Sri Lanka’s crisis highlights the importance of budget transparency

The writer is interim director of policy at the International Budget Partnership

For many countries that are reeling from the twin shocks of the pandemic and the war in Ukraine, Sri Lanka’s falling house of cards should be a wake-up call.

With numerous emerging markets facing record high debt and inflation, it is vital that governments begin meaningful discussions with their populations about budget decisions. Only then will they be able to stabilise their economies and secure support for the hard trade-offs they face.

Sri Lanka’s crisis underscores the importance of transparency and public engagement in how governments raise, spend and manage taxpayers’ money, including when countries first decide to take on new debt. In the view of the IMF, high levels of debt transparency can cut the risk of default.

However, according to the Open Budget Survey (OBS), only about half of the 120 countries surveyed provide data in their budget proposals on their total debt burden at the end of the fiscal year. Even fewer supply figures that indicate the potential vulnerability of the country’s debt position, while just one-quarter contribute information on the long-term sustainability of government finances. Meanwhile, OBS and IMF data show that countries at higher risk of debt distress are most likely to have less budget transparency.

When economic constraints set in, many governments react by centralising decision-making and ending public-facing dialogue.

We saw this happen in Sri Lanka and among its neighbours in South Asia, which has the dubious distinction of being the only region in the world that has consistently lowered its levels of transparency in budgetary practices. Sri Lanka, in particular, ties with Bangladesh for the lowest budgetary transparency in the region. The nation has also seen the most dramatic decline in transparency over the past two years. It is this mistaken preference for opacity that left the country economically and politically vulnerable.

States cannot afford to ignore the outrage felt by many people as they struggle to make ends meet while public funds are mismanaged or squandered. Governments must learn from Sri Lanka’s experience, and open up spaces for their citizens to have a say in how to manage scarce public resources.

Public engagement in budgetary decisions builds trust in governments. And a positive cycle is created as governments are better able to deliver the social services people need when they are in discussions with recipients about how those services can be best delivered and monitored. Engagement also increases the likelihood of people paying their taxes and corruption being exposed. These benefits can further lead to higher revenue generation and lower borrowing costs.

More countries need to realise the value of involving citizens and bolstering accountability in their management of public finances. From Ghana to Pakistan, many nations are staring over a fiscal cliff. Going forward, governments must make national and international efforts to unite 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 organisations providing emergency lending, debt relief and technical assistance for debt management should support governments in strengthening reporting in national budgets. External creditors should commit to disclosing all loans in a public registry of loan and debt data, as proposed by Debt Justice.

If countries want to take one key measure to avoid Sri Lanka’s fate, they should move swiftly and open up budget processes. Public scrutiny and greater oversight are needed more than ever.