The post of Finance Minister is a challenging one at any time in any country, but it is especially so at this particular moment, when the entire world is being battered by the deadly Covid-19 pandemic. The world economy has gone into a meltdown and emerging economies such as Sri Lanka have been hit hard.
It is in this backdrop that Basil Rajapaksa, who has a reputation for turning things around and achieving victory over adversity, has been entrusted with the responsibility of helming the Finance Ministry. By all accounts, it will not be a walk in the park, given the present global and local economic climate.
For starters, Covid-19 has torn the country’s economic fabric apart. The State had spent around Rs.300 billion on anti-Covid efforts so far, including testing and hospitalisations. This is a huge quantum of funds that could have gone for development and social welfare at any other time.
At least an additional US$ 200 million will have to be set apart for securing vaccines for most of the population. Thankfully, this process is well under way and hopes have been expressed that Sri Lanka could achieve herd immunity by year end, having vaccinated 70 percent to 80 percent of the population. That will help the authorities to re-open the country fully.
Covid is the cause of most, if not all, of our economic woes at this juncture. Expatriate remittances, usually US$ 7 billion per year, have dried up as most foreign job holders lost their jobs in the host countries and came back home.
Many of them have not succeeded in finding local jobs either, adding to the economic burden. The remaining expats are also facing a range of problems from lower wages to restrictions on sending money to third countries.
A good example for the latter is Lebanon, which is facing a severe shortage of US dollars. There has also been a drop in exports, as many countries have restricted imports, just like Sri Lanka has done.
These and other factors have collectively led to the depletion of our foreign reserves to around US$ 4 billion, from around US$ 8-10 billion previously. This is a dangerously low figure in these times, given that the annual fossil fuel bill alone exceeds it.
One also has to take into account the challenge of debt servicing. Sri Lanka has to repay US$ 1 billion in the short term, a challenge that is being met by various methods including currency swaps with neighbouring nations.
Thus the new Finance Minister will have his hands full in the coming months in dealing with this precarious economic situation.
His first challenge is to take stock of the Covid-19 situation in the country and allocate funds where necessary for health sector improvements, vaccine procurement and testing. He should work closely with the Health Ministers and health authorities on the subject of cautiously re-opening the country and resuming all normal economic activity.
This could be possible once the majority of the population is vaccinated. In fact, many countries including the UK and Singapore are planning to “live with the virus” after vaccination since the chances of the virus fading away suddenly are rather slim. It would be best to resume normal economic activities under “New Normal” conditions.
His next major challenge is boosting the foreign reserves, which, again, depends to a great extent on the eradication of Covid from our midst. This certainly will not be an overnight process – at least one more year will be required to put things right.
In the meantime, the import restrictions on certain goods are likely to continue. The new Finance Minister will also have to take a decision on when the import restrictions can be relaxed. He will also have to think anew – it has already been proposed by the Environment Minister to limit car imports to electric vehicles once the import restrictions are lifted.
This is a sound move that the Finance Minister should seriously consider in view of the escalating fuel bill.
The Government has widely decided not to discontinue any development projects despite the present economic problems.
Besides, some projects are funded by foreign credit lines which anyway have to be used. Indeed, the low utilisation rate of foreign funds has been a major problem. The new Finance Minister should address this issue without delay.
As for new development projects, there should be a vetting process, with many ministers, MPs and Local Government bodies competing for funds. Some of them may not be very important or beneficial.
The Finance Minister should, in consultation with the President, take the final decisions on which projects deserve priority. Any projects that seem to be a waste of public funds must be discarded.
Talking of public funds, they are mostly raised from taxes. But tax income in Sri Lanka is derived mostly from indirect taxes such as Value Added Tax (VAT), which both the rich and the poor pay alike.
But we need more direct taxes – mainly income and wealth taxes – to plug the loopholes in the present tax structure. The number of direct tax payers in Sri Lanka is abysmally low in terms of our population, even in comparison with our immediate neighbours.
The new Finance Minister must give serious consideration to this anomaly and try to get more people into the direct tax net.
Sri Lanka is facing a myriad of economic problems that may not have any overnight solutions. It will take thorough planning and economic sagacity to put things right. Fortunately, the new Finance Minister has these attributes in abundance, which is a cause for optimism all around.