Sri Lanka seeks budget balance between subsidies and development

Nov 07, 2007 (LBO) – Sri Lanka is seeking a balance between subsidies and development in a budget for 2008 to be presented today, as officials said planned capital spending had been sacrificed in 2007. “We are at a time when we need to present long-term answers to the problems of the country,” deputy finance minister Ranjith Siyambalapitiya told reporters in Colombo.

Treasury Secretary P B Jayasundera said the budget deficit outlook for the current year would be “7.5 percent or a little less” as capital investment projects had been delayed.

Originally the 2007 budget promised a surplus on its current account, ensuring that revenues would be enough to pay for day to day expenses. This was widely disbelieved.
In Sri Lanka’s budgets revenue is usually overstated and expenses understated.

Last month the government passed an unprecedented volume of supplementary estimates to cover expenditure overruns.

Cashflow shortfalls which were bridged with printed money had pushed inflation upto 19.6 percent in October.

The finance ministry originally designed the budget to generate 10 percent inflation.

Heavy money printing also pushed the country into a minor currency crisis by the middle of 2007, which was overcome by tightening monetary policy in late August.

The 2006 budget had created 19.3 percent inflation by the end of that year.

Since 2004 Sri Lanka had tended to focus on subsidies ranging from fuel, fertilizer and free jobs for unemployable graduates and increases in state worker salaries. However there could be a change in direction this year.

“There is no point in delaying development and engaging in welfare, or developing by forgetting welfare,” Jayasundera said.

“We would try to balance these objectives in the budget.”

Siyambalapitiya said the budget was being presented at a time the country was coping
with many challenges such as an intensifying war and soaring prices of commodities like oil and wheat.

From 2004 Sri Lanka had poured billions into energy subsidies undermining state finances and creating balance of payments problems.

But by the middle of 2006 the government realized that fuel subsidies were benefiting privileged classes more and creating economic imbalances and pledged to reduce them.

However political ideology continues to dog energy pricing, and even now large export industries are receiving subsidized electricity at the cost of the poor of Sri Lanka, and ruling politician froze energy prices in July.

But the government had not attempted to subsidize milk and wheat prices this year. However price controls on powdered milk had created shortages.

Siyambalapitya said the challenges were achieving a durable peace and ensuring balanced development all over island along with getting big infrastructure projects started.

Treasury secretary P B Jayasundera said recent inflows of funds, such as those from a government dollar bond sale, would help get projects off the ground.

He said the government was also mindful of the need to tackle the cost of living problem and bring down inflation which has been soaring in recent months.

Sri Lanka has been printing money to finance the deficit pushing inflation up, but has managed to settle a large proportion of central bank credit in the last two weeks with the proceeds of a 500 million dollar sovereign bond.

Jayasundera said expenditure seems to be peaking and this may allow the deficit to fall as revenue has been rising in the past two year.

“For 2007 we’re talking of a less than 7.5 percent budget deficit,” he said. “We’re also working towards a lower deficit next year.”

Delays in getting projects started had resulted in delays in spending, helping keep the deficit down this year, he said.

Defence spending had gone up by only 15 percent in the 2008 budget and Jayasundera said it was still below the five percent of gross domestic product peak reached five years ago.

Most of the money for defence is being spent on salaries of servicemen as the government had to maintain a large force, he said. .