By Mangala Samaraweera –

Mangala Samaraweera – Former Finance Minister

Following statements by Members of Parliament and civil society activists, the Secretary to the Treasury published the Pre-Election Budgetary Position Report last Monday. Publication of this report prior to elections is a requirement under the Fiscal Management (Responsibility) Act of 2003. 

While welcoming the Report’s publication, it is our duty to draw the Government and public’s attention to the worrying contents of this report, relating to the health of both our economy and democracy. 

Unconstitutional ‘Vote-on-Account’

“Parliament shall have the full control over public finance.” This is the opening line of our Constitution’s chapter on finance. Until April 30, a Vote-on-Account passed by Parliament – setting-out Government revenue, expenditure and the borrowing limit – is the legal framework within which public finance must operate. 

However, the Pre-Election Budgetary Position Report refers to a so-called ‘Vote-on-Account’ authorized by the President for the period March, April and May. This raises the paradox of a Vote-on-Account without a vote. Presidents cannot authorize Votes-on-Accounts. Only Parliament can approve a Vote-on-Account. This Presidential action is prima facie inconsistent with the Constitution and usurps the Parliament sanctioned Vote-on-Account. 

Even more worryingly, this does not appear to be an oversight. The Pre-Election Budgetary Position Report explicitly refers to Section 150(3) of the Constitution as authority for this irregular move. This is disingenuous. Section 150(3) reads as follows.

“Where the President dissolves Parliament before the Appropriation Bill for the financial year has passed into law, he may, unless Parliament shall have already made provision, authorize the issue from the Consolidated Fund and the expenditure of such sums as he may consider necessary for the public services until the expiry of a period of three months from the date on which the new Parliament is summoned to meet.” 

As is evident above, the provision places two important limitations on the president’s ability to draw from the Consolidated Fund after an election is announced. First, it states that the President can draw from the Consolidated Fund, “unless Parliament shall have already made provision.” Through the Vote-on-Account ending 30 April, Parliament has made such provision. Therefore, the President cannot authorize any funds from the Consolidated Fund till then. Second, after April 30, any funds authorized from the Consolidated Fund can only be those “necessary for the public services.” In laymen’s terms, this means government salaries and continuance of essential government services. This becomes evident when 150(3) is read in conjunction with 150(4), which provides specific authorization for the President to draw funds for a purpose other than paying government salaries viz the conduct of an election. 

In January and February this year, the Government only spent Rs. 36 billion in capital expenditure. However, for March to May, it now intends to spend Rs. 150 billion in capital expenditure. This could hardly be funds “necessary for the public services.”

This measures constitute a usurping of Parliament’s constitutional role by the executive. Such a weighty violation of the separation of powers is a grave threat to democracy, the rule-of-law and the check-and-balances essential for accountable use of public funds. This unfortunate situation could be easily have been avoided by passing a Budget prior to the announcement of polls or by summoning Parliament to pass another Vote-on-Account. 

Cash Crunch 

As noted above, Parliament approved a Vote-on-Account until 30 April. The Vote-on-Account specifies a borrowing limit for the Government. As a result of the Government’s tax-cuts and the decline in economic activity, revenue will fall drastically. In this situation, Government borrowing must increase or a cash crunch will occur. In fact, the borrowing limit must be raised even to print money through the purchase of Treasury securities. Already, the Government has purchased Rs. 100 billion in Treasury securities over the last fortnight – a major cause for the depreciation of the rupee. The borrowing limit cannot be raised without convening Parliament. It is impossible to manage the economic fall-out of the tax-cuts and pandemic by executive action alone. 

Inaccurate Estimates & Irresponsible Stewardship 

The Report estimates a budget deficit equal to 7.5 percent of GDP. This is a very substantial increase compared to budget deficits of 5.5 percent, 5.3 percent and 6.5 percent for 2017, 2018 and 2019 respectively. Notably, the Report does not project a primary surplus (where government revenue exceeds government expenditure, allowing for interest payments). The primary balance registered a surplus in 2017 and 2018. Sri Lanka was also on track to achieve a primary surplus in 2019, until the November Presidential Elections led to a change in policy.  

A core challenge facing Sri Lanka has been a very low tax-to-GDP ratio. This is a very serious problem as it results in lower disaster relief, public investment, ability to service debt, macroeconomic stability and redistribution. Even though there has been widespread awareness and very serious measures to rectify this problem in the past years the Pre-Election Budgetary Position report envisions a reversal of the progress that has been made. It states that “government revenue is expected to be around 10.6 per cent of GDP in 2020 in comparison to 12.2 per cent in 2019.” 

Even these estimates reflect a considerable degree of over-confidence. They are explicitly based on the assumption of a 4 percent growth rate for 2020. The IMF projected a growth rate of 3.7 percent on 7 February, well before the Coronavirus pandemic. In January, the World Bank projected a 3.3 percent growth rate and while the Asian Development Bank’s estimate is 3.5 percent. 

Over-confidence is also evident in the estimate of a 7.5 percent of GDP budget deficit. Although the report discusses the impact of the Coronavirus epidemic, the 7.5 percent budget deficit estimate does not appear to factor in its impact. As the pandemic will undoubtedly have sizable impacts on revenue and expenditure, the budget deficit will certainly be larger. In Sri Lanka’s current context – a very high debt level, a global recession and market uncertainty – this is irresponsible. It places Sri Lanka at a very precarious position at a highly uncertain time of crisis. 

Moreover, the Report’s revenue estimates assume “the revival of both domestic and external demand and improvements in the investor confidence”. This stands at odds with earlier sections of the Pre-Election Budgetary Position Report. It also contradicts the Central Bank’s last Monetary Policy Review which forecasts a downturn as a result of the Coronavirus pandemic. 

“The likely slowdown of the global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics. The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China.” 

 The Fiscal Management (Responsibility) Act also specifies that the Statement of Risks include quantification. However, no quantification of risks has been offered. This leaves the Government and public without the tools necessary to plan in this highly uncertain time. 

Debt

Sri Lanka had its highest ever debt payment in 2019. Despite the constitutional crisis and Easter Sunday bombings, Sri Lanka was able to settle this payment and maintain market confidence. In June 2019, just after the bombings, Sri Lanka was able to borrow at 7.5 percent from international markets. As a result of this Government’s irresponsible tax-cuts – leading to begging bowl requests for debt forgiveness which forever undermine Sri Lanka’s hitherto unblemished track record of meeting debt repayments – interest rates on government debt now exceeded 18 percent in March. Even though this year’s repayments are 20 percent lower than 2019. 

Lack of Transparency

The Report also failed to incorporate critical information necessary for assessing the state of Government borrowing. For example, the Report says, “the Foreign Currency Term Financing Facility 2018 with China Development Bank (CDB) has been upsized at more favourable terms to USD 1,000 million.” However, it does not disclose the interest rate for these loans.  Another example is the failure to disclose the breakdown of revenue estimates for January and February 2020. 

Way Forward

The Government has still not provided the Committee on Public Finance with detailed estimates of its tax-cuts revenue effects. It has presented a report on the economy that sets us on a path to crisis and is replete with inaccurate estimates. Parliament must have the opportunity to scrutinize and debate this Report. Parliament must also be able to convene to legislate in order to provide the country with the relief it needs at this precarious time.