Formulating a Budget is a challenging task in any given year, but this is especially so for 2023, at a time when its economy has hit the nadir. Soaring inflation, high Cost of Living, depleted foreign reserves, mounting debts, fuel and power crises, loss-making State-Owned Enterprises (SOEs) and a general contraction of the economy have all made the task of Finance Minister President Ranil Wickremesinghe and economic planners a rather arduous one.
We have arrived at this unenviable position thanks to the wrong economic policies followed by successive Governments. The economic liberalisation of the late 1970s did lead to a spurt of growth, but at the expense of many social protections.
The 30-year-old battle against terrorism, two Southern insurrections and most recently, the Covid-19 pandemic also stifled growth. The latter also decimated our tourism industry and adversely affected expatriate remittances, two vital factors on which our economy depended for foreign exchange.
But it was more or less a case of spending everything we earned – the US$ 6 billion earned from expatriate workers went towards the purchase of fossil fuels. Of course, it was good while it lasted, because we did not feel any pain. However, experts had warned a long time ago that we were living beyond our means and the bubble could burst any time.
Well now it has, with devastating consequences for everyone. Apart from perhaps the super-rich, everyone else is struggling to live from their meager incomes as the value of our currency has fallen in real terms thanks to spiralling inflation.
It was no wonder that the people took to the streets, even though the initial non-political struggle was later hijacked by some extremist political parties. But it has to be acknowledged that the political changes that resulted from those events have brought a measure of relief for the suffering masses.
Ranil Wickremesinghe undertook the challenge of facing the socio-economic crises while many others declined to do so, first as Prime Minister and then as President. Now he faces his biggest hurdle yet – Budget 2023. Needless to say, Budget 2023, to be presented tomorrow in Parliament by President Wickremesinghe, will thus be a make-or-break event for the Government, which needs to gain public acceptance and satisfaction in the current dire economic conditions.
During the past few years, the people did not pay any attention to the Budget, but this year, they will be keen to learn how they will be afforded relief through it.
But these expectations should be tempered, because the solutions to our economic woes may be rather painful. President Wickremesinghe has alluded to this stark truth and reality several times. Sri Lanka is negotiating with the International Monetary Fund (IMF) for an Extended Fund Facility (EFF) to the tune of US$ 2.9 billion to tide over its economic difficulties.
But as we have mentioned in these spaces before, Sri Lanka will have to commit itself to a number of economic reforms and other steps in order to qualify for this assistance. None of it is going to be easy, from reforming the loss-making SOEs to restructuring our external debt. The loss-making SOEs with their bloated, unproductive workforces are a drag on our economy and they should be reformed without delay.
The President has taken a keen interest in the debt restructuring process and preliminary discussions will be initiated with bilateral donors including Japan, China and India to restructure the external debt. This has to be expedited, since debt restructuring is often essential to qualify for IMF lifelines. No organisation will extend a loan to Sri Lanka if it is unable to prove debt sustainability.
The Government has also revised the income tax structure to boost revenues, but as some experts have pointed out, this could have a detrimental effect on professionals and certain industries. More professionals could opt to leave the country due to this issue, leading to a brain drain. While there is no dispute that the tax base has to be increased, there still are many loopholes that tax dodgers exploit.
These should be permanently closed before widening the tax net. The Government should strive to levy more direct taxes from eligible persons as opposed to indirect taxes such as VAT which even the poor have to bear.
The Government should also consider alternative ways of boosting its income. For example, there is no mention of recovering the almost US$ 40 billion stashed away in offshore accounts by Sri Lankan politicians, officials and businessmen. If at least half of this sum can be recovered, it will be a great boon to the economy.
The World Bank has a program aimed especially at this – the STolen Assets Recovery Initiative (STAR) that checks the money trail and finds where it is hidden. Granted, this is no easy task due to the opaque nature of tax havens, but many countries have already recovered most of their looted wealth.
The Government should work with the World Bank on this issue to recover the monies that rightfully belongs to the public. Tackling corruption is another way of saving public funds.
In spite of the onerous challenges it faces, the Government has to be mindful of the social protections for the more vulnerable sections of society. In fact, even the IMF has mentioned this in their previous brief on Sri Lanka. In this regard, the Government is caught between a rock and a hard place, as it is not financially viable to expand welfare measures as much as it would like to.
But a balance has to be found through Budget 2023 to address the woes of the public without straining the economy too much.