Lessons from Sri Lanka on bad politics, mismanagement and populism

government, reserves, spend, sri, tax, lanka, country, borrow, Singapore, country, debt, future, foreign, GST, pay, politics, WP, jamus, pritam, singh

Good politics, honesty and integrity, and good governance are topics the PAP Government repeatedly remind Singaporeans of, sometimes like a broken record. But the experience of Sir Lanks tells us just how important these are. 

Sri Lanka is in its worst crisis since its independence in 1948.  A severe shortage of foreign currency has left the government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Ordinary Sri Lankans face shortages and soaring inflation after the rupee was steeply devalued by the government ahead of talks with the International Monetary Fund (IMF) for a loan programme.

In desperation, the government has urged its citizens overseas to send home money to help pay for desperately needed food and fuel after announcing a default on its US$51 billion foreign debt.

The roots of the crisis, critics say,  in mismanagement by successive governments. 

Tax cut galore

After winning Sri Lanka’s presidential election in November 2019, Gotabaya Rajapaksa made good his campaign promise to slash taxes. 

The value-added tax (VAT) – akin to the GST – was slashed at one go from 15 per cent to 8 per cent. Several other taxes were abolished. They include a 2% nation-building tax originally intended to finance infrastructure building after the country’s long-running civil war was ended in 2009, the pay-as-you-earn tax and economic service charges. Corporate tax rates were reduced from 28% to 24%.

The government also raised the minimum threshold for personal income tax from 500,000 rupees to 3 million rupees, effectively reducing the number of registered taxpayers by about one-third in a single year. 

Borrow like no tomorrow

Successive governments had repeatedly borrowed from international capital markets at commercial rates to fund public services. Sri Lanka has accumulated more than US$50 billion in external debt since 2007.

Dipping into reserves

Instead of restructuring and living within its means, the government started dipping into foreign reserves to fund spending and to defend the rupee. 

Foreign exchange reserves have shrunk almost 70% in two years. As of February, the country was left with only $2.31 billion in its reserves, too little to cover its import bill and debt repayment obligations of $4 billion.

Unable to pay, Sri Lanka’s finance ministry said the country was defaulting on all external obligations, including loans from foreign governments.

Lessons from Sri Lanka

The lesson we draw from Sri Lanka is that a country’s path to ruination does not happen suddenly. 

Most countries are founded on the basis of high ideals and noble causes. But sustaining that momentum is not easy. To quote PM Lee in a speech in Parliament, “All too easily – a slip here, a blind eye there, a fudge, a trim – and gradually things go downhill. The texture of politics changes..” 

The path to ruination starts with bad politics. If the politics of a country is bad, things will eventually fall apart. Good politics is underpinned by honesty and integrity. It starts at the top. In Sri Lanka, rampant corruption undermines rule of law. Family, friends and allies of the Rajapaksas have profited by receiving lofty, well-paying, state-funded positions that require little work.

Next, populism. Extreme populism is the perfect recipe for disaster. Populism and mismanagement go hand in hand. Instead of sustainable sources of revenue for spending, Sri Lanka borrowed like no tomorrow. By 2020, nearly 70% of government revenue was going toward debt interest payments after taxes were slashed. 

At the 2021 Budget debate, DPM Heng Swee Keat said that while Singapore will look to borrow for long-term infrastructure, it has to resist doing so for recurrent expenditure. “Borrowing is not a form of revenue. Borrowing gives us cash for liquidity planning but it does not create free monies for spending. Today’s debt is paid for by tomorrow’s growth and tomorrow’s generation,” he said. 

When all three main agencies downgraded Sri Lanka’s sovereign ratings to junk by early 2020, the door to the capital markets slammed shut.

Instead of restructuring to within their means, Sri Lanka dipped into their reserves for spending which by now are all but gone, shrinking by 70% in 2 years. 

No country is immune to bad governance and imprudence

A government must have the gumption to do the unpopular including raising taxes if necessary.

In the Singapore context, the Constitution does not allow the government to borrow for recurrent expenditure. This ensures that future generations are not burdened by debts accumulated by profligate spending by the present generation living selfishly beyond their means.

The Singapore Government’s plan to raise GST by a 2% hike to make social spending sustainable in the long term was met with fierce opposition from both the and the WP. The 2 opposition parties chose not to support this year’s budget because of the GST hike even though they support all the good things that the 2% hike will pay for. Instead, they offered populist alternatives like taxing the wealthy more (despite taxes already being rasied for this group) and proposed that strategic reserves be used to fund recurrent spending. 

The WP MPs – Pritam Singh, Leon Perera and He Tingru – pressured the government to the framework to allow for more spending from reserves. They argued that spending more from reserves would not kill the golden goose. 

The truth is that if a government loses sight of fiscal prudence, things will begin to unravel. Singapore’s strong reserves are the result of sound fiscal policy, financial discipline and that the PAP Government imposed on themselves.

Do we have the discipline to sustain this momentum? We have witnessed over the years, the populist approach of the Opposition, resisting the broad based GST (even though the impact on the lower income group is mitigated by a permanent enhanced GST Voucher Scheme) and putting pressure on the government to spend more from reserves. There is nothing to prevent Singapore from going down the same road as Sri Lanka because we are not intrinsically more virtuous or smarter. 

Fiscal is not just a discipline the government imposes on itself. It has to be a collective discipline embraced by Singaporeans where they are willing to bite the bullet and welcome unpopular policies when these are good for the country and future.

Populism is shortsighted. It focuses on the present without an eye on the future. The WP MPs misled Singaporeans in their arguments to more reserves for recurrent spending. During this pandemic, the government dipped deep into the reserves to spend billions to support businesses and Singaporeans.
A government is elected to take care of the present. But their obligation is not just to the present. Their deepest obligation is to the future so that there will be an enduring Singapore. If there is no enduring Singapore, our future will not endure either. This is why the government is concerned that future generations should have the firepower that they need in strong reserves to overcome whatever challenges that would come their way in an increasingly unpredictable and volatile world. This is why the government is concerned with climate and how to protect this little island from rising sea levels and extreme weather conditions.

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