Foreign, local loans to finance Sri Lanka’s record deficit

Nov 17, 2006 (AFP) – Sri Lanka is set to borrow heavily abroad and at home in a bid to finance a record 2.18 billion dollar budget deficit next year, official figures showed Friday. The overall budget deficit for 2007 was estimated at 7.2 percent of Gross Domestic Product while the government revised the 2006 deficit to 7.9 percent of GDP from an earlier projection of 9.1 percent.

Cuts in expenditure and higher foreign grants and huge domestic borrowings brought the 2006 deficit down, according to budget estimates.

Sri Lanka expects to borrow 1.06 billion dollars next year, up from 629 million in 2006.

The annual budget for calendar 2007 unveiled in parliament by President Mahinda Rajapakse sets aside a record 1.29 billion dollars for defence, a 45 percent jump compared to 2006.

“Increased violence compelled the government to channel more resources for security and humanitarian relief operations,” said the president who is also the minister of finance and defence.

He urged the rebel Liberation Tigers of Tamil Eelam (LTTE) to resume peace negotiations with the government and end the latest spiral of violence which has claimed over 3,300 lives since Rajapakse came to power a year ago.

The budget was presented two days after International Monetary Fund warned that escalating violence could trigger an economic crisis with inflation galloping and foreign reserves set to come down.

Rajapakse proposed expanding the tax net, slapped a 10-dollar visa tax on all tourists visiting the island and decreed that no Sri Lankan should be employed abroad for less than 250 dollars a month.

Sri Lanka expects over half a million foreign holiday makers to visit the island this year despite the escalating violence.

He said Sri Lankan workers will be offered better training to ensure that their minimum overseas wage reaches 500 dollars.

Sri Lanka expects about two billion dollars this year by way of remittances from Sri Lankans employed abroad, who are the main source foreign exchange for the island.

The government hopes to maintain an economic growth rate in excess of seven percent and reach a per capital income of 3,000 dollars in 10 years, from the current 1,000 dollars, the president said.

“What is positive in the budget is taking away the VAT (value added tax) on electricity,” a spokesman for the Chamber of Industries said. “But, the increase in port levies will mean that prices will rise across the board.”

Sri Lanka currently has one of Asia’s highest electricity tariffs and the president said he wanted to bring it down to a more competitive level with the commissioning of cheaper coal-powered generating plants.