Harim Peiris

Political and Reconciliation perspectives from Sri Lanka

  • November 2017
    M T W T F S S

Budgetary Challenges for 2018

Posted by harimpeiris on November 24, 2017

By Harim Peiris

(Published in the Daily News of 23rd Nov 2017)


“Good economics is good politics” goes the old adage and Finance Minister, Mangala Samaraweera, relatively new to his crucial portfolio of public finance has presented his maiden budget, styled a blue green budget, which in characteristic Mangala style, is optimistic, forward looking and environmentally friendly, highlighting the opportunities and the promise available to an economy emerging from nearly three decades of civil conflict.  The budget debate as it proceeds through Parliament, reflects the many economic challenges ahead for the Finance Minister and economic Yahapalanaya.

That the National Unity Government of President Sirisena and Prime Minister Wickramasinghe inherited an economy, which had been badly mismanaged together with significant corruption in the preceding term, is widely accepted not just in the commercial world, both local and international, but also among the general public. However, the public expectations from the Yahapalanaya Administration has been quite high, as the Rajapaksa’s and corruption were largely blamed for Sri Lanka’s economic malaise. The end of the Rajapaksa’s in 2015 raised public expectations, that a “good governance dividend” would be forthcoming. It is this good governance dividend which now, the leaders of Yahapalanaya have called upon Mangala Samaraweera to deliver. Mangala is no stranger to state sector reform. It is worth remembering that it was Mangala twenty years ago, who as the then Minister of Telecommunications and Media, who implemented the entire telecom sector liberalization, ending the state sector monopoly and privatizing Sri Lanka Telecom, resulting in Sri Lanka today having South Asia’s most advanced telecoms infrastructure and its highest mobile and internet penetration rates.

The Standard and Poor’s rating outlook upgrade


A few days ago, the international credit rating agency, Standard and Poor’s revised upwards, Sri Lanka’s credit rating outlook from negative to stable. In practical terms, this should make Sri Lanka’s access to the international capital markets to refinance its maturing dollar loans easier and somewhat less costly. On a more policy recognition level, the outlook upgrade recognizes what the rating agency calls the “improving reform momentum” including the passage of the new Inland Revenue Act, the proposed Liability Management Act and the recent independence of the Central Bank.

The political challenges of reform


However Standard and Poor’s also states that “we continue to observe significant challenges to the policy making environment”. Economically the Rajapakse post war policy of foreign, largely Chinese, commercial borrowings spent on projects of dubious utility value, such as a little used port, airport and a loss-making budget airline together with the world’s most expensive highways was no longer fiscally possible. Besides the astrological predictions, the other more rationale political reason for Mahinda Rajapakse calling the presidential elections two years before his term was over, might well have been the advice of his economic guru’s that the borrow and spend good times, just could not be sustained. The Yahapalanaya Administration though is faced with dealing with both the decades of economic reform stagnation, as the civil war sapped our national energy and more importantly the mismanagement of the immediate post war era. This mismanagement ballooned the national, especially foreign debt, while making precious little contribution to sustainable economic growth. The challenges of a low productive agricultural sector, an education system which produces graduates for non-existent white-collar jobs, inflexibility in the labor market through archaic regulations, are all long overdue for reform. The immediate challenges of stagnant or declining expatriate worker remittances, undiversified exports and especially significantly below peer group average foreign direct investment and tourist arrivals, all remain to be addressed.

The Poverty Legacy of the War in the North and East


The Blue-Green Yahapalanaya budget 2018, though addresses and deals with one of the key effects of the decades long civil war in the Northern and Eastern provinces. The recent survey by the Census and Statistic Department denotes that average median household incomes are considerably less in the North and East than they are in the rest of the country. The destruction of community infrastructure has resulted in serious livelihood and income generation challenges especially in the rural parts of the North and East. Amid the rural poverty, the food security, health and overall vulnerability of certain social sub groups, such as women headed households and children in low income families is acute.

The budget also allocates funds for the implementation of the much delayed fifty thousand houses program in the North and East. This time directly under the President in his capacity as Minister of Reconciliation. It is somewhat regretted that this flagship project, much awaited and anticipated in the North and East was delayed due to the controversy over the proposal to build the houses in steel rather than the common and culturally acceptable brick and mortar constructions.

In terms of reconciliation, while the Government works through the constitutional framework for political reform, it is also important to recognize and address the effects of the war, especially on the most vulnerable sectors of the population. It is expected that the fifty thousand houses program if targeted correctly will make a significant contribution in that regard.

It is interesting to note that the Government enjoys a two third (2/3) majority in Parliament for its annual signature finance bill and that both the first and second readings of the budget has passed with greater than one hundred and fifty (150) votes, being a two third majority in the House. A Government which commands that much support in the legislature should not waste this majority on business as usual, but move towards effecting the economic, democratic and reconciliation reforms which Sri Lanka, so badly requires.

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