By Dr Arujuna Sivananthan

IMPROVEMENT

Sri Lanka’s 2017 budget seems to be receiving several accolades, not from those outside Sri Lanka or anyone credible within, but from politicians in the ruling coalition. So it should!

The coalition’s attempt to shed its statist skin by expressing an intent to privatise loss making state owned enterprises (SOEs) must be welcomed along with permitting foreign nationals to buy property. It also makes good economic sense.

By Sri Lankan standards it is not the worst budget, particularly when compared with the wanton recklessness of last year that precipitated a balance-of-payments crisis within three months, negative ratings actions by Moody’s, Standard & Poor’s and Fitch, and, made its exchequer go once again with bowl in hand on bended knee begging to the IMF.

I say this with gritted teeth, nevertheless the Rajapakses showed better fiscal prudence in their final year in office than this government did last year – a fact that did not escape foreign ministries in major capital cities and cited by rating agencies in their reports. With respect to the former, it took a while for them to reconcile with this, given the UNP’S so-called reputation for good fiscal management and “sound” economics. Though, when confronted with mounting facts, in the end they did.

EXTERNAL DURESS

The 2017 budget is a significant improvement from last year, though it was crafted under severe external duress.

Also it hits famers and those who live in rural areas hard, and, uses steep hikes in both direct and indirect taxes to narrow the deficit. There is very little infrastructure spending, which has a high multiplier effect on national income.

Firstly, Sri Lanka’s external debt metrics are worse than Pakistan’s. Rating agencies have made this clear in reports published this year. And, while Sri Lanka rating remains above Pakistan’s, all three major agencies have it on negative outlook with a high likelihood of being downgraded absent a major course correction. In such an instance it will share a place with Rwanda, Seychelles, Uganda and Jamaica. Only Venezuela, Ukraine and Greece are rated lower.

Secondly, the IMFs conditionality on disbursing more instalments of its bailout package makes fiscal consolidation necessary.

Sri Lanka’s external reserves as of the 11^th of November stood below USD 6 billion. For the remainder of this year its exchequer is thin on options with only loss making SOEs such as the Hambantota Port to sell to raise much needed foreign currency reserves.

Also, next year Sri Lanka needs to tap international capital markets and external creditors to refinance existing debt and fund its budget deficit. To do this it needs to demonstrate some semblance of attempting fiscal discipline and adherence to IMF conditionality despite both being politically unpalatable. With emerging and frontier markets experiencing negative fund flows since October, which accelerated following the election of Donald Trump, the necessity for this becomes more acute.

Finally, foreign governments and in particular the major shareholders of the IMF have been expressing alarm in public and their parliaments over Sri Lanka’s economic trajectory. While it took time to dawn on them, some in the diaspora have been shrill and relentless in expressing their angst over economic policymaking in Sri Lanka over the past twelve to eighteen months.

This should be noted in the context of the carte blanche the Tamil National Alliance (TNA) opposition gave Sri Lanka’s government to spend at will last year, and, thus neglecting its obligation to perform its role in parliament of credibly challenging the government on its fiscal discipline. Though, it needs to be excused on the basis that its economic literacy level is zero.

PEACE DIVIDEND

Sri Lanka’s fiscal imbalances stem largely from one line item in its budget. It is also the reason why it suffers from low productivity and a lack of competitiveness. That is, its persistent failure to cash-in the peace dividend.

Since the war ended, Sri Lanka’s government has not engaged in a meaningful Strategic Defence and Security Review, like the UK does every 5 years to upgrade its threat assessments and re-contour its defence forces and spending accordingly.

Almost seven percent Sri Lanka’s population relies on its defence expenditure, a seventh of government spending, for their livelihood. It has failed to re-train and re-skill military personnel so they can seek productive employment, unlike the UK and NATO member states did after the fall of the Berlin wall, and thus generate much needed fiscal consolidation but also increase the productivity of its labour force.

Sri Lanka’s armed forces, the army in particular, have evolved into a client state. However, despite there being several fissures that stem from rivalry among the general staff, at regimental level, political affiliation, caste and other differences, this government has shown no willingness to expend the necessary political capital to deal with this.

Tackling defence spending will also help Sri Lanka negotiate the challenges it confronts in multilateral forums such as the UNHRC or regain GSP+, the trade concession it once enjoyed with the EU.

Inexplicably, rather than challenge the government on these critical matters, the opposition TNA seem preoccupied with focusing on issues marginal to Sri Lanka’s budget. Also running counter to global economic trends it wants the government to retain ownership of its SOEs.

Furthermore, the TNA asks for the armed forces to release civilian occupied lands and speaks loudly about demilitarization. Yet last year they voted with the government for record defence spending and thus helped provide the life-blood to Sri Lanka’s military apparatus to sustain these and ongoing human rights abuses of the most egregious forms. Disappointingly, the TNA opposition has not challenged Sri Lanka’s high level of defence spending in the 2017 budget as well.

It is also apparent that Sri Lanka’s government has chosen to tread a different fiscal path, not due to any overt desire to change or any internal pressure but pressures entirely external.

POLLS NEXT YEAR

The contractionary nature of this budget also casts serious doubt over this government’s pledge to hold several polls, including local government elections and the so-called referendum on a “new constitution”. Thus far without exception incumbent parties have presented highly populist budgets with sweeteners for every constituency ahead of the country voting. This is also a global phenomenon, but in Sri Lanka this is done to extremes.

In this budget, steep tax hikes adversely impact every voter, while the sharp contraction in agricultural spending hits rural constituencies very hard. With Sri Lanka’s voters being buffeted by economic forces from beyond its shores, and, this budget forcing necessary belt tightening it is highly questionable whether this government will risk seeking a mid-term verdict from a financially squeezed electorate that could undermine its prospect of governing for its full mandated tenure.

Do not hold your breath for polls next year. Those who have fawned and been pliant at all costs, including political parties, expecting the government will stick to its promised timetable of polls are likely to be jilted; jilted at the very last minute and left standing at the altar despite whispering sweet nothings in their ears now.

Tamils must take serious note that of that this government when presented with choosing between incumbency and implementing a political solution to solve their woes, despite what it says now, will always choose the former!

Dr Arujuna Sivananthan has a MSc and PhD in economics from the University of Glasgow where he was a university scholar and also tutored economics. He is an entrepreneur and runs a medium sized business that employs over 200 people. Prior to this he was a Director at Barclays Capital where was responsible for trading bonds and credit derivatives in the TMTs, Autos and Utilities sectors. Prior to this he was a Director and Head of High Yield Trading at Societe Generale. He first worked at Commerzbank where he was Vice President and traded on the Proprietary and Eurocorporate bond trading desks.