IPS Proposals for the Interim Budget – Lanka Business Online

Ahead of the presentation of the Interim Budget, the Institute of Policy Studies of Sri Lanka (IPS) has recommended policy proposals for inclusion in the forthcoming Budget.

Some key policy issues and recommendations follow.

Trade Policy

Despite strict import controls, Sri Lanka’s trade deficit in merchandise goods widened in 2021. The slight increase was mainly due to the sharp price movements in the world market, with the import reduction patterns across categories being consistent with the post-pandemic controls. As consumer goods imports are prioritised, including food imports, it generates two key undesirable impacts. First, it impacts food security and nutrition needs. Second, high food prices will incentivise a further resource shift – such as labour – to agriculture, raise wage costs for sectors like manufacturing and impact their competitiveness. In this context, two key recommendations are:

Prioritise imports for industrial expansion and food security needs: IPS research shows that about 88% of food imports are now subject to quantitative or price restrictions.[1] The Special Commodity Levy (SCL) on items such as canned fish, green/black gram, cowpea, palm oil, and black gram flour should be removed to ensure that food security and caloric needs are met. Licensing restriction on maize imports which feeds poultry production costs must also be revisited. Sri Lanka must prioritise fertiliser imports and reintroduce fertiliser subsidies to paddy and vegetable farmers to raise productivity and prevent a resource shift that will impact overall economic efficiency.
Focus on increasing exports in sectors that use minimum foreign raw materials: There are certain products in which Sri Lanka enjoys a comparative advantage in global markets, requiring low imported raw materials in production such as tea, spices and mineral products like graphite. To meet immediate needs, bottlenecks such as fertiliser shortages should be addressed to raise productivity and export earnings whilst mineral resources can be auctioned to increase revenues.

Education Policy

The COVID-19 pandemic and the current economic crisis have severely affected the education sector. Health concerns, union action, social unrest and transport issues have resulted in frequent school closures. Inadequate budget allocations and improper recruitment of teachers have deteriorated the quality of education. Recent news items have highlighted difficulties faced by schools due to shortages of paper and other materials necessary for the functioning of schools. Further, deterioration of school facilities has affected the effective functioning of schools. Interruptions to school-based relief measures such as the school meal programmes can also increase school dropouts and malnutrition. Data from the Ministry of Finance reveals that public investment in education has remained just above 1%. Of this minuscule allocation, a large share is spent on teacher salaries. Frequent absorptions to the teaching cadre to provide jobs to unemployed graduates has worsened this situation crowding out funds from other necessary education inputs.

The government has recommended online lessons as a solution to difficulties in conducting on-site school classes. But IPS research shows that the access to online lessons is not equitable due to poor access to the internet, lack of necessary devices and high cost of data.^[2] In this context, two key recommendations are:

Food Security and Nutrition Policy

IPS research shows that long-term environmental, social, and economic trends heightened by domestic and international challenges have eroded the resilience of Sri Lanka’s agri-food systems.^[3] On the global front, the COVID-19 pandemic and the Russia-Ukraine conflict are generating a global recession with high world market prices of food, oil, and fertiliser. At the local level, crop failures have resulted from poor government policies such as the chemical fertiliser import ban. Inflationary pressures arising from a combination of factors including excessive money printing and the sudden free float of the exchange rate have also taken a toll on domestic food prices and food supply.^[4] All these have resulted in low farm incomes, high food prices, food shortages and hunger and malnutrition. In this context, two key recommendations are:

Health Policy

Sri Lanka’s health system is recognised as an efficient, low-cost model. However, changing demographic and disease patterns along with domestic finance issues threaten the sustainability of the health sector.[5] Inadequate service provision in the public sector and shortages of medicine and equipment are driving people towards the private sector causing inequities in access to healthcare, as not all can afford private sector healthcare. Over half of the existing budget is allocated for wages leaving very little resources for all other health inputs. As a result, investments in this vital sector have been curtailed over the past few years. Further, changing lifestyles have exacerbated the risk factors for non-communicable diseases (NCDs). Four major behavioural risk factors directly contribute to the escalating NCDs in the country: tobacco use, physical inactivity, alcohol misuse, and unhealthy dietary patterns.[6] In this context, two key recommendations are:

Labour Migration Policy

In the first half of 2022, total departures for foreign employment were 138,789 which records a 351% growth relative to the first half of 2021. Despite the high departure statistics, the below-par performance of worker remittances is a concern. IPS research indicates that a major component of remittances to Sri Lanka are sent through informal channels.^[9] Many migrants avoid using formal channels due to their cumbersome rules and regulations. In recent times, some have boycotted using formal channels to show their dissatisfaction with the government’s ad hoc policies and related economic mismanagement that led to a foreign exchange crisis. In this context, two key recommendations are:

Social Protection Policy

Rising food and non-food prices and fuel shortages have serious consequences, particularly for low and lower-middle-income households with declining household earnings affecting consumption pattern.[10] Given the extent of the present crisis, the existing social protection schemes will not be sufficient to cover those falling below the poverty line due to the economic downturn. Hence rapid assessments are needed to identify the poor and those affected by the crisis using village-level administrators/committees. This can be done efficiently by using the existing lists compiled during the pandemic as a basis but improving them to rectify any targeting errors. Given the level of targeting errors in the Samurdhi programme, beneficiaries should not necessarily include Samurdhi recipients (families) if they are neither poor nor their earnings affected by the crisis. In this context, two key recommendations are:

The full set of proposals can be accessed on: https://www.ips.lk/ips-proposals-for-interim-budget/

[1] Wijesinghe, A., & Yogarajah, C. (Forthcoming). The Effects of Import Controls on Sri Lanka’s Export and the Economy. Colombo: Institute of Policy Studies of Sri Lanka.

[2] Abayasekara, A., Perera, U., & de Silva, T. (2021). Demand for Private Tutoring during COVID-19: An Initial Scoping Exercise for Sri Lanka. Retrieved June 29, 2022, from Institute of Policy Studies of Sri Lanka: