Debt for debt and Budget 2024
View(s):
President Ranil Wickremesinghe presenting the 2024 budget.
Budget 2024 is a good one. And it suits much better for a high-performing Sri Lanka under normal circumstances than for a crisis-ridden Sri Lanka like the one we live today.
It is quite possible that we have already forgotten our status of living in a crisis-ridden economy in the last two years. Sri Lanka didn’t have dollars to meet our foreign debt obligations and to pay for our essential imports. Shortages of essential supplies resulted in long queues throughout the country. Skyrocketing inflation wiped out the value of our incomes, not just temporarily but permanently. Supply chains were broken, and businesses collapsed resulting in a loss of jobs and incomes.
Breathing space
With some bold decisions, we have just created a little breathing space, but it does not mean at all that the economy is out of the crisis now. The economy was only transferred from the ICU to the patient’s ward for long-term treatment, but it is still bed-ridden. Any external shock such as the spread of the Israel-Palestine conflict or the Russian-Ukraine conflict, the economic and inflationary chaos in the West, and any other local or international issue, could be a knockout punch.
Nevertheless, for many including politicians, trade unionists, student activists, and social activities, it is a fertile ground for playing old politics and protests. By sharing much in common with such events and circumstances, even the Budget 2024 projects a comfortable economic outlook.
As someone could argue, it is not necessary to take everything seriously because Sri Lanka’s implementation mechanism is, anyway a paralysed one; at the end of the day it is not surprising to find that many of the budgetary proposals would have never been implemented or are half-done.
Let me first outline some of the scary numbers from the Budget Speech and, then focus on some of the salient proposals that are important to pin-point and explain in the context of a crisis-ridden economy.
Terrifying numbers
Government revenue is estimated to be Rs. 4,107 billion, while 65 per cent of that is needed for paying interest costs of Sri Lanka’s previous borrowings. This leaves only 35 per cent of the revenue for everything else – public sector salaries, subsidies, public investment, and a new expenditure item of recapitalising the banking sector.
With all these expenses, the total government expenditure is estimated to be Rs. 6,978 billion. It amounts to 9.1 per cent of GDP in 2024, which is an increase from 8.5 per cent of GDP this year.
That is not all, because the above expenses do not account for the debt repayment for 2024. The loan installment that Sri Lanka must pay after the debt restructuring programme is estimated to be Rs. 4,268 billion, which is even larger than the total government revenue!
Technically speaking, government’s total revenue is not even, barely enough to meet the debt repayment alone. Together with interest payments, total debt service is getting closer to Rs. 7,000 billion. Accordingly, there should be new borrowings too: The budgetary estimates reveal that the new borrowing requirement of the government is Rs. 7,350 billion. This borrowing requirement is expected to be achieved with an increase in the borrowing limit, which now remains at Rs. 3,900 billion.
Now there are limits on money printing as per the new Central Bank Act, while external commercial borrowing is virtually non-existent. With the deterioration of the capital adequacy of the banking sector, there are limits on raising domestic bank borrowings too. Therefore, new borrowings may be limited to a few sources of credit finance, while its macroeconomic implications are another area of concern too.
Welfare orientation
In spite of all the above challenges, the Budget has been directed towards an extensive welfare orientation. With an estimated over seven million people living below the national poverty line, and further few millions of the ‘middle class’ have fallen into the ‘hidden poor’ category, there is no dispute about an increase in public sector salaries, pensions and subsidies to the vulnerable groups.
Given the current dire state of the majority of people, hardly anybody can oppose the welfare orientation of the budget. In fact, the relief would have been extended further to cover the people whose real incomes have reduced and living standards deteriorated, because the public sector represents just a small fraction of the society.
Nevertheless, the bottom line is that the Sri Lankan economy is in a crisis, and if there are budgetary reliefs originating from the government budget, it must be a miracle! This is why we must pay more in terms of taxes and we must borrow more in order to implement welfare budgets. And the crisis is, in fact, a ‘debt crisis’ and to address the crisis impact on the people, it is necessary to depend more on further borrowings.
Save the banks
I am sure it is quite surprising to many who have noted the new expenditure item, ‘bank recapitalisation’ infusion Rs. 450 billion to the banking sector from the Budget 2024 – either from taxpayers’ money or borrowed money. Even though the budget speech does not specify which banks must receive this capital infusion, the Annexed pages of the English version of the Budget 203-204 provide some details; they are the two state banks.
The problem is a complex one related to the so-called ‘circular debt issue’ of the state-owned enterprises (SOEs) in the country, as the budget itself hints us to recognise. Historically, the two state banks used to lend millions and billions to the loss-making large SOEs such as the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB). These two SOEs continued to make losses because the fuel and electricity prices were below the costs and they also suffered from internal inefficiencies.
CEB and Sri Lankan Airlines also pump fuel from the CPC on debt, while they also continued to make losses. The two state banks are also part of the SOEs, which have their own debt obligations too. Government-guaranteed total SOE debt amounted to US$ 3,739 million by the end of 2022, while the two state banks were apparently exposed to the debt risk and faced with capital adequacy problem.
Along with debt restructuring process, the dollar-denominated sovereign bonds held by the state banks will be subject to restructuring, which would worsen the capital adequacy of the state banks; hence we need to save the two state banks by recapitalising them with public money.
By the way, as far as the government attempts to saving the state banks are concerned, I remember the arguments against excluding the banking sector from domestic debt restructuring (DDR) process. It is frightening for me even to imagine the implications of DDR extended to cover the bank holding of 15.9 per cent of Treasury Bills and 35.7 per cent of Treasury Bonds.
Balance budget
The budget entails important steps towards vital reforms, including some of them leading to a better fiscal management in the coming years. One of the main budgetary issues in the country is the government’s inability to identify the eligible income taxpayers.
This is because there has been no significant effort to establish a technology-based information system to know people’s income, wealth and expenditure. As a result, the tax base is too narrow because of widespread tax evasion and related corruption, in addition to tax exemptions. There is an attempt to address this issue, although its successful implementation is yet to be seen.
Although the Budget Speech commenced with reference to a Buddhist teaching on the concept of “balance living” and “balance budget”, whether such a “balance” is actually projected through the Budget is a debatable question. Even if it is a difficult accomplishment at this stage, a set of bold steps towards such an end result could be the way forward in the coming years.
(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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