Promising and committed, but his Cabinet

colleagues have to walk the talk

Mangalas Mangala Budget Part I

Finance Minister Mangala Samaraweera presenting Budget 2018

A budget is a short-term financial plan-Monday, 13

November 2017

Finance Minister Mangala Samaraweeras Mangala Budget (Maiden Budget) was

presented to Parliament last week. A budget is simply a one year financial plan of
the government. But modern budgets have become a medium-term enterprise
for governments in the sense that they are linked to the government policy a few
years before and a few years hence.
In the case of the present Government, the Budget for 2018 is a midpoint
financial plan that would take forward its policy from August 2015 till about 2020.
If the Government is successful in getting re-elected in 2020, as per the policy
document Vision 2025, the policy package presented in the Budget 2018, will be a

part o f a long-term enterprise continued till 2025.

Challenge of satisfying many diverse groups

Presenting a budget at this point in time would have been a difficult task for
Mangala. That is because there had been three constraining factors that had
limited his freedom of coming up with a prudent budget. One is that his
Government will have to face at least three elections in the next three-year
period. Hence, the Budget should satisfy the ordinary citizenry.

Another is that it should satisfy the two main coalition partners of the
Government, the UNP section and the SLFP section, which harbour two different
visions about the future of the economy. The UNP follows an economic policy
based on knowledge, competition and seamless integration to the world economy
to deliver prosperity to Sri Lankans. The SLFP, on the other hand, follows a policy
that would first look after the national economic interests and think of global
integration only later. Keeping these two factions satisfied through a single
budget is obviously a Herculean task.

The third constraining factor is to keep the opposition criticisms of the Budget at a
manageable level. The basic criticisms will come from JVP and the group that calls
itself the Joint Opposition or JO. JVP has already condemned the Budget as being
a neoliberal one and JO has labelled it as an IMF copycat.
The difficulty for Mangala would be to field speakers from his side to effectively
defuse these ideological positions. That cannot be and should not be done by
humiliating the critics as is being done in Parliament today. Such arguments
should be countered by solid facts as was done by Senior Minister Sarath
Amunugama in his speech in Parliament recently (available at:

https://www.facebook.com/100010230071841/videos/539506386400359/?id=10
0010230071841&hc_ref=ARTIMiQ-
YpLn8ufFOFITZbMULhkMi6v_F1NVhN9Dgv8ISzQ0R9JMDPVChbGGEIl_3wM&pnre
f=story).

The Blue-Green Economic System

When presenting the Budget, unlike his predecessors, Mangala exuded

confidence in what he was reading. It did not appear to viewers that he was
reading a text prepared for him by someone else. It was short and to the point.
Both offensive bashing of the previous administration and colourful eulogising of
the achievements of the present administration had been kept to a minimum.

The entirety of the budget speech had been used to present the case for a new
theme in budgeting, namely, the establishment of a Blue-Green Economic
System in the country. It also gives a different connotation. That is, the economy
to be developed in Sri Lanka in the future is a joint effort by both the Green party
and the Blue party.

Greening the economy should not be a fashion but a passion

Bold pronouncements about greening an economy is a popular fad today. It

permits an administration to win that group of people who firmly believe that
greening an economy a must to its side. At the same time, it helps an
administration to hide its own weaknesses, howlers and deficiencies from the
watchful eyes of the people. Thus, if an administration is not sincere about its
pronouncements, they are forgotten even before the sound waves of such
pronouncements dissipate in the air.
Another problem for such long-term policies is the possibility of the policy getting
reversed by an administration which is not very friendly to environment, as is the
present case of the United States. Hence, it is advisable to adopt two strategies to
make it a reality.

One is the appointment of a change-leader from within the Government to carry

it forward. He should empower civil society organisations so that they could
thwart any attempt at reversing the policy by a future administration. The other is
reaching consensus about the need for greening the economy among the rival
political parties which have the prospect of forming a government in the future. If
this is not done, the green side of the policy theme will become dysfunctional.

