A Rs 1.35 trillion hole in the Budget Finance Minister urges China to adjustterms of loans
Posted on October 25th, 2015

by Kumar David  Courtesy The Island

The government has tabled estimates of expenditure for 2016, the first reading of the Budget, and a short summary dated 9 October is available on the Finance Ministry website (Appropriation Bill for year 2016 approved by the Cabinet of Ministers). A deficit of Rs 1.35 trillion (million-million) is expected; at 11.8% of GDP this is appalling! The number is so large that it is more comprehensible in dollars – $ 9.51 billion at Rs 142 to a $. The job of finance minister Ravi Karunanayake and the government in the second reading on 20 November, the always much awaited Budget Speech, is to lay out proposals to bridge the gap.

Expected expenditure is Rs 1.94 trillion made up of Rs 1.31 trillion recurrent and Rs 0.63 trillion (630 billion) capital spending. Additional provisions of Rs 1.20 trillion have to be made for servicing the public debt, W&OP payments and minor expenses. This (1.31+0.63+1.20) adds to a grand total expected expenditure of Rs 3.14 trillion. However revenue at prevailing tax and customs duty rates, plus expected foreign grants will total only Rs 1.79 trillion. (The 1.35 trillion deficit is 3.14 minus 1.79). The budget speech is when the government explains how it intends to trim expenditure, raise additional revenue and borrow heaps more money from domestic and foreign sources. It’s pretty grim and if expenditure rises (more recurrent spending or fresh capital projects) or if revenue declines (craftier tax dodgers or belt tightening lenders) the hole becomes deeper.

Yes the task is grim but there is no need to panic. If the government is prepared to take a long view and plan three to five years ahead it can evolve a strategy of economic recovery. Yes recovery is the right word because though in his final years the wily Rajapaksa claimed to have reduced consumer and wage earner hardship, actually his regime was piling up now exploding problems. Nearly Rs 1.2 trillion or a horrendous 67% of revenue is earmarked for servicing the debt, mostly incurred by the previous government and inherited by this one. Another shocker will come when we get updated figures on how much of this is for servicing foreign debt; the previous regime and its moustachioed mafioso leader borrowed (and stole) with gay abandon. Now the task is to set the economy on a RECOVERY road.

In an interview with the South China Morning Post (19 Oct) finance minister Karunanayake urged China to let “bygones be bygones and help us by adjusting the payment terms of loans to make them bearable”. I have also done a cut-and-paste job of a part of the prime minister’s statement in the House during the Interim Budget debate at the end of January. The gist, largely verbatim, is as follows.

“The state of public finances exposes the shady operations of the previous government. The façade of duplicity has to be removed and the actual position made known. The country has incurred many liabilities in recent years. (i) The previous government gave Rs 524 billion as Treasury Guarantees to commercial banks to implement infrastructure projects by state-owned enterprises (SOE). (ii) The outstanding debt of SOEs to the local banking system is Rs 593 billion. (iii) Foreign borrowings of SOEs at end-2014 was US $ 2.36 billion or Rs 308 billion for Puttalam Coal Power, Hambantota Port and Mattala Airport. According to provisional data the outstanding government debt at end-2014 was Rs 7.4 trillion, but if these three items are included it rises to Rs 8.8 trillion”. [Rs 8.8 trillion is 78 % of GDP]

A medium term (3-5 year) programme that avoids two mantras canvassed by parties with an axe to grid, the business classes, is imperative. Mantra 1 is that it must be an all export oriented effort and mantra 2 intones that it must all be left to the private sector. Both suggestions, in moderation, have a point but it is a balanced approach that is more to the point. Yes export performance is crucial not only to correct the foreign trade account, but also to generate revenue and create employment, but domestic concerns are, if at all, of greater concern. Yes the private sector is dynamic, efficient and can raise a great deal of capital on its own, but no ways should it be allowed the freedom of the wild ass or permitted to escape directive principles in respect of where the economy should be going.

