What Went Wrong In Fiscal Policies.

Post-Covid Effects

 

There have been a lot more developments in the global economy and geopolitics since COVID-19. both geopolitics and the major financial institutions may be influenced by this change. the conflict between Russia and Ukraine has had a negative impact on the economic health of Eastern Europe. It begins as an after-COVID-19 incident. There's conflict with Israel and Gaza, while there are also political breakdowns in certain nations.

USA after Biden is elected

The whole financial industry experienced certain shifts following Joe Biden's appointment as US president. Some components of the system must endure as a stable, permanent structure, while others do not.

The Washington Post claims that there are both advantages and disadvantages. After Biden was elected, the US economy experienced an abrupt increase in fuel prices, which was a high altitude for the economy. However, in contrast to Trump, Biden's changed position was outstanding following the COVID-19 event. it has an impact on every aspect of the county, just as it does on us here. it has both positive and negative effects. in circumstances like this, each government's fiscal policies were critical.

Southeast Asian Fiscal Policy and Pandemic

Government decisions on expenditure and tax collection are referred to as fiscal policy. After a worldwide pandemic that sent some nations with the exception of India, governments in Southeast Asia in particular were unable to recover from their pre-pandemic for instance, following the pandemic, governments like Afghanistan, Bangladesh, Pakistan, Sri Lanka, and the Maldives were unsustainable. Since I presently reside in Sri Lanka, I narrowed most of the Sri Lankan country's fiscal policy collapse

Sri Lanka Pre-pandemic Events.

Mr. Gotabaya Rajapaksha was elected a
s the nation's next president during the 2019 presidential elections in Sri Lanka, following his presidential election. he maintains his commitments to the general public, such as cutting taxes and promoting organic farming nationwide. on initial glance, a few of these things appear promising. after two to three months of presidential elections, COVID-19 devastated the world, leaving many unsure about its likelihood. these were within a certain level of responsibility, but the government policies were not given any consideration at all. As a newly formed government, they repeatedly said that they would manage the pandemic. the newly-elected president did not attempt to accelerate the execution of new government initiatives after lowering tax rates because the government's revenue flow was already in poor shape. he encouraged the farmers to shift to organic farming even before the outbreak. however, some necessary groundwork was not completed.  Since the government already supports organic farming, they were forced to comply at that point. The majority of people were against it. however, the government does not intend to raise salaries in times of pandemic for a nation within three realities. after the pandemic, it was challenging to sustain the financial situation. in my opinion, the Sri Lankan government utterly failed in this regard, which led to an economic collapse two years later. 

Financial Status and Political Background Before 2020

As a democratic government, the most important aspect of politics was to listen to the people. Since former president Mahinda Rajapaskaha endorsed the newly elected candidate Gotabaya throughout his campaign, his victory was not an accident; rather, the administration was constructed with the people as its focal point. He performed a crucial role. and they both receive far more than just exceptional votes. It was in no way comparable to the opposition parties at the time. at the time, both Rajapakshas' viewpoints were generally accepted. The Sri Lankan government holds an additional 6.0 billion in international debt in addition to Rs 15.1 billion (about 9.05 billion) in domestic debt, according to the Central Bank of Sri Lanka. The central bank's 2020 annual report also mentions . that, in contrast with 2019, a significant decrease in foreign funding occurred.

Government earning sources before the pandemic

Before the pandemic, tourism was Sri Lanka's primary source of income. and the Sri Lankans who were employed in the Middle East at the time sent them foreign exchange. Apart from that, Sri Lanka didn't make money from any significant sources. other than Tea Exports Not even the tax system was designed to adequately collect taxes. It was essentially the production of rice, textiles, apples, real estate, tea exports, tourism, and other agricultural items, according to Google. Without the aforementioned industries, they have little alternative for expanding the economy. The majority of textile work was contracted out to large corporations, meaning that Sri Lanka's textile and garment businesses did not make much money. they earn a very low amount compared with others. The international market for Sri Lankan tea was quite popular. However, there are a few nations that are significantly larger in comparison to Sri Lanka. Kenya is among the most dominant countries. Sri Lanka With 9% of the production share and 23% of the product demand share in the global tea market, The world's fourth-largest exporter of tea was Sri Lanka. Sri Lanka had some respectable statistics when compared to other countries with tea-growing regions. But there are a few strong ones they have to deal with. For that, they need the proper amount of funding and assistance from the government. China and India were their competitors in a global market. The local market did not carry some chemicals following the Gotabayas organic agricultural approach. some fertilisers.  For a while, that also meant that tea farmers had to endure hardship. Sri Lanka was ranked third on the list prior to the pandemic, but it dropped to fourth thereafter.

