Challenge of Lanka’s economic revival under the “new normal”
Posted on November 8th, 2020

By Sugeeswara Senadhira/Daily News Courtesy NewsIn.Asia

The Gotabaya Rajapaksa government has taken a variety of steps to correct economic distortions brought about by the pandemic

Colombo, November 6: On the eve of the first anniversary of the Gotabaya Rajapaksa government, the Budget for 2021 is to be presented by Prime Minister Mahinda Rajapaksa, who also holds the Finance portfolio. Some people are of the view that the budget could also be considered as a scorecard of performance in the first year.

However, it is a wrong assumption. The government’s performance since November 2019 had been tested at the people’s court and at the August 5, 2020 General Elections and the voters had overwhelmingly given full marks to the government. They gave it a thumping victory, nearly a two-third of seats in the 225-member parliament.

Budget 2021 is being presented at a time of global and local economic retardation due to the Covid-19 pandemic forcing economic activities to slow down and in some spheres. The government will present the budget based on President Gotabaya Rajapaksa’s ‘Vistas of Prosperity’ Policy Statement targeting people-centric development, and the general economic development and welfare of the people.

While the economy is on the downslide, the government is faced with unemployed persons and their families amidst a drop in expatriate remittances and loss of jobs for many expatriates. Despite all these, the government will definitely put forward proposals to revitalize collapsed businesses.

All said and done, Sri Lanka’s resilience in the face of challenges is well known and the government is expected to take stern measures to ensure fiscal consolidation to reduce the deficit and give a push to economic revival.

Treasury Secretary S.R. Attygalle acknowledged that the budget deficit for 2020 would be 9% but insisted that this was largely due to expenses that were carried over from the previous year and also Covid-19 related expenses. Government expenditure for the year 2021 has been estimated at Rs. 2,678 billion with the highest allocations for the Ministries of Defense, Highways and Provincial Councils, according to the Appropriation Bill for next year.

Separate allocations have been made for State Ministries in the Budget with those related to agriculture and rural development sectors getting the bulk of the allocations along with the highways and road development sector.

Of the total of approximately Rs. 2,678 billion (Rs. 2,678,040,000,000) estimated for the period beginning January 1, 2021 and ending on December 31, 2021, Rs. 1,714,301,178,000 is for recurrent expenditure while Rs. 963,738,822,000 will be for capital expenditure.

The expenditure will be met from payments which are authorized to be made out of the Consolidated Fund or any other fund or moneys at the disposal of the Government and from borrowings made in the financial year 2021.

The limit on borrowings for the financial year 2021 has been set at Rs. 2,900 billion with the details of such loans to be incorporated in the Final Budget Position Report which is required to be tabled in parliament under Section 13 of the Fiscal Management (Responsibility) Act No. 3 of 2003.

The difference between the total short-term borrowing during the financial year 2021 and the total settlement of short-term borrowing made during the financial year 2021 shall only be considered in deciding the volume of short-term borrowing for the purposes of calculating the borrowing made during the financial year 2021 as specified by the Appropriations Bill.

Dr. Attygalle stated that the highest allocations in the Budget will be for the Ministry of Defense Rs. 355 billion (Rs. 355,159,250,000) of which Rs. 316 billion (Rs. 316,806,290,000) will go towards recurrent expenditure while capital expenditure is at Rs. 38 million (Rs. 38,352,960,000).

The State Ministry of Internal Security, Home Affairs and Disaster Management has been allocated around Rs. 152 billion (Rs. 130,818,002,000 for recurrent expenditure and Rs. 21,647,040,000 for capital expenditure).

The Ministry of Education has been allocated over Rs. 126 billion with over Rs. 102 billion (Rs. 102,670,000,000) towards recurrent expenditure and around Rs. 23 billion (Rs. 23,870,000,000) towards capital expenditure.

The Ministry of Health has been allocated around Rs. 159 billion but the bulk of the money around Rs. 128 billion (Rs. 128,480,998,000) will go towards capital expenditure while around Rs. 30 billion (Rs. 30,995,000,000) will go towards recurrent expenditure.

The Appropriations Bill provides for the financial year 2021; authorizes the raising of loans in or outside Sri Lanka for the purpose of such service; makes financial provisions in respect of certain activities of the government during the financial year; enables the payment by way of advances out of the Consolidated Fund or any other fund or monies, of or at the disposal of the Government, of monies required during that financial year for expenditure on such activities and provides for the refund of such monies to the Consolidated Fund and to make provision for connected matters.

It is a matter of fact that the government is keenly working to reduce the deficit to about four percent over the next few years.

Economists admit that it is impossible to reduce the budget deficit at once. But we hope to gradually reduce it from next year. One of the main reasons for the Budget deficit to increase to nine percent this year was unpaid bills by the State,” they asserted. Of the Rs. 242 billion that was owed, Rs. 226 billion has already been disbursed. Once these payments reach the rest of the economy, including banks, we are anticipating a resurgence of growth in the third and fourth quarters.”

State Minister of Finance, Capital Market and Public Enterprise Reforms Ajith Nivaard Cabraal has dismissed predictions of doom. He said that those predictions failed to recognize and do justice to the ground reality of the ongoing rapid economic recovery backed by the vastly improved business confidence arising from the return of political and policy stability after a lapse of five years in Sri Lanka.

He charged that a leading global credit rating agency has unreasonably and in a biased manner, downgraded Sri Lanka’s Credit Rating without analyzing the ground realities of the national economy, mainly in the successful fight against the Covid-19 pandemic and economic reforms introduced by the new government.

During the three different phases of the Covid-19 pandemic, the government was compelled to impose a curfew in order to implement social distancing effectively to prevent the spread of the pandemic. While this has curtailed the spread of coronavirus, the downside of the move was that the entire economic sphere came to a standstill. The services sector, manufacturing and retail services have come to a halt. Although the public and private sector employees have been instructed to work from their residences during the period of the lockdown, only a very few economic activities could be carried out in such a manner.

Even though the Government has allowed agricultural production to continue unhindered, doubts about marketing the produce due to uncertainties surrounding the lifting of curfew hours, difficulties in obtaining fertilizer and other inputs, and worries about possible crop wastage due to lack of storage facilities prevented a substantial section of the farming community from harvesting.

The sectors that suffer the most are the daily wage earners and Micro, Small and Medium Enterprises (MSMEs), including those in the informal sector. The daily wage earners could be taken care of by the temporary welfare scheme of giving an Rs. 5,000 handout and supply of essential food items.

However, loss of economic contribution from MSMEs which account for a little over half of national employment would be a heavy loss to the Gross Domestic Production (GDP). The absence of any meaningful economic activity for a month or two will severely affect the well-being of those involved. Since daily wage earners and many MSME employees operate on thin margins and low levels of reserve savings, a prolonged lockdown without adequate support would lead to unemployment and a major loss to the GDP.

With these in mind, President Gotabaya Rajapaksa has instructed that a post-Covid-19 economic strategy should be devised to minimize possible economic downturn due to the ceasing of almost most economic activities as a result of the coronavirus. The steps taken had enhanced employment opportunities in the Small and Medium Enterprises (SME), leading to lower social tensions. The resulting economic activities in the country would ensure a rise in government tax revenues.

Other steps to revive economic activities included fiscal steps to augment the small and medium sector, directing and providing facilities to the Department of Agriculture and to the Department of Agrarian Services to provide seeds, plants, fertilizer and equipment required for farming and encourage seed farming, use of organic fertilizer and home gardening as well as to grant loans to farmers through State banks. Budget 2021 is expected to continue these fiscal measures to ensure a speedy revival of economic activities in these vital sectors.

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