Public investments to come under pressure: Economist

Sri Lanka will find it extremely difficult to maintain the public expenditure target of 6 percent of the gross domestic product (GDP) going forward amid revenue side pressures, inability to cut down recurrent expenditures due to political reasons and meeting the ambitious fiscal consolidation target, a leading economist in the country opined.

“Although the government managed to maintain a 6 percent of the GDP for its public investment programme in the recent past, I think going forward, it will be difficult to sustain it and achieve the fiscal consolidation targets at the same time,” Dr. Indrajit Coomaraswamy said.

The Treasury has set a target to bring down the budget deficit to 5.8 percent of the GDP by the end of 2013 and to 4.7 percent by 2015.

The Central Bank projects gross investments of 33 percent of the GDP from the current level of 30 percent for the US $ 100 billion dollar economy by 2016, of which, only 6 percent will be invested by the government.

At present, 85 percent of the government revenue is spent on interest payments, public sector salaries and subsidy and transfers.

“Interest payments, of course, there is nothing you can do about them, because they have already been incurred. And the other two are very politically difficult to cut down,” Coomaraswamy remarked.

As a remedy to encounter it, he opined that policymakers would have to depend on public-private partnerships (PPPs) to maintain the investment momentum in the future.

“Of course we are beginning to see that. You can already see that the Chinese are involved in the Colombo port expansion project and the Northern highway project. This time it’s equity and not loans. So, I think, that’s the direction we need to go if we are to maintain the momentum of infrastructure development,” Dr. Coomaraswamy said.

However, the flipside of Dr. Coomaraswamy’s proposal is that the cost of equity is extremely higher than that of debt because the equity owner expects a higher return to compensate the higher risk he undertakes.

This may sometimes lead to these infrastructure projects becoming financially non-viable, if the equity owner decides to overcharge the users, which could ultimately result in losing customers.

For instance, in the case of a highway project, a higher toll will have to be charged from the users in order to make a positive contribution compared to the higher return expected by the finance providers, in this case, the equity providers.