Is the President’s strong resolve to undertake economic reforms feasible?

President Ranil Wickremesinghe’s brilliant address to the Annual Sessions of the Asian Development Bank (ADB) in Manila on September 29, was a strong commitment to undertake economic reforms and an exhortation to the international community to assist Sri Lanka in her quest for economic recovery.

He also referred succinctly to the global impacts and geo- political factors that have impacted Sri Lanka. It was a well-articulated and impressive speech that may enhance international assistance to Sri Lanka.

Speech

“Sri Lanka will shoulder an unprecedented fiscal effort, as part of the government’s commitment to restore the country’s debt sustainability amidst major economic stress, while hoping creditors and stakeholders will support the efforts,” he said.

Paramount issue

The paramount question is whether the resolve of the President will be implemented. Is the President’s strong resolve to undertake economic reforms feasible?

The political base of the President, opposition from within the Government, popular opposition to taxation measures and pricing policies that increase the already high inflation and living costs make taxation measures unpopular.

Similarly, cutting down of imprudent and uneconomic expenditure is difficult. In as much as it is important to implement tax reforms that generate a much higher revenue, a drastic reduction of imprudent and wasteful expenditure is imperative.

Furthermore, reducing salaries and pensions is not possible. Payment of salaries, pensions and interest payments absorb more than government revenue. There are many other areas where government should and must cut expenditure drastically, but are difficult to implement.

Reducing expenditure

Reducing government expenditure that is much above government revenue is imperative to reduce the fiscal deficit. This is indeed difficult owing to rigidities in government expenditure, huge allocations for defence and other economically unproductive and wasteful expenditure. On the other hand, there is a need to increase expenditure on social security, poverty alleviation, health and education.

Defence expenditure

Among these is the need to cut the huge defence budget. Government expenditure cannot be reduced without a significant curtailment of the huge defence expenditure that has been increasing after the cessation of the war. Will the President be able to achieve this?

Other government expenditure

There are only few insignificant signs of frugality in expenditure. It is doubtful that many government expenditures, such as the expenditure on the large number of ballooning ministers, could be reduced. They may increase.

Foreign affairs

In the current context of financial stringency, the curtailment of expenditure on foreign missions and foreign travel is important. However what we have witnessed is the opening of embassies in countries of no consequence diplomatically or economically, such as in the Seychelles’, and appointment of friends and relations of politicians to foreign embassies. This exemplifies the inability of the government to curtail wasteful government expenditure. Can we see a reversal of this wanton wastage of foreign resources?

Revenue

The President’s address once again stressed the resolve for fiscal consolidation. Government revenue that has progressively declined to as low as 8 percent of GDP has to be enhanced by effective increased taxation.

Several drastic changes must be implemented to increase personal and corporate taxes. Drastic increases in both direct and indirect taxation are needed to achieve substantially higher revenue. The interim budget presented in September indicated increased taxation in the next Budget for 2023.

Reforms

Previous columns have indicated the needed reforms for effective revenue collection. In the case of direct taxation, the current threshold for income taxation has been reduced from a high exemption level in the 2022 interim Budget and likely to prevail or be even increased in the Budget for 2023.

Political challenge

Although, fiscal consolidation is economically imperative, it is politically challenging. Our political conditions, nature of party politics and “pork- barrel” electoral politics are inimical for reducing government expenditure and increasing revenue. Consequently, sustained fiscal consolidation and the country’s economic recovery is uncertain, difficult and unlikely.

Conclusion

The President’s resolve to undertake an “unprecedented fiscal effort, as part of the government’s commitment to restore the country’s debt sustainability,” may face severe political, economic and social opposition that make it difficult to implement.

Pres ident Wickremesinghe knows well that “politics is the art of the possible.” He is also fully aware that good economics is often bad politics in the short run, but good politics in the long run.

Does the President have a long- run vision for Sri Lanka?