Financial Times

Reducing fiscal profligacy
When the World Bank says that "the fiscal situation remains under considerable stress”, it implies that if the country continues along its present path, the economy would go off the rails, and that tough, unpopular measures are required to prevent that happening.

That's the kind of diplomatic language the lending institution has used to describe the current state of the economy in a new report prepared for discussion at the forthcoming Sri Lanka Development Forum to be held in Kandy. It speaks of macro-economic imbalances and the need for a "sustainable fiscal stance" and of expansionary monetary policies.

It is well known that the government has been using the present monetary policy to keep interest rates low to reduce the cost of funds it borrows to bridge the budget deficit. The finance ministry is obviously taking calculated risks in the way it is managing the economy - almost a gamble - because it has to balance the interests of diverse sections of the people and often conflicting requirements. Such risk taking is not unusual and perhaps unavoidable in our case since we have little financial space within which to manoeuvre given the precarious nature of our finances and the weaknesses in the economy.

Many of the problems faced by the country are beyond the government's control, such as the unprecedented high oil prices which have burnt a bigger than expected hole in the government's budget. To that extent the government cannot be faulted for its present predicament.

No doubt the government would argue that it has to take such calculated risks in order to ensure fair play in economic management and prevent the most vulnerable sections of the people from sinking deeper into poverty, as it is usually they and the middle classes who have to bear the brunt of 'structural adjustment' that lending agencies are known to impose on poor countries such as ours. This is why the government waited for so long to raise fuel prices.

The government is hoping that inflation could be controlled with time and that the inflow of foreign funds, especially tsunami aid, will help shore up our inadequate foreign reserves and strengthen public finances. But in the meantime depositors and savers have to suffer negative returns on their hard-earned income.

But there are also factors which are very much within the government's control and stuffing the bureaucracy and state-owned enterprises with its supporters is one of them.

The World Bank report is sharply critical of the government's continued reliance on state employment to reduce unemployment. Around 13 percent of the labour force is employed in the public sector, which means that Sri Lanka has one of the largest bureaucracies in the developing world. It describes as "worrisome" the rising wage bill. It is well known that this government, even more than the previous one, is using large-scale recruitment to the state sector as one way of reducing unemployment and pacifying its supporters.

Many state organizations are overflowing with people, who sometimes do not even have a place to sit. The World Bank says that there is significant scope for reducing spending on the overstaffed and inefficient public administration and that there is an urgent need to improve targeting of welfare programmes to better reach the poor, through objective eligibility criteria. It says that "strong political commitment" is needed to address such issues as overstaffing, wastage and administrative fragmentation and duplication. That political backbone appears to be exactly what this government lacks.

These issues will do doubt be thrashed out at the aid forum later this month and the government will most likely come under strong pressure to reduce its profligacy.

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