Greening will not increase prosperity but expand its quality

However, greening an economy does not expand the prosperity frontiers of a

nation. In fact, it imposes an immediate economic cost in the form of impeding
the growth process. Countries in the developing world, therefore, considers such
policies as a luxury at the present stage of economic development. Hence, there is
a general aversion to the adoption of green policies. But, such policies improve
the quality of prosperity of the peoples of a nation.

To the extent they contribute to alleviating global warming and other associated
issues, such policies being adopted by general consensus will improve the quality
of the global prosperity as well. Since green policies are a part and parcel of the
developed world today, there is a likelihood that developed countries would
impose trade sanctions on countries that do not follow such policies.

Since Sri Lankas main export market is in the developed world, it behoves the
country to get ready to join the green club with suitable measures at this
moment. In this sense, greening the economy is a far thought-out policy strategy
in the present Budget.

Tapping blue ocean resources will open new opportunities

Blueing the economy is a new concept for Sri Lanka. It has a modern management
strategy denotation as well. A blue ocean strategy, coined by W Chan Kim and
Renee Mauborgne of the famed business school INSEAD in their 2005 book Blue
Ocean Strategy: How to Create Uncontested Market Space and Make Competition
Irrelevant, enables a firm to make super profits by entering a market which has
so far not been chartered by anyone or by an insignificant number of rivals.

The vast blue ocean around Sri Lanka very well fits to this strategy. Unlike green
policies, exploitation of the vast blue ocean will help Sri Lanka to enhance its
prosperity immediately. The development of harbour facilities, getting connected
to the rest of the world through naval routes and harvesting the massive ocean
resources will help Sri Lanka to create prosperity for people in the near term.
Analysing the success of past budgetary policies is a must

A budget also has to be evaluated not in terms of what the Minister has
presented in the Budget speech (available at:

http://www.treasury.gov.lk/documents/10181/470884/budgetspeech2018E.pdf/
9a9b081b-a709-418f-88ee-64f397db6ab4). It has to be evaluated in terms of the
past budgetary policies which are linked to the present budget.

A budget should bring about an analysis of the past policies, how far they have
been achieved, if not achieved, the reasons for same and what corrective
measures should be taken to rectify them. It has been in the practice in the
budget speeches delivered in the recent past not to make this analysis in the
budget speech itself.

However, it could be found in three other documents, the Annual Report of the
Ministry of Finance for the latest year available (in the present case it is for 2016
which could be accessed at:

http://www.treasury.gov.lk/documents/10181/12870/2016/c36d6610-d6e7-
4b1c-ab35-238a4db56b88), Mid-Year Fiscal Position Report 2017 (available at:

http://www.treasury.gov.lk/documents/10181/12882/2017/855362d8-5946-
4bdc-962d-fce5faa53ce4) and Fiscal Management Report 2018, presented along
with the Budget for 2018 (available at:

http://www.treasury.gov.lk/documents/10181/12876/Fiscal+Management+Repo
rt+-+2018+English.pdf/71375d9b-4984-4d78-b7f7-075c55734c52).

All these three reports are in fact a eulogy of what the Ministry has done and not
helpful for readers to make any assessment of the success or otherwise of the
countrys immediate past budgetary performance. Even the Central Bank does
not make an analysis of the budgetary achievements in Sri Lanka by proposal by
proposal.

Damning findings by Verit Research

In the absence of any official evaluation, it has been left to a private think-tank,
namely, Verit Research in Sri Lanka, to keep a track of the budgetary promises. In
terms of the latest Budgetary Track Report released in October 2017, of the
Budget promises for 2017, as at the middle of the year, a very disappointing
picture has been painted (full details in graphical form are available at:
http://www.budgetpromises.org/en).

Of 37 budget promises for 2017, the fate of about a little more than a half has
been in the dark room, since no information has been disclosed. Another 14% has
been taken out, while the implementation of about 32% has been behind the
schedule. According to the analysis, only 3% has been progressing or ahead of
schedule.

Though it is a right to information era in Sri Lanka, only about 38% of the spending
agencies have been responsive about releasing the data on the progress of the
budget promises. The balance 62% has been closed, obstructive or resisting. Thus,
in terms of the openness of the budgetary process, Sri Lanka is ranked very low
(available at: https://www.internationalbudget.org/budget-work-by-
country/findgroup/group-data/?country=lk).

