By Ravi Ratnasabapathy
Following the Cabinet reshuffle, Sri Lanka now has a new Minister of Finance. The reshuffle was timely, there is widespread disillusionment amongst the public who keep repeating that “nothing seems to be happening”. The Government now has the opportunity renew itself in the public eye, what should our new Minister of Finance do?
The macroeconomic indicators are improving: government revenues are up, expenditure is stable and the fiscal deficit targets look likely to be achieved for the current year.
Growth has slowed a little to around 4-4.5% but this is only to be expected and caused by the drought and tax increases, which are also the factors that have pushed up inflation. The impact of the floods will add to these pressures but macroeconomic fundamentals are stabilising and things should improve.
Yet why is there such intense annoyance amongst the public and the business community? This is partly a problem of perception and partly due to the painful measures imposed to sort out the fundamentals.
Public anger is driven by the cost of living while the business community is left bewildered by the perceived instability in the tax and policy environment. It is a tall order, but if both can be fixed he will be hailed as a success.
For the public, the problem is that the Government has achieved its macroeconomic stability at a cost: by imposing a huge tax burden on the public. Getting the macro fundamentals right is necessary and some tax increases are unavoidable but this cannot be a one-way process. The Government cannot expect to tax punitively, spend ostentatiously and expect the public to grin and bear the spectacle of ministers living in luxury while they are cutting back on staples.
The cost of living has risen sharply over the past two years because of taxes (VAT, excise duty, PAL and others) and the depreciation of the currency. Over the past two years the combined impact of VAT, PAL and the currency has added around 25% to the cost of imported items. Considering most of our basics are imported the impact on household budgets is heavy.
This is excluding the impact of any increases in duty and excise. While some duties have been cut others have risen, adding to the burden. Naturally, there is unhappiness when people have to cut back on their lifestyles; when ministers are seen to be living luxury this unhappiness morphs to real anger.
What should the minister do?
The Government has no room to cut tax – yet, but they do need to send a strong message that it is serious about controlling expenditure.
It cannot be only the public who bear the burden of closing the deficit, the Government must be seen to be doing something about cutting their own expenditure. This cut back needs to be visible and lead from the top: which means no new vehicles, no fancy offices, fewer overseas jaunts, no large entourage of security/staff. It must be visible, even if the impact on cutting back on ministers privileges yields comparatively small savings, they need to be seen to be tightening their belts to win public support.
Corruption and waste
Citizens are wearied by the sight of ministers scrambling for plum positions leaving a distinct impression is that their sole interest is in feathering their own nests and enjoying the perks of office.
The minister should launch an economy drive eschewing extravagance, the elimination corruption and waste through increased transparency and open processes. Sri Lanka’s leaders frequently cite the example of Singapore. Fiscal prudence has been a hallmark of Singapore’s governing philosophy and successful management of the economy; an ethos that must become a watchword for Sri Lanka’s rulers.
When faced with a crisis Singapore set up a “Cut Waste Panel” headed by members of the public and private sector, to receive suggestions from the public on where the government can cut waste, remove frills and make savings in the delivery of public services. The minister could set up a similar panel and in addition to suggestions from the public actively seek other opportunities to reduce costs.
For example, moving to daylight saving time will save money for the CEB and reduce household electricity bills. It is a simple measure that can bring benefits at almost no cost and should be implemented immediately.
There needs to be a tightening of belts but we must all be seen to be doing it together.
In parallel, there needs to be a comprehensive review of spending, reviewing not only the scale of spending but also the scope of Government. The Government should not expend any further funds expanding the SOE’s and should restructure these to cut waste and losses. Privatisation can have a threefold benefit:
a) raise revenue which will supplement tax revenues,
b) obviate the need to fund losses (in the case of loss-making entities), and
c) open new opportunities for private sector participation in the economy.
For example, plans to add 500 new outlets to the loss-making Lanka Sathosa chain at a cost of a billion rupees need to be shelved. Many SOE’s serve as vehicles for patronage and are dens of corruption. Lanka Sathosa which is mired in corruption scandals (one involving a Rs.15bn consignment of rice) and has not submitted an annual report since 2012 is a prime example.
Illiberal trade policies protect businesses close to politicians and raise the cost of living. There are many such instances but to cite just one example, the import of wheat flour is taxed, ostensibly to support paddy farmers but increases the price of bread. Bread is subjected to price control – to “protect” the consumer but why the local price of bread is rising even while world wheat prices have collapsed by 50% since 2013 is a question that needs to be asked. Liberalising the import of wheat flour could reduce prices significantly and thus the cost of living.
There are other sectors such as dairy, (milk powder attracts a duty of Rs.225/kg, butter Rs.880/kg), fruit (oranges Rs.65/kg, grapes Rs.130.kg, apples Rs.45/kg), cooking oil (Rs.130/kg) sugar (Rs.30.kg) and meat (taxed at 30%). The cost of living can be brought down if more sectors of the economy are liberalised.
These are short-term measures that can bring relief to the public while the private sector will welcome the new opportunities for trade that this opens.
The government’s fiscal position must sustainable over the medium and long term.
If this is not properly planned periodic fiscal crises will recur pushing the Government to resort to ad-hoc, short-term measures to deal with them creating the volatile business environment that destroys confidence.
The Prime Minister has already announced a medium-term economic framework. This, a good starting point. Budgets and policies must now fall within this framework. Policy making must be evidence based, with adequate consultation through the use Green and White papers, as in the UK.
Green Papers set out for discussion, proposals which are still at a formative stage. These detail specific issues and point out possible courses of action in terms of policy and legislation. Once an issue is debated, White Papers are issued as statements of policy, and often set out proposals for legislative changes, which may be debated further before a Bill is introduced.
The process of consultation minimises the need for later changes and results in stability in the policy environment which means business confidence will rise.
The minister has a huge task ahead of him, these are only a few preliminary ideas to explore and we wish him all success.
(Ravi Ratnasabapathy is a Fellow of the Advocata Institute, a free-market think tank based in Colombo. www.advocata.org)