Economist and statistician Dr Anila Dias Bandaranaike made a well-crafted presentation of the budget at various panel discussions she addressed this week. Here is a synopsis of her presentation:
On Past Performance vs. Future Targets
- Targets have been lowered since the Central Bank Annual Report 2010, indicating that goals have been moderated since early 2011.
- (The focus is to) maintain, rather than increase, annual economic growth
- (Aiming at) lower investment target
- Higher budget deficit and inflation targets
- 3% exchange rate devaluation acknowledges past misalignment
Recent Budget Estimates vs. Actuals
- Revenue down, Recurrent Expenses above targets upto 2009
- Expenditure more than double revenue upto 2011
- Recurrent expenditure exceeded revenue upto 2011
- Debt servicing used most of revenue upto 2011
Proposed economic actions to goals
- Infrastructure to improve regional economic access
- Private investment for development (This means higher state involvement in economic activities)
- Export competitiveness with value addition (means consumer imports for domestic retail and tourist market)
- Education reforms towards vocations, better language, IT, soft skills. (There was no reference to the unmet demand for university education)
Lower commercial borrowings (The conceptual framework not clear; the capacity to deliver uncertain, and need to address inconsistencies)
Positives
- Consultative process – with 3,000 stakeholders
- Recognises need to modify market economy to local conditions – build on post conflict dividends
- Recognises key structural problems – regional disparities, inadequate investment, losing export competitiveness, rising import bill, rising debt
- Recognises key social problems – aging and health, remaining poverty, environmental protection, social security, access to tertiary education, food security, idle armed forces
- Overall broad policy consistency
Negatives
- No reconciliation of Proposals, Estimates, Performance – Investment, Revenue, Expenditure
- Implementation regression from 2011 Budget
- Reversal from broad macro to narrow sector specific incentives
- Reversal from simplifying rates and taxes
- Back to tax holidays and ad hoc tax relief measures
- Conflicting signals to Private Investors
- Wanting private investment vs. New Expropriation Bill, 37,000 hectares (being taken over)
- Pushing foreign employment vs. meeting local HR needs
- Backtrack on previous medium term strategy
- lowering of targets with less direction
- Poor consolidation of recent gains
- poverty decline not reflected in welfare measures
- Rhetoric vs. Proposals – lack of clarity in rationale
- Why Rs 100,000 for 3rd child in forces or police families?
General observations
- Anti-climax - 2011 Budget a hard act to follow!
- Overall policy consistency with some confusing signals
- Does not clearly connect objectives with proposals
- Regressed on consolidation, simplicity, direction
- Some strange proposals indicate government’s need to accommodate all stakeholders’ requests
- A “tired”, less optimistic outcome than early 2011.
Current risks
- Credibility with investors: Mixed signals affecting investor confidence
- Borrowing for state expansion, infrastructure spending: Debt servicing affected by lower investment and growth targets.
- Commercial Debt: Lack of transparency on terms and conditions of recent market and bilateral commercial debt affects stakeholder confidence
- Continuity: long-term sustainability of economic growth, investment, inflation, interest and exchange rate targets.
- HR capacity: Impact of migration and brain drain on growth targets
- Infrastructure: Effect of road congestion on efficiency, productivity.
- Global: Impact of slowdown in EU/US and import prices of oil, grain
Current challenges
Socio-Political
- National unity – ethnic/religious communication barriers
- Diplomatic ties with Western world – uneasy relationship
- Private participation – uncomfortable Private-Public partnership
- Labour market rigidities –tertiary education, labour laws
- Long-term plan for armed forces – Government relationship with large force without a cause sending conflicting signals
Economic
- Investor confidence – conflicting signals; State crowding out Private
- Official communication - lacks balance, transparency, consistency
- Migrant employment – reduces Sri Lanka’s HR capacity
- Soft skills – weak progress on link languages, English, IT
- Exports - dependent on EU/US, explore markets in India, China
- Road congestion – Need public transport reforms
- Performance - Outline delivery and monitoring mechanisms
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