Tracking the progress of the Budget is important

Of course, Mangala is not responsible for this poor budgetary performance but he
cannot ignore it. He has to now put in place a suitable mechanism within the
Ministry to track the progress of the budgetary promises, identify deviations and
take remedial measures to put the process back on track. At the end of the
Budget speech, he has promised to do so. If this promise is broken, then, the rest
of the promises in the Budget too will be broken.

This writer recalls that in the good old days when he was at the Central Bank, the
process of budget implementation, progress review and taking remedial
measures had been fairly streamlined. The Appropriation Act was passed by
Parliament in the second week of December. Before the end of the year, a circular
was issued by the General Treasury informing all the spending agencies of the
budgetary allocations made to them, the targets to be achieved and the time plan
of implementation of the proposals. This was strictly followed by the Secretary to
the Treasury himself. In this way, a fair progress of the budgetary implementation
was achieved by the Ministry.

Both Minister Mangala Samaraweera and State Minister Eran Wickramaratne will
have to see that such an effective mechanism is put in place to ascertain the
implementation of the key proposals made in the Budget.

Savouring in small gains

Sri Lankas budgetary sector had made some small gains in 2016 about which the
Government cannot and should not be complacent. One such small gain has been
the increase in the revenue base faster than the consumption expenditure of the
Government, also known as recurrent expenditure, excepting the interest
payments. As a result, the deficit in the primary account of the budget, that is,
revenue of the Government minus recurrent expenditure without interest
payments, has declined from 2.9% of GDP in 2015 to near zero balance at 0.2% of
GDP in 2016.

This has been the combined outcome of three developments. One is the
containment of the consumption expenditure at 14.8% of GDP in 2016 from
15.5% in 2015. The second is the higher level of interest payments in 2016
compared to 2015. As a result, the non-interest consumption expenditure
declined from10.8% of GDP in 2015 to 9.6% in 2016. The third has been an
increase in the revenue of the government from 13.3% in 2015 to 14.2% in 2016.
But whether this favourable outcome could be further consolidated and
converted to a surplus will depend on the Governments ability to further contain
the non-interest consumption expenditure on the one hand and to increase its
revenue continuously over the years to come, on the other.

This is the challenge faced by Mangala though his initial Budget estimates for
2018 has given him a small surplus in the primary account at 1% of GDP. If this is
to be attained in 2018 and continued since then, his Budget implementation
machine at the Ministry has to work day and night to keep the Budget on target
and his Cabinet colleagues should extend their full cooperation to him for
maintaining those targets.

Drawbacks should be rectified

In my view, Mangala should not be complacent about this type of small gains. This
is because the bigger issues faced by him are much more challenging than this.
The Central Bank in its Annual Report for 2016 has highlighted some of the
budgetary drawbacks which the Government should fix on a priority basis (p12).

The first is the need for implementing structural reforms in tax administration.
The second is containing the consumption expenditure of the Government within
manageable levels. The third is to keep interest payments low and resolving the
issue of the accumulation of the commercial borrowings from external sources.
Thus, the Central Bank has advised the Minister of Finance that a national
consensus should be built on sustaining the fiscal consolidation through timely
implementation of urgent fiscal and structural reforms.
A good politician can be a good economist too
Mangala, who is now caught up with the dilemma of resolving the long-term
prudent economic goals with short-term political objectives, may remind himself
of a statement reported to have been made by veteran leftist politician, Dr. Colvin
R. de Silva.
It is said that Colvin had remarked to a friend that a good politician can never be a
good economist and a good economist can never be a good politician. Does it
mean that what society has to expect is the combination of a bad politician and a
bad economist? Surely, Mangala has to prove that Colvin was wrong and his
Budget has laid the foundation for same. But, it is the responsibility of his Cabinet
colleagues to walk the talk.

In the next part, we will analyse the soundness or otherwise of the proposals
made in the Budget for 2018.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
could be reached at waw1949@gmail.com.)
Posted by Thavam