Journey Through The Rotten Bridge For The Reforms Of Government Expenditure

By Harsha Gunasena –

According to the National Consumer Price Index released by the Department of Census and Statistics, prices of food items and nonalcoholic beverages were increased by 85.8% from October 2021 to September 2022 (related figure of Colombo Consumer Price Index (CCPI) was 94.9%). Prices of all goods for the same period were increased by 73.7% ( CCPI- 69.8%). These indices were increased rapidly from April to June this year and thereafter the monthly increase was slowed down. (Please refer to the table)

Soon after his appointment the present Governor of the Central Bank increased the Policy Rates of interest to contain the rapidly rising inflation. The Average Weighted Prime Lending Rate (AWPLR) which was 9.85% in March this year was increased to 25.95% in September this year. Only high-end borrowers whose credit worthiness is high could borrow at AWPLR and the others must pay a higher rate of interest. Now the general rate is over 30%.

During the time of the former Governor of the Central Bank, a lot of sacrifices were made to keep the exchange rate stable. Suddenly, the Rupee was allowed to move freely in the market and as a result it was depreciated rapidly within a short span. (Please refer to the table) We can remember that when the same Governor was in office in his previous tenure the country faced the same scenario of sudden depreciation of the Rupee in two occasions.

In this background the government increased the taxes and there were criticisms against this move. Subsequently the President addressed the nation defending the tax increases. Tax exemption limit was reduced from Rs. 3 million to Rs. 1.5 million. As per the increased income tax a person whose income is over Rs. 100,000 has to pay tax at the rate of 6% for his or her income up to Rs. 142,000. There are slabs for the income above that limit.  Small business and other entities which were taxed at the rates of 14% and 18% were increased to 30%. 

Tax relief of the senior citizens for their interest income was also removed.  It should be noted that due to the inflation running more than double of the interest on fixed deposits, the net income of fixed deposits is negative. Therefore, by taxing the interest income the net gain would be more towards the negative side. Moreover, during the covid period the Banks provided debt moratorium to the borrowers and this additional burden to the banks was not financed by the government or the general taxpayers, but by the depositors of the Banks. Even now there is a huge gap between the lending rates and the deposit rates of the Banks and also between the Treasury Bill rates and the AWFDR (Please refer to the table) Therefore the fixed depositors are hit by many sides.

Recently the Government presented the Appropriation Bill 2023. According to that the estimated expenditure of the government is Rs. 3.6 trillion. This is 46% more compared to the estimates of 2022 prior to the amendment. This increase is lower than the current inflation rate, but it is a considerable increase. Estimated capital expenditure of the Ministry of Power and Energy is 36.2 billion and the corresponding figure in 2022 was Rs. 224 million. This is a huge increase.     

The credit limit approved by the Parliament for the year 2022 was Rs. 3.8 trillion and recently it was increased to Rs. 4.5 trillion. Since there are limitations to foreign borrowings the government borrows from the domestic sector. As a result, the interest rates of the Treasury Bills issued by the Central Bank are keep increasing gradually. It is around 30% now. On October 19 this year the Central Bank called for the bids for Rs. 30 billion maturing in three months, for 25 billion maturing in six months and for 20 billion maturing in one year totaling to Rs. 75 billion. However, the bids for only Rs.25 billion were accepted and the interest rates offered were 33.05%, 32.53% and 29.60% for the bids maturing in there months, six months and one year respectively. Balance Rs. 50 billion may have purchased by the Central Bank and those funds would be supplied by way of printing money. We all, including the government, know that this will increase the inflationary trend of the country which has reached to unbearable level.

The government as well as the country is in such a grave situation now. Many think that the situation has eased since there are no fuel or gas queues. It has not.

The government increased the taxes in this background. Based on the increased tax rates it is evident that the government is in a difficult position. The government is in the process of transferring its difficulty to the citizens. Small entrepreneurs who face 70% inflation and 35% interest on bank borrowing will have to pay 30% taxes.

Recently the Institute of Policy Studies of Sri Lanka launched its State of the Economy 2022 report. At the discussion when I  questioned why the people who were pushed down to marginal levels due to unprecedented inflation were also taxed, the Governor of the Central Bank responding on behalf of the Secretary to the Treasury who was not in at that time said  that the groups below that level were in dire straits and it was the responsibility of the government to support them using the money generated from this tax increases.

The Secretary to the Treasury addressing the audience prior to that said that the government initiated the revenue-based reforms. He further said that it would take some time to initiate expenditure based reforms. At the same time, he said that the government contributes to the inflationary trend by borrowing money from the Central Bank. The Governor of the Central Bank said that the fiscal transparency is needed if the government wants these reforms to be successful.

It is evident from the expenditure estimates of the Appropriation Bill that the government is not taking up the expenditure reforms now.  At least the government should give a road map for the future reforms. At most the government should start to implement those reforms now. The conditions agreed with the IMF should be revealed to the citizens. Then and only then can the fiscal transparency mentioned by the Governor be in place. 

The President, at the time of assuming the post of the Prime Minister, said that Sri Lankan Airlines should be privatized. There are many institutions in the line which should have followed this path. The President and the government should have the political bravery to take up these issues. Opposition politicians who pose mere populist criticisms without giving any solutions should be politically undressed. That is called the journey through the rotten bridge as quoted by the President from the Caucasian Chalk Circle. The President who was not elected by the people can do whatever needed to be done without getting blinded by the so-called populism which ruined our country. 

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