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The Herculean task of mending and paying for past sins


26 March 2016 12:00 am - 0     - {{hitsCtrl.values.hits}}


Securing a better future for our children and grandchildren is a huge challenge. The National Unity Government offers us the best opportunity to give primacy to national interests rather than petty  partisan politics 

  • In the modern world, where the domestic and international economic landscapes change very quickly, economic management is a continuous task. It is not uncommon, therefore, for fiscal measures to be introduced at various times of the year to respond to emerging challenges. 
  • A combination of both international and domestic factors have had an adverse impact on the prospects for the Sri Lankan economy. 
  • On the external front, the US Federal Reserve’s interest rate rise; the slowdown in China; the net outflows of capital from emerging markets in general; disturbances in the Middle East; sluggish recovery in Europe and Japan; the depreciation of the Russian Rouble and the uncertainty caused by the threat of Britain possible exit from the European Union have all served to generate significant headwinds for countries like Sri Lanka. 


  • On the domestic front, we are having to take constant remedial action to counter the effects of the highly burdensome legacy which we inherited. 
  • The previous government pursued a policy, which was inappropriate for a country like Sri Lanka. Its growth model was based on foreign commercial borrowing financed public investment in infrastructure. The quality of these investments was so poor that they are not earning or saving foreign exchange.  Instead, they have merely resulted in the building up of an unsustainable debt burden. 
  • More than $10 bn was incurred as external debt, which contributed to financing white elephant projects like the port, airport, conference centre and the cricket stadium in Hambantota. The cost per kilometer of the roads has also become the subject of much controversy. 
  • Our government is now working on a number of projects to rescue the country and the people from the parlous situation of a port without ships, an airport without planes, a conference centre without conferences and a cricket stadium with very few matches. 
  • The projects we are pursuing include a 1000 acre industrial zone near the port in Hambantota; an aviation hub for Mattala Airport as well as trade and logistics centres in the surrounding area. All this activity will increase usage of both the port and the airport. The port will also be further developed to handle the anticipated increase in shipping. These plans are designed to reduce the massive debt burden imposed upon the people by the previous administration. 


  • We are also exploring ways and means of improving the terms and conditions of the loans taken to finance these white elephant projects. 
  • Our government is hopeful that it can transform these projects, which are imposing an onerous burden on the people through increased taxes and/or a diversion of resources from high priority public expenditure, such as hospitals and schools, into viable businesses earning valuable foreign exchange. 
  • Our legacy also includes a policy framework, which disproportionately favoured producing for our small domestic market as against selling in the global market place. 
  • The result of all this has been that the growth momentum in the economy has slowed down; debt payments have ballooned; and the economy is not generating enough productive employment. The previous government created unproductive jobs by increasing the public service from 600,000 in 2005 to 1.4 million in 2015. The fiscal space no longer exists to continue with this short – sighted policy. Our predecessors have created a ticking time-bomb for future generations in terms of pension liabilities. 


  • We now need to draw a line under this misguided and burdensome legacy, which is extremely dangerous for this and subsequent generations. 
  • We are determined to restore the growth momentum in the economy; to create high-value employment rather than merely increase the size of an already over-sized public service in an unsustainable manner; and to invigorate our export performance with the support of increased Foreign Direct Investment (FDI). 
  • In this connection,  it is extremely counter-productive that our efforts to create the conditions to attract investment and generate employment for our young people are being attacked for no good reason.  The partnership agreements we are negotiating with China and India have the potential to be the corner stones of our development process.  These agreements can give us the access to capital, markets, technology, training and know-how to transform our economy for the benefit of our people.  Those who are leading the campaign to attack our efforts should be aware that they are, in fact, undermining the path to prosperity of our people for narrow self-interests and political gain.


  • I should also place on record that it is unacceptable for members of this House and others to make totally unsubstantiated and irresponsible statements about professionals who are giving their time to advance the development of the country.
  • In my view, fiscal consolidation is the most important element of the remedial measures that need to be taken to create a competitive economy which will create the enabling conditions for accelerated growth; productive employment; and a sustained non-inflationary rise in real incomes of the people. 
  • We need to move away from repeating cycles of unsustainable populist policies.  We cannot afford to keep living beyond our means, as a country. 
  • Sri Lanka has been able to ‘live beyond its means’ largely due to the generous amounts of highly concessional foreign aid it received over three decades, since the liberalisation of the economy in 1978. 
  • These aid inflows have served to fill the structural gap between revenue and expenditure in a less burdensome manner. They also assisted in financing the current account deficit of the balance of payments on very easy terms. 


  • The downside was that this generous access to easy money enabled successive governments to postpone making the difficult decisions necessary to achieve a sustainable fiscal framework. 
  • However, the circumstances have now changed. Sri Lanka’s graduation to lower-middle-income country status has introduced a new paradigm of fiscal management. 
  • Over the last five years, the previous government substituted foreign commercial borrowing for the declining ODA. As this money was much more expensive, a high premium had to be attached to the prudent use of these borrowed resources. However, the opposite happened. Much of this expensive borrowing, which has to be paid back by the people of this country, was wasted in the pursuit of a highly personalized family agenda. 
  • The poor quality of much of the expenditure incurred has now meant that the headroom to continue to borrow from international capital markets has become much more limited because of the heavy burden of servicing such debt.  In addition, the debt overhang has become a major obstacle to future development.
  • The time has now come to turn over a new leaf when it comes to fiscal management. It would be dangerous to adopt a ‘business as usual’ approach. 
  • We need to get away from the repeating cycle of stop-go policies of the past that have caused unpredictability and uncertainty in the business environment. 
  • (At this point, it would be useful to take a historical perspective of fiscal performance over the last four decades. 
  • The budget deficit has been the main source of macroeconomic instability. 


