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Budget 2021 – Playing Ostrich or Parading in the Emperor’s New Clothes?

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by Anila Dias Bandaranaike, Ph. D.

The national budget is a financial plan, not a policy statement. Specific budget proposals become nonsense, unless they form part of a consistent whole. Unfortunately, Budget 2021 parts did not add up to a consistent whole. Yet, Sri Lanka’s leadership in both public and private domains did not seem to care.

Parliament and Corporate Response to the 2021 Budget

Budget 2021 was presented in parliament on 17 November 2020. Several analysts with knowledge, experience, and integrity reported that this budget 1) provided no numeric estimates of the revenue impact of the budget proposals (e.g. revenue lost or gained under each tax revision or concession); 2) had key estimates differing between the budget speech and the statistical tables by Rs. 50 – 70 billion, (e.g. Rs.1,961 billion vs. 2,019 billion for revenue, Rs. 3,525 billion vs. 3,594 billion for expenditure); and 3) had glaring inconsistencies between the budget proposals and associated numeric targets (highlighted below). However, on 10 December 2020, Budget 2021 was approved by parliament with a two thirds majority.

I have evaluated national budgets at post-budget seminars for over 15 years and been invited by the Parliamentary Committee on Public Finance (COPF), previously and this year, to help them analyse the budget. Never have I felt such despair for the management of this country’s finances.

Yet, observations in public by members of the corporate sector conveyed that they were either nervous of the adverse consequences of a thoughtful opinion or totally self-absorbed. Their observations only referred to tax breaks and concessions given to their own businesses. One panelist even contradicted his own words. He began by saying how happy he was that Budget 2021 gave his sector incentives instead of handouts, but in the next breath, asked the Government for a handout to pay employees in that sector during COVID-19! The newspapers quoted this. Sadly, corporate sector comments were uniformly superficial. Not one made any reference to the bigger picture – that the numbers did not match with statements in the budget speech and that the strategies presented could not deliver what they said they would, given the extremely difficult financial situation Sri Lanka is facing.

 

A New Government with Sri Lanka at a Crossroads

 

This was the maiden budget of a strong new government, elected with the people’s blessings, with greater powers under the 20th Amendment to the Constitution and a two thirds majority in parliament. Budget 2021 was a unique opportunity for a strong, capable government to implement difficult reforms to address Sri Lanka’s priorities. Alas, they lost this opportunity.

Sri Lanka is at a crossroads in a new global reality created by COVID-19. This reality underlines the fragility of global connectivity and uncertainty of Pre-COVID-19 economic activities as we knew them. International and domestic movement of people, goods, and services can no more be taken for granted. Sri Lanka’s priorities must adjust to this new reality.

As I see it, Sri Lanka’s immediate priorities should be to address:

 = a pandemic-related health and welfare crisis; and

 = a looming economic and debt crisis

 

Sri Lanka’s long-term priorities should be to reverse:

 = People/skills drain of 200-300,000 per year, searching for greener pastures abroad;

 = Environmental drain, with rainforests, sanctuaries, mangroves, coasts destroyed for short-term monetary gains; and

 = Investment drain, with investment below 30% of GDP and declining.

 

Budget 2021, oblivious to reality, ignored both pandemic and priorities.

 

Irrelevant Budget

The government’s policy statement, ‘Vistas of Prosperity and Splendour’ is embodied in their 10 key principles. As I see it, those principles can be divided into three categories, People, Environment, and International Relations.

People:

People centric economic development (6) in a technology based society (7) with a productive citizenry and a vibrant human resource (5) in a disciplined, law abiding and values-based society (10) under a new constitution that fulfills the people’s wishes (4) and an administration free from corruption (3), giving priority to national security (1).

Environment:

Development of physical resources (8) with sustainable environmental management (9).

International Relations:

A friendly, non-aligned, foreign policy (2).

The budget speech hit some good buttons, consistent with their vision and Sri Lanka’s current reality —support the rural heartland, agriculture and small entrepreneurs; protect the environment; promote technology and vocational training; raise investment; curtail non-essential imports and expand exports; etc. However, budgetary allocations in the Appropriation Bill told a different story, as follows:

People:

The ministries of Defence (Rs.355bn) and Highways (Rs.330bn) were allocated 26% of total expenditure (Rs. 2,678 bn), while Health (Rs. 220bn), during a COVID-19 crisis, Education and related ministries, including pharmaceuticals, distance learning, technical and vocational skills and education reforms, (Rs.177bn) together, were allocated only 15% in total.

