Fiscal Federalism: Financial Power Devolution Under the Sub National Government System in Sri Lanka

Abstract

This study attempts to analyze strengths and weaknesses pertaining to fiscal decentralization in Sub National governments (SNGs) in Sri Lanka. Constitutionally the government of Sri Lanka has given self-ruling rights to the top layer of SNGs regional/ provincial governments in 1987 while local governments are operating under the Central Cabinet since 1947. With this decentralization of political power, the Central governments has been handling their functions and responsibilities in a sharing system with provincial and local governments for more than six decades. However, though a significant role has been assigned to the SNGs in Sri Lanka, the effectiveness of operation is questionable due to their inherent constraints, such as the lack of financial autonomy. This limited financial capacity of provincial governments and local governments has been a major weakness in Sri Lanka, vesting more strength of taxation power with the Central Government. This is further weakened by non-implementation of the existing tax power of Provincial governments and also, the devolved power to the Provincial governments has not been transferred fully by the Central Government. Creating limited and a shortage of funds, the annual transfers have not been made by the Central Government at the required level. As a result, the annual revenues of both regional governments and local governments in Sri Lanka have never met the annual expenditure requirements.