Hand-Outs and Subsidies - Who is Left Holding the Bag?

The Pathfinder Foundation in its blueprint on economic reform, ‘Charting the Way Forward: Prosperity for All’, highlighted the following paragraph:

Sri Lanka needs to follow good practice which is being pursued by an increasing number of countries around the world. All hand- outs, subsidies and other welfare measures included in the manifestos should be costed and specific measures should be identified for financing the incremental costs involved. This will enable the voters to assess the financial viability of the promises made by various political parties and to make a clean break from the ‘auction of non-existent resources’ which have characterized party manifestos in the past.

Sri Lanka is once again allowing politics to suppress and postpone urgently needed economic policy reforms. Since independence, time and again political opportunism and short-term political expediency have undermined sound economic policy-making. Politicians have been able to get away with this partly due to the low level of economic awareness among the population. While Sri Lankans are knowledgeable and engaged on political issues, their interest in economic issues is governed by an entitlement culture, which has been fostered by politicians from all parties.

The RBI has stepped in to provide timely support to Sri Lanka when its external finances were deteriorating and the currency was under pressure. The $400 million, drawn upon by the CBSL under the SWAP arrangement with the RBI, was one of the outcomes of Prime Minister Modi’s visit to Sri Lanka. There is a further $1.1 billion which can be utilized. These arrangements are providing much-needed insurance against depleting external reserves and a boost to the creditworthiness of the country. However, it is important to realise that the support provided by the SWAP arrangement with the RBI only serves to buy time. It does not address the underlying causes of the elevated risks associated with the country’s external position.