I am aware that this is a centre-right government; the centre is its populist and democratic mandate, the right the strong business interests represented by the UNP and SLFP and propped up by the Muslim Congress. Therefore policy could drift anywhere from mild social democracy to anti-populist austerity. A social democratic thrust modulated by a commitment to growth is what it should be; that’s easy to say but the devil is in the details.

This government’s drift is still not easy to foresee. It could lean on mass action and civil society to thwart a chauvinist backlash against the war-crimes probe (Weerawansa et al have gone quiet; has the threat of a sound thrashing if they invoked mob violence scared the chauvinists?). If the government opts for this populist political response, it will also automatically move in social-democratic directions in economic matters. On the other hand the prime minister (the president counts for less) may shift into authoritarian gear mimicking Lee Kuwan Yew. The political trajectory somewhere between these limits that the prime minister may opt for will in turn set economic policy in respect of both domestic-to-export balancing and in modulating the legroom permitted for the private sector to do just as it pleases.

Feeding folks or exporting for dollars

Enhancing export earnings and encouraging corresponding production drives is desirable for the reasons already noted; there can be no argument about that. Production of exportable commodities and processing of agricultural output for export is part of the answer and planning to benefit from the Trans Pacific Partnership is wise. The problem is that obsession with exports is accompanied by considerable ideological baggage. A stock in trade is anti working class legislation euphemistically called ‘labour market reform’ (easier firing, curbs on collective bargaining and trade unions, physical and legislative hostility to strikes). Strangely there is greater pressure to implement such measures in the third-world than in the West. Anybody familiar with labour laws and employee protection in California knows that no investor will touch Lanka with a barge pole if this scenario were replicated here.

Two other items of ideological baggage often associated with an export oriented paradigm are preferential or nil taxation for foreign investors and removal of all capital controls. Extreme export orientation is necessarily accompanied by heavy reliance on foreign investment and a frame of mind driven by this obsession overwhelms policy makers – FDI is slowing down so the panic is worse. Recall an extreme case, the Pinochet military dictatorship in Chile, standard bearer and poster child of neo-liberalism, called Washington Consensus in polite circles. Though exports and overseas investment played a big role in China’s take-off, the country set aside even greater resources to yank 300 million (President Xi claims an improbable 600 million) people out of poverty and to take modernisation deep into the hinterland and landlocked western regions. The CCP, for all its dictatorial character, is also a balancing act in which millions of workers and the huge peasantry exert influence at grassroots levels.

Populism will have to provide this counterbalance in Lanka to curb unconditional surrender of the UNP-SLFP-SLMC to big business. However, apart from the ideological dimension there is the straightforward matter of the product mix of national output not only to earn foreign currency but also to satisfy people’s needs. Food security is one – Lanka is not strong except for rice and marine products; nutrition and protein deficiency another; and the dilapidated state of much of the national housing stock is a shocker. Resources have also to be set aside to improve deplorable public education and healthcare and to build a suburban railway in and around Colombo.

The last three are economic issues, not welfare and infrastructure matters only. An educated and healthy population improves output and man-hour and petroleum savings from eliminating the gigantic traffic snarl-up in Colombo and environs will enhance productivity. My bottom line is that there is a lot more to do than a naïve obsession with export orientation. One other crucial matter is that policy makers and planners in Lanka completely neglect or are hostile to the informal sector. However, this sector of the economy is nimble, productive and generates large amount of employment. Economic policy must include recognition, credit facilities and regulatory assistance for this sector. A national planning framework with a light touch, staffed by intelligent people not bureaucrats, a big if, can do much to guide the government. Leaving it to the invisible hand of the private sector is playing blind man’s buff.

