By Chandeepa Wettasinghe
Leading economists recently called on the government to implement austerity measures in the upcoming budget in order to save the country from the trouble it is in and to market the budget as a ‘thrifty budget’ to rally public support around it.
Former Central Bank Deputy Governor W.A. Wijewardena speaking at the Sri Lanka Economic Association Annual Sessions last week said, since all government revenue is being channelled into repaying debt, the customary consumption expenditure must be curtailed.
“The expenditure side of the government, specifically the consumption expenditure, is where the government has to do a major cut. Normally, this type of an economic policy is known as an austerity programme,” he said. Sri Lanka experienced austerity to a horrifying degree during the left-leaning administration of Sirimavo Bandaranaike in the 1970s, with food rations and import controls.
“But of course, austerity has a bad name in Sri Lanka, and when we talk about austerity, we get a lot of opposition from the opposition members, opposition from the government members and opposition from the members of the public,” Wijewardena said.
Central Bank Governor Dr. Indrajit Coomaraswamy noted that contrary to popular belief, the current fiscal policy is more anti-poor than austerity.
“Often people think that austerity measures are anti-poor but in many ways, the expansions in fiscal policy, which are unsustainable, are, in my view, even more anti-poor,” he said.
He noted that the excess demand created from handouts leads to higher inflation, during which period the assets of the rich appreciate and increased consumption leads to booms, while the overheating of the economy and the busts cause the government to adjust policy, which adversely affects the poor. Dr. Coomaraswamy pointed out that Sri Lanka had managed these policies in the past due to being a lower-middle income country and a donor darling, which is not the case now.
Wijewardena noted that many European countries have introduced austerity programmes in the recent past, successfully.
He speculated that instead of using a word like austerity, the government could market an expenditure-stripped budget using a different word. “So instead, the word I’ve used here is thrift. Thrift is one of the elements in the Sri Lankan society and people from early childhood are taught by their parents to be thrifty. So (what) I’ve suggested here (is) thrift in the budget and not austerity in the budget,” he said.
He stressed that along with the cut down of handouts, there needs to be a reduction in bailouts of financial institutions and state-owned enterprises as well as the removal of extravagant wastes of politicians and the increase of government revenue. Further, Wijewardena noted that the government has to select and channel capital expenditure into projects that create healthy revenue streams. However, he said that first of all, the government has to convey to the public the current situation the country is in.
“The government has to now, first of all, come out before the nation and admit to the public that we are in trouble,” he said.
The International Monetary Fund (IMF) recently started to fund Sri Lanka’s balance of payments deficit by opening a US $ 1.5 billion three-year Extended Fund Facility.
The multilateral lender approved the loan in return for fiscal reforms including austere budgets and reforms to boost revenue collection, changes in monetary policy by way of transitioning to inflation targeting, flexible foreign exchange policies and greater foreign reserves as well as boosting external trade.
Other countries usually reach out to the IMF as a last resort but the Sri Lankan government has been boasting about the approval of the programme as a major achievement in foreign policy.
Pix by Waruna Wanniarachchi