Sri Lanka revised 2006 budget likely to have more welfare

A new budget that the Sri Lankan government will announce next week to fulfill some of the new President’s election promises is likely to contain welfare measures and help for farmers. A new budget that the Sri Lankan government will announce next week to fulfill some of the new President’s election promises is likely to contain welfare measures and help for farmers. However, the new spending is not expected to lead to a deficit blowout, with analysts expecting overall spending to increase by another Rs. 5 billion ($50 million) and the budget gap by a marginal 0.2 percentage point of gross domestic product.

The 2006 budget proposed Nov. 8 – before Finance Minister Mahinda Rakapakse won the Nov. 17 presidential election – has a budget deficit target of 9% of GDP, slightly wider than this year’s 8.5%.

Rajapakse, in his capacity as Minister of Finance, will announce the revised budget proposals in parliament on Dec. 8.

“Apart from more welfare measures, we don’t expect the new budget to contain significant changes from the one already announced. The likely higher spending may not have a major impact on the deficit,” said Hasitha Premaratne, head of research at HNB Stock Brokers.

Rajapakse won the election on a campaign aimed at offering relief to the lower-income groups and local industries which make up a large voting group. Providing fertilizer subsidies to farmers and bringing down the cost of living were among the promises made in his election campaign.

Rajapakse’s economic adviser, Nivard Cabraal, told Dow Jones Newswires earlier this month that “the budget will have a lot of proposals that are development-oriented” but didn’t elaborate.

Analysts expect the revised budget to retain proposals like farmer benefits, higher wages for public servants and an increase in pension payments. These will comprise the bulk of the overall spending.

The new budget is likely to include a proposal to set up three small state banks that will offer incentives to the agriculture sector.

The Nov. 8 budget estimated total spending for 2006 at Rs. 721 billion, compared with an expected Rs. 586 billion for the current year.

Total revenue in 2006 was estimated at Rs. 477 billion, up from Rs. 386 billion in 2005, and is expected to be helped by proposed higher taxes on companies, banks, and alcohol and tobacco sales. These proposals are likely to stay.

Cabraal said the government will not increase taxes levied on the private sector as “we will be very conscious of fiscal management. We will try our best to reduce the budget deficit as well.”

The government, said analysts, isn’t likely to increase domestic borrowings as it wouldn’t want the deficit to widen too much ahead of plans to secure a sovereign rating from international ratings agencies. The government plans to borrow more from the international capital markets to fund its spending.

“Taking into consideration that a rating is imminent, the government might focus more on external borrowings to fund the budget deficit and keep pressure off the domestic market,” said Ajith Fernando, the chief executive of Capital Alliance Group.

Domestic borrowing is estimated at Rs. 124 billion next year, according to the original budget, up from Rs. 115 billion this year.

Foreign borrowing, excluding outright grants worth Rs. 42 billion, is estimated at Rs. 75 billion in 2006, up from Rs. 48.8 billion this year.

Even if government borrowing doesn’t show a large increase, yields won’t likely fall because of high inflation. Inflation in November was 12.1%, based on a 12-month moving average, up sharply from 7.6% at the end of last year, fueled by more credit to the private and public sectors.

Cabraal said the government is keen to keep inflation down but didn’t spell out any specific measures.

“The budget could also contain some relief measures that will help bring down inflation and without affecting the overall deficit target,” added Premaratne of HNB Stock Brokers. (Dow Jones)