  • It has meant that Sri Lanka has tended to be a high fiscal deficit; high inflation; high nominal interest rate; and overvalued/volatile exchange rate economy. 
  • This is diametrically opposed to the successful economies of East and South East Asia. Unlike in Sri Lanka, East/South East Asia pursued sound budgetary policies which facilitated macroeconomic stability. This enabled accelerated development in a way, which has not been possible in Sri Lanka. 
  • An unsustainable budget deficit pumps money into the economy. This has two effects: it raises prices and draws in additional imports thereby exerting pressure on the balance of payments. 
  • We must also recognise that the unsustainable budget deficit fueled high inflation is tantamount to an implicit very regressive tax on the poor and vulnerable. The value of the assets that belong to the rich increases with inflation and acts as a hedge against its adverse impact.


  • However, the poor have no such hedge as they own little or no assets. 
  • Rising inflation and balance of payments pressure resulting from the excess demand created by unsustainable budget deficits also exerts upward pressure on interest rates. This results in an increase in the cost of financing in the economy and acts as a drag on growth. 
  • In addition, increasing inflation differentials between Sri Lanka and its competitors and trading partners result in local exports losing competitiveness as their prices rise faster. This in turn exerts pressure on the exchange rate to restore competitiveness. However, depreciating the currency is politically challenging as Sri Lanka’s basic consumption bundle has a high import component. Consequently, the exchange rate has tended to be overvalued for much of the time over the last three plus decades. This is one of the important factors explaining Sri Lanka’s inability to replicate the export – led growth successes of East and South East Asia. 


  • It is remarkable that in every year since 1988 current expenditure has exceeded revenue. This has meant that the government has had to borrow to meet even some of its current expenditure. 
  • In the new paradigm of Sri Lanka being a lower-middle-income country with exposure to rating agencies and international capital markets, this is a level of profligacy we simply cannot continue. )
  • We have to make a decisive break from the past when it comes to the management of the budget. Poor fiscal management has been one of the key reasons why we have had difficulty in creating an economy that has generated employment and incomes to meet the aspirations of our people. 
  • We must not forget our past, which has been marked by two youth insurrections in the South and a separatist conflict in the North and the East. A mismatch between expectations and opportunities has been a major cause of these social upheavals. 


  • As I have already mentioned, the country is now exposed to rating agencies and international capital markets, which will punish poor economic management in the most brutal fashion.  We have seen what can happen in Greece recently and during the East Asian and Latin American debt crises in the 1980’s and 1990’s. 
  • We must, therefore, initiate timely remedial measures to strengthen our budgetary outcomes and debt dynamics. 
  • The previous government allowed tax revenue to fall to 10.9% of GDP in 2014. It was above 20% in the 1980’s. The norm for countries with our rating is 18% - 20%. The previous government’s mismanagement of revenue mobilization now means that we have to impose burdens on the people to increase revenue to acceptable levels. Levels that are aligned with the responsibility of the government to deliver basic services and essential infrastructure for the people. 


  • It is our intention to increase revenue to 15% of GDP within 3 years and eventually to 20% in line with the needs of a country at our level of development. 
  • During its later years the previous government reduced the country to a point where debt servicing absorbed over 90% of government revenue. They took the country to a point where new borrowing has to be incurred to pay off previous debt. 
  • The measures we are proposing will place us on the path to a fairer and simpler tax system. They will widen the tax base and improve tax administration. 
  • We must also curb unnecessary expenditure, while protecting capital expenditure and ensuring its quality as this is necessary for developing the economy. 
  • We are determined to reduce the budget deficit to 3.5% of GDP within 5-years. This is the level, which would be aligned with a sustainable fiscal outcome. 
  • We owe it to our children and grandchildren to put our fiscal house in order once and for all. We need to get away from the ad-hoc approaches of the past that have given us repeating unpredictability and uncertainty in our economic life. 


  • The National Unity Government offers the best opportunity we have had to give primacy to the national interest rather than petty partisan politics. We owe it to future generations to seize this opportunity. 
  • A strong commitment to fiscal consolidation to address the main source of instability in the system and create the conditions for a sustained path to prosperity for our people, their children and grandchildren is the hallowed responsibility of every member of this House. 
  • In conclusion I hope this House will respond to this historic opportunity by rising to meet its responsibility to this and future generations of Sri Lankans by breaking with the past of unsustainable populist policies.  We need a new era of fiscal prudence. 


  • The costs of not rising to this challenge can have devastating effects for future generations.  We must slay the twin dragons of large budget deficits and the unsustainable debt burden once and for all.  I hope this House will do its duty by future generations.  
  • We need respond decisively to the external and domestic challenges before us, in order to meet the aspirations of our people for gainful employment and achieving higher living standards.

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