decoration in the country. The mindset has been created that they are above the law and pardoned for their personal crimes as well. Has the opposition questioned the withdrawal of charges against a Navy Chief?

      • 1
        0

        Dear MyView,
        .
        I’m beginning to realise that “The Establishment” in most places gets away with perpetrations of injustice. Actually, they seem to shy away from making any comment. Considering how much of criticism is directed at the role of Christianity, I’d have expected a few people to at least read what the current Anglican Bishop has said. He’s said things like “successive governments using terror tactics to suppress the voice of people.”
        .
        But to stick to the subject, I think it true that many of us (like you, oc, NV etc) have been saying that consistently. We must remember also that there are many who raise the issue with varying degrees of shrillness in articles. Kumar David, who was actually a candidate of the NPP keeps writing from a Pro-Peace point of view.
        .
        However, I do agree that we should be more outspoken.

  • 0
    0

    How can these rascals solve any problem?
    Just for commission, they imported poisonous fertilizers and killed the health of farmers and peasants. But the entire world is producing in $ trillions with chemical fertilizers and living healthy lives. These guys created an LNG shortage, increased the price, then put a dangerous, ill- proportionate chemical mix and now setting up houses, household things, children & women on fire. This month alone five blasts took place, but the month is not yet over. After the women are dead only Aanduwa is telling “it was only suicide, no gas cylinder accident”. Situation is people have to eat their food only by setting up their mothers and wives to the gas cylinder fire. Think about a man telling his wife, well knowing that any time she would be consumed with the cylinder blast fire, “dear go to kitchen and prepare something for the kids; they are hungry”. Is this family life scenery possible in Lankawe family life, today?
    This “cylinder fire” is absolutely a new problem the Aanduwa created for the families who are hard hit by Covid- 19 & food shortages.
    Tell me something please: How can these rascals solve any problem?

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