Tuesday, December 18, 2012

Budget 2013

The Government has submitted yet another huge budget for 2013, with an estimated deficit exceeding Rf4 billion, amounting to 6% of GDP. This estimate is based on many changes to the revenue component of the government. Some of the major changes proposed include, revising the import duties, and revision to the GST rate for tourism sector, leading to an increase up to 15% from the tourism sector.

As it has always been said in various forums and writings, we are as a nation living beyond our means. The most basic structural issue with our budget is that over 70% is spent on recurrent expenditure, and from that most goes to the salary and allowances. We have the highest percentage of the population as state employees from the whole world, and the CSC will always justify this. Fact is, last year and this year we have spent/will spend more than Rf4.1 billion only on salary and allowances. It alarming, when the 2013 budget has planned to spend Rf5.7 billion for this component!

As for the financing of the deficit, there's an external borrowing of Rf 771 million, and domestic borrowing of Rf 1.25 billion. This is at a time when we have to spend about $73 million for debt repayments within next year and at a time when our external debt will exceed 40% of GDP by the end of 2013.  This is also at  a time when our domestic market has almost reached its maximum in terms of lending to the government at the huge cost of crowding out the private sector investments, and at a time when outstanding treasury bills exceed Rf5 billion, and the interest rate exceeds 7.8%.

The government has an outstanding debt to MMA of about Rf3.7 billion, and recently MMA has paid $50 million on behalf of the government to SBI for the repayment of US Dollar bonds issued to the government. The equivalent Rufiya amount of 771 million, if government has not yet paid to MMA, the outstanding debt already would have reached Rf4.4 billion. Assuming the remaining $50 million is repaid by MMA in February 2013, it would reach Rf5.2 billion.If nothing is done to repay this debt to MMA, this will be direct monetization.

We will only be able to manage our macro economy on a sustainable path, by rectifying this major structural issue of state employment, and other current expenditures. As and when we increase salaries and government expenditure, the total Rufiyaa expenses in the economy increases, and prices of goods and services go up, without actually increasing the real value of money. In the end, even with so much Rufiyaa in our hands, we are able to buy less. Politicians will never understand this.