Crisis in Sri Lanka highlights the importance of budget transparency

The writer is Interim Policy Director at the International Budget Partnership.

For many countries that have recovered from the double shock of the pandemic and the war in Ukraine, Sri Lanka’s falling house of cards should be a wake-up call.

As numerous emerging markets face record high debt and inflation, it is imperative that governments start meaningful discussions with the public about fiscal decisions. Only then will they be able to stabilize their economy and garner support for the difficult conditions they will have to face.

Sri LankaThe crisis in Russia highlights the importance of transparency and public participation in how governments collect, spend and manage taxpayer money, including when countries first decide to take on new debt. According to the IMF, a high level of debt transparency can reduce the risk of default.

However, according to Open Budget Review (OBS), only about half of the 120 countries surveyed provide data on their total debt burden at the end of the financial year in their budget proposals. There are even fewer supply indicators that indicate the potential vulnerability of a country’s debt position, while only one quarter provides information on the long-term sustainability of public finances. Meanwhile, OBS and IMF data show that countries at higher risk of debt distress are more likely to have less fiscal transparency.

When economic restrictions arise, many governments respond by centralizing decision-making and cutting off dialogue with the public.

We have seen this happen in Sri Lanka and among its neighbors. South Asia, which has the dubious reputation of being the only region in the world that consistently reduces transparency in budget practices. Sri Lanka, in particular, is tied with Bangladesh due to the region’s lowest budget transparency. The country also faced the sharpest decline in transparency in two years. It is this misguided preference for opacity that makes the country economically and politically vulnerable.

States cannot afford to ignore the outrage of many people trying to make ends meet while public funds are squandered or wasted. Governments should learn from the experience of Sri Lanka and give their citizens a voice on how to manage scarce public resources.

Public participation in budget decision-making builds trust in governments. And a positive cycle is being created as governments are better able to provide the social services that people need when they are in difficult situations. discussions with recipients how best to provide and monitor these services. Engagement also increases the likelihood that tax payers will be exposed for corruption. These benefits can further lead to higher revenues and lower borrowing costs.

More countries need to realize the value of engaging citizens and strengthening accountability in public financial management. Many countries, from Ghana to Pakistan, are looking at a financial cliff. Going forward, governments must make national and international efforts to come together around a common agenda to ensure full transparency on public debt.

Oversight actors, including civil society, legislatures and supreme audit institutions, should call on their governments to improve disclosure practices and engage with the public. International organizations providing emergency lending, debt relief and technical assistance for debt management should support governments in strengthening national budget accountability. External lenders should commit to disclosing all loans in a public loan and debt registry, as proposed by Debt Justice.

If countries want to take one key step to avoid the same fate as Sri Lanka, they must act quickly and open budget processes. Public scrutiny and stricter controls are needed more than ever.