Lessons for Sri Lanka from Malaysia’s Daim Zainuddin

Mar 22, 2008 (LBO) – Many East Asian Tiger economies like Malaysia are now famed for fiscal prudence, running surpluses on their current and overall budgets, and low inflation. But they were not always so disciplined. Countries like Sri Lanka are still not able to balance current spending with government revenues and the public sector is a net dis-saver that undermines national savings.

Public enterprises in the island frequently run losses which are either financed by state-banks, which then run out of capital when loans are defaulted, or losses are topped with Treasury subsidies or tax rebates, which again increases public sector dis-saving.

All too often in Sri Lanka, gaps in the current budget are filled with central bank credit (printed money) driving up inflation to 20 percent levels, forcing the poorest citizens to shoulder the burden of a too-large government which the poor simply cannot afford.

State Saving

Malaysia also has an interventionist government that now runs surpluses on the current budget, saves and invests heavily in infrastructure and even commercial ventures, much like Singapore does.

In countries like Malaysia public sector investments in the economy - including