By Rusiripala Tennakoon –
Sri Lanka is just one other among the countries in the world facing growing uncertainties of extreme health hazards and rapidly declining economic conditions. Like many others we live in hope and with expectations of changes for the better sooner than later before the conditions wither to levels beyond recovery. For, “what does it serve to water the leaves when the tree is cut off at its foot”.
The global pandemic has pushed them all into an astronomically rising tide with highly unpredictable prospects of recovery and posing challenges to surmount the shocks of distress experienced in common, virtually forcing the peers to share the risks to maintain the required equilibrium. One consolation is we are not alone in this economic downturn and instead sharing in common the devastating economic and social disruption caused by the pandemic. We are also in the middle of a global campaign exploring reforms with a concerted effort towards the right socioeconomic purpose for a rapid and equitable development. Our only commitment at this critical moment should be to move in the correct direction grabbing the opportunities in common human interest with the choice of correct socially beneficial objectives, to achieve the desired results. In other word it has pushed us to a compelling situation where we cannot live in isolation any more.
The Sri Lankan budget 2022 will be the most daring challenge that the country will have to face in the current context. Published official statistics for 2020, recording a worst recession since independence, indicate an economy contracted by 3.6% in real terms. Any program for economic recovery from this highly explosive state, depends to a great extent on the developing new phases of the pandemic which continue to further aggravate the situation making it more and more unpredictable. The post analytical observations made by the Central Bank in its Published Annual report for 2020 highlight the following state arisen due to International Mobility restrictions and containment measures introduced locally for Covid-19 prevention;
* Industry sector has shown a sharp contraction with a slowing down of construction and manufacturing activities,
* A deceleration in transportation, personal services, accommodation associated with food and beverage services,
* Decline in the Agriculture sector outweighing the policy supports extended despite the favorable weather conditions,
* Un-employment rate has risen to 5% the highest in a decade for the first time,
* Depreciation of the rupee against the US $ and the decline of the GDP per capita income to US$ 3682(2020) from the US$ 3852 level in 2019,
Among these and several other downward trends caused due to the Pandemic, Central Bank reports that the overall size of the economy of the country has declined to US $ 80.7 billion in 2020 from US$ 84 billion in 2019.
The information provided in the Annual Report is based on the statistical data up to end of December 2020. The latest position is even more distressing showing a rapid decline in almost all sectors of the economy. CBSL periodically updates the statistical data under the Special Data Dissemination Standards (SDDP) given in a National Summary Data Page. The latest release of the NSDP relevant to reference period June 2021 (released on 11-8-2021), highlights the following helping us to understand the trends of the actual position and performance of important sectors in the economy.
Category Unit of description Latest data % change (from last)
GDP [at 2010 constant prices] In Rs Millions 2,393,749 -13.5
Agriculture -do- 163,272 -13.1
Industries -do- 716,261 13.7
Services -do- 1,411,836 -7.8
Total Revenue -do- 1, 425 553 -29.9
(tax revenue, non-tax revenue &grants)
Total Domestic Debt -do- 16,053,804 6.2
(short term, medium & long term)
Total Foreign Debt -do- 6,417,392 6.0
Govt. Guaranteed Debt -do- 1,273,183 29.1
Net Foreign Assets In Rs. Billions -481.3 -12.2
(banking sector-reflecting a negative position)
Official Foreign Reserves U.S.$ Millions 2833.5 -30.2
Amount in Currency -do- 2364.6 -34.3
Gold and SDR -do- 460
Others –do- 8.9
Total Gross external debt U.S.$ Million 47,307 -3.9
The estimated approximate monthly requirement of Foreign Exchange to finance the Imports of essentials is U.S.$ 1.5 Billion. Accordingly, as at present we have sufficient foreign exchange reserves to import only one and a half months essentials.
We have seen reports and statements by the State Minister of Finance announcing that there is no cause for any alarm because the government has already concluded negotiations to replenish our foreign reserves through a 200 million U.S.$ currency SWAP with BANGLADESH and another 400 million U.S.$ on the same basis from the Reserve Bank of INDIA, which will be available shortly. He has also stated that Sri Lanka is expecting a facility from the IM F amounting to U.S.$ 800 million to be availed as a SDR allocation under Covid relief assistance program to the member countries in need. The State-Minister also mentioned about a U.S.$ 1.5 Billion loan facility from a Chinese Bank which will not be drawn immediately but will be kept as a contingency reserve source. But he admitted that the country needs a minimum of $ 2.65 Billion during 2022 for settlement of sovereign debts and other liabilities.
According to a strategized financial plan as announced by him GOSL is hopeful that the contemplated following measures could generate further income to supplement the foreign exchange reserve.
a) A minimum of USD 400 million through the sale or lease of State owned under-utilized assets
b) Improving the export income from the non-traditional sectors such as Gems and by increasing Foreign remittances ( no estimates made!)
c) From the tourism sector targeted to be improved following a planned 100% Covid vaccination program scheduled to be completed in the month of September.
State Minister Cabraal expressed hope that the whole picture of dubious outlook will change if the govt. could succeed in raking in 1 Billion U.S.$ by the sale or lease of state- owned assets.
Apart from the highly unlikelihood of the feasibility of realization of these goals there is a high degree of fragility in this expectancy filled with many ifs and buts. Most of the presumptions appear to be inconceivable in the context of a balance of probability because the success of achieving the desired goals rests on several extraneous factors, beyond the control of the planning authorities. Hence the pronounced confidence that the State Minister attempted to inspire appears to be wishful and improbable.
