Sri Lanka ’07 Budget gap at 5% of GDP

November 8, 2006 (Dow Jones)–The Sri Lankan government expects the budget deficit to narrow to 5 percent of gross domestic product in 2007 from an estimated 9 percent this year due to higher tax collections and increased borrowings, the deputy finance minister said. “A key focus will be the small and medium scale industries. We plan to offer several programs and incentives to boost this sector,” he added. In an interview with Dow Jones Newswires, Ranjith Siyambalapitiya said next year’s budget will focus on rural development, incentives for small and medium scale industries, and large projects, which will help push economic growth to 8 percent from the near 7 percent growth expected for the 2006 calendar year.

The 2007 budget is due to be presented in parliament on Nov. 16 by President Mahinda Rajapakse, who also holds the finance minister portfolio.

In order to bridge the budget gap next year, the government has set a total gross borrowing limit of 690 billion rupees (6.5 billion dollars), up from an estimated 518 billion rupees this year, Siyambalapitiya said.

He didn’t give a breakdown of foreign and local borrowings or a revenue target for next year but said the budget won’t include new taxes and sale of state assets to raise funds.

“Instead of introducing new taxes, we plan to streamline the existing tax system and improve tax collections,” he said.

“The government won’t privatize state firms but will strengthen the public sector to make it more efficient and profitable,” he added.

The budget is the first after Rajapakse won a presidential election in November 2005 with his pro-poor policies attracting a large portion of the rural vote.

Since then, the continued violence between government troops and Tamil Tiger rebels who are fighting for a separate homeland has threatened a 2002 ceasefire and driven up defense costs.

In a bill presented last month in parliament, the government put the defense ministry’s expenditure next year at 139.6 billion rupees, twice the 69.5 billion rupees budgeted for this year.

Siyambalapitiya said recurring costs are estimated to total 586 billion rupees next year compared with a 503.1 billion rupee target for this year and pegged capital expenditure at 733 billion rupees, up from an estimated 217.9 billion rupees in 2006.

“A large portion of the capital expenditure will be used to fund several big construction and development projects and rural development programs,” he said.

The planned investments for 2007 include a coal-fired power plant estimated to cost 450 million dollars, development of the Colombo Port, a second international airport in the south and a key highway connecting the south to the country’s east.

“The budget will also include plans to develop roads and electricity supply in rural areas,” said Siyambalapitiya, adding that the current growth rate mostly reflects development in the capital Colombo, which accounts for some 50% of overall economic growth.

Total spending for 2006 is estimated at 721 billion dollars while revenue is expected to hit 477 billion dollars.

“The budget will include incentives to the country’s key export sectors like garments and agriculture as well as tourism and construction,” he said.