Sugar Coating

Sri Lanka’s government is likely to announce ambitious spending plans to help low-income groups and farmers when it presents its 2006 budget proposals next week, analysts say. Sri Lanka’s government is likely to announce ambitious spending plans to help low-income groups and farmers when it presents its 2006 budget proposals next week, analysts say. The ruling Sri Lanka Freedom Party is expected to increase welfare spending despite a large budget deficit. The party may use the Nov. 8 budget proposals to woo voters ahead of keenly fought presidential elections Nov. 17, they said.

“There will be welfare measures and populist measures included in the budget this year,” said Vajira Premawardhana, the head of research at Lanka Orix Securities.

The government is targeting a budget deficit of $1.6 billion, equivalent to 8.2% of gross domestic product, in 2006 compared with this year’s target between 8% and 8.5%.

This year’s budget deficit is likely to be similar to last year’s figure of 8.2% of GDP, despite heavy spending on reconstruction after the December tsunami.

Analysts said this was due to a one-year debt moratorium worth $500 million granted by foreign governments to help the country after the tsunami, which killed nearly 40,000 people in Sri Lanka.

Spending in 2006 is estimated at Rs. 568 billion based on preliminary figures announced last month.

The budget may include some proposals of the government’s candidate for presidential elections, Prime Minister Mahinda Rajapakse.

Last month, Rajapakse said he wanted to increase direct welfare payments to the poor by 50%, which may cost an additional Rs. 3 billion ($30 million) next year if included in the budget.

He said he also wanted to support the agriculture sector by reducing the cost of fertilizer. Agriculture accounts for about a fifth of the economy and comprises the cultivation of rice paddy, tea, rubber and coconuts.

To raise welfare spending, the government will have to trim spending in areas such as new infrastructure or boost tax revenue. Tax revenue has fallen short of targets in recent years, and if this happens again next year the budget deficit is likely to exceed the targeted 8.2%.

After coming into power last year, the Sri Lanka Freedom Party said it didn’t believe strong macroeconomic indicators alone would ensure rapid economic development.

The party said a stronger public sector was needed, and recruited more unemployed university graduates into the public sector and stopped the privatization of state enterprises. This has made it more difficult for the government to meet revenue targets.

The government is likely to announce more recruitment of unemployed graduates into the public sector.

The government may also try to help the fisheries sector by increasing its subsidy for fuel. The tsunami destroyed fishing boats and equipment, nearly decimating the fisheries sector.

The government is expected to continue a policy of subsidizing fuel sold to domestic consumers due to high oil prices. It will spend between $50 million and $75 million more on fuel subsidies this year than last year.

To encourage income-tax payers to make regular income tax payments, the government may give them the opportunity to import a vehicle free of import duties, a policy proposed by Rajapakse last month. (Dow Jones)