Dissecting Mangala’s 2019 Budget

Sam Samarasinghe, in Island, 9 March 2019, where the title is “Budget for All”

The 2019 budget is a budget for all. It is no surprise because 2019 is an election year. The government has not been shy about it. The request that it made to the IMF to extend the $1.6 billion Extended Fund Facility by one year to 2020 at the same time included a request to relax the terms and conditions on which the IMF facility was originally given in 2016. This signals the intention of the government to have a budget that will be attractive to voters.

 

 

Producing election budgets is not the monopoly of the UNP. Almost every government in the past seven decades has done it. Elections budgets usually violate strict rules of prudent economic management. But that is a trade-off that Sri Lankans appear to have accepted.

Winner and losers: There are winners and losers in all budgets but especially in election year budgets. Some of the proposals that are popular also make good economic and social sense. For example, this broadly applies to proposals to enhance the social welfare of the poorest one-fifth of the population.

Theme and strategy: Minister Mangala Samaraweera’s theme for the budget is “Enterprise Sri Lanka: Empowering People, Nurturing the Poor.” No political party will object to the two goals “Empowering People and Nurturing the Poor.”

The strategy that the government has chosen can be more controversial and will draw criticism from the left both inside and outside parliament. The government has opted to encourage and deploy a “new breed of private enterprise, where success is through merit and the market operates on a rules-based level playing field.” Mr. Samaraweera explicitly rejects what he calls the “protectionist mindset” in favour of “economic liberalization, buttressed by a robust safety net, and state intervention.” With a democratic form of governance this economic cum social strategy is closer to what prevails in some successful Scandinavian countries. Whether such a model would work in Sri Lanka that is much poorer and has a vastly different political culture and social system is a matter for debate.

Beneficiaries: The budget is presented under 15 sub-headings ranging from village and urban development to jobs, education, health, environment, social safety net, poverty reduction, public sector services, housing, religion, art and culture to ethnic reconciliation. The prospective direct beneficiaries of the budget include farmers, fishermen, rubber growers, small scale entrepreneurs, women, exporters, public sector employees, temples and other places of religious worship, newly weds, school children, university faculty and students, residents in the north and east that suffered from the war and many other categories. Mr. Samaraweera has tried to cover all bases large and small. His party colleague are sure to applaud him.

Good proposals: Politics aside, the budget has many good proposals. For example, Mr. Samaraweera is absolutely right to stress the importance of increasing the female participation rate in the labour force that is currently estimated to be about 35.1%. This is only slightly below the global lower-middle income country average of 37.3%. But it is well below the average of 54.8% found in upper middle-income countries. More women in Sri Lanka will have to enter the labor force for the country to reach the upper middle-income level that it is striving for.

There are many other proposals in the budget such as assistance to increase pre-school facilities which will be beneficial to children and also help raise the female participation rate, and the use of economic development as a strategy to promote ethnic harmony and reconciliation in the north and east, which merit the support of all.

Other proposals:  Given the number and range of proposals made, limitation of space does not permit us to take up all. We will only focus on two proposals to indicate the difficulties that may arise even when intentions are good.

Scholarships to foreign universities: The first, and perhaps the least consequential is a proposal that Mr. Samaraweera has made to send 14 top performers in the AL examination to foreign universities for undergraduate education at taxpayer expense. The annual fees for a top US University is around Rs 9.0m. For 14 students the annual school fees alone will be about Rs 126m. The four-year bill will be about Rs 500m. Travel, books etc. will cost an additional sum. In 2016 the total expenditure of Colombo University was Rs 4,158m. Without adjusting for inflation, the university fees for 14 students in a US university will cost 3% of Colombo’s annual budget.

It is possible that the foreign universities may offer scholarships to reduce the cost to government. That happens even when very good students privately apply to such universities. But the government making arrangements to send the best students abroad makes little educational sense. First, it could be interpreted as an admission that the state does not believe that the universities which it runs are good enough for the best students that we have. Second, the Rs 126m can be used to award generous scholarships to a far higher number who do well and enter local universities. There are also other useful methods by which this money can be spent to help cash-strapped local state universities.

