Top economist says budgets end up being political manifestos instead of planning documents
By Shabiya Ali Ahlam As the new government is heavily caught up with the tweaking of its financial plan for greater economic prosperity, a top economist in the country pointed out that politics in the most cases trumps professionalism as budgets end...As the new government is heavily caught up with the tweaking of its financial plan for greater economic prosperity, a top economist in the country pointed out that politics in the most cases trumps professionalism as budgets end up being political manifestos instead of serving as governance or planning documents.
Citing revenue predictions in budgets as a straightforward example in this regard, Verité Research Executive Director and Head of Research Dr. Nishan de Mel said from 2006, it was projected for revenue as a percentage of GDP to increase, whereas the actual direction of this factor moved in the exact opposite direction.
He showed that the outcomes of such projections only create significant mismatches in terms of the expectation of the government and businesses and the society at large are have become cynical of such projections, since to date none has been met.
“There are knock on effects on making poor projection. It is like making poor plans or failing to plan properly. Not understanding how revenue is actually going to go forward sets the government to create short term revenue cultures that will then have to be met with short term solutions,” de Mel told a forum titled “Business Climate Outlook of 2016” organized by LBO-LBR.
He warned that use of trade taxes and incentives to increase imports not only widens the trade deficit, but also is a short term fix that makes up for poor planning in the past and does not help reach the set revenue target.
Dr. de Mel stressed that a professional assessment of the opportunities for taxation in the country should and could reveal that there are other areas of taxation which the government could tap into and collect a reasonable sum— something the successive governments have failed to do so.
Taking the case of cigarettes where according to him the collectable tax can increase by about Rs.50 billion as consumption continues to surge despite increase in excise tax, Dr. de Mel asserted the failure of the bureaucracy to understand this is the cost of failure to professionally asses, calculate and calibrate taxes on an on-going basis.
“There is a serious issue as how the bureaucracy and the public sector professionalism are functioning. This is not only about politics, but the capacity and competence of Sri Lanka’s public sector,” asserted Mel.
With regard to the budget deficit, the Dr. de Mel professed that it could have been addressed by finding sustainable and professional ways of increasing revenue instead of opting to cut expenditure drastically. From 2010, there have been significant cuts on agriculture and irrigation expenditure while other areas of political priorities such as defence expenditure were hardly tapered.
Dr. de Mel pointed out that the deficit cut is not happening in a manner that is necessarily helpful to the long term development of the country, and to the sectors that require investments. It is also observed budget deficit is reduced and improved just before an election.
“There is a lot of predictability in a perverse way as to how the government handles finances. In a situation where there is no accountability, where there is no analysis on what the government did and what it said, the manifesto gets forgotten soon after the election. And when the numbers are available no one holds the government to account.” Dr. de Mel stressed the importance of having some regulative legislative ability to curtail such political incentives enjoyed by Sri Lankan political parties. “Politicians are invariably rewarded for this misbehaviour rather than being outshined or held accountable. This is an issue in the system,” he stressed.
CBSL’s currency handling skills unimpressive
While a key role of Sri Lanka’s banking watchdog is to ensure smooth currency management, Verité Research chief noted the regulator has been handling the affair rather poorly in the recent decades.
“The role of the Central Bank (CBSL) in professionally handling the currency is really to manage a much more smother path of currency depreciation that doesn’t create incentives for capital flight. But from the 1990s the CBSL has been poor at that,” opined Verité Research Executive Director and Head of Research Dr.Nishan de Mel.
Dr. de Mel pointed out the when the currency is depreciating at a rate of one percent a month equating to 12 percent a year, leaves business community at a miserable state.
According to the Central Bank, the rupee has depreciated 8.5 percent during this year up to December 08, 2015. While recognizing the fact that driving growth through trade deficit adds pressure to the currency, Dr.de Mel said that the volatility is managed rather poorly.
“The problem is not just political. Political cycles can create step-ups in currency, but the volatility is also managed quite poorly.
The monthly volatility is more than 1 percent. There is no problem in currency adjustment if you manage it in a way that the adjustment offsets the interest rate differential that Sri Lanka has over the US dollar,” he explained.
Prior to the General Election in September, the government did not allow the currency to adjust, but the suppressed pressure was released suddenly when it was allowed later, impacting business sentiments. “It is terrible for business planning and the confidence of international community when the currency adjustments are not smooth.” “We know that politically in Sri Lankan society the way in which economic ideas have percolated says the value of your currency is the sign of your virility. Economic of virility and the strength of currency are somehow brought together mistakenly,” Dr. de Mel stressed. (SAA)