The Sri Lankan Budget was presented with a vision statement that said: “Regaining Sri Lanka: Vision and Strategy for Accelerated Development”. It is this context that one must ask: What is meant by regaining? What exactly is being regained by this budget?

After the second world war, with Europe in disarray and the lives of its people hit hard by war time disruption and lack of access to resources, countries such as England, France, Germany, as well as the Scandinavian nations decided that it was important to invest in social infrastructures to help their people – that would be the road to development. Even through process of intense capitalization and privatization, these infrastructures – health programs, education for all, other social benefits – have been critical in development in these countries.

The Sri Lankan Budget was presented with a vision statement that said: “Regaining Sri Lanka: Vision and Strategy for Accelerated Development”. It is this context that one must ask: What is meant by regaining? What exactly is being regained by this budget? The Sri Lankan leadership has been in an unenvious position (in more ways than one). Economically, it could choose to invest in social infrastructure focusing on growth of its people, their skills, their lives and their livelihood. This would be important given that the island nation has been in the grips of violence for decades now and is perhaps looking at a viable process of coming out of it. In such times, social investment would have gone a long way in helping this process. On the other hand, revenue generation is important too. After all, how else do you fund programs for building social infrastructure? And yet, over the last century, it has become clear that the trickle down theory does not work.

Sri Lanka decided to go the economic route. The thrust of this economic strategy is to phase out government agencies from business, restructure and privatize public enterprises and reform regulatory framework of the economy. It places a major share of the responsibility for accelerating economic growth and employment generation on the private sector. Unfortunately, the private sector is not interested in development of people and employment generation – it is only interested in profits. For this reason, this decision by the Sri Lankan leadership will come back to bite the people of Sri Lanka.

To encourage foreign investment in a country trying to come out of civil war and strengthen private sector enterprise, the government has changed tax structures, and committed to labor reform and regulatory reform. A new Value Added Tax was implemented in lieu of multiple taxes. The government has presented this as a strategy to move towards a low and broad based tax regime. With a focus on liberal trade environment, exchange controls have been relaxed and restrictions placed on non-residents for investments in banking, finance, insurance, stock broking, transportation, telecommunications, supply of water, electricity, etc have been removed. These changes have two major implications. For one, with an easier flow of currency, a larger section of the Sri Lankan economy becomes vulnerable to external economic forces and speculation of international markets. More importantly, this ruling allows for privatization and foreign control of essential services such as water, electricity, transportation and telecommunications. Given experiences of Bechtel in Cochabamba, Columbia or Enron in India, it is not clear that such a process will help the people of Sri Lanka.

While, relaxing laws that help private investors access resources in Sri Lanka, checks on their activities and how they affect Sri Lankans have also been relaxed. These changes, which the government claims will create a business friendly policy environment, have included amendments to laws pertaining to rights of labor unions, employees’ rights at work place, pensioners, and wage structures. These amendments have curtailed the rights of workers and have given greater power to the private sector in negotiating with the Sri Lankan work force.

In addition, the government has privatized numerous public sector enterprises such as Sri Lanka’s largest insurance company – Sri Lanka Insurance Corporation Ltd., a large sugar manufacturing company – Sevanagala Sugar Company Ltd., an oil facility – Lanka Marine Services Ltd, among several others. Several other enterprises such as the petroleum sector, the railways and bus transportation are also going through restructuring or privatization initiatives. In the last two years, the government has raised US$0.12 Billion through these processes.

The bigger picture of the Sri Lankan economy is not in a great state. External debt is at 97% of GDP though the GDP is back at 6% growth rate and inflation has dropped to 7%. Total revenue is at $US 3.3 Billion while expenditure is at US$ 469 Billion with an overall budget deficit of 7% of GDP. The government recognizes that the economic and political environment look uncertain and possibly justifies the strong commitment to privatization in this context. However, it is doubtful that Sri Lanka – at least in terms of development for all its people – will be driven through such a process. More likely, these policies will drive Sri Lanka into an economic and political strait-jacket defined by external economic institutions.