No pain, no gain

Karapincha Perera, the tea-kade gossip, laughed aloud when he was told that inflation was below 5 per cent. “You must be joking or someone is joking,” he said, laughing aloud again.

He was discussing the cost of living with a friend who had mentioned inflation figures reported by the Central Bank.

There is no single inflation rate given by the banking regulator. According to the bank’s latest inflation measurement, core inflation (which reflects the underlying inflation in the economy) increased significantly from 3.1 per cent in December 2018 to 5.1 per cent in January 2019 on a year-on-year basis.

Headline inflation as measured by the year-on-year change in the National Consumer Price Index (NCPI) increased to 1.2 per cent in January 2019 from 0.4 per cent in December 2018.

Karapincha’s comments were on my mind on Thursday morning while listening to the usual conversation among Kussi Amma Sera and her friends under the Margosa tree.

“Hamedama aanduwa kiyanawa badu mila adukarala kiyala… habai badu ganna-kota mila wadikarala (The Government says consumer prices have dropped but the prices in the shops are still high),” said Kussi Amma Sera.

“Ehemai, ehemai (Yes, yes),” responded Serapina.

“Janathawata ena aadayama ekka jeevathwenna hari amarui (It is difficult for people to live on their normal income),” added Mabel Rasthiyadu.

As they got engaged in a long conversation about the cost of living and average man-on-the-street income levels which don’t match today’s consumer needs, the home phone rang.

My jolly-mood economist friend, Sammiya (short for Samson), was on the line and in the mood for a chat.

“I say the budget is next week, right? It seems the Government is planning a populist budget to garner votes with elections this year and has also asked the IMF for some ‘breathing space’ to delay key economic reforms,” he said.

“Yes, you are right. I believe the IMF would respond positively to this request,” I replied.

“Giving handouts in pre-election stunts might woo voters and win elections (as it has done in the past) but that doesn’t solve the country’s precarious debt crisis. More subsidies mean more headaches to the Treasury,” he noted.

He is absolutely right. In an economy that is struggling with debt, presenting a budget with no pain (to the population) is also ‘no gain’ to the people. For, eventually, at some point (at a later stage) people will be taxed higher to seek revenue to pay off debt or more taxes must be obtained from income tax rather than indirect taxes.

In the first quarter of 2019, Sri Lanka has to repay US$2.6 billion in debt while the figure for the entire year is believed to be over $5 billion, all of which will come from borrowings through sovereign bonds and other sources.

The fact that the government is bending backwards to ‘soothe’ the population this year in view of elections (provincial council, presidential poll and possibly parliamentary elections) is well known and finding it hard to offer concessions (while reducing tax revenue) amidst growing debts it has to meet.

According to a Business Times report last month, Finance Minister Mangala Samaraweera had directed Treasury officials to prepare “a populist budget”, a challenge to Treasury officials amidst falling Government revenue, mounting public debt and severe balance of payment issues.

The budget is expected to provide tax relief and increase social spending. Among the incentives is the resurrection of the ‘Enterprise Sri Lanka’ and ‘Gamperaliya’ programmes which were suspended during the recent 52-day political impasse when Prime Minister Ranil Wickremesinghe and his Cabinet were sacked, to be re-appointed later.

The report said the 2019 budget will allocate Rs. 48 billion for the implementation of the Gamperaliya programme with Rs. 300 million for each electoral division to carry out development activities. Separately Rs. 60 billion is to be allocated for the ‘Enterprise Sri Lanka’ programme to create 100,000 new entrepreneurs countrywide. Furthermore, soft loans amounting to Rs.10 billion will be provided for both small to medium enterprises in rural areas to develop their businesses.

Continuing the conversation, Sammiya said: “These populist budgets are short-term solutions to long-term issues. I use a simple premise why it won’t work. For example, a farmer receives a subsidy for fertiliser which is half the original sale price. On the other hand, he pays taxes on his household consumption purchased from the nearby shop which might work out or be close to the amount he receives as a subsidy. So what’s the purpose of a subsidy?” he asked, raising a pertinent ques- tion. Subsides have dogged many Governments, present and past, and administrations find it hard to get out of the subsidy syndrome.

In a budget-era where tax revenue is less than half of the expenditure, the pain of taxing the population to pay off debt takes longer to bear. For instance, this year’s bunching of debt payments is largely money borrowed during the previous regime. The same would happen with money borrowed now (debts are generally paid with borrowed cash since tax revenue is woefully inadequate to meet even the interest payment, apart from capital). Someone has to pay it later; another governing party or if the United National Front is re-elected.

Sri Lanka desperately needs to broad-base its exports, increase production and secure more foreign exchange and revenue from exports. This has been one of the biggest challenges facing the country as foreign exchange from exports meets just half the foreign exchange required for the country’s huge import bill.

While there has been foreign exchange gains from garments exports and workers’ remittances (which have, however, seen a slide in recent times and according to the latest available figures fell by 5.7 per cent, year-on-year, in November 2018, registering a decline of 0.9 per cent on a cumulative basis) in the past, Sri Lanka is also banking on earnings from tourism.

However, Down-to-Earth columnist Sirimal Abeyratne raises a pertinent question in his column (on this page). In a research study down by one of his students, it has been found that a large percentage of the food and drink consumed by top-rated hotels is imported which means that this cost has to be deducted from foreign exchange earning from tourism. For that matter, the foreign exchange consumed by the garment sector to import raw material also doesn’t figure in the final tabulation of what this sector earns, eventually, in foreign exchange for the country.

At the end of the day, no pain means no gain. Populist budgets will come and go – every governing party resorts to this closer to an election – but that won’t solve the long-term pain of the people.