‘The problems accumulated in the past have now exploded
“The time has come to put the house in order”
“The dismal fiscal sector has caused imbalances in the macro-economy”
“Engagement with the IMF, a starting point in the implementation of critical reforms”
by Sanath Nanayakkare
The Ministry of Finance (MOF) said last week that Sri Lanka must urgently undertake difficult but much-needed and far-reaching reforms to address the accumulated and persistent problems in the country’s fiscal sector.
In a report titled “Fiscal Sector: Current Status and Way Forward,” the Ministry of Finance pointed out that the poor performance of the fiscal sector has caused many imbalances in the macro-economy.
“Exceptionally low tax revenue, rigid recurrent expenditure, a large budget deficit, accumulated and now unsustainable debt are the main concerns of the budget sector. Responsible and disciplined fiscal management has become more important than ever. In this process, the country and its citizens will have to go through a difficult period,” the MOF warned.
The report further said:
“A strong social protection network is needed for vulnerable and needy segments, as reforms will be painful.”
“Now is the time to put the house in order and reorganize the government’s fiscal operations to strengthen macroeconomic stability and facilitate medium to long-term economic growth.”
“Gap financing poses a critical challenge due to the lack of foreign financing following the loss of access to the international capital market. The resulting increase in monetary financing caused serious macroeconomic imbalances.
“The poor performance of the fiscal sector over the years has contributed to macroeconomic instability and failed to support long-term growth. Excess aggregate demand generated by unsustainable budget deficits has led to high inflation, balance of payments (BOP) pressures and currency volatility.
“Sri Lanka today faces a severe balance of payments crisis with insufficient foreign exchange to purchase essential imports such as food, energy and pharmaceuticals, let alone meet its service obligations. Debt Sound macroeconomic fundamentals cannot be achieved without prudent and sustainable fiscal outcomes.
“The problems accumulated in the past have now exploded and caused serious disruption in the daily lives of Sri Lankans, leading to widespread public discontent and social unrest.”
“Fiscal sector performance in the recent past has been characterized by exceptionally low government revenues, rigid recurrent expenditures, high budget deficits, and accumulated debt that is now unsustainable. The weak fiscal position manifested itself in credit rating downgrades, loss of access to international capital markets and foreign financing. As a result, the government has increasingly relied on domestic budget financing, including monetary financing by the Central Bank, which in turn has led to significant macroeconomic imbalances.
“Government revenue has particularly fallen over the past two years for various reasons, including the economic slowdown caused by the COVID-19 pandemic, import restrictions imposed to ease pressure from the external sector, but
above all, due to the ultra-low tax regime introduced at the end of 2019 and the easing measures related to the COVID-19 at the beginning of 2020. Even before these tax cuts, Sri Lanka was a country with the one of the lowest revenue-to-GDP ratios in the world. world, and tax cuts have moved Sri Lanka closer to the bottom of that list.
“The government’s decision to seek assistance from the International Monetary Fund (IMF) will be a starting point and a catalyst in implementing these essential reforms with the support of citizens and other stakeholders.”
While acknowledging the fact that government budgetary operations have played an important role in improving economic and social conditions in Sri Lanka during its post-independence history, the Ministry of Finance went on to say that “the inability implementing the political reforms required at this critical juncture will be very difficult. dear. However, it will lay a solid foundation for creating a resilient economy for future generations.
Central Bank Governor Dr. Nandalal Weerasinghe said on Friday that the Central Bank has taken the necessary steps to stabilize the economy by taking the right monetary policy measures in terms of price adjustment and raising policy rates. .
“Now the fiscal side also needs to implement key measures such as increasing government revenue through tax increases. There is a full understanding of improving macroeconomic fundamentals and Decisions will be taken to address the balance of payments problem, debt sustainability and improving government revenue to transform the economy into a more resilient one,” he said.
The governor noted that the sooner social and political stability is restored, the better it would be to stabilize the economy and put it on the path to growth.
In September 2020, in response to a credit rating downgrade by Moody’s, a global rating agency, from B2 to Caa1, Sri Lanka’s Ministry of Finance retaliated by saying such a report was “unwarranted, premature and reckless “.
In November 2021, former Central Bank Governor Ajith Nivard Cabraal said debt restructuring was underway without IMF assistance and said, “We need to manage our debt without using the word ‘restructuring’ of frivolous way.