Sri Lanka needs deeper diagnosis to address governance crisis and build economy: Verite Research

• Points out core weakness in SL is not the lack of rules but the lack of compliance
• SL continues to flout three key rules of the Fiscal Management Responsibility Act
• Asserts repeat prescription of more fiscal rules might be ineffective

Sri Lanka may need deeper diagnosis and more robust correction mechanisms with regard to the crisis of governance to recover confidence and build the economy, the latest insights from Verite Research revealed.
While adopting fiscal laws with rules ideally serves as a tool for anchoring confidence and improving public finance management, the island nation’s failure to comply with the existing laws indicated that continuing to do more of the same is not the solution.

“...the core weakness in Sri Lanka is not the lack of rules but the lack of compliance. To be effective, any new law will need to contend with this problem of governance,” the Colombo-based thinktank said in its recently published Insight.
According to the in-depth analysis, Verite Research pointed out that three rules of the Fiscal Management Responsibility Act (FMRA) have been flouted.

The first is the rule pertaining to the budget deficit. While the FMRA limits the deficit to 5 percent of the estimated GDP in any given year, the actual budget deficit violated this rule every year in FMRA’s 20-year history. 
Second is the rule on central government debt. The FMRA introduced a limit for government debt and laid out a pathway to reduce it over time. However, successive governments simply altered the deadlines to achieve reduction and ultimately drove a path of increasing rather than reducing the debt. 

The final area that remains ignored is the rule on Treasury guarantees. The FMRA limited the increase in treasury guarantees that could be provided by the government. Instead of complying, the government repeatedly made the rule more lenient in 2013, 2016, and 2022, and increased the treasury guarantees at will. 

Although the government proposed introducing a new law to establish stronger rules on public finance management, the analysis by Verite Research affirms that the problem for Sri Lanka is not simply a lack of laws, but the ability of the highest levels of government to flout the laws of the country with impunity, and/or change those laws when they become a constraint to irresponsible decision making. As a result, the potential benefits of a new Public Finance Management Act become questionable.

“...this insight suggests that this repeat prescription of more fiscal rules might be ineffective unless it is paired with a separate prescription to address the pervasive problem of poor compliance with economic governance laws in Sri Lanka,” Verite said.