Economy reaches pre take-off position within two years of governance

The National Unity Government of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe has embarked on a long-term development to become a higher middle-income country by year 2025. This envisages creating a strong, diversified, resilient and competitive economy. But, the efforts of successive governments have not brought the desired results, and had kept Sri Lanka lagging behind other countries in Asia.

When the new government came into office in 2015, they inherited an economic legacy fraught with issues, beyond the reach of a developing nation. In the fiscal sector, it had a falling revenue hardly enough to meet the debt servicing. The Government’s revenue as a percentage of the GDP has declined from 21 % in 1990 to 11.4 % in 2004. Accordingly, the gap between the government revenue and expenditure had widened at an unprecedented level. The gap which was Rs 125 bn in 2000 had escalated to Rs 601 bn by 2014. As a result Sri Lanka had an economy in which income was inadequate to finance recurrent expenditure, leaving the country to lag behind without sufficient money for capital expenditure, which is paramount for economic development and job creations.


President on a field visit

The situation was further aggravated with the increase in the debt stock. The debt stock increased by over 233 % between 2005- 2014, and had doubled in five years, between 2005 and 2010. Sri Lanka owed its financiers Rs 2,222 bn in 2005, which later increased to Rs 7,391 bn at the end of the previous government.

Though certain politicians tried to interpret these debts as Foreign Investment, none of them were investments but long term credit, some with commercial rate interest for infrastructure development. None of the major infrastructure developments brought in any return on investment.

The Minister of Finance Ravi Karunanayake said, as of end 2016 Sri Lanka has a debt stock of Rs 9,423 bn plus another Rs 1,200 mn off the balance sheet obtained by the Public Enterprises of which the domestic debt was Rs.5,697 bn.

The previous government had obtained different loans for the Hambantota Port from China Exim Bank. It reads as, a preferential buyers credit loan of US Dollars 600 mn for 13 years, Rs 147 mn for 14 years and Rs 157 mn for 12 years from the Exim Bank of China. The first installment of USD 307 mn was taken at 6.0 % interest.

The following statistics show that the Hambantota Port and other pet projects started for the glory of the rulers of the previous regime have not brought any favourable results to the economy, but a burden to the tax payers (See Table A)

Under the command of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe the Minister of Finance Ravi Karunanayake has shouldered the burden of transforming the country into an economically viable state with dividends to the masses. In a country like ours the Minister of Finance has the foremost place next to the President and the PM as it is the responsibility of the Finance Minister to run the economy smoothly with dividends to all stakeholders. But, with this enormous burden on the country and the masses, what can we do?

The Minister said, before implementing the government’s policy statement, it was imperative to bring financial discipline into the system to ensure that the government receives all its dues, as it was noticed that there appeared to be privilege treatment to people who had affiliations with the then rulers. So, in the past two years, efficiency and financial discipline in government’s revenue authorities have brought fruitful results by way of increased revenue. The major fiscal priorities identified were the augmentation of revenue with great emphasis on the expansion of tax base, strengthening tax administration, strengthening fiscal consolidation and improving management of public debt while continuing with income support programs to the vulnerable and the needy.

The total revenue which was at 11.4% of the GDP in 2014, has increased to 13.6% by end of 2016. This in real value term is an increase by Rs 465 bn from Rs 1,195 bn to Rs 1,660 bn. The total revenue increased by 21% in 2015 and the projected increase in 2017 will be 29% which will be sufficient for the first time in recent history, to cover the recurrent expenditures. According to Minister Karunanayake it is a great achievement.

The Minister, describing the major hurdle and the burden faced by the country, said, the debt burden is the biggest challenge, because the past government achieved zero in bringing any revenue development to the country as it had not inaugurated a single industry that would generate income of employment. What they did was, expand the already overcrowded public sector, making the country hold one of the largest public service sectors in the world.

The Hambantota Port in fact did not bring any revenue to the country other than the replacement of income by directing the vessels which came to Colombo to Hambantota, increasing the final economic cost to customers. It has been continuously making loss from 2011. The annual operational loss which began with Rs 90 mn in 2011 has increased to over Rs 9,000 mn per annum since 2014 while the revenue is Rs 200 mn per annum. The loss to the tax payer this year will be Rs 10,656 mn. If there is no need for this debt servicing, the country would have been in a better position. So the government has selected the best alternative, to reduce the burden of the people.

We will not put the burden of debt servicing of the Port on the people. We will make it affordable that would bring us the revenue, said Karunanayake. The Hambantota port, Mattala Airport and other related developments in the area have already displaced over 2,700 families. The Minister opined that it is a pity that the previous government which pawned the country with expensive debt and weakened the economy is now shedding crocodile tears saying that the government is selling off national assets. They are trying to create a new interpretation saying that bringing a joint venture with Public Private Partnership is selling off the assets.