Most people live in rural communities. Yet, 15 ministries responsible for their key needs—agriculture, fisheries and livestock, irrigation and water supply—together only received an allocation of 10% (Rs. 262bn) of the total. The major share of Sri Lanka’s employment and output (GDP) is with her informal sector, not corporates. In Sri Lanka’s labour force, 53% work in the informal sector. They have no social security. 18% work in the public sector and only 29% work in the formal private sector. Yet, significant tax concessions and incentives in the budget prioritised listed or large corporates. The vast majority will continue to pay indirect taxes on their basic consumption, inconsistent with principle 6.

Critical structural reforms to address the mismatch between products of the education system and needs of the labour market, particularly English, mathematical, analytical and technological skills, identified in the policy statement, need funds. Yet, education reforms, vocational training and research and innovation received a paltry Rs.15 bn (0.5% of total expenditure), despite principles 5 and 7.

Critical structural reforms in the wage structure and labour laws to address employee dissatisfaction and reverse the exodus of professional, skilled and unskilled persons from Sri Lanka need funds. Without budgetary allocations for such reforms, brain and skills drain will continue, contrary to principle (5).

Environment:

The entire allocation for the environment (Rs. 9 bn) is below 3% of the Defence or Highways allocations. The environment is facing serious problems due to ill-conceived construction, encroachment, poaching, illicit logging and destruction of national parks, dry zone forest cover, rainforests, mangroves and wetlands. Yala, Wilpattu, Sinharaja, Anawilundawa, Mannar, Moneragala are examples highlighted in mainstream and social media recently. This budget only pays lip service to principles 8 and 9. Soon, we will have nothing to attract tourists in the short term nor for future generations in the long term.

International Relations

: This budget has been unable to build confidence with long-term foreign investors (highlighted below) to raise foreign investment, despite principle 2.

In summary, monetary allocations in Budget 2021 were neither relevant to the government’s vision nor Sri Lanka’s short-term and long-term priorities.

 

Unrealistic Budget

Budget 2021 estimates and strategies were unrealistic. For example,

1) The Budget’s GDP growth estimates were -1.6% for 2020 and +5.5 for 2021. Official GDP statistics released on 15 December recorded a contraction of -5.3% for the first three quarters of 2020. With the COVID-19 second wave, 2020 GDP will obviously contract by more than -5.3 %, highlighting the unrealistic optimism of GDP estimates.

 

2) The investment estimate was also optimistic. The official release of 2020 2nd Quarter GDP contraction of -15.3% was delayed by three months. Loss of confidence among potential local and foreign investors, by the deliberate withholding of official statistics, cannot be overcome by tax breaks and incentives. Two rating agencies, Fitch and Moody’s, downgraded Sri Lanka recently, criticizing economic management. Subsequently, the Citi Group went further, actually stating that the government is “in denial”. Serious long-haul investors will want positive signals from rating agencies. Who will invest here now?

 

3) The estimates for inflation and private sector credit expansion were inconsistent. The State Minister stated that there will be no IMF bailout, while the budget speech stated that bilateral loans and domestic borrowing would meet the deficit. This conveys that government will borrow from captive sources like state banks, EPF and ETF. Till now, with low private credit demand, interest rates have remained low. The estimated optimistic rise in private sector credit by 14.7% (6% in 2020), together with high govt borrowing and low interest rates cannot all three be reconciled. Alternatively, printing money will raise inflation to well over the 5% estimate.

 

4) Revenue was overestimated in relation to actual data up to October. With the tax breaks and tax holidays given, from where will this huge revenue appear in this current climate?

 

5) Budget 2021 made no effort to trim public sector expenditure, contradicting the policy statement. The deficit will likely be higher than estimated due to higher recurrent expenditure and debt repayments, unless investment is cut below budget, as has been done in the past.

 

6) The unrealistic economic strategies proposed for import substitution and export and investment promotion, respectively, were tried and failed in the Bandaranaike Government of ’70-77 and the Jayawardena Government of ’77-’90. Can old rhetoric promoting failed ideas succeed 30-50 years later?

 

In summary, Budget 2021 numbers were both unrealistic and inconsistent with Sri Lanka’s current economic and financial situation.

 

In conclusion, this budget is a farce set in an alternate reality. I cannot understand whether those who prepared it and who supported it are entirely devoid of thinking capacity or callously devoid of any regard for our people and our environment. Are they playing ostrich to fool themselves or making the emperor parade in his new clothes to fool himself and others? Either way, during 2021 and beyond, Sri Lanka will remain a country of vast potential and lost opportunities.

