By R.M. B Senanayake –
The Opposition Manifesto is a mere shopping list. It does not reflect any understanding of the problems likely to be faced in 2015. MR understood these problems – the vulnerability on the foreign debt repayment, the increasing current account deficit in the balance of payments, the need to borrow to fund it from foreign loans and the failure of the infrastructure investment program to improve the living standards of the people. So he decided to hold the presidential election in 2015, two years before it was due.
Perhaps the Opposition thought the primary goal should be “Carthago delenda est.( Carthage must be destroyed).So it seems to match or outdo the giveaways promised by President MR in his last budget. So the economic aspects of the Manifesto are badly flawed and inadequate. It promises to raise the salaries and pensions of government employees; increase Samurdhi by 200% which is paid not only to the genuinely poor but to over 50% of the population. These salary increases to government employees are not linked to any measures to increase productivity. Increase of Mahapola Scholarship by Rs 500, pension schemes for 3 wheeler drivers, carpenters, farmers’ fishermen etc (hopefully they will be contributory pension’s scheme.) are other goodies. The present non contributory pension scheme for government employees is a huge burden. MR recklessly converted the contributory pension scheme for new employees to the public service to the present unaffordable non-contributory pension scheme in 2009. What is required is to restore the contributory scheme. The losses in State owned undertaking must be eliminated either by eliminating the inefficiencies and corruption, either sold to the private sector or closed down altogether if there are no takers. This is what China did in the 1990s. She closed down the loss-making enterprises and sacked a large number of the government employees. There is no other way to promote economic growth. The Manifesto says the allocation for Education will be increased to 6% of GDP– impossible without cutting elsewhere and there is no scope for cutting since the entire Tax revenue is not enough to pay the salaries and pensions and the interest on the outstanding debt.
All these giveaways will cost extra money and not a word about how the government revenue is to be raised to fund them. Instead there are to be reductions of taxes on essential commodities and a reduction of the levy on fuel. The Governor of the Central Bank pointed out that the CPS owes a large amount of money to the state owned banks which could have been repaid from the savings in the oil subsidy. This manifesto removes the only way out for the recovery of the debts due to the State banks from the CPC. It risks a banking crisis.
The urgent need is not to increase the giveaways but to contain the budget deficit to 5% of the GDP. To achieve this and maintain the standards in public administration and the quality of the public services like free education and free health care, the minimum desirable level of Government Revenue should be at least 14% of the GDP as computed by development economists for a developing country. But despite the alleged high growth rates Government Revenue has fallen and in the current year it is likely to be less than10% of GDP. We are already in a serious budgetary crisis and these giveaways of the recent budget and the Manifesto of the Opposition will mean that these measures will have to be funded by printing even more money than presently printed by the Central Bank. The result is not necessarily higher inflation but a worsening current account deficit in the balance of payments which has to be funded by more foreign borrowing. Since our Foreign Reserves are largely borrowed and they have come down in a futile attempt to maintain the Rupee, recourse to the IMF will be inevitable if extra government revenue is not raised to contain the budget deficit. MR if re-elected would have to go to China for a bail-out. If Sirisena is elected we will have to go to the IMF which will insist on austerity measures.
Presently the Recurrent Account as well as the Primary Account of the budget are in deficit. The former means that there will be borrowing for current expenditure which is a violation of the golden rule of budgeting that money should be borrowed only for investment. The latter means that there will new borrowing to repay the debt falling due during the year whereas borrowings should be repaid from revenue. Both are unsustainable practices and demand corrective action. Since Independence our politicians have given the impression to the people that there is a free lunch to be had from the State. But there is no free lunch and the people have paid for them by way of higher inflation and Rupee depreciations. The Dollar which was Rs 6.95 in the early 1950s is today Rs 130. It is still over-valued and in a free market will probably be Rs 135 –Rs 140. By holding the dollar constant when it is strengthening against all other currencies the Central Bank has been covering up and delaying the Day of Judgment. The urgent need is not for more giveaways but to contain the budget deficit and carry forward the projected fiscal consolidation announced earlier but from which the President has departed in his latest budget. It is only fiscal consolidation that will lower market rates of interest and contain the deficit in the current account of the balance of payments and preserve the value of the Rupee in the foreign exchange market. Instead we are living in a fool’s paradise and will have to go to the IMF sooner rather than later and will be forced to comply with its conditions of austerity.
The problem of high Recurrent expenditure is immense and these giveaways will make it worse. The entire government tax revenue is not enough to pay the public service salaries and pensions plus the interest on previous borrowings. This leaves no room for any more giveaways in the budget unless there are corresponding increases in government revenue. Otherwise the budget deficit will increase. But it is already high and even this deficit is achieved by creative accounting by the Treasury which includes running up payment arrears. The urgency of resolving the budgetary problem is great and these measures without compensatory revenue increase will drive the economy to a financial crisis if not a recession unless the IMF comes to our rescue. It is naïve to assume that there will be savings through removing corruption, waste and ostentation alone. The Fertilizer subsidy costs Rs 30-40 billion and needs to be abolished.
Foreign Debt Service
There is no mention of how to deal with the large foreign debt servicing costs in the budget. Since Ronnie De Mel did away with the provision of debt repayment in the budget, the annual debt repayment has to be borrowed. But the foreign debt repayment has to be in U. S dollars or other foreign currency and our Foreign Reserves are not enough to fund both the debt repayment and the buffer of at least 3 months imports. There is also no mention of how to correct the current account deficit in the balance of payments, a matter which cannot be postponed any further without total erosion of our Foreign Reserves leading to a foreign debt default position.
The new legislation promised in the Manifesto, are most welcome. Yes we badly need a Freedom of Information Act. But what about the proposed Public Finance Act suggested by a UN organization several years ago. Also needed is a new audit Act to safeguard the Auditor General’s independence from the Executive branch of the State. The Parliamentary Powers and Privileges Act also needs to be amended to allow for greater public access to the hearings of COPE and COPA.The U. S Constitution provides Congress with the power to impeach any public officer elected or appointed on tenure. Similar provision is required to haul Ministers and Secretaries before Parliament and impeach those found guilty of financial malpractice. It is the lack of financial accountability of the Executive to Parliament that has led to the President treating public funds as his personal funds. This must be stopped and abolishing the Executive Presidency alone is not enough to do so. The President or the Prime Minister must be accountable to Parliament. Hiding under Cabinet responsibility will not do. The Cabinet is a collective deliberative body to decide on new policies and not an executive body to cover up for financial malpractices and fraud. The Minister responsible should be accountable and he should not be permitted to take cover under Cabinet decisions to evade responsibility.
New Growth model
We also need a new growth model. When China wanted to launch its export growth strategy it set up several Free Trade Zones and invited foreign companies to set up there and export to their home countries. Most of the exports of China are carried out by them and not by the State owned enterprises. We should finalize the Free Trade pacts with China and India and ask investors from both countries to invest and export to their home countries without any taxes. Export supply is short and hence free import and export should be permitted along with freedom to bring in foreign labor on contract.