Columns

Last week’s column discussed the burden of foreign debt during the last regime, when it doubled from US$ 21.4 billion to US$ 43 billion. The foreign debt that was about 60 percent of GDP at the end of 2014 is a continuing burden to the new government that took over in 2015.

Clarifications
Some misinterpretations on foreign borrowings of the present government, such as the currency swaps, have been clarified. The Finance Ministry or the Central Bank should make a detailed statement of the foreign loans taken by the previous government, the rates of interest and the period of repayment. It should also indicate the debt servicing costs in 2015 and due this year. Such a clarification is needed to dispel the idea that it was loans taken by the present government after 2015 that created the debt burden.

Current mismanagement
Admittedly the present government did not take the necessary policy measures to mitigate the impending crisis. It aggravated it by its fiscal and monetary policies in its quest for popularity to win the general elections in August.

The 2016 budget disclosed ineptness in fiscal management. Never in the country’s budgetary history has a budget been amended, changed and fresh proposals, so different from those in the original budget, been proposed by the government. Such revisions have created considerable uncertainty in economic policies, eroded confidence in the capacity of the government to manage the economy and are dissuading much needed investment.

Fiscal discipline
The fiscal discipline that was expected especially after the Prime Minister’s Economic Policy Statement prior to the budget was not implemented in the Budget of 2016. The guiding principles of the PM’s statement on taxation and fiscal consolidation were not adhered to. The fiscal deficit target of 5.9 per cent of GDP in the budget was disappointing. Moreover the fiscal measures were not expected to achieve it and the amendments increased the deficit further.

The prospect of reducing the fiscal deficit in 2016 and progressively bringing it to 3.5 per cent of GDP in 2020 was unlikely with the first budget’s fiscal approach. Now we have a fresh set of proposals and tariffs that are expected to reduce the yawning fiscal deficit.

Extravagant expenditure
As claimed in the Rajapaksa statement the savings from petroleum imports was spent on consumption. This was mainly due to the expenditure of the present government to fulfil election promises made at the Presidential election and granting of further benefits to woo the electorate at the general election. Consequently the fiscal deficit is expected to be 7-7.5 per cent of GDP in 2015.

In as much as the previous government mismanaged the public finances, the present government too mismanaged the public finances owing to the imperatives of electoral politics. Had President Rajapaksa returned for a third term and kept to his promises in 2015, the situation could have been much worse, unless he shelved the promises and squashed the opposition with an iron hand.

Election promises
Recall what the former Chairman of COPE, D.E.W. Gunasekera said of the election promises; that all government revenue would be inadequate to fulfil the promises of either main party. The extravagant promises were once again a reminder of Lee Kuan Yew’s celebrated saying that elections in Sri Lanka are an auctioning of non existent resources.

Political imperatives
Understandably political imperatives resulted in this excessive public expenditure that was a mismanagement of public finances. It accentuated the fiscal problems of the previous government.

The root cause of our fiscal difficulties is the populist economic policies of both governments: The former to remain in power and the latter to defeat it at two elections to usher in a return to democracy. It has been argued that the fiscal mismanagement was a small price to pay for ushering in law and order and in moving towards good governance.

IMF loan conditions
The former President’s views on the expected IMF loan are the conventional opposition to the corrective measures by the IMF of ensuring fiscal discipline and prudent fiscal and monetary policies. These are essential, though more drastic than would have been needed had the present government managed the economy better in 2015. Contrary to his view, it is the discipline that the IMF may impose that is much needed for an economic recovery. The measures or conditions suggested by the IMF are essential, though more drastic than would have been needed, had the present government managed the economy better in 2015-16.

The former President has conveniently forgotten that his government went begging to the IMF in 2009 after denying that it would ever go to the IMF for support. It did save the day, but after 2012 the discipline of the IMF standby program was lost.

Summing up
The foundation for the economic crisis was laid by the Rajapaksa regime’s imprudent economic policies. The large foreign borrowing for infrastructure development that did not enhance the repayment capacity of the country, and in some conspicuous large projects, added to government spending, is an underlying cause for the crisis.

Extravagant and wasteful public expenditure resulted in continuous large fiscal deficits that increased the public debt to such high levels when debt servicing costs nearly absorbed the entirety of government revenue, and some years even exceeded government revenue. Colossal losses in state owned enterprises due to their blatant mismanagement compounded the economic problems.

The new government of 2015 continued to mismanage fiscal policies as it increased public expenditures to fulfil election promises and gain political support for the general elections. It worsened the fiscal balance and the 2015 fiscal deficit is expected to be over 7 per cent of GDP. Inappropriate fiscal and monetary policies aggravated the trade deficit. Capital outflows owing to global developments and weakening of the country’s economic fundamentals eroded the foreign reserves.

In conclusion
Former President Mahinda Rajapaksa’s mid March statement on the economy not only justified its economic management but placed the blame for the current crisis on the present government. If truth be told, the Rajapaksa regime laid the foundation for the current crisis and the new government aggravated it by not taking needed remedial measures. The economic crisis was brought about by both governments pandering to the public to gain electoral support rather than implementing policies that would strengthen the economic fundamentals.