 

(The author is a former Assistant Governor and Director of Statistics of the Central Bank of Sri Lanka)



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Features

UNFORGIVING CONSEQUENCES OF DEFORESTATION

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By Eng. Thushara Dissanayake

A forest is much more than a group of trees. Clearing of forests for agriculture has been an age-old practice. We accepted chena cultivation as a traditional livelihood of the rural poor. Secondly, we had ample forestlands throughout the country. Another cause of deforestation is development activities, besides logging and gem mining in some cases. Because of these acts, either legal or illegal, our forest cover has fast dwindled posing many serious environmental issues.

According to the World Food and Agriculture Organisation (FAO), by 2015, the estimated forest area in the world equaled 31 per cent of the earth’s surface area, most of which was located in tropical areas such as Africa, South America, and Indonesia. Today, according to experts, we have only 17 per cent of the forest cover left in this country.

People are the ultimate managers of forests and the higher their level of knowledge and awareness, the better their ability to conserve forests. It is unfortunate that recent incidents prove that people are not serious about the environment.

We are living in an era where climate change has become a major challenge. Ever-increasing amounts of carbon dioxide emitted to the atmosphere, mainly by the burning of fossil fuels has caused global warming, which renders myriads of bitter consequences. In the meantime, deforestation has been identified as the second major driver of climate change. It is forests which can help us reduce the excessive amount of carbon dioxide in the atmosphere playing a leading role in the fight against global warming. Forests act as a carbon sink and probably the only entity that is capable of carbon regulation. On average, the amount of oxygen produced annually by an acre of trees is about 2,500 kg while the annual oxygen consumption of a person is 750 kg.

Trees relieve people from stress and make them more comfortable while enhancing their well-being. Without trees, the world would not be beautiful and appealing. The earth has millions of different varieties of trees. Many trees do not remain the same throughout the year. When we plant a tree, we are emotionally attached to it and keen to observe its growth day by day. Sometimes we plant a tree to mark a special event and it may be our birthday, the day of marriage, or the demise of a close relative. Bhutan introduced the Gross National Happiness (GNH) index, which is used to measure happiness and well-being of its people. One of the four pillars of GNH is environmental conservation.

Even our tourism industry, which is one of the main sectors that bring us foreign exchange, vastly depends on the natural beauty of this country. If we fail to maintain its unique natural beauty, the country will cease to be a tourist attraction, jeopardising the industry.

The contribution of trees to the ecosystem is massive. Trees improve air quality by trapping solid particles, retard rainfall-runoff and thereby mitigate floods, increase groundwater recharge, and preserve soil by preventing erosion. The sustenance of our river system largely depends on the central forest area being the source of water. Not only forests but even green areas such as shrubs and turfs inside forests also contribute to the ecosystem immensely. Although they receive less attention, they can filter air by removing dust and absorb many pollutants like carbon monoxide, sulphur dioxide, and nitrogen dioxide.

Forests are home to wildlife. The same is true of humans and the survival of humans is also dependent on forest conservation.

 

The way forward

If the concept of vertical development is followed, not only in major cities but also in other areas, the acquisition of forest areas for human settlements can be significantly minimised as high rise buildings will obviate the need for many acres of land. Modern technology has to be used in agriculture together with methods that could contribute to high water use efficiencies to increase productivity rather than expanding agricultural land areas. Human settlements in less developed rural areas should be discouraged. There are large amounts of barren lands, including abandoned paddy lands, that could be used for afforestation if a proper mechanism is put in place to compensate landowners. These are several effective strategies which should be implemented sooner than later as policy interventions on all fronts are required to protect our existing forests. If the country’s forest cover shrinks further, we will all have to face bitter consequences sooner than expected.

 

(Eng. Thushara Dissanayake is a Chartered Engineer specialising in water resources engineering with over 20 years of experience)

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HYPOCRICY OF OUR COLONIAL MASTER!

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By Dr Upul Wijayawardhana

Irrespective of what happens at the UNHRC, there is one thing we should never forget; the arrogance and hypocrisy of our colonial master! The behaviour of the British Government is despicable. The UK has taken from the ‘nouveau-evil empire’––the US––the task of pressuring member nations of the UNHRC to vote against Sri Lanka! All this for the crime of defeating terrorism! Is this what is expected of the so-called leader of the Commonwealth?

It is a shame that the British representatives have not read Mathias Keittle’s excellent, well-reasoned piece “A German Analyst’s View on the Eelam War in Sri Lanka” which appeared in The Island on 28 February.

