Budget 2022
All through this month, Parliament has been convening to read the Budget for the upcoming year. You’ve probably read multiple analyses - this is an attempt to collect all these disparate threads into one place.?
The 2022 Budget is particularly important given that Sri Lanka is at a critical juncture, due to?weak?economic policies by successive governments. It was already in a weak position fiscally due to sweeping changes in tax policy in recent years (the 2015 government?attempting?to shift from indirect to direct taxation, but ultimately unable to push through its reforms, the 2019 government promptly announcing?sweeping tax cuts?ahead of Parliamentary elections).?
At the same time government spending remained?high, as Roshan Perera points out.?
This year and the next are also important years for debt service repayments - Sri Lanka?paid?an estimated USD 2.6 billion of debt by June 2021, but the actual amount of foreign debt repayment is even higher than what’s being reported, as publicfinance.lk notes in this infographic.
?All this was pre-pandemic. COVID-19 has also disrupted economic activity, not just in?Sri Lanka?but?worldwide.
?Higher prices
Recently, the Central Bank?mandated?that commercial banks convert foreign currency from exporters and those receiving foreign currency for ‘goods and services’ into Sri Lankan rupees. This coupled with announcements of?‘securitising’?worker remittances by mandating commercial banks to sell them 10 percent of ‘voluntarily converted’ migrant worker remittances have highlighted that Sri Lanka is grappling with a shortage of foreign currency (Worker remittances have always been a major source of foreign currency earnings for Sri Lanka, and the government has?made?attempts to encourage people to use formal channels - most recently, by offering a?Rs. 2 concession). Despite?reassurances?couched in technical jargon, there has?already?been a drop in remittances - as much as 50% compared to last year. There have also been?restrictions?imposed by banks on outward remittances.?
In addition,?restrictions on imports, and a drop?in tourist arrivals?as the country had to lock down for significant parts of 2020 also made an impact on Sri Lanka’s economy. Sri Lanka has been financing most of its activity?domestically?through banks (including through?printing money), which is only deepening its own debt. It’s also exerting an upward pressure on prices.?
The impact of this is already being felt. Fresh produce like?vegetables?have skyrocketed in price, with upward pressure also being exerted due to heavy rains and the?chemical fertiliser ban. Other staples like?milk, sugar,?rice, bread?and cooking gas?have also shot up in price, with the government having to?remove?price controls to avoid shortages. (For gas, the?shenanigans?of private company?Litro gas?are also a contributor).?
The impact of this has meant that people, particularly the middle-class, have had to?go without.?
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Enter Budget 2022. What do we know so far?
The allocations
As Rehana Thowfeek?notes, Sri Lanka’s overall budget is expected to grow by around?4%, looking at the Appropriation Bill. As expected, there is a shift in government expenditure towards meeting its upcoming debt obligations. There is also a reduction in programme capital expenditure.?
One of the largest allocations, once again, went to the Ministry of Defence. Counting both the Ministry of Defence and the Ministry of Public Security, the government set aside?Rs. 479.6 billion?for military and police in 2022. Much of this is recurrent expenditure -?mostly?on personnel, as Daniel Alphonsus has shown lookinf at postwar defence budgets?- with most of it going to the army compared to navy and police, and with less of a focus on diplomacy, research, testing and evaluation. The allocation for defence also consistently increases, year on year, even postwar.?
A large allocation also?goes?to the ministry of public services, provincial councils and local government, largely due to civil pensions. Sri Lanka’s population is ageing (it’s currently at just over?12%?- the highest in South Asia, and in?15 years, one in four is expected to be over 60). The allocation for the department of pensions will only grow larger in future. Yet, as the World Bank?notes, the social pension only covers half of eligible workers, leaving many vulnerable elderly without income after retirement, and forcing many to have to continue working, often informally. (It is striking that the World Bank acknowledges this, even as the report frames this as a human capital problem).?This is a situation which should be rectified - but rather than looking at this problem proactively, governments have continued to simply increase the budgetary allocation for pensions.?Past?proposals have included raising retirement ages, or?switching?to contributory pension schemes (even though past attempts to do so?haven’t?worked, with expenditure fast outstripping income).?
Salaries and civil service pensions also contribute significantly to government spending - as Rehana Thowfeek writes, in 2021, salaries and pensions amounted to?73%?of government revenue for the year. The public sector is overstaffed and yet underpaid. State-owned-enterprises like the Ceylon Petroleum Corporation and the Ceylon Electricity Board are mired in debt. Yet proposals to improve efficiency, even when made, are?ignored.
While it is important to cut down expenditure, it’s also important to note what the impact of cutting expenditure entails. The lack of effective social protection mechanisms in the budget (apart from the traditional mechanisms including pensions) is an?aspect?NPP representative Harini Amarasuriya highlighted in a round-up after the first Budget reading hosted by Verite Research.?
Safety nets
Amarasuriya mentioned that issues around social protection mechanisms had been ‘always politicised’. She acknowledged that while there had to be better targeting within existing social protection mechanisms like Samurdhi (which often favours recipients based on political patronage - and which is?barely?enough to meet household needs) the concept of social protection also needed to be widened. “Social protection is not just about Samurdhi and pensions. It’s about the need for a safety net in a time of crisis,” she said. For instance, Amarasuriya noted that job loss due to COVID-19 had not just impacted those who had the lowest income in Sri Lanka but also the middle class.?Other critiques along these lines have noted the?smaller?allocations for women and children and, overall, for labour. (I also haven't noticed any discussion on initiatives to benefit minority communities).?
In particular, Amarasuriya noted the relatively smaller national-level allocations given to key sectors like health and education compared to defence, despite the major societal changes as a result of the pandemic, when most families had to adjust to working and studying at home (although counting provincial-level allocations, as above, it could be?seen?that balance was somewhat restored). Nevertheless, Amarasuriya’s comments highlight some of the social impacts that arise during a time of austerity and which can sometimes be glossed over in post Budget forums (talking about the need to trim expenditure has a different implication for those who are reliant on government services). As an example, the allocation for water supply was?Rs. 48.9 billion in 2022, compared to?Rs. 105 billion in 2021?- potentially impacting those in underserved areas without easy access to water.?
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