The next action was a government tax cut, which the elected president had promised would happen. They rely on the local banks and never look back or reverse their choices during and after the pandemics. Taking out high-interest loans was the primary cause of Sri Lanka's financial collapse in the early months of 2022 during that time.

IMF and Sri Lankan Government Infrastructure

What went wrong? after concluding the reasons behind this financial crisis. A significant factor is the countries' fiscal policies. It did not perceive government as the ultimate goal, in contrast to other South Asian nations that direct their financial resources towards other objectives. Additionally, they rely on the International Monetary Fund (IMF), something Sri Lanka is unable to do. Because if the IMF provides us funds, our regulatory framework has to follow certain standards; for instance, tax revenue has to be monetized, and the government can impose controls. In essence, those new demands were not intended to be completed by government infrastructure. It demonstrates the inaccuracy of the Sri Lankan government service. Ministers and the government shouldn't be the only ones who can tolerate this. Additionally, it is also an exaggeration of high-ranking government officials.

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Pre- and post- Post pandemics' events compared to Pakistan

Comparison: Political and economic problems affect southeast Asian nations like Sri Lanka. Pakistan experienced almost the same issues as Sri Lanka. It was, however, far more attainable than not.

Before Covid, Pakistan held a higher ranking than Sri Lanka when considering the GDP and tax collection of the two countries. Both nations have a strong ties with China. The primary reason Pakistan's fiscal policies outperformed Sri Lanka's was that Pakistan's tax revenue and budget deficit rates were significantly higher. Policy analysis and development wing 2022 of the Pakistan Ministry of Economic Affairs conducted the research. 

It shows below paragraph. 

In comparison with 2019 and 2020, it also shows that Sri Lanka's tax cut programme is visible in 2020, which will cause the tax-GDP ratio to decrease.

Without a doubt, comparing with Pakistan was not a wise choice because of how different the geography and labour force were from Sri Lanka. yet it should be noted that there are reasonable considerations as well.

• Sri Lanka GDP per capita was USD 3,815 Pakistan's GDP per capita was USD 1,676.
• The Sri Lankan agricultural sector was 8.70%. Pakistan was 23%.
• Sri Lankan manufacturing sector was 29.80% and Pakistan manufacturing sector was only 18.90%.
• Sri Lanka Service Sector was 55.10%, and Pakistan Service Sector was barely the same as Sri Lanka; it was 58.10%.
• Sri Lanka Poverty and unemployment rates were lower than compared with Pakistan (SL 14.30% and 4.60%), respectively, and PAK (21.90% and 6.30%). 

Source - (Policy analysis and development wing 2022 of the Pakistan Ministry of Economic Affairs conducted the research.) 

If we compare both countries' covid data, we can see that Pakistan maintains a better record than Sri Lanka.

• Sri Lanka's morality rate was 7.36 deaths per 1,000 inhabitants in 2021
• Pakistan's morality rate was 7.17 deaths per 1,000 inhabitants in 2021

(Source -Google.)

Conclusion (What Went Wrong)

A strong dependence on tourism, which led to its collapse, made foreign exchange unavailable in Sri Lanka since it was needed to pay off foreign debt. taken Sri Lanka by unexpected; before to 2019, Sri Lanka's macroeconomics had not been sealed as intended. Alternatively. If executed correctly, Sri Lanka will go the same route as Pakistan. take advantage of concessionary loans, which are those offered on more advantageous terms than what the borrower may find elsewhere.

• Author - Chathura B Kularathne.
• Find more - https://www.linkedin.com/in/chathura-kularathne-408673137/