The Budget with No Perspective
By Sumanasiri Liyanage
The second reading of the maiden budget of Basil Rajapakse, the new Minister of Finance, was passed by the Parliament on 22 November with 153 votes in favour and 60 against. The budget was presented at a time when the Sri Lankan economy is in severe all-encompassing crisis. The crisis may be discussed at two levels. The first refers to what we can see at the surface level and this is the level at which mainstream economists are primarily concerned with. At this level, the foreign exchange crisis is the predominant aspect being all the others connected to it either as a cause or as an outcome. The impact of COVID-19 pandemic is felt particularly on the trade balance and the current account of the balance of payment.
This crisis is extended to the fiscal crisis exerting heavy pressure on Government spending at a time Government revenue is dwindling partly because of the very policies the Government has adopted in the last two years. The crisis at this level has been widely described, so that I do not need to dwell on that using the limited time given to me. I believe, the crisis at second level is of great importance as the crisis at the first level is in a way a symptom of the second level of crisis that has been spread to deeper into the body-economic of the country.
I call this a structural crisis in opposition to surface level crisis. The budget expressed its conspicuous silence, wittingly or unwittingly, about the sicknesses of the economy at both levels. One may even wonder that the Finance Minister in presenting his maiden budget was much more concerned with maintaining political power of his party/alliance than correcting the economic impasse of the country.
Understanding the Crisis
Prior to the development of a strategy, it is imperative to understand the crisis with its all-encompassing linkages. It is not incorrect to start with the forex crisis as it is linked with the post-1977 development strategy. In August this year, the net foreign assets of the Central Bank of Sri Lanka (CBSL) was down to minus 400 million US dollars. It rose to minus 1200 million dollars in October. There is no doubt that this is a critical situation.
The question that should be raised is why such a situation arose after 43 years of export-oriented development strategy that was introduced in 1977 and has been highly praised by the mainstream economists. Moreover, the continuation and deepening of the same strategy has been proposed by them as remedy for the crisis. Simply, they say, following Margaret Thatcher, ‘there is no alternative’. On the contrary, I submit this so-called export-oriented development strategy has failed and the country should abandon it.
The present crisis is not as W. A. Wijewardena presumes a product of “the domestic economy-based economic growth model used by Mahinda Rajapaksa administration” between 2005 and 2015. As Prof. Lalithasiri Gunaruwan has shown the so-called export orientation in fact did not work and Sri Lanka has had a negative trade balance throughout the entire period in which this strategy was put into practice. Throughout this period of 43 years we based more on imports of goods and as a result, Sri Lanka’s import bill rose to 25 per cent of the GDP in 2019.
Hence, the export-oriented development strategy was at the end metamorphosed into an import-based consumption and production strategy. The import-based consumption and production strategy was financed by foreign assistance and soft loans in the initial years and then by foreign debt. As a result, Sri Lanka was transformed from foreign-assistance State to foreign-debt State.
This process is somewhat similar to the model developed with regard to developed countries in the West by a German political economist, Wolfgang Streeck. He has shown that in Europe it was a transition from a tax State to a debt State. Sri Lankan situation has reached an alarming level as it has immediate needs of foreign currency in the vicinity of 3 billion US dollars to import essential goods and services.
It is in this context that going back to the IMF was raised by mainstream economists, think tanks and bureaucrats. The Government’s opposition to it is not based on principle or past experience but just to avoid the close supervision by Washington over the running of the economy. I discussed this issue in two recent columns, so, there is no intention to repeat them.
Forty-three years (1978- 2021) of experience provides an adequate time frame for the evaluation of a developmental strategy. The time has come that we should think of not just an alternative but a paradigmatic shift. Nonetheless, it is hard to see such a perspective in the Budget 2022. It does not have a deep understanding of the nature of the current crisis and as a necessary corollary nor remedial prescription.
Whither Sri Lanka
Two blurred ideas scattered here and there in the speech may be found. The first idea reads as follows: “At present, our economy is tilted more towards the trading sector. For a long time now, imports have been double of exports. This is not sustainable, and it is challenging. We will have to transform our economy into an advanced manufacturing economy.”
The second is a restatement of the idea of making Sri Lanka five major hubs that was initially outlined in Mahinda Chinthanaya 2010. Thus, the budget envisions the possibility of making Sri Lankan economy following the example of Singapore and Dubai. Nevertheless, how these ideas could be materialised has not been adequately shown in the budget speech except for one or two indications.
It appears that the Minister is aware of the fact that the transfer of capital within the economy is not conducive to the development of the manufacturing sector. In a capitalistic economy capital usually moves from less profit sectors to high profit sectors. The natural tendency is to move capital to high profit areas. In Sri Lanka, high profit areas include FIRE + HE. (Finance, Insurance, Real Estate + Health and Education). The Budget proposes an additional tax on the financial sector. However, it would not be adequate to inverse the market process. Hence, one may describe the Finance Minister as a medical practitioner who knows the correct medicine that is to be prescribed but does not know the dose and the frequency it is to be taken.
The world knows varying development paths. In the final analysis, the relevant question is how the social surplus is used. Besides this fundamental issue, there are so many questions that have to be addressed soon in order to take the country out of its present impasse. Unfortunately, both issues are completely neglected by the maiden effort of the new Finance Minister.
The writer is a retired teacher
of Political Economy
at the University of Peradeniya.