The state must assert itself

I have in mind more than the conventional triple-task of managing interest rates, exchange rate and capital controls. Lanka’s experience of the Rajapaksa state pushing people around has been revolting, but fortunately the public understands that a greedy dictatorship is not the same as the guiding hand of the state in setting directions of growth. The citadels of Asian capitalism – South Korea, Taiwan and Singapore – were the pioneers; China and Vietnam were late comers to the concept of the state directing private, public-foreign and public-foreign-private development models. None is to be copied blindly; each case is a candidate for bottom up thinking. However the directive paradigm common to them all is compelling. Of course the state can get it all wrong; Megacity plans promise lucrative projects for business but will impact adversely on the poor; and most of Rajapaksa’s grandiose state-led infrastructure ventures were sheer madness. So I repeat, there is no substitute for case by case bottom up thinking.

Some of my ultra-left friends still hanker after a Soviet style state-owned economy, but do they not recall that Lenin and Trotsky were thorough going pragmatists? I have just finished Michael Pearson’s biography of Inessa Armand, Lenin’s girlfriend, and here is an abbreviated quote:

“Lenin realised (late 1918) that worker control in factories was not successful. He shocked the left but was facing the facts. The first thing many workers committees had done was to vote themselves big wage increases. He did the unthinkable and ordered the creation state managers supported by managerial boards”.

And in the Red Army, desperately fighting the civil war, Trotsky rued that operational plans were drawn up by men “who could not even read a map”. Pearson reminds us:

“Trotsky called back officers of the regular army; reintroduced saluting; dissolved soldier committees; and brought back pay scales and privileges. The result was anger from the troops and a howl of outrage from the left. After a tough start Trotsky’s policy won battles. Lenin backed him since winning in the field was more important than socialist theory”.

The moral of this is, hard nosed social democratic pragmatism must take precedence over ideology, left or right, in crafting economic policy at the present time.

9 Responses to “A Rs 1.35 trillion hole in the Budget Finance Minister urges China to adjustterms of loans”

  1. Lorenzo Says:

    “Feeding folks or exporting for dollars”

    He was a LEFTIST until now to OPPOSE MR in power.

    Now he has become FAR RIGHT to support UNP. Go sign the CEPA and see how the economy will “recover”!!

    This UNP govt. is DOOMED from start. It must collapse for the economy to recover.

  2. Ratanapala Says:

    The Yahapalana Regime has no right to plead with China after belittling the visit of President Xi Jinping who came personally to inaugurate the Colombo Port City Project. Delaying and haggling the project to please the Indians are paying dividends now. These beggars should now go to India and ask for the funds necessary to keep their scrawny necks intact.

  3. Leela Says:

    ‘Yahapalana’ regime’s economic wizards rather lizards has no shame whatsoever. As said before grabbing power, By now, Ranil should have borrowed from IMF, the US or India and paid off China loans as mentioned during the elections time. No point blaming Mahinda for for China loans now for his strategy for economic management had been is not catch a (no)thief.

    Professori David and should forget that Mahinda took power when our loan GDP ratio was almost 100%. Yet Mahinda not only fought and won a war but improved the life the of the average man by three fold. On the contrary, just coming a year on to ‘jadapalanaya’ rural economy is in the doldrums: No small or large projects worthwhile have started or is in operation for small businessmen to earn a buck, tea leaves are under Rs.50/- a kilo, rubber under Rs.200/- and that is not enough to pay pluckers, tappers and other workers. Other than one-man-bands most have abandoned their small holdings or are on the verge of abandoning. There is no prospect for things to get better. Soon the people will be in a worse situation than Chandrika’s first term. Soon, except for profesotri David like minded greed blooded anti Mahina vermins all others will have no choice but to take to streets.

  4. Dilrook Says:

    As expected, an utterly idiotic budget to overcome insurmountable financial crisis. When recurrent expenses alone are 1.9 trillion, how can the revenue budget be 1.8 trillion? That means the government is unable even to manage essential services. The country is bankrupt and there are all the reasons for panic. The nation is already in debt crisis as Greece.

    Revenue coming in is far inadequate to cover even recurrent expenses, then how can they repay 1.2 trillion debt and interest? In addition to the debt crisis, the country is also in a balance of payment crisis. Export earnings are in decline, foreign reserves in decline and foreign investments in massive decline. Further borrowing will only worsen the situation.

