A worsening economic climate is the familiar story for Sri Lanka, he pointed out, given very unbalanced macroeconomic policies and the chances are that this climate is going to get considerably worse in 2016. As interest rates continue to rise in the US and other parts of the world the “debt funded growth spree based on consumption and imports and public investment is no longer tenable,” he said and the argument for the repair of public finances is more urgent than ever.
“I’m repeating a familiar story but it is a story the Government doesn’t seem to have registered as well as the previous Government,” Prof. Sally said. Lead Economist at Frontier Research ShiranFernado and Hayleys Group Senior Economist Deshal de Mel concurred with Prof. Sally with the former pointing out the “boom and bust” cycle of Sri Lanka’s economy would have to move to a sustainable patch if it is to ride out $4b in debt payments maturing in 2018.
“Sri Lanka has had an accursed culture of complacency since independence and it is true of this Government. What we have seen is a disastrous Budget in February, which actually made fiscal and monetary policy worse than it was under the Rajapaksa government. Lack of Government revenue, monetary policy has likely been far too lose, interest rate climate too liberal and creates unrealistic expectations in the economy. The prime minister’s economic policy statement sounded like it was a welcome correction and realism had finally arrived to put public finance on a better footing but the Budget continued that culture of accused complacency on both the revenue and expenditure side and there is clearly a disconnect between the prime minister statement and the Budget. It is not just messy but a missed opportunity and questions the Government’s reform credibility,” Sally stated.
He advised the need for comprehensive tax reforms in a fair and transparent way and concurrently expenditure reform to put Government expenditure on a sustainable footing as the first step to reducing debt. “The pretence continues that Sri Lanka can ride this out with a little bit of luck. That is wantonly dangerous and probably not sustainable during the course of next year. This is a penny that seems not to have dropped with this Government.”
Sally acknowledged IMF funds may become necessary as money flow tightens and get a reform programme underway. But he criticised the Government acting irresponsibly and then expecting to be bailed out by the IMF.
“In other words there is simply too much money in prospect for Sri Lanka from the IMF and other organisations and it prevents the sinner from repenting and it is an excuse to continue sinning. Consider the previous IMF standby agreement, which was clearly political, it was given under easy conditions, the Government pretended it was reforming and the IMF pretended this was so. But it postponed the problem. The main message is that the problem has to be resolved at home. You cannot expect the IMF to come and sort out Sri Lanka’s problems. Given the message sent out by the last Budget it probably makes it more difficult as the Government clearly lacks credibility in the eyes of the IMF, the Ministry of Finance in particular.”
Focusing on the thin silver lining Sally praised the Government for understanding the constraints on exports and investments but said Budget measures are still “too partial, too piecemeal and not enough.”He called for a Competition Bill during the first half of 2016, which would have across the board approach to cutting red tape, improve business climate and improve climate for producers and consumers, not just big business but small entrepreneurs as well.
“That is the better way to go about it and the Prime Minister should spearhead it. It should include a simplified tariff limited to a two band structure, the cesses and export duties need to go as soon possible and Customs has to be reformed.”
The Government should put in place a holistic policy on FDI that moves beyond tax incentives, which also opens up paths to corruption.
“On trade negotiations the Government needs to get more serious and aside from China and India the really big prize is Europe and US so the government should consider trade agreements with both. There should be a serious investigation to see whether Sri Lanka would benefit from joining Trans Pacific Partnership (TPP) because it would bring significant export markets and push the Government towards key reforms that are needed anyway.” (Daily FT)