Mr. Samaraweera says that the winners of the scholarships have to sign an agreement to return and serve the country for 15 years. That is unlikely to be effective because the students who are selected are the very people who will move on to postgraduate studies soon after undergraduate studies, and thereafter to careers abroad.

This proposal stands out as an example of the dangers of presenting ill-conceived proposals for political effect.

Gamperaliya: Usually there is a gap between what is proposed in budgets and what is actually implemented. The Colombo-based Verite Research Institute that tracked the 2018 budget has reported that “At the end of the first six months, the pace of progress was slow – only 8% of the promises are progressing in line with their targets. Further, progress on 33% of the proposals are categorized as either broken, neglected or undisclosed.” Taking a longer view Verite reports that “When we looked at agriculture and education Budget allocations since 2007, it is clear that in most years, actual expenditure is less than what was promised.”

There are at least two major reasons for this discouraging performance of the government. The first is lack of money. When the expected revenue is not raised the first to suffer are capital projects. The second is limited implementation capacity.

We fear that Gamperaliya, one of the lead projects on which the government is heavily relying, may suffer from both these constraints. If fully implemented the government will spend a total of Rs 48b or about Rs 3,000 on each of Sri Lanka’s 15.0m or so rural and semi-urban residents. But there are major implementation capacity problems that Gamperaliya is bound to confront in the coming months.

The government’s representative in rural areas is the Divisional Secretary (DS) who works under the Government Agent. The Divisional Secretariats have a cadre of officials. Only a very few are technically qualified. Many are graduates with little practical skill. The key village level officials are the Grama Sevakas (GS). Some of these local officials are also politicised and may owe allegiance to poltical parties opposed to the government. The problem is compounded by the fact that in the February 2018 local government election, 231 of the local government bodies – Pradesheeya Sabhas, Urban Councils and Municipal Councils – came under SLPP control. UNP won only 34. These local government bodies control much of the local infrastructure such as roads. For political reasons SLPP controlled local bodies are unlikely to strongly support Gamperaliya.

Democracy: One can make a case that budgets such as the one presented are essential to preserve democracy, periodic elections in particular. Populist budgets usually contain programmes and projects that help ordinary people. That in turn helps generate popular support for the system of governance that we currently have, no matter what its other deficiencies may be. In other words, give-away budgets during election times is part of the price that the country pays for democracy.

However, even the best laid plans may go awry when hard realities intrude. One set of such realities are the severe macro-economic challenges faced by the Sri Lankan government.

Macroeconomic challenges: As in past budgets this budget also has increased the rates on several existing taxes including import duties and excise taxes. But the budget has only two taxes that may be called “new”. Neither is of much importance.

In most years tax revenue collected falls below what is estimated. For example, in 2017 the estimated tax revenue was Rs 2,039 but the actual amount was 1,671b, a shortfall of Rs. 368b. (18.0%). In 2018 the estimated amount was Rs 2,250 b and the actual provisional amount Rs. 1,712 b, a shortfall of (23.9%). There is no reason to believe that the government has vastly improved its tax collection capacity in the last few months to avoid such a gap in 2019. The opposite may be true. The budget was delayed by three months. Thus it has a far shorter time period to collect taxes.

The IMF has agreed to the one-year extension of the facility extended to Sri Lanka. However, a team from the IMF that visited Colombo in the second half of February stressed the importance of increasing tax revenue, reforming state-owned enterprises (SOE), reducing the public debt, and building up the country’s foreign reserves. It is likely that the IMF understands the pressure that the government is facing in an election year, but one cannot bank entirely on the sympathy and kindness of the IMF or the community of international lenders who take their cue from the IMF.

Moreover, 2020 will also be an election year. Thus, the country can expect and the international community will have to tolerate a second consecutive election budget.

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Filed under accountability, economic processes, electoral structures, export issues, island economy, modernity & modernization, politIcal discourse, sri lankan society, welfare & philanthophy, working class conditions, world events & processes

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