Crumbling under public debt burden
The latest State of the Economy Report of the Institute of Policy Studies (IPS) highlights several key development issues facing the country. Among them is the need for political stability and progress in the peace process, the need for early fiscal consolidation, financial sector weaknesses, public enterprise reforms and the persistence of poverty.

The report identifies the burden of public debt as the most fundamental and serious economic weakness in the economy. The magnitude of the public debt and its high servicing cost is deemed as the crippling factor, as it absorbs a disproportionate share of public resources as debt service payments, thereby rendering fiscal management extremely difficult.

The report points out that this has led to a serious misallocation of resources by appropriating a large chunk of resources being utilised for debt servicing whereas they should have been expended for investment. Further, it indicates that even essential current expenditure needed to sustain basic social services is not available. The sad plight of the country is that an end to this serious constraint and impasse in the economy is not in sight.

"Despite repeated pledges by successive governments of their commitment to fiscal consolidation, Sri Lanka's total public debt (both internal and external) reached a level in excess of 100 per cent of the country's GDP by 2001. In 2002 the public debt had risen to 105 per cent of GDP. There are little signs that this ratio would be reduced appreciably in 2003, in spite of higher economic growth," the IPS report says.

Reducing the debt is deemed essential to facilitate a progressive easing of interest payments that have already reached an unsustainable level of nearly half the total government revenue. A surplus on the primary fiscal balance should be speedily achieved, if meaningful progress is to be made in economic management.

The IPS report is of the view that it is vital to reduce the fiscal deficit to about 3-4 per cent of GDP from recent levels exceeding 8 per cent. The report points to the need for fiscal consolidation by both curtailing expenditure as well as increasing revenue.
However, the IPS is of the view that the scope for trimming expenditure appears to be limited. The problem is compounded, as the capacity to increase government revenue also appears to have weakened.

"In recent years, the country has witnessed a progressive deterioration in the government's revenue effort," the report says and contends that it is vital that the fiscal deficit is reduced to a level of about 3-4 per cent of GDP over the medium term, from recent levels exceeding 8 per cent.

The tenor of the report is that the realisation of such a fiscal consolidation is unlikely owing to the government's inability to rein in expenditure as well as increase revenue.
The bottom line then is that the most pressing problem in the economy will remain unresolved. Strong political will and determined action, the report contends, are essential for better targeting of welfare expenditure and improving expenditure controls.

While the report admits that the enactment of the Fiscal Management Responsibility Act (FMRA) and the Welfare Benefit Law (WBL) to reform the welfare system with better targeting is an important step in the right direction, it appears to be sceptical about their implementation.

The improvements in tax administration and the establishment of a Revenue Authority, it points out, are still pending. The reduction of the public debt and its servicing cost being a fundamental prerequisite to economic progress, it deems bold measures are needed to resolve it.

The report contends that the scale and magnitude of the problem is such that it is not possible to reduce the debt burden by economic growth alone. "The magnitude of the problem and its corrosive impact on development dictate drastic actions to reduce the public debt. Only sacrifices in the present for the long-term good of the economy can effectively reduce the debt burden. Such a call for sacrifice and burdens are not politically feasible in a context where the public at large expects benefits rather than burdens," the report says.

Many of the other problems in the economy that the IPS report alludes to or discusses, have at their foundation the poor state of the public finances. No government could hope to solve the country's economic and social problems without rectifying this fundamental problem. Yet there is hardly any progress towards resolving the problem. By implication the sorry state of the economy will prevail.

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