Fiscal reforms imperative for sustained growth, says Economics Prof. Indraratna
Prof. A.D.V.de S. Indraratna
Populist proposals such as salary increases, various perks and consumer subsidies should not be undertaken without commensurate proposals for enhancement of revenue, especially direct tax revenue, Sri Lanka’s best-known economics professor has said.
Prof. A.D.V.de S. Indraratna, President of the Sri Lanka Economists Association (SLEA), speaking at the inauguration of last week’s 13th annual sessions of the association in Colombo, said that it was common knowledge that fiscal operations over the years have resulted in a high budget deficit and an excessive debt burden which has to be serviced without allowing it to pile up further. “The government must take steps to curtail expenses especially those of a current nature,” he said. This is unfortunately a call made by many people in many forums over many years which have gone unheeded.
The theme of this year’s SLEA sessions was ‘Fiscal Reforms: An Imperative for Sustained Growth’. Here are excerpts of his presentation:
“The Finance minister seems to have accepted that Sri Lanka’s ‘major problem has been living beyond means’. However, the remedial action taken so far for its solution has not been encouraging. Even though the trend of current revenue which has fallen consistently as a percentage of GDP from 16.8 in 2000 to 11.4 in 2014 has been reversed in 2015, with around 20 per cent absolute increase in the total revenue over the previous year, this has happened due to the very large increase of indirect taxes, that is taxes on domestic goods including excise taxes on tobacco, liquor, petrol, etc. Of the total increase of around Rs.305 billion of total tax revenue, only around Rs. 65 billion, just 20 per cent, was from direct taxes. This was rather in direct antithesis to the policy announced by the Prime Minister, just before the budget in November 2015. Worse still, current revenue has increased at a much slower rate than current expenditure, almost doubling the primary deficit as a percentage of the GDP, and the overall budget deficit to an unsustainable level of 7.4 per cent of the GDP in 2015.
On the other hand national debt – both domestic and foreign, has increased, with the debt service ratio on foreign debt rising from 20.8 per cent of the GDP in the previous year to 27.7 per cent, in 2015, that is by more than 7.5 per cent of the value of the exports of goods and services, which themselves have been falling. Even though a part of this increase might be due to the inclusion of some earlier unregistered debt discovered latterly, the net increase is still significant.
Foreign direct investment (FDI), which is also necessary for sustained growth, has not improved either. With the end of the terrorist war and the establishment of peace, FDI was expected to increase significantly. This did not happen. FDI has, in fact, reduced to 0.83 per cent of the GDP in 2015 from more than 1.0 per cent of GDP in each of the preceding four years.
Foreign private investors desire good governance and an efficient and corruption – free public sector when deciding to invest in a country as a sole investor or more so, in partnership with the Government in the form of Private – Public Sector Partnership (PPP). The inevitable conclusion is that without an enabling environment with good governance and its characteristic attributes, foreign investors are reluctant to come in a big way. And, unfortunately, there is no substitute for good governance.
With the new unity Government, the journey to good governance has only begun. Independence of the judiciary has been restored; the rule of law has been made operative; the right to information has been enforced even though subject to some limitation; media freedom improved and independent commissions have been appointed though integrity and independence of a few of them have been questioned. Nevertheless, there is a long way to go in the elimination of waste, extravagance, corruption including favouritism and nepotism, and enforcement of transparency and accountability in public and corporate transactions, which are all attributes of good governance. There are allegations in respect of each one of these. One does not have to enumerate them; they are in the know of public domain and in the media and in the recent reports of COPE and COPA.
With regard to trade policy, Sri Lanka must not rush to embrace bilateral trade agreements like the ETCA, but focus more on regional and multilateral trade. At the same time, Sri Lanka should enhance its competitiveness by improving product quality and cost via improvement in productivity, and adhering to standards needed to access international markets. I hope the Development Framework or Plan, which the Prime Minister is scheduled to announce soon, would come out with a home-grown model determined by the endowment of the country’s natural and human resources, its strategic location and its insularity and small size. In this context, SLEA is glad that the Prime Minister, according to the media, has thought it fit to appoint a committee comprising our own local economists and other professionals rather than getting down foreign experts.