Ranga Jayasuriya.
Since assuming power, the National People’s Power Government has tried to strike a delicate balance between fiscal consolidation guided by the IMF reform formula and NPP’s expansive campaign promises and election rhetorics. During the first four months in office, it played within the confines of the IMF programme, which was the mainstay of Sri Lanka’s quicker-than-expected economic recovery. That not only helped assuage investor fears, but also managed to notch a higher-than-expected economic growth – though three-quarters of that was achieved during the term of its predecessor.
Anyone worried that economic prudence was temporary can sigh a breath of relief. The budget 2025 is a continuation of the same cautious approach. The budget has stayed broadly within the IMF guidelines and will maintain a primary account surplus of 2.3% of GDP, which is in line with IMF requirements for 2025, though the projected budget deficit of 6.7 % of GDP is higher than the IMF target. The government’s primary expenditure (expenditure excluding interest payments) is 12.9% of GDP, in line with the 13% limit outlined in the Public Financial Management Act.
On the other hand, the government has raised the public sector salaries, with the minimum salary being increased from Rs 24,500 to Rs 40,000. The private sector minimum salary has been raised to Rs 27,000 in April this year and Rs 30,000 next year. That effectively delivers a key promise to the government servants, who overwhelmingly voted for the NPP. Still, it also reflects the current economic circumstances after the 50 per cent depreciation of the rupee during the economic crisis. Still, Rs 110 billion allocated for the salary increase in the public sector this year is dwarfed by Rs. 232.5 Billion allocated for the Aswesuma benefits.
The government has allocated large sums for education and health, which is commendable. Education and healthcare should be the mainstay of a welfare state and not the financially ruinous handouts designed to perpetuate poverty. However, they still fall short of campaign slogans of 6 per cent for GDP, which is financially unattainable for the country with a limited revenue base and low revenue accumulation.
However, this should highlight the urgency of fostering private-public partnerships in university and vocational education to provide opportunities for all deserving youth. However, true to the NPP’s ideological straightjacket, the budget lacks any constructive proposals on this front. Considering that Sri Lanka is the main source destination of the UK’s transnational education, the government should be able to capitalize on these already evolved advantages by providing incentives to established global universities to set up campuses in Sri Lanka. It can also assist institutions already operating in the country in expanding their operations. That could cater not just for the local students but also establish Sri Lanka as a global education hub. Such measures would have a long-term multiplier effect and cultivate a skill base for the government’s ambitious plan to increase the digital economy to US$ 15 billion or 12 per cent of the GDP by 2030.
The government has provided Rs 135 billion to develop state universities, a substantial increase from the past. However, this is not the first time such ambitious efforts have been made. For instance, during the Rajapaksa regime, the government obtained a US$ 300 million loan from ADB to upgrade the state university sector. However, local universities have continued to slide in their global ranking. None of them are within the top 1000 global universities. The problem is probably not just limited resources but also the outdated organizational structure in the university sector. Whereas modern universities are run like modern airlines. Without these lacunas being addressed, it is unlikely that money would deliver the intended outcome. Disturbingly enough, though, the local university sector is so insular that they don’t care about their relative position compared to their international counterparts.
In general, the government is ambitious and forward-looking. It is refreshing that the government has emphasized the merit of Free Trade Agreements ( with ASEAN and Regional Comprehensive Economic Partnership (RCEP). However, the latter is yet to induct members from outside the region. It has also proposed a set of forward-looking legislations for investment protection, managing state-owned enterprises, public-private partnerships, public asset management, valuation, and information management within the state institutions. The timely implementation of these laws should help Sri Lanka foster an image of an investment-friendly destination.
The government has allocated Rs 1 billion to facilitate the commercial utilization of Research and Development by local ventures and Rs 3000 million to accelerate the digital economy. However, given the scale of requisite investment, such investments, though salutary, are very little. That would require the government to court private-public investment FDI actively and probably divert a portion of ETF into a sovereign wealth fund to foster investment in digital start-ups.
Equally, the government’s proposal to modernize public transport is salutary, and the decision to set up a separate Metro Bus company reveals economic prudence for neither State-owned CTB nor the private sector operators are in a position to manage such a venture in the long run.
However, a bolder plan would be to call competitive tenders from local and international investors to operate a modern bus service under a cost-reflective pricing formula and phase out the current mom-and-pop private sector bus operators. J.R. Jayawardene’s choice to bring in small timers to run a national bus service after S.W.R.D Bandaranaike conclusively destroyed well-functioned bus companies was an aberration of the very notion of the creative destruction of the free market. It had stuck Sri Lankan public transport in the stone age- while the aspiring nations have moved to electric buses.
All in all, the government’s budget is ambitious. However, this is not the only government that had such great expectations. The proof of the pudding is in the eating, and the success of the budget is in its implementation. Successive governments have fared poorly in that aspect.
As for the current budget, its successful implementation is even more important. There is serious concern whether vehicle imports, which are expected to contribute to the bulk of revenue gains this year, would deliver on that, considering high taxes would leave out the majority of aspiring vehicle buyers. That would lead the government to rely on efficient revenue collection from customs, inland revenue, and other revenue-collecting agencies. The government has proposed reforms to streamline revenue collection, including the mandatory use of point-of-sales machines, which should limit VAT avoidance. Their successful implementation would be key to meeting the revenue targets of the year.
The government now has the opportunity to show the people that not only can it dream big, but it can also make it a reality. If it manages to deliver on its budget proposals, it will pave the way for long-term economic growth for the country and prosperity for its people.