Budgets and bubbles | Sunday Observer

Budgets and bubbles

20 November, 2022

What happens to the economy and can it be predicted by what took place on Monday with the presentation of the budget? It was a budget almost tempting fate against the odds, but more about that later.

The problem is that no matter what happens there is little clarity on which way the economy would evolve. It’s not we do not know of the contours of our current crisis, but there are so many ‘unknown unknowns’ as these unpredictables have come to be known.

There is a great deal of uncertainty about how the blanks can be filled. How is the country managing its debt when there is still quite a bit of uncertainty about which countries want a real debt-restructure?

So are we in a bubble in that case? Probably we are in a sense, but then again probably we aren’t. But that’s the uncertainty. It’s hoped that we would secure the infusion of funds that would help us tide over, but what if we do not?


Are the private banks for instance going to suffer as a result and is there any truth to some of the rumours about private banks taking some extraordinary measures to defer certain payments to deposit holders?

That’s so unlikely that even speculation on this type of thing should be near outlawed. But the speculation exists because there is so little clarity about how we are as a country going to manage to tie-up some of these loose ends.

Are we poised to obtain a cash infusion from some source other than the IMF? Are we expecting a sudden tourism-bounty or some such infusions of funds for which we do not have to depend on anybody? If that is the case aren’t we planning for any contingency in that regard?

There is so little clarity that there is also a great deal of speculation about how more family jewels would be sold. That way there is a possibility that any shortfall in the domestic-debt could be met one way or the other, but then why would any administration wait for the last moment without taking concrete steps now?

There is no way of knowing which pubic assets if at all are earmarked for sale or for liquidation so as to minimise losses. If that’s the case when we are still not fully turned around from the brink of calamity, why is it that there is still no discussion about liquidation of Sri Lankan Airlines for instance?

The answers to these questions are not readily available to put things across as clinically as possible. Nobody seems to know why SriLankan Airlines is not up for liquidation, even though there is no law to say it ought to be.

About the budget — it’s almost as if it was presented in normal times at least at a cursory glance. This of course is a good tiding in terms of not upsetting markets, but how much of this hope lends to clarity, and how much of this hope would be seen as justifiable and not misplaced?

There is a lot said there about taxation and no doubt the budget expects to ensure that taxation is at full throttle to meet the current needs, but then the people are not conversant about the debt-figures for instance and are always left wondering whether their tax rupees would be well spent or whether they would go mostly towards the settlement of debt.

A forward looking budget is normally one that at first glance at least engenders hope such as the one presented last week. But these are not usual times and that’s the rub. People are somewhat wary of rosy pictures, and that’s natural, but as far as clarity goes this feeling that we are still existing in a bubble is rather telling.

The people are unable to feel as if there are answers unless some of the anxieties swirling around are addressed.

What would happen if your bank had to take a haircut that it cannot sustain? This writer is not banking on any such thing happening, pun-intended — but the problem is that there are various narratives out there because of the uncertainty.


The esoterica of how we are settling our debt is not explained in the budget, and of course one cannot expect such an explanation in the first place. But people do want to understand something beyond the figures expected in terms of settling of debt, and incurring of debt. They want to know exactly who pays for the debt-resettlement and what component of it they would have to eventually pocket out.

People do not understand ‘haircuts’ anyway by and large, and want to know if they are safe and are able to get about their normal business as best as they could. But answers are hard to come by because except for a select few that know exactly what is going on the MPs and other high-rankers in government know nothing more than what the Central Bank tells them and the credibility of the Bank is unfortunately not at its best due to events that transpired earlier this year.

Most central banks in many parts of the world are facing this situation this year in particular, and that’s particularly significant because there is a prediction that there would be many more countries that will face the kind of meltdown Sri Lanka faced earlier this year. After what has happened, Sri Lankans feel they are rather fortunate to get back to relative normal even though they estimate they are not aware of all the facts with regard to how the situation would pan out in the near future.

The last thing they want to be is in a fool’s paradise. They also feel the country is not taking some of the steps that ought to be taken with the liquidation of loss making enterprises and so on, and it’s not just SriLankan airlines.

In other words they feel it’s too much business as usual for their own comfort.

The budget would hopefully assuage the fears of at least some of the folk about an immediate return to the economic carnage that we witnessed in the earlier part of this year.

But the tax-burden being imposed is extremely heavy, unsustainable even. The people have gone to court but have no guarantee of redress.

The Government on the other hand has little alternative. But yet the issues of corruption in particular were not addressed in the budget say the experts, and this is seen as unconscionable in a year that saw so much focus on the repercussions of corruption, with an economic meltdown largely attributed to pilfering of public funds,though other factors such as mismanagement largely figured in the equation.


Perhaps it was just as well that the budget announcements were kept relatively low-key so and not to upset the markets, but then the repercussions of a harsh tax regimen are poised to be felt in the coming months.

The country cannot so much as think of growth, but there is a lack of alternative. The budget has some innovative measures but there is so much a budget could do when the alternatives are meager.

There may be certain repercussions that are forced. This time around there may not be any choice with regard to the winding-up of certain public institutions. They say if the private sector doesn’t take up and manage certain institutions then over time there will not be any choice but to close up — the old business as usual style would not just be untenable, it would be practically impossible.

Despite all this whether we exist in a bubble isn’t a good question when our economy already crashed in 2022. Bubbles don’t figure in a recovery phase. We have to recover and it’s the shape, the size and the extent of pain of that recovery that has to be considered. As things are we are in complete unchartered territory in this regard, and a budget though full of taxes wouldn’t create much of dent concerning that equation.