Sanctions, incentives crucial for Public Financial Management Act’s success: CASL

The forum in progress
PIC BY NIMALSIRI EDIRISINGHE

• By Nuzla Rizkiya 

Sanctions and incentives are crucial for the effective implementation of the Public Financial Management Act of

2024, the Institute of Chartered Accountants (CA Sri Lanka) asserted. 
Speaking at a recent forum, CA Sri Lanka President Heshana Kuruppu highlighted that although Sri Lanka laid its foundation for proper fiscal management in 2003, the weak enforcement of fiscal disciplinary rules had undermined the success of the efforts. 

“The primary challenge (in Sri Lanka) was the compliance of fiscal rules by institutions. The core issue was not the lack of rules, but the lack of adherence to them. I think the effectiveness of a fiscal act depends on what kind of sanctions are attached to it and the escape clauses available in it,” Kuruppu opined. 

According to a study by the International Monetary Fund (IMF), some Fiscal Responsibility Laws (FRLs) around the world contain well-defined sanctions for non-compliance, while others rely on reputational consequences as a commitment mechanism. In countries with a history of non-compliance with budget targets, reputational sanctions may not be effective. 

“What we did in 2003, was to go ahead with reputational sanctions. What we usually see is punishments and negative sides, but good adherence is not recognised. So additional incentives may be necessary to promote fiscal discipline. We might have to have some deliberations to include incentives to those who are applying and adapting them to be recognized,” Kuruppu said. 
Moreover, he highlighted the crucial role of escape clauses in effective 
fiscal management. 

FRLs often include explicit escape processes that limit and suspend application during extreme circumstances, such as natural disasters or severe recession. However, in some countries, including Sri Lanka, these exceptions can become the norm, leading to frequent 
rule amendments. 
“There is growing evidence that discussions may be misused, leading to big budget deficit biases. I think this is what we experience (in Sri Lanka) that in exceptions, there is always bending of rules,” Kuruppu stressed.