{"id":212597,"date":"2020-08-15T01:44:27","date_gmt":"2020-08-14T20:14:27","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=212597"},"modified":"2020-08-20T03:27:38","modified_gmt":"2020-08-19T21:57:38","slug":"budget-is-the-next-big-thing","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/budget-is-the-next-big-thing\/","title":{"rendered":"Budget Is The Next Big Thing!"},"content":{"rendered":"

By Hema Senanayake<\/a> –<\/strong><\/span><\/p>\n

\"\"<\/a>

Hema Senanayake<\/p><\/div>\n

One major event is over now. People have elected a new government having high hopes. The next major event is not the abolition or change of 19th constitutional amendment. The next big event is the submission of new government\u2019s first budget. Will it dash the people’s expectations? The writing is on the wall for those who want to read it. \u00a0<\/span><\/p>\n

Leaders of the government might be thinking to run a big budget deficit. Big budget deficit means big government. And big government means lower productivity, lower sellable output, lower capital formation and lower allocation for consumption money to households.<\/p>\n

However, I have my doubts whether the IMF<\/span><\/a> would support such maneuvers. For the previous government IMF insisted to have at least a primary surplus in the government\u2019s budget. Primary surplus means that government revenue must be sufficient to meet its expenditure excluding the payment of interest. For the first time, after many decades, the previous government achieved primary surplus in 2018, but again the target \u201cwas missed by a sizable margin in 2019 with a recorded deficit of 0.3 percent of GDP, due to weak revenue performance and expenditure overruns\u201d (IMF staff conclusion, Feb. 7, 2020). IMF did this observation nearly after two and half months of Gotabaya\u2019s presidency. Therefore, there is no reason to believe that the IMF would not have insisted on the same condition on this new government. Perhaps, Covid-19<\/span><\/a> might help to get a temporary excuse. Such excuses would be for the mitigation of economic fallout from Covid-19 but not to run a big government with high budget deficits to finance ambitious projects. This intimates that the government has to slash its ambitious infrastructure projects to be implemented by local expertise and financial resources. \u00a0<\/span><\/p>\n

However, if the government wants to have a big budget deficit then it should focus to provide support to enterprising sector enabling entrepreneurs to increase total national proceeds (which is the sum of sales) with profits. For this, IMF would support as this approach helps recovery of economic fallout, capital formation, take control of current account deficit, and increase the tax revenue eventually. The message from the IMF is clear. In the same report, it observes that, \u201cgiven risks to debt sustainability and large refinancing needs over the medium term, renewed efforts to advance fiscal consolidation will be essential for macroeconomic stability.\u201d\u00a0<\/span><\/p>\n

Fiscal consolidation is a deadly concept for the new government. It seems the government wants to think \u201cout of the box\u201d solution as Nivard Cabraal<\/span><\/a> suggests in recent times. This has already been in government\u2019s official thinking. I quote, \u201cThe issuance of an international bond by the Government is not anticipated in the near term, thereby rendering the current yields observed in the international bond market irrelevant\u201d (Central Bank of Sri Lanka). Read this again carefully. What is the problem with the current yields in the international bond market? In fact, yield rates are low and positive for the government. But certain governments cannot benefit from low rates if that government\u2019s credit rating is not good. In such an eventuality, the government cannot risk damaging the country\u2019s image trying to access international bond market.\u00a0<\/span><\/p>\n

But, as observed by IMF, the government has large refinancing needs in the medium term. It means the government needs money in U.S. dollars. The \u201cout of the box thinking\u201d has kicked in. \u201cThe Government has taken proactive measures in mobilizing funds from multiple sources of market based and official sources of financing to effectively improve the terms and conditions of financing\u201d (CBSL<\/span><\/a> website). Here, what do they mean by \u201cmarket based \u2026sources?\u201d As far as we know, international bond market is the best \u201cmarket-based source.\u201d The government has decided not to go for international bond market for whatever reason. Then, does this mean that the government plans to mobilize funds from private financial consortiums? Leave this question open.\u00a0<\/span><\/p>\n

CBSL further says that, \u201cThe focus of financing will be to further explore bilateral and multilateral sources to benefit both risk and cost considerations of debt management, and these discussions are well underway. Further, the country is in the process of exploring SWAP facilities with regional central banks, while arrangements are being made for syndicate financing with identified foreign sources.\u201d Borrowing from foreign private sources can break a country than make a country. That was what happened to Greece; in desperation at one point seventeen years of future ground-handling income of airports were sold to a foreign consortium. If Sri Lanka issue international bonds, then it limits to 10 per cent of the total bonds and treasury bills issued separately and borrowing limit also must be approved by the parliament. All these measures are to ensure debt sustainability.\u00a0<\/span><\/p>\n

With Covid-19 pandemic the whole world in a mess economically. IMF and other international financial organizations do not have clear policies as to how the crisis should be mitigated. As such, IMF is going to hold a conference in November 2020 with a theme \u201cLiving in the Extreme: Economics of Pandemics, Climate Change and Tail Risks.\u201d As such best source of funds must come from the IMF in times of pandemic getting the U.S. participation in developing such program invoking its \u201cExchange Rate Stabilization Act\u201d as many countries use U.S. dollar as their main reserve currency. This would be more appropriate \u201cout of the box thinking\u201d solution than approaching private foreign funds. In times of difficulty, the government must cling more on to the traditional international financial institutions and donors than newly found friends.<\/p>\n","protected":false},"excerpt":{"rendered":"

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