Joint ventures are not a new phenomenon to developing economies. Even in 1971 the Sri Lanka Ceramic Corporation had a joint venture with the Japanese firm,Noritake. But, it was the Mahinda Rajapaksa Government that gave the land at Army Headquarters at Galle Face and Hambantota as a freehold to Shangri La Hotel and the portion of the Colombo Port city to China as a freehold. This government was able to renegotiate and convert it to a 99-year long lease. If not for the debt on the Port the government would have a surplus in its revenue over expenditure.

Economic Growth without Development

Now the new impetus given to the Hambantota Harbour by converting the debt into equity will be an area of activity that would transform the Government policy of bringing in Foreign Direct Investment and the creation of one million jobs a reality.

Countering the claim of higher growth rate, said to have been achieved during the past regime, the Minister said, there are several schools of thought that differentiate economic growth from economic development. Accordingly, it is possible to have economic growth without economic development. Sri Lanka could be perceived as such a country where we have a large military and a large public service when compared with the population, and the expenditure on it will be accumulated into the public expenditure that would increase the level of GDP.

Subsidies

Further, during the past regime we had a large amount of spending on infrastructure such as, Sea Ports, Air Ports and Expressways which hardly had any returns. It is not a secret that during the period of the previous government there existed an exaggerated GDP growth rate fuelled by a debt creating public spending spree, because almost all infrastructure development inclusive of some rural roadways were made possible with foreign loans, many of them at commercial rates.

Karunanayake as the architect of Budget making under the unity government has come up with a proposal for a bottom-up approach where he has obtained the services of academics of 12 National Universities.

The value of the GDP has increased to Rs 11,183 bn (US$ 82.3 B) in 2015 from Rs.6,414 bn (US$ 56.7B) in 2010. Sri Lanka has a new phenomenon in its expenditure chain where a sizeable portion goes to social welfare and subsidies. The country spends a colossal amount on welfare and subsidies up to over Rs 403 bn in 2017, but its value for money is questionable. Sri Lanka inherited a government that doesn’t earn revenue to even cover its debts.

None of the allocations already made available for subsidies on fertilizer, Samurdhi and school uniforms have been reduced. In fact, the payments for school uniforms are now being distributed to students. The replacement of giving fertilizer at subsidized price and school uniforms to students with cash payment has not only helped bring down the use of chemical fertilizer but also streamlined the process with efficiency eliminating the middlemen thereby reducing the cost incurred on fertilizer and school uniforms. The special interest rate paid for the first Rs.1.5 million fixed deposit of senior citizens and Rs.2,000 monthly payment for needy senior citizens introduced in 2015 after this government came to power has not been reduced or removed, as stated by certain opposition politicians.

This government, for the first time in history, started to pay a higher interest rate for the deposits on senior citizens’ saving accounts in 2015. Rs.1,450 million and Rs.4,000 million were allocated for this purpose by Budget 2015 and Budget 2016 respectively. It has been reported, by expecting higher dividends, more and more retired senior citizens have deposited their pension funds in commercial banks. Therefore, to meet this increased demand to pay the higher interest rate to senior citizens the treasury of the Finance Ministry has allocated Rs.8,000 million for 2017. The Rs.20, 000 being paid for expectant mothers for a poshana malla over a period of 10 months is also being distributed without any curtailment.

The Good Governance Government, as pledged, increased the Samurdhi allowance in 2015. Allocation made to pay Samurdhi allowance in 2014 was Rs.15 billion and, has been increased to Rs.44 billion in 2017. The minimum Samurdhi allowance paid in 2014 was a minimum of Rs.210 and the maximum was Rs.1, 500. It has now been increased to a minimum payment of Rs.420 and a maximum payment of Rs.3, 500.

Since the President has declared 2017 as the Year of Poverty Eradication, the fertilizer subsidy granted for paddy has been extended to cover tea, rubber and coconut from next year to uplift the agricultural economy. An additional Rs.1, 500 mn has been allocated for this purpose in Budget 2017. At the same time, a new subsidy scheme has been introduced from 2017, with the allocation of another Rs.450 million subsidy for domestic milk powder manufacturers as part of making the country self sufficient in milk.

Due to the new government’s current policies the support of the international community and the development partners are pouring in by way of various support schemes for a sustainable medium term program. Some features of a new economic landscape for Sri Lanka at the end of the medium-term program would be:

• A fiscal deficit of 3.5 percent of GDP by 2020 - sustained or lowered over the longer term to ensure that the debt-to-GDP ratio continues to fall.

• An increase in the tax-to-GDP ratio from 10.1 percent in 2014 to about 17 percent by 2020.

• A reduction in public debt to about 60 percent of GDP by 2020.

• An increase in foreign exchange reserves of the Central Bank to about 10 months of import cover by the end of the medium-term.

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