Considering there are allegations that some friends of high-ranking politicians of the British government made a mint from Covid-19 epidemic, one begins to wonder whether the Tiger-rump has helped some of them line their pockets. After all, it cannot simply be for a few votes. It will be interesting to see if the British government can counter what Matias Keittle so emphatically stated:

“Sri Lanka eliminated a dreaded terrorist group, with intricate global links, but receives little credit for it. Unlike elsewhere in the world, Sri Lanka has succeeded in resettling 300,000 IDPs (Internally Displaced Persons). There are no starving children for the NGOs to feed but this gets ignored. Sri Lanka has avoided mass misery, epidemics and starvation but the West takes no notice of this. Sri Lanka has attained enviable socio-economic standards for a developing country while eliminating terrorism but gets no acknowledgement. The government of Sri Lanka and its President continue to enjoy unprecedented popular approval through democratic elections but this is dismissed. The economy is functional, but remains not encouraged by the West.”

My concerns perhaps are confirmed by what Lord Naseby, a government peer sitting in the British House of Lords, has stated. The following from the statement by Lord Naseby published in The Island of 5 March under the title, ‘Lord Naseby asks why Adele not prosecuted in the UK for child recruitment’, surely, is an indictment on the British government:

“I am astounded how the UK or any other Member of the Core Group can possibly welcome the High Commissioner’s so called ‘detailed and most comprehensive report on Sri Lanka’ when it is riddled with totally unsubstantiated allegations and statements completely ignoring the huge effort to restore infrastructure and rehouse displaced Tamils and Muslims, who lost their homes due to the Tamil Tigers.

“Furthermore, I question how the UK government knowingly and apparently consciously withheld vital evidence from the despatches of the UK military attaché Col. Gash. Evidence I obtained from a Freedom of Information request, resisted by the Foreign Office at every stage for over two years. These dispatches from an experienced and dedicated senior British officer in the field makes it clear that the Sri Lankan armed forces at every level acted and behaved appropriately, trying hard not to harm any Tamil civilians who were held by the Tamil Tigers as hostages in a human shield.

“This conscious decision totally undermines the UK‘s standing as an objective Leader of the Core Group; made even worse by the impunity for not prosecuting the LTTE leader living in the UK, largely responsible for recruiting, training and deploying over 5,000 Child Soldiers – a real War Crime. It is time that the UK Government acknowledges and respects the recommendations of the Paranagama Commission, which involved several international expert advisers, including from the UK – Sir Desmond de Silva QC, Sir Geoffrey Nice QC, Rodney Dixon QC and Major General John Holmes.”

Her Majesty, Queen Elizabeth II, has strived so hard to strengthen the Commonwealth of Nations so that the UK could successfully transform itself from a colonial master to a friend of the past colonies but Her Majesty’s Government seems to be behaving in a manner to undermine Her efforts. Her Majesty’s vision of friendship and cooperation seems to be countered by the bully-boy tactics of politicians.

The excellent editorial “Should SL follow UK?” in The Island on 24 February concluded with the following:

“Anything Westminster goes here. It is the considered opinion of the defenders of democracy that Sri Lanka should emulate the UK in protecting human rights. What if Sri Lanka takes a leaf out of the UK’s book in handling alleged war crimes? In November 2020, the British Parliament passed a bill to prevent ‘vexatious’ prosecutions of military personnel and veterans over war crimes allegations. This law seeks to grant the British military personnel, who have committed war crimes, an amnesty to all intents and purposes. The International Criminal Court (ICC) has ascertained evidence of a pattern of war crimes perpetrated by British soldiers against Iraqi detainees, some of whom were even raped and beaten to death. Curiously, the ICC said in December 2020, it would not take action against the perpetrators! Too big to be caught?”

the UK may argue that it has to protect military personnel against vexatious prosecutions. If so, they should understand the position of Sri Lanka. We know that the US administrations, be it under Obama, Trump or Biden, run more on brawn than brain but we expect better from the UK. Why or why do they have to behave like a poodle of the US.

Is this not hypocrisy of the highest order? Shame on you, the British government!

 

 

 

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ASIAN DEMONSTRATORS AND THE AMERICAN DREAM

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The US was always a selective supporter of democracy, and now it is a diminished one. 

By Ian Buruma

One month ago, in Myanmar, protesters against the military coup gathered around the United States Embassy in Yangon. They called on President Joe Biden to make the generals go back to their barracks and free Aung San Suu Kyi from detention. Her party, the National League for Democracy, won a big victory in the 2020 general election, which is why the generals, afraid of losing their privileges, seized power.