    Interestingly, the last time Sri Lanka was in a serious balance of payment crisis was in 1981 and 1982 (with a balance of payment deficit of 21 billion rupees at that time). Uncontrolled imports caused this. Ironically, it was the mass exodus following the 1983 riot that saved Sri Lanka! Over 300,000 Tamils immediately left Sri Lanka and started to send money to their less fortunate relatives. Collapse of the northern economy meant they heavily relied on remittances.

    Even a large number of Sinhalese left the country. Their remittances helped save the country from the balance of payment crisis (and an increased demand for tea). By 1984, Sri Lanka once again had a healthy balance of payment terms despite spending on weapons imports and a collapsed tourism and FDI sector. A large number of Tamils who left the country was from the public sector. Government didn’t fill the vacancies but managed to deliver the same level of service saving billions in recurrent expenditure.

    Hopefully one idiotic budget disaster will not lead to a worse disaster. All forms of violence must be prevented. It is the government’s responsibility to look after the economy and not let unrest set in.

  5. Charles Says:

    KumarDavid is no great objective political analyst, he is a pro LTTE activist even if he were to deny it. This stupid government would have been alright if it followed from where Mahinda Rajapakse left. He did not do a bad job. This government is still vasts sums to accuse the previous government and every body connected with it to court. This government which is based on h

  6. Charles Says:

    ……this government of Sirisena Ranil is based on anger, hatred, vengeance, and lopsided reconciliation, allowing the Central Government Governors Bond deal to be swept under the carpet, and with a speaker who fears to deal with the antics of the PM and the UNP fellow travelers, is doomed to fail. We can say good bye to a unitary Sri Lanka , as long as the famous CFA traitor and back stabbing traitor of yesterday are in power. The President knows nothing of what is going on, if he is wise he should ask RANIL of CFA fame to withrdraw from his sponsorship of the Geneva resolution. But has Sirisena the guts to force Ranil to do so ? If not he can himself do it as Ranil did not get his or Prliament’s approval before sponsoring USA Geneva Resolution

  7. Fran Diaz Says:

    Agree with Charles. Yes, the MR govt did a far better job and the People of all groups felt far more secure.

    Many wrongs have been to Lanka People by Yahap. Ranil was NOT elected to office as PM by the People. Pres Sirisena (of the flawed election) elected Ranil as PM and said “the west wants it so”. Democracy has gone silly in Lanka.

    The Budget pothole will become a sinkhole large enough to engulf Lanka. The whole point of Yahap seems to be to make Lanka a Failed State and divide Lanka. Being pals with the west is one thing, but total capitulation is unacceptable.

    All in all, it seems to us that “the west” is running the country via Ranil the Wick(ed) aka “Dr No the Proven Inept”.
    Shame and double Shame !

  8. LANKAPUTHRA Says:

    China will not re-negotiate a loan after RANIL PUNK tried to audit the Harbor projects. I do not know why one cannot see that Kumar David is a paid dis information writer. RANIL PUNK has had enough but Muslim OBAMA will not let him out of the trap. If you can see news briefings and in the Parliament RANIL PUNK always laughs before speaking! Why? His speech writers do not have any more dis-information to present. Israel was going to buy water from Sri Lanka, what did Srisenaya do nothing. Then they were going to help cultivation of mangoes for export, what did Sirisenaya and RANIL PUNK do nothing but state MR HORA. India Pakistan, Mexico, and Bangladesh exports mangoes to USA. Why can’t Sri Lanka do so? It is because MUSLIM OBAMA does not want Sri Lanka to prosper. Today there is no one political party like SLFP and UNP because average villager do not understand the difference of political parties.

  9. Naram Says:

    This article indicate the deranged mental state of a one time Marxist now reduced to sing the praises of successful economies of Singapore and South Korea while pouring plaudits on Ravi Karu and Man Sam. But one must also see the failed examples of crony capitalism of obsequious timid and subservient states under US umbrella. If one looks at Sierra Leone, Liberia,

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