Candy Man

Sri Lanka plans to lean on foreign aid and debt relief to trim its deficit, though Tuesday’s budget will be sugar coated to woo voters in the run up to next week’s keenly contested presidential poll. Sri Lanka plans to lean on foreign aid and debt relief to trim its deficit, though Tuesday’s budget will be sugar coated to woo voters in the run up to next week’s keenly contested presidential poll. “We will use the tsunami pledges and the benefits of debt relief,” to cut next year;s budget deficit to 8.5 percent of gross domestic product, Finance Minister Sarath Amunugama told reporters on Monday during the traditional pre-budget briefing.

International donors pledged US$ 3.2 billion in aid and around US$ 300 million in debt relief to help Sri Lanka recover from last year’s tsunami. But much of the aid is still trickling in, with most of the rebuilding work undertaken by international and local non-governmental organizations.

The government estimates this year’s budget deficit to be around 8.2 percent.

Nagging Deficit

Despite a large budget deficit, Amunugama said the government will increase welfare spending in health and education, to set the platform for Sri Lanka to “enter the knowledge economy.”

Total government spending for 2006 is estimated at Rs. 568 billion based on preliminary figures announced last month.

Government also plans to splash on fertilizer subsidies to help farmers and low income groups, maintain fuel subsidies as well as start a few highway projects.

Amunugama declined to comment, but the government is likely to announce more jobs for unemployed graduates in the public sector to boost its presidential candidate, Prime Minister Mahinda Rajapakse.

Rajapakse has also promised duty free vehicle permits to encourage citizens to pay income tax.

But welfare spending may come at a cost of less cash for new infrastructure projects or more taxes to boost revenue.

The government’s tax revenue has fallen short of targets in recent years. If the trend continues, next year’s budget deficit could miss the 8.5 percent target.

On Schedule

Amunugama is expected to present the budget before parliament at 2.30 on Tuesday, despite protests from opposition parties.

The main United National Party said they will not boycott the budget tomorrow. But, the party would make suitable changes if they win next Thursday’s poll.

“We will honour the budget depending on what’s in it. If it is reasonable budget along the lines of the appropriations bill already presented, then the UNP will consider implementing with necessary amendments,” UNP’s economic advisor Harsha de Silva said.

“If on the other hand it contains a fairytale and a totally unrealistic budget of a desperate presidential candidate the new Finance Minister will present a more realistic budget,” de Silva said.

Both UNP’s Ranil Wickremesinghe, 56, and Rajapakse, 59, have pledged to boost government spending on subsidies to ease the cost of living.

But more Sri Lankans prefer Wickremesighe style of handling the economy and peace process, according various opinion polls release this month.

Petro Dollars

“Despite twin shocks of oil and tsunami, our economy is doing well,” says Amunugama adding that the government plans to tap the overseas debt market to fund some large infrastructure projects.

Last month, Treasury Secretary P B Jayasundara said the government plans to raise US$ 100 million through its large expatriate workforce this year, to fund future development projects.

“We will announce the details in the budget tomorrow,” Jayasundara said.

“The markets have already discounted the fact of a welfare budget. But the government needs to find ways to fund the oil bill and tackle issues like inflation and bringing down the budget deficit,” says Vajira Premawardhana, Director Research at Lanka Orix Securities Ltd.

The Central Bank has raised short term rates three times this year, to ease inflationary pressures caused by a hefty oil bill. So far, inflation rate has eased to 12.5 percent in Oct., from 12.7 percent in Sept.

(US$ 1 = Rs. 101)

– LBO Newsdesk: