Govt. in classical Catch 22 situation
Posted on September 12th, 2016

by Ravi Ladduwahetty Courtesy Ceylon Today

“All of the problems we’re facing with debt are manmade problems. We created them. It’s called fantasy economics. Fantasy economics only works in a fantasy world. It doesn’t work in reality.”

This profound quote came from Michele Marie Bachmann (6 April 1956), an American Republican politician. She is a former member of the United States House of Representatives, who represented Minnesota’s 6th congressional district and she was a candidate for the Republican nomination in the 2012 US Presidential election…

Prime Minister Ranil Wickremesinghe, addressing the 70th Anniversary celebrations of the United National Party, of which he is also the Leader, at Campbell Park in Colombo on Saturday, said, inter-alia, that he and the government were to reduce the government debt by the year 2020.

All well and fine. If the government has such lofty ideals for the economy, all it has to do is to stick resolutely to its Financial Consolidation Plan which is envisaged from the time it was in the Opposition and when the development plans were strategized at that time.

The eventual target to reach that elusive goal is the reduction of the Budget Deficit to 3.5% of GDP which is also in consonance with the dictates of one of the two Bretton Woods Institutions, the International Monetary Fund. If these lofty plans are stuck to, the plan is to bring the budget deficit to 5.4% in 2016, 4.5% in 2017, etc which will also mean that the target will be 3.5% in 2020. The lesser the budget deficit is, this will also mean that there will be lesser need for borrowings, both locally and overseas.
This will also mean that the Revenue will also have to improve which has to be ahead of the 12% of GDP now. This will have to be raised to around 20% of GDP by 2020. Then the first step would have to mean that the tax revenue also has to increase.
The increase of export revenues will also mean that there will be less pressure on the Balance of Payments (BOP) and the Current Account deficits. It will also address the concerns in the Balance of Payments issues. Then the government will not have to borrow from the Current Account.

That is essentially and effectively what the Prime Minister is saying. He is saying that we have to reduce the budget deficit and increase revenue.

Noble economic ideals

While lauding the Prime Minister for his noble economic ideals, it will only remain to see how it would be practically implemented. It also depends on what commitments that the government is having with so many Bond issues and what fate these have on the future.

One has to decide which is better. The economy and its growth have to improve. There are three options for the government. The first is to ensure that there is higher economic growth while the second is to reduce borrowings as a percentage of GDP which were hitherto for mega infrastructure projects which have yet to generate any form of returns and the third option is to repay all the loans.

Let us now compare the Sri Lankan economy and its taxation. According to the Central Bank Annual Report 2015, the debt to GDP ratio stands at 76%. However, few months back, the government claimed that the real debt to GDP ratio in the country exceeds 80% as the previous government had borrowed large sums of money through State-owned enterprises. The massive amounts of debt certainly reflect the crisis that the government has faced. What is more concerning is the increasing foreign debt and the increase of commercial borrowings. As per the Annual Report, domestic debt amounted to 44.3% of the GDP while foreign debt amounted to 31.7% of the GDP. The increase of foreign borrowings can cause serious economic issues, including a Balance of Payment crisis which the country faced early this year.

Sri Lanka, also, cannot raise loans at concessionary rates. It is now a middle income country and Multilateral and Bilateral institutions will also not have concessionary funding at the time it had only the status of a low income country.
However, contributing lavishly to the precarious situation is the foreign debt which is a legacy left behind by the previous regime from China, predominantly at prime Commercial rates which have not brought in any returns. That had made the situation from bad to worse.

These loans, despite being given as professional loans for Hambantota Port and Mattala Airport, have to be collected. We are eagerly awaiting your reminiscences. Ambitious plans are good but, these debt- driven funds would have benefitted of the money circulation locally. Now who is going to bell the cat? The government in its bid to pamper the voters, who brought them to power, lowered the fuel prices. Also the Rs 10,000 allowance which it promised, which has come a cropper.
There is also the need to increase the Direct Taxes but whom is the government targeting? The poor and the masses also have to pay for the settlement of the loans which have been taken at exorbitant interest rates and they are not even drawing the benefits. For instance, loans being paid for the expressways do not benefit the masses as they cannot even take a trishaw on those. So, there!

Conclusion

It is also a strange paradox, that this government is also adopting the practices of the previous regime. There has been a tender given to Indian company to repair the Northern railway line when the Railway Department had the capacity to do the same task at a lower cost which is the exact same thing that Rajapaksa regime did. Taking loans at a higher interest rate and awarding tenders to foreign companies will bring no good to the country.

There is also no proper plan to address the Balance of Payment issues.
The economic woes of the country are not something that this government has suddenly found out in a major discovery.
So, in order to have higher revenues, will the government stop or reduce subsidies such as Samurdhi, health and education?
At the moment the government has been caught in a catch 22 situation. The increase of revenue is not an option, but a must.

Given the conditions of the IMF, revenue increase alone may not be sufficient. The government will likely have to cut the expenditure. However, it is the job of the government not to hurt the common man in the process of implementing these reforms. Failing to protect the common man, will certainly not be an element of so-called social market economy which the government is boasting about.

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