One of the criticisms of the budget was that it followed IMF policies. These were described by some in the opposition as following neo classical liberal policies. Ironically the 1977 liberalisation of the economy that the UNP ushered in were basically neo classical liberal economic policies with a few adaptations. What is sauce for the goose is not sauce for the gander! It is one thing when in government another when in opposition.
It is not the label that one attaches to economic policies that is important but the efficacy of economic policies to achieve the objectives of rapid economic growth, enhancement of employment, and reduction of poverty. Other objectives would be the reduction of regional difference in incomes and a better distribution of incomes. These are agreed aspects of economic policy.
The Mahinda Chintana too has these as its goals and objectives. How they are to be achieved would have differences of opinion. There is no need to attach labels to the policies; it is whether they are good policies to achieve the desired objectives that matter. Neo classical, liberal or other is not the issue. Neither is it important whether they are home-grown or suggested or imposed by foreign agencies. What are needed are good economic policies that achieve results.
It is also recognized that stabilization of the economy is of utmost importance to launch a big push in economic growth. Economic stabilization is vital for high growth. Neo classical or otherwise, few would disagree that containing the fiscal deficit to a manageable proportion is a precondition for investment and growth. It is also essential that the public debt does not rise to such a level and that debt servicing costs do not absorb a huge proportion of government revenue.
A massive expenditure on debt servicing implies that the government has no funds for developmental expenditures and sometimes even for current expenditures. Recurrent large fiscal deficits lead to large public debt that in turn means large debt servicing costs. Therefore bringing down the fiscal deficit is vital for economic growth.
In the case of Sri Lanka in 2009 debt servicing costs absorbed more than the revenue for the year. To be specific, debt servicing costs were 114 per cent of revenue in 2009. It means that debt servicing costs were 14 per cent more than the revenue of the government. Where then is the money for recurrent expenditure quite apart from capital expenditure for development needs?
The government has to borrow and the public debt increases and debt servicing costs rise. How does the economy move out of this vicious debt cycle? This debt trap if not checked will pass on a huge debt to future generations. It is through fiscal consolidation or bringing down the fiscal deficit progressively that the country could achieve economic growth.
This is why fiscal discipline is needed. We don’t need the IMF to tell us this. But we do need the IMF to discipline us as we do not have the self discipline in fiscal management or good governance in economic affairs. If the IMF exerts that influence it is for the benefit of the country. The stark reality is that the government has agreed to several key conditions in fiscal management to obtain the IMF loan. This despite the fact that the IMF bent backwards to grant the loan in spite of the government not keeping to the previously agreed amount of the fiscal deficit. The arguable issue is whether the government will comply with the agreed conditions or manage the country’s finances in any way it wants to and even consider flouting good economic principles.
The agreed conditions are quite clear. They are contained in the government’s letter of intent signed by the acting Minister of Finance and the Governor of the Central Bank to the Managing Director of the IMF, Mr. Strauss-Khan. These agreed conditions include the reduction of losses in state enterprises, reduction of defence expenditure, containing subsidies to current levels in nominal terms, reform of the tax system especially the elimination of tax exemptions, broadening the VAT and income tax base and increasing tax revenues on a sustainable basis.
These are good principles to follow in order to bring down the fiscal deficit. Therefore agreeing to these conditions is not the problem. Deviating from them would be.
The compliance with these conditions is the way to fiscal consolidation. The government is expected to bring the fiscal deficit down from 8.9 per cent last year to 7 per cent this year and reduce it further to 6 per cent in 2011 and to 5 per cent thereafter. This objective was also the objective of the Fiscal Management Responsibility Act of 2002 that was never complied with. In the light of past experience and the approaches of the government to expenditure and reforms, it is most unlikely that these programmes would be effectively implemented and the deficits contained within the agreed levels.
This then is the salient issue. Instead of criticizing the government for agreeing to these conditions, the opposition could be a watchdog to see whether the government would comply with these conditions. Constant review of the government’s progress in achieving these goals would be a constructive role for the opposition.
The government may not be concerned in complying with these conditions for another reason discussed in last week’s column. The most likely outcome would be that the fiscal deficit targets would not be met. The government will adduce a series of reasons why this was so, such as unfavourable external factors, for instance the continuing recession in developed countries and the withdrawal of the GSP + concession by the EU countries and expenditure on reconstruction and economic infrastructure. The IMF keen to remain in business in Sri Lanka will readjust the targets and continue to lend.
This is a deadly scenario where intentions and attainments would diverge to keep the country in a debt trap. If the economic fundamentals continue to be unfavourable, there is no way in which the goals of achieving 8 per cent growth from next year could be realized. Instead of the dream of two digit economic growth we will end up with two digit inflation. Complying with the IMF’s conditions for fiscal stabilization is good for the country irrespective of the fact that these are conditions laid down by the IMF. |
E-mail