The upcoming Budget is the crucial one yet in Sri Lanka’s economic trajectory when the country seeks stability after the post-pandemic era. The Government will seek direction through its Budget 2022 to set course on achieving the goals pledged in the President’s manifesto Vistas of Prosperity and Splendour, so far slowed down or halted due to the pandemic. In addition, the Government faces multiple challenges in the debt and foreign exchange crisis, apart from issues resulting from the pandemic.
The public, local and foreign investors as well as the internationally community, therefore, eagerly await the strategies the Government would adopt to bring the country back to prosperity.
The pre-Budget panel discussion organised by NextGenSL - the cross-party youth initiative - in partnership with the Friedrich Naumann Foundation for Freedom, attempted to address these issues in redirecting Sri Lanka’s economy, bringing in local and foreign experts. It was highlighted at the discussion that a nation’s Budget is more about the values and vision for the country, and getting the policies right to enable growth, rather than numbers and allocations.
German model
Providing examples from Germany, Justus Lenz, Head of the Liberal Institute and Division of Issue Management and Political Consulting of the Friedrich Naumann Foundation for Freedom, said his country overcame the dire repercussions of World War II due to the social market economic policy they adopted.
“Germany’s economic success is based on free market, property rights, unregulated prices, rule of law, infrastructure and social policies provided by the state, and free trade. The entire economic activity depends on entrepreneurs who develop products and services. But they need a well-functioning market that provide freedom and security,” said Lenz.
The free market and entrepreneurial spirit of the Germans are key ingredients to economic success after the devastation of Germany due to the World War.
Role of state
Germany abolished price controls and introduced a stability-oriented currency. “Suddenly, shops overflowed with goods. The policies were highly controversial with a lot of opposition. However, positive results began to show after several years and the social market economy became very successful, although the transition took time and was painful,” Lenz added.
He said the role of the state is the enforcement of the rule of law, provision of infrastructure, social policy and education. However, it is also crucial that the state abstains from intervening directly in the market.
However, Lenz added that every country needs to find its own way in the social market economy but any state can benefit from it as long as the state values long-term political commitment, ensures that the justice system is well funded, provides entrepreneurs their rights and upholds the rule of law.
Prof. Sirimal Abeyratne, Head of the Department of Economics at the University of Colombo, also agreed that price controls never work and that it never sorted out supply shortages. He said it has eliminated the quality goods from the market, created a black market for them, and not helped to eliminate poverty in Sri Lanka, although it is a feel-good policy. However, he reiterated that eliminating price controls should come as a part of an overall reform package.
“When considering our budgetary management in the past, it has been in a shaky situation for many years before the pandemic. Now the expenditure is double the Government revenue. Seventy percent of the Government revenue is spent as debt service payments annually. In such a situation, the Budget has to be consistent with the long-term plan and policies should show the direction the country is moving. But we haven’t seen this kind of consistency in the past,” Prof. Abeyratne said.
Covid effect
Given the narrow fiscal space, he said, the Budget problems multiplied during Covid because the Government lost the revenue and it also had to take care of the pandemic-affected sectors. The country managed this by printing money.
“This was not unique only to Sri Lanka, but was commonly seen all over the world. We had the space to print money without negative repercussions during the Covid times to finance the Budget deficit. But now many countries have successfully carried out their vaccination programs and Sri Lanka has been very successful too. As a side effect of the vaccine program, inflation is rising, and the aggregate demand is getting heated in the world including Sri Lanka, limiting the Central Bank’s ability to finance the Budget deficit. The Central Bank is compelled to look at its primary objective which is the price stability. Therefore, the Budget is in a difficult situation on managing these,” Prof. Abeyratne said.
He said: “We are always looking for short-term solutions to long-term problems. Our problems did not start with the pandemic. It has been there since the pre-pandemic time. Therefore, economic recovery means not the Budget or ending the pandemic. The budgetary management has a lot to do, not within the 12-month period, but managing the expenditure, cutting down wasteful expenditure and improving the revenue side. We also need to improve tax collection efficiency.”
Selective investment
Board of Investment (BOI) Chairman Sanjaya Mohottala, joining the discussion, agreed that Sri Lanka needed long-term planning. He said the country needs to make way for long-term investors rather than opportunistic ones, being selective on the kind of investment they bring in. The State will need to get the policies right for the country to double its GDP in 10 years and the Budget needs to reinforce this.
“The quality of the FDIs matters because we have a misconception that every FDI is the same. We need to focus on the economic multiplier. While the FDI numbers matter, we need to ensure that we get the right investments so that it creates the workforce, infrastructure, and the eco-system to help the country grow,” he said.
He added that certain foundation work takes time, but Sri Lanka needs to lay the foundation right now - consider which sectors to focus on, and get the enabling factors in the Budget without throwing quick bones for short-term gains. Ensuring a compelling investment climate and retaining the value prepositions are of paramount importance, he said, adding that Sri Lanka needs to tap on the resources so far untapped.
Mohottala said he hopes to see cohesiveness in the Budget in terms of the thrust, the development and the supporting industries, and provide the base in terms of the policies to be able to hold this up. He stressed the need to have a set of codes that addresses regulatory-related issues, to take our industries to former conflict zones, and ensure that people are employed in their vicinity so that money stays in the regions.
The need to boost the tourism sector and provide relief to industries to regenerate and reboot, was also highlighted.
Work together
Mayantha Dissanayake, MP, said to ensure that correct, long- term policies are implemented, the Government and the Opposition need to work together to create confidence among investors.
He said the Government should not be involved in state-owned enterprises but rather strive for private-public partnerships so that the country could strike a balance between being a welfare state and spearheading economic growth. He added that a system of monitoring and evaluation is also needed to set the country on the right course.
Overall, the panellists agreed that Sri Lanka should keep efficiency and financial stability in mind, not spend too much, and be careful of what you promise while focusing on helping those who really need it.