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The ‘interim’ government cannot be expected to pursue long-term economic policies. Admittedly some steps have been taken in its one hundred days programme to improve economic governance, but its primary concern is to establish itself by delivering the promises made during the presidential election campaign.

Political expediency will determine its economic policies for the present, but vital economic reforms must be undertaken after the election to improve economic fundamentals. An important difference in the current regime is that it recognises that the Government’s resources are limited; that extravagant and wasteful expenditure should be curtailed; that government revenue must be increased; that public enterprises should be run efficiently with proper management in place; and that there should be a different prioritisation of public expenditure. These are significant changes in economic perspectives that will have a bearing on the economy.

Longer view
However, a longer view of economic consolidation through fundamental reforms is needed to stabilise the economy and place it on a path of sustained high-economic growth. Economic stability cannot be achieved without fundamental reforms in economic policies. Reforms in public enterprises, education, public administration, health administration, taxation policy and other areas are crucial for long term economic development.

The need to increase government revenue has been recognised. Despite economic growth of around 7.5 per cent, the revenue collected as a percentage of GDP has fallen from about 20 per cent to around 12 per cent. This is an unacceptable for a country with Sri Lanka’s per capita income. Appropriate taxation measures and an efficient tax collection mechanism have to be put in place to increase revenue.

The ad hoc taxes the Government introduced is not the correct means of ensuring higher revenues, as these taxation measures have eroded business confidence and created uncertainty. An early reform of the taxation system to eliminate tax exemptions, tax avoidance and tax evasion is needed. The taxation system must be simple and pragmatic and take into consideration the weak capacity of tax administration.

The reform in trade and excise taxes, a broader tax base and more effective tax collection are needed to achieve higher revenue collection that would reduce the fiscal deficit. Increasing revenue depends very much on the realistic nature of the tax reforms, the administrative capacity and honesty of officers of the Department of Inland Revenue and other tax colleting agencies.

State enterprises
Lossmaking state enterprises are a huge burden on public finances. Most enterprises were managed by incompetent people, who were not concerned about their efficiency. SriLankan Airlines and Mihin Lanka are glaring examples of such mismanagement. The efficiency of state enterprises could be improved to lessen the huge losses that are a heavy burden on state finances.

The replacement of incompetent persons from management positions in state enterprises could reduce losses, but far more extensive reforms are needed. Efficient management within the public sector is inherently difficult to achieve as political interference is inevitable. Inefficient political appointees overcrowd state-owned commercial enterprises. This feature that is an important cause for inefficiency of state enterprises is difficult to eliminate.

Privatisation of some state-owned enterprises offers the best means of reducing losses and gaining from their sale proceeds. However, this is difficult owing to ideological reasons and its unpopularity owing to a mindset that views privatisation as “selling the family silver”. The Chandrika Bandaranaike Kumaratunga government adopted a pragmatic policy of privatisation that improved public finances.

Expenditure
The curtailment of extravagance and waste will reduce government expenditure. However, some of these gains have been offset by reductions in prices, tariffs and the granting of substantial increases in salaries and pensions of public servants. Salaries and pensions are the second highest government expenditure after debt servicing costs. Expenditure on education and health would also increase the fiscal deficit by about 2 -3 percent of GDP.

The weakening of public administration capacity has been a serious constraint. The over expansion of the public service has denied the country the possibility of a well-paid incorruptible efficient administration. The strengthening of administrative and research capacity is a priority that can be achieved only in the long run.

The appointment of an independent Public Services Commission will be an important step in this direction. More stringent recruitment qualification for the higher echelons of the service and training are needed to ensure quality administration.

Debt problem
The issue of the large public debt, especially the foreign debt, must be addressed to avoid a debt trap. The new Government has disclosed that the actual debt is much higher than what was disclosed earlier. Debt servicing costs absorb the entirety of government revenue and foreign debt servicing absorbs about one fourth of export earnings.

The last government argued that debt was not a problem as the debt to GDP ratio was falling to around 85 per cent. This is not a good measure because it does not tell us anything about the maturity structure: Whether this amount to be paid back in the short term or in the long term. Other criteria of debt servicing costs cited above indicate the serious burden of debt.

Foreign debt
There is some inflexibility in managing the foreign debt as the Government is struck with the very expansive contracts signed with the Chinese such as the Port City Project. No economic analysis had been made in any of the large projects such as the Hambantota harbour, the Mattala Airport or international cricket playgrounds. These have been financed by foreign borrowing at commercial interest rates. A restructuring of the debt profile may be needed to ease the debt servicing burden.

Concluding reflections
Good economic management that reduces the fiscal deficit, public debt, trade gap and long-run administrate capacity to achieve the country’s economic potential must be effected by the Government after the elections. The 2016 budget must be based on a perspective plan with a programme of action for the next five years. Fundamental economic reforms should be a part of that programme of action.