Eg; the leasing and sale of State assets is a highly politically sensitive issue which can lead to a public furor as already seen. Such reactions usually tend to delay the desired accomplishment. Hence such a proposal may not deliver the anticipated results to overcome short term urgent funding requirements !
Banking on increasing the export income from Gem trade is a hundred-to-one imagination. When the world is in a turmoil under an unprecedented pandemic disaster it is very unlikely that an investor or even a collector coming forward to make a substantial investment on gemstones. It must be understood that gems belong to the colored stones group with no fixed market value unlike Diamonds. Investment in Gems has always been a fanciful exercise based on individual taste and desire. Diamonds have universally accepted valuations like Gold or any other precious metal. Certainly, such a source should not be considered as so reliable for the purpose of urgent supplementation of a falling economy. Therefore, even reluctantly it has to be stated that such reliabilities sound rather frivolous in a context of urgent financial needs. The law of supply and demand, often influenced by the caprice of fashion, governs to a great extent the rarity of gemstones. There are many stones which undeniably possess the qualifications of beauty and durability but are in little demand. The State Minister seems to be highly carried away by the recent fairy tales about the detection of huge gem stones of high assumed values, which only serve as media ploys and not as reliable sources of income to prop up dwindling economies.
The reference to foreign remittances too sound presumptuous in the context of the recent authentic observations made. Foreign investments in the government securities market and the Colombo Stock Exchange recorded net outflows in May 2021. The highly disappointing country ratings assigned by leading rating agencies will adversely contribute to this state of affairs and will further increase the drain.
Tourism is an important source for foreign exchange income. It is an industry that depends on world trends. When countries affected with the pandemic impose travel restrictions it is difficult to ensure substantial inflows only with a successful vaccination program carried out here. Pandemic is not under complete control in any country due to emergence of new variants with different mutations. In such a demanding scenario placing a high stake on the tourism industry to generate sufficient exchange earnings sounds unrealistic.
Selling family silver appears to be the only attainable objective provided the mounting public opposition could be successfully controlled.
Nevertheless steps taken by the government as urgent measures such as the curtailment of non-essential imports and limitation of expenditure in the SOEs have had some positive impact in helping the situation. However, certain policy decisions taken in a hurry such as the sudden clamping down on the use of inorganic fertilizers, and continued lethargy in the implementation of revamping and promoting the renewable energy sector have caused negative effects to fast economic recovery. Petroleum and Electricity sectors have been continuing their decline and degeneration over a period of several decades now. Accruing losses due to corruption, political interference and mis-management have turned these entities into huge aggregate loss makers.
All these point towards a need to have a comprehensive national level plan to steer the economy out of the mess. Imposing of sudden restrictions, allowing the underperformance and indebtedness to continue , should end, with a strict adherence to a pre-determined reform plan. Country awaits a budget under these circumstances and many have predicted that there would be dire consequences for the state’s economy if sweeping changes are not made. We have seen many budgets authored and presented by eminent personalities. Except for a few, our budgets have been still born, vaporizing into thin air soon after. While we were not aware or certain about their paternity, we only witnessed the skills of the midwifery. The new FM has a humongous task with a Humpy Dumpty role. We wish him and his behind the scene mentors all the best in this maiden attempt.
People normally expect budgets to be people friendly, relief driven country plan within the frame work of a declared broad National Policy concept. But due to the prevailing situation , peoples expectations are slightly different and the country is more towards a need to build up greater macroeconomic stability in the context of the prevailing serious imbalances. Therefore, these expectations are summarized below for the attention of the budget makers, who unfortunately, happen to be the same old in the pack only shuffled and reshuffled many times.
People expect specifics and not rigmaroles. They wish to see assessable proposals with value targets for each sector spelled out in respect of each sub category.
* Revenue proposals
a) A clear and unwavering Policy of taxes on private capital designed to reduce public debt, reduce inequality
b) Measures proposed how to increase the Quantum of Direct taxes and reduce indirect taxes with special focus on possible additional taxation on capital as an emergency measure
* Urgent Reforms
* A program for reform of large loss making SOEs, with emphasis on SriLankan Air lines, CEB, CPC, and State Banks
* Internal reforms to “improve efficiency and transparency and external reforms to address soft budget constraint on them and undue political influence into the operations”
* Allocation of funds on a priority basis for those in need of monetary assistance and social protection to combat post-pandemic poverty situations;
* Increased fund allocations to Health and Education with emphasis on prevention and facilitation of distant education referring to corresponding reductions in other sectors;
* Specific program for reducing the total debt percentage to less than 80% of the GDP
* All Wages and Salaries to be brought under a National Wage Policy;
* Limits on maximum and minimum pensions under all non-contributory pension schemes
* All public service salaries and wages to be brought within a limit between a Maximum and Minimum as an emergency measure for a specified period including all SOEs, MPs and Ministers.
* Maintain the Price of selected essential commodities at a fixed level during a period of 6 months covering items such as, Fuel – Gas – Electricity – Flour – Sugar – Rice – Dhal and Medicines with the creation of a buffer fund to absorb fluctuations in world prices(temporary emergency step)
* Introduce attractive incentive schemes (locally applicable) to promote inward remittances of foreign exchange by investors as well as Sri Lankans employed overseas;
* Accept the creation of a Social Security Scheme covering all sectors of employed by aggregating the EPF, ETF and Gratuity without making the employee lose the benefits under those;