Transformative change is being contemplated, with Constitutional amendments to be made aiming to deliver economic moksha. All well and good, but the issues that have led to this crisis are simple but stunning in clarity.
We ran up debt as a country. We tried to settle the debt without contemplating an early default despite the fact that we had no dollars to buy essentials for the people.
We had a massive balance of payments issue — importing far more than we exported. These were patterns that because entrenched, and each successive Government ran up more debt than its predecessor, and we have the statistics to prove it.
However the ‘political solutions’ that are envisaged do not address any of these issues. Instead, we are talking about sweeping changes and Constitutional tinkering.
No doubt some of that may be necessary because there ought to be political clarity so to say, in order to engineer specific changes.
But specifics have to be addressed lest those who would be in charge eventually or those in charge now, forget what caused the problems in the first place.
As a country we are bracing for lender-prescribed remedial measures after the grueling negotiations with the IMF are concluded.
These would address certain specifics within specifics, such as taking the fat off the public service i.e. reducing the public service cadre, as has been speculated. But apart from the fact that these are measures that would help balance the budget they would not help address macro-economic imperatives policy-wise.
Considering all this, why is there no consensus emerging on the fundaments that any succeeding administrations in the next few years would be enjoined to consider? Would a balanced budget amendment help? That may be too drastic. A “balanced budget amendment is a Constitutional rule requiring that a State cannot spend more than its income”.
It requires projected receipts and expenditures of Government would be equal — so that there would be no bridging of deficits by borrowing. It is surprising, the number of countries that have introduced balanced budget amendments.
Envisage
Germany, Hong Kong, Italy, Poland, Slovenia, Spain and Switzerland, among others, have introduced balanced budget provisions legislatively.
“Every U.S. state other than Vermont has some form of balanced budget provision that applies to its operating budget.” Just imagine that, particularly keeping in mind the fact that budgets of quite a lot of those States are larger than ours in dollar terms.
We already have a Fiscal Responsibility law which was enacted in 2003. But this is what is said in IMF literature about this piece of legislation: “Sri Lanka’s FMRA remains too recent to provide a full assessment, but the narrow coverage of the targets, and the rapid postponement of the scheduled reduction in fiscal deficits, diminishes the credibility of the law.”
We have just kept postponing the need to abide by the ‘law.” So much for such measures. But also there are escape clauses in most such legislation enacted in various parts of the world. These concern natural disasters and so on and it is clear that the pandemic would have been counted as an exceptional circumstance.
But should it have been? Many countries are where there today — the economic doldrums — at least partially due to a too drastic response to the pandemic, such as the medical community recommended lockdowns which impeded economic activity, and curtailed taxation drastically.
So it is seen that legislation of course is not the only answer, and that if there is legislation it ought to be enacted in such a way that there is no easy contravention of those legal provisions.
But what does that do to a Government that wants to run a deficit for economically sound reasons during a period in which there is no immediate threat to the economy?
Rigid rules do not allow for such exemptions. However there is reckless spending due to considerations of political economy. This simply means that there are politicians who offer tax-cuts for instance because it would help them with the chances of re-election.
So deficit spending becomes the norm.
In such cases though it’s impossible to legislate what promises politicians make, it could be possible to legislate issues dealing with deficit spending, with sufficient sanctions for backup. Some of these sanctions are personal sanctions meaning that legislators who breach such laws would be found personally liable.
Budgetary
However there is always the catch. If there are debt-ceilings for instance that are too rigidly prescribed by law, it could lead to a lack of investment for starters, impeding growth and condemning the economy to unproductive stasis.
Is there a way to enforce fiscal discipline therefore without legislative recourse? Some countries have mooted and others have implemented the idea of independent fiscal councils.
These bodies essentially envisage outsourcing the job of taking decisions on fiscal policy. But in reality such a body — a fiscal council — cannot exist.
Non-elected bodies cannot take all the decisions on fiscal management for obvious reasons. People elect Governments because they expect a general economic policy direction from the elected representatives. An appointed fiscal council will interfere with achieving those expectations.
However, such a body could always present its own budgetary proposals with detailed explanations of the dangers that are bound to accompany reckless decision-making that deviates substantially from their independently evaluated recommendations.
Quagmire
Such fiscal council proposals can by law be presented in Parliament i.e. it would be mandatory for Legislators to consider the policy formulations of the independent FCs before finalising policy measures that impact on the economy.
This would certainly act as a disciplinary measure, and would serve as a deterrent to reckless decision making on the part of legislators.
While the country is focused on the big picture — the repeal of the 20thAmendment and the introduction of the 21st and so on — nobody has thought of the essential legal measures that may avoid further instances of policy confusion and so on that causes unnecessary crises.
The legal aspects of sovereign bond issues for instance cannot be underestimated. Already lawyers are lined up by interested parties in the expectations of a sovereign bond default of sorts as part of our current negations with the IMF.
But lawyerly submissions do not take into account the struggles of the people. The people are directly impacted by the loans and the fact that the repaying them may turn out to be a life and death matter for them, almost literally.
If there is no money in the kitty after loan repayment, people may not get to eat.
Amidst such critical issues debt write-offs may be contemplated too, but that issue is too broad in scope to be addressed in this article which is about another issue.
It seems the political jockeying that’s taking place is either about personal political calculations for those involved — or about matters that have been flagged as political hot buttons such as the 20th Amendment and the Presidency and so on.
There is no harm looking at those issues, but it shouldn’t be at the cost of addressing more pressing concerns about how any Government should not fall headfirst into something of the order of the current quagmire. We have a situation in which the President is calling for an interim Government of all political persuasions — no President would take such a decision lightly.
The move exemplifies the gravity of the situation we face. But any Government that succeeds could face the exact same issues concerning national debt, and have no laws guiding them on how to avoid perilous economic meltdowns.
It’s incumbent upon those who are seeing ways out of the current impasse to address these areas of policy head-on before they think of anything else. Else we may be, to put it mildly, missing the woods for the trees.