Pray for the future; pay for the past
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File picture of a protest in Sri Lanka.
The increase in public protests organised by numerous pressure groups has been a common issue now in Sri Lanka. During the past few weeks, almost every day we have seen public protests somewhere in the country. In fact, it is not unusual to see the heights of public protests in crisis times according to the experience of all crisis-ridden countries.
The causes of the protests in Sri Lanka have been the issues like high cost of living, commodity prices, electricity tariff hikes, and increased tax burden, while there is also a growing demand for increasing public sector salaries and reducing commodity prices. Some of the protests are also seen as mounting against proposed educational reforms, against private medical education, and against state-owned enterprises (SOEs) reforms.
Two types of protests
As I was observing the causes of the growing public protests, I was amazed by the fundamentally contradicting nature of the two types of public protests among them. It is even more surprising to anybody, if the protesters were taking part in both types of protests.
One type is the protests against the increasing hardship of people, while the other type is those against the reforms. If we are against the hardship, we must accept reforms. If we are against the reforms, we must accept hardship; this is the simple lesson that we have learnt so
far from the economic crisis
of Sri Lanka.
If we understand this simple truth, we would choose to take part in or at least sympathised for only one type of protests, leaving the other aside. Whether the protest itself is going to resolve the issue or multiply the same is totally a different matter.
Any issue of living costs that we struggle with today has originated from the economic crisis that the country has fallen down in the recent past. Then, we must change our course of action that has led the country to an economic crisis through reforms in order to ensure recovery and progress. If we are against the course correction, then we should accept the fallen status of our economy and its bitter repercussions over our life.
Budgetary impasse
With the intention of prioritising the issue of high cost of living in the forthcoming Budget 2024, the government has already announced an increase in the salaries of the public sector. While the public sector comprises about 1.2 million employees, the proposed salary hike is by Rs. 20,000. At the same time, the government has also announced an increase in VAT to 18 per cent, from the current 15 per cent.
We cannot accept the former and reject the latter, because both are interrelated matters, technically or otherwise. But nevertheless, the issue is an indicator of the budgetary impasse that the country has been entangled in – inadequate revenue to pay for spending, which has historically led to borrowings after borrowings.
This time the matter is more detrimental than ever before. There is fiscal conditionality to achieve in order to guarantee economic recovery and debt sustainability. Sri Lanka must achieve a “primary balance surplus” in its fiscal operations.
Primary balance of the government budget is the difference between revenue and non-interest expenditure. In other words, it shows whether the government is in a position to meet its expenditure obligations merely from its revenue without any borrowings. In Sri Lanka, for many years this has been in deficit, indicating that the government has to borrow in order to meet its non-interest spending; it has caused further borrowings every year.
For instance, the budgetary outcome in 2022 reported Rs. 895 billion primary deficit which was equivalent to a 3.7 per cent of GDP. This budgetary disarray needs to be corrected in order to ensure that the crisis-ridden economy is on the recovery path. Any increase in government expenditure, including the proposed salary hike is working against this difficult but unavoidable budgetary management.
Too high, but too narrow
As per the Appropriation Bill 2024, the government’s expected total expenditure would be Rs. 6,563 billion, out of which 40 per cent should be set aside as interest payments. The balance 60 per cent consist non-interest expenditure, which amounts to Rs. 3,929 billion. In order to produce a positive primary balance, therefore, the government revenue must be more than Rs. 3,929 billion.
In order to ensure a positive primary balance, the government must ensure a further increase in its revenue by over Rs. 500 billion above the estimated revenue target in 2023. The recent news from the government sources confirmed that its actual revenue collection has fallen short of the ambitious revenue targets for the year. While we are already missing the 2023 targets, we are in the process of raising the bar to new heights now.
Whether the increase in VAT would be the remedy to cure low tax revenue is yet to be seen. In fact, the aggregate demand has already been subdued with higher commodity prices and lower disposable incomes in the past. Although there are many countries with higher income and indirect taxes than those in Sri Lanka, their sharp increase under different circumstances might further dampen the aggregate demand.
The main issue in question is related more to the tax administration than to tax ratios. As it has been discussed extensively in many different forums, the issue is about the too narrow tax base of the country that has been a result of administrative inefficiencies, regulatory complexities, tax evasion and exemptions, and the inadequate use of technology.
High tax, low growth
The ambitious target is to raise higher taxes from a shrinking economy. Even though few more dollars are now flowing into the country and a few reform programmes are in the pipeline, Sri Lanka’s crisis is not yet over.
Our eyes are fixed upon the increased tourist arrivals, renewed private remittances, and of course multilateral loans and currency swaps with China and India as the sources of foreign income. These sources are expected to bring some foreign exchange in order to manage our payment obligations and to build the stock of foreign reserves to a manageable level.
Apart from that we are yet to see some private investment coming in and our export growth picking up. During the first nine months of the year from January-September, Sri Lanka’s exports have declined by over 10 per cent compared to the same period last year. In the midst of import restrictions, imports have also declined by 12.5 per cent, but the worrying factor is that this decline has been from the intermediate and capital goods, and not the consumer goods.
Policy dilemma
Despite the gloomy economic and political outlook in the global economy, Sri Lanka has to get its economic growth and export expansion right on track. Whatever the tax reforms that we undertake, it is hard to generate any tax revenue against dismal economic performance.
The government is getting ready for a series of reforms, on the one hand to restructure the state-owned enterprises (SOEs), and on the other hand to create an enabling environment for investment. These reforms, which may provoke public discontent, are more likely to bear fruit in the medium-term, while the anticipated budgetary outcomes should essentially be a short-term outcome.
The gap between short-term and medium-term outcomes leads to both policy and political dilemmas. Particularly at a time of approaching an election year, we may forget that we are in a crisis; in fact, some have already been acting as if everything is running smoothly and wondering why the people are on the streets. However, such policy and political dilemmas at this juncture of Sri Lanka’s crucial times could be too costly to bear.
(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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