But is the US Embassy the best place to protest? Can the US President do anything substantial apart from expressing disapproval of the coup? The protesters’ hope for a US intervention shows that America’s image as the champion of global freedom is not yet dead, even after four years of Donald Trump’s ‘America First’ isolationism.

Demonstrators in Hong Kong last year, protesting against China’s harsh crackdown on the territory’s autonomy, even regarded Trump as an ally. He was erratically hostile to China, so the protesters waved the stars and stripes, hoping that America would help to keep them free from Chinese communist authoritarianism.

America’s self-appointed mission to spread freedom around the world has a long history. Many foolish wars were fought as a result. But US democratic idealism has been an inspiration to many as well. America long saw itself, in John F Kennedy’s words, as a country ‘engaged in a world-wide struggle in which we bear a heavy burden to preserve and promote the ideals that we share with all mankind.’

As Hungarians found out when they rose up against the Soviet Union in 1956, words often prove to be empty. The Hungarian Revolution, encouraged by the US, was crushed after 17 days; the US did nothing to help those it had egged on.

Sometimes, however, freedom has been gained with American help, and not just against Hitler’s tyranny in Western Europe. During the 1980s, people in the Philippines and South Korea rebelled against dictatorships in huge demonstrations, not unlike those in Hong Kong, Thailand, and Myanmar in the last two years. So, of course, did people in the People’s Republic of China, where a 10-meter tall ‘Goddess of Democracy,’ modelled on the Statue of Liberty, was erected on Tiananmen Square in 1989.

The Chinese demonstrations ended in a bloody disaster, but pro-democracy forces toppled Ferdinand Marcos’s dictatorship in the Philippines and South Korea’s military regime. Support from the US was an important factor. In Taiwan, too, authoritarianism was replaced by democracy, again with some US assistance.

But what worked in the Philippines, South Korea, and Taiwan is unlikely to work in Thailand, Hong Kong, or Myanmar. The main reason is that the former three countries were what leftists called ‘client states’ during the Cold War. Their dictators were ‘our dictators,’ protected by the US as anti-communist allies.

Propped up by American money and military largesse, they could continue to oppress their people, so long as the US saw communism as a global threat. Once China opened for business and Soviet power waned, they suddenly became vulnerable. Marcos was pressed on American TV to promise to hold a free and fair election. When he tried to steal the result, a US senator told him to ‘cut and cut cleanly.’ Marcos duly ran for his helicopter and ended up in exile in Hawaii.

Similarly, when South Korean students, supported by much of the middle-class, poured into the streets, angry not only with their military government, but with its US backer, America finally came down on the side of democracy. Dependent on American military protection, the generals had to listen when the US urged them to step aside.

The generals in Thailand and Myanmar have no reason to do likewise. Biden can threaten sanctions and voice his outrage. But with China willing to step in as Myanmar’s patron, the junta has no reason to worry very much (though the military has been wary of China up to now).

Thailand’s rulers, too, benefit from Chinese influence, and the country has a long history of playing one great power against another. And because Hong Kong is officially part of China, there is little any outside power can do to protect its freedoms, no matter how many American flags people wave in the streets.

Dependence on the US in Europe and Asia, and the clout that Americans held as a result, was sustained by the Cold War. Now, a new cold war is looming, this time with China. But US power has been greatly diminished since its zenith in the 20th century. Trust in American democracy has been eroded by the election of an ignorant narcissist who bullied traditional allies, and China is a more formidable power than the Soviet Union ever was. It is also vastly richer.

Countries in East and Southeast Asia still need US support for their security. As long as Japan is hindered from playing a leading military role, because of a tainted past and a pacifist constitution, the US will continue to be the main counterweight to China’s increasing dominance. But as Thailand’s deft balancing of powers demonstrates, US allies are unlikely to become ‘client states’ in the way some were before. Even the South Koreans are careful not to upset their relations with China. The US is far; China is near.

This pattern is to be expected. US dominance can’t last forever, and Asian countries, as well as Europeans, should wean themselves from total dependence on a not-always-dependable power to protect them. Being a ‘client state’ can be humiliating. Yet, the day may come when some people, somewhere, might miss Pax Americana, when the US was powerful enough to push out the unwanted rascals.

 

(Buruma is the author, most recently, of The Churchill Complex: The Curse of Being Special, from Winston and FDR to Trump and Brexit.)

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