The new budget is meh. Other than the out the blue devaluation of the Rupee, the budget didn’t deliver any major surprises. This is probably a good thing, the surprises sprung in past budgets have seldom been happy, but this budget wasn’t that solid either. While it has its positives most of its proposals for development appeared to simply throw money at problems hoping they’ll solve themselves. One very absurd example of ill thought out spending is making Sri Lanka a sporting hub, I mean, where did that come from? We’re not even good at any sports in particular aside from cricket, and now even that is open to debate.
Who, what and why came up with in idea of self sufficiency for Sri Lanka? This in an age where economic theory has proven again and again the benefits of robust international trade and specialization. Offering incentives for import substitution is a recipe to increase the burden on the average Mr. Silva. Have people forgotten the tough times Sri Lanka went through in the time of Sirimavo?
Import substitution encourages local manufacturers to produce good of inferior quality to those that could have been imported. They are often more expensive as well. So while this creates the illusion of economic superiority all it will do is sell cheap quality produce at exorbitant prices to ordinary Sri Lankans. Your basic economics course teaches you that import substitution only reduces the level of wealth in an economy by benefiting a few (the producers) and negatively affecting the vast majority (the consumers).
What would have been much better is to structure domestic production strategically. Promote the resources we would have used for import substitution to create value in areas of export that are of long term worth. Essential items can be produced locally but that also with a keen ear to global supply considerations.
Simply saying we are going to be self sufficient and harking back to ancient Sri Lanka might be all very well to glisten the eyes of your average ardent patriot, but it’s not very good for the country’s economy.
The rupee devaluation was a shocking, but positive step. Many pundits were expressing fear about Sri Lanka’s increasingly precarious Balance of Payments position; the Central Bank was actively selling the dollars that came into the country to buy rupees, in order to prop up the value of the rupee. This is not harmful in itself, but subsequent re-injection of rupees into the system (sterelization) started creating a vicious cycle that was set to ‘crash land in the BOP’ as one LBO columnist put it.
The rupee devaluation was long called for by the IMF but the Central Bank was refusing to comply. Now the government has gone and done what the IMF wanted, purportedly for reasons of its own. The Central Bank it seems has been left in the dark.
Bad side of devaluation
The negative side of this move is of course loss in investor confidence. Right up to the point of the budget speech, investors believed Central Bank assurances promising that the rupee will not be depreciated. And then the government goes and does exactly the opposite in the budget (which is not expected to deal with exchange rates and monetary policy anyway). A central bank relies heavily on market credibility and, coupled with the expropriation bill and generally bad Public Relations, The whole thing might serve to spook would be investors even more.
Things could have been handled with greater delicacy.
Throwing Money at Infrastructure
The government h as planned to spend a lot on building schools. It has also resolved to provide vocational training to the large proportion of students who can’t enter university. While this is a good thing, what would make better sense is to reform our education system more along the lines of increasing opportunities via private universities and professional courses.
Vocational training will only be attractive to some. And the majority of people who try hard and fail to get into local universities are really quite clever, it’s just that the advanced level exam is a pipeline used to squeeze through just the amount of students the local university system can take. These students deserve more than simple vocational training. The economy needs entrepreneurs and innovators more than it needs mechanics and AC repairmen.
Roads to lead somewhere
There is also the question of roads. The government has pledged to build plenty of roadways. This is a positive thing, better roads improves access and quickens the lifeblood of the economy; logistics. Same goes for improving utility services. But what the government could improve on here is the trickle down effect. the very act of building infrastructure itself can be vastly beneficial to the economy when local contractors and workers are used wherever possible. So far most of the money spent on construction has been trickling down to China.
Tax reform is on the cards. But not the type of tax reform to get our Mr. Silva excited. Currently Sri Lanka taxes poor people too much. Taxes like VAT take more money from the poor than they do from the rich, and are known as regressive taxes. The government is planning on moving into a more simplified tax system but will not be focusing on reducing the tax burden on the poor. They are moving from direct taxes into indirect taxes, and so will focus more on import duties, cess, VAT and commodity levies rather than income taxes. This is going to burden the public with higher prices.
Conversely tax breaks are planned for investors and entrepreneurs in specific industries, to boost business. They must be hoping this pays off in the long term. The public certainly should be.
The budget deficit
Will all these efforts cut government spending or improve revenue and reduce the budget deficit? The government thinks yes. I think maybe. The new venture to charge VISA fees from tourists can net a few million dollars, but that is petty cash compared to the vast amount of money we are spending. The budget deficit reduction will again depend largely on things out of our control like foreign direct investment, export growth and domestic revenue.
Is it good for the economy?
Is it good for the economy? Hard to say. A temporary squeeze on the prospects of the general public can be expected, inflation will go up and more bad fortune could be expected based on how absurd the government gets with this import substitution agenda. There is hope that foreign investors will go for the better investment climate that the government is putting together, and this could ease things up in the future. But a lot will depend on what’s happening to the global economy and right now the global economy is not looking very good.
Policy wise, the government hasn’t changed much. Progressive thinking in the areas of reform will be needed if the money to be spent on education, infrastructure and reforming government institutions are to pay off. On an overall basis there’s nothing for the general public to get too excited about.