REVENUES DROP IN 2007 TO 565 BILLION RUPEES AND DEFENSE EXPENSES 200 BILLION.
EXPENSES IN 2008 AND 2009 WILL INCREASE, WITH EXPORT AND TOURISM PRICES DROPPING SHARPLY, AND OIL AND FERTILIZER PRICES INCREASING SHARPLY.
RAJAPAKSES ARE DRIVING THE ECONOMY TO THE GROUND, WITH THE THE ESCALATING VIOLENCE, AND DEATH/DESTRUCTION LOOMING WITH INCREASED POTENTIAL FOR 2008-2009.
Off Target
03 Nov, 2008 13:49:06
Sri Lanka defence, subsidy costs overshoot ahead of next budget
Nov 03, 2008 (LBO) – Sri Lanka's budget for 2009 will focus on keeping a military campaign on track while also providing resources to build infrastructure, while expenses in the current budget have overshot targets, a government minister has said.
Junior finance minister Ranjith Siyambalapitiya told ETV's Lanka Business Report show that managing the 2008 budget has been tough.
"Generating the budgeted income has been a challenge this year," Siyambalapitiya said.
"Expenses have risen. These will have an effect on the deficit this year."
Overshooting
In the past few years Sri Lanka's revenues have been routinely over-estimated, expenses under-estimated and the gap had been filled with printed money which drove inflation up or by foreign commercial borrowings, which put the national balance sheet at risk.
In the 2007 budget Sri Lanka's parliament was told that revenues would be 599 billion rupees. In November 2008, parliament was told that revised revenues would be 605 billion rupees.
Later revenues turned out to be only 565 billion rupees. Inflation topped 20 percent and a 500 million dollar sovereign bond was also sold. The 8.25 percent dollar bond is now trading at more than 20 percent in foreign markets.
The 2008 defence and subsidy budgets are set to overshoot.
"We budgeted defense spending at 166 billion rupees but it’s now increased by a further 28 billion," says Siyambalapitiya.
"I look at that as an investment. We were able to clear the Eastern province because of that spending."
Additional security spending this year will increase the defense budget by 16 percent to 194 billion rupees.
In 2009 the government plans to spend 177 billion rupees on security according to the appropriation bill which set out preliminary estimates for next year.
The subsidy on fertilizer – the international price of which is linked to crude oil - has also doubled to 30 billion rupees in 2008, Siyambalapitiya said. The government has already gone to parliament once to increase the fertilizer budget to 25 billion rupees.
Forward Focus
Minster Siyambalapititya says the upcoming budget this week will focus on keeping infrastructure projects on track while balancing defense expenditure at a time when the external conditions are becoming weaker.
"We hope to bring peace in 2009. Peace for all communities: Sinhala, Tamil, Muslim and Burgher," says Siyambalapitiya
"Next year's budget will bear a large responsibility to achieve this."
Sri Lanka Tamil Tiger guerillas pulled out of peace talks which started after a ceasefire in 2001 and in late 2005, stopped people voting in areas controlled by them.
A new government resumed a military campaign re-taking large areas from the Tamil Tigers, some of which had been previously taken and lost in the long drawn out conflict.
The biggest burden on the budget however may not be the war. It is a bloated public sector that is eating up more than half the tax revenue in salaries and pensions. After 2004, plans for a funded pension scheme were scrapped.
The public sector itself is made of super citizens, protected from income tax and given tax-free cars.
In 2008, the finance ministry tried to address the problem by limiting salary increases. But in 2009, the public sector will have to be given its pound of flesh.
The real economy is also facing pressures, and four years of imprudent budgeting has left the country ill-prepared for an external slowdown.
Already a tax-free access for Sri Lanka's exports to Europe appears uncertain in 2009, over European Union concerns on human rights abuses and child soldiers. The government has promised 150 million dollars in help to exporters to the EU, mostly apparel.
"2009 is also going to be a challenging year for many countries," says Siyambalapitiya.
"We are going to see how Sri Lankan citizens can be shielded from these shocks through provisions in this budget."
Tough Times
A burst commodity bubble has hit Sri Lanka's tea and rubber exports. Tea factory owners are asking for 50 million dollars in relief.
But a large part of the benefit of falling commodity prices has been lost with the state-run Ceylon Petroleum Corporation capping up to a third of its imports through hedging contracts.
Meanwhile, analysts warn that in trying to 'shield' citizens through the budget, the hardest hit could be the poor, as happened in the last three years, via 20 percent plus inflation.
State power to spend comes from three sources; taxes, printing money or borrowing.
Taxes pass the cost right back to the people immediately and transparently; printing money raises inflation later hurting wage earners and benefiting the rich asset owning classes; borrowing endangers the national balance sheet and passes the burden to the next generation.
Of the three options, taxes are the least harmful. But in Sri Lanka, taxes are the least favoured by politicians because a popular deception that 'the government bears the burden' cannot be kept going with taxes.
The 'government bears the burden' deception has been in existence long before 2004, when economic policy radically reversed and state led 'growth' was given pride of place.
Mangala Samaraweera, a politician who was a key architect of the current economic policies but is now in the opposition, said at the time that Sri Lanka should follow Venezuela and its 'mixed' economic policies.
Inflation Remedy
In 2008 when inflation in Venezuela topped 36 percent, Sri Lanka was only a little behind. In April 2008 Sri Lanka's consumer inflation hit 29.9 percent, the highest in its history, and the island changed its inflation index.
But the central bank had also started to tighten policy by that time.
The country is now grappling with a balance of payments crisis, triggered by retreating hot money brought into fill budget gaps and a central bank defence of a dollar peg with the rupee over valued by 18 percent by June due to past inflation.
The entire monetary program has been undermined by around 87 billion rupees of money printed poured into the system to sterilize foreign exchange interventions. Reserves are down to 2.6 billion dollars and deadly sterilized intervention is still continuing to preserve a peg.
The International Monetary Fund has warned Sri Lanka to abandon its dollar peg and move for comprehensive reforms 'front loaded' with better budgets. Since 2004 however IMF advice has been spurned, in favour of 'home grown' policies.
Sri Lanka's key 'home grown' prescription has been government expansion followed by inflation and rupee depreciation, as against fiscal prudence preached by the World Bank and IMF that brings low inflation and economic stability.
The burden of adjustment is put on the private sector.
The inflation-depreciation remedy has been cynically resorted to by all Sri Lankan political parties, after a central bank was created in 1950 abolishing a currency board that had at one time made Sri Lanka one of most prosperous nations in Asia.
In 1995 President Chandrika Kumaratunga of the Sri Lanka Freedom Party changed course, bringing anti-inflation policies and central bank reform. But in 2004, policy reversed again despite the very real results of low inflation and economic stability.
One of the worst abusers of the inflation-depreciation remedy has been Sri Lanka's United National Party, which scored the previous record for the highest inflation in the country in the early 1980s.
But in 2002 and 2003 the party improved on Kumaratunga's policies, taking over after a currency and economic crisis brought on by a bout of loose fiscal and monetary policy amidst an intensified conflict in 2000/2001 caused her government to fall.
Stability
The new administration continued privatization and tightened budgets further. Inflation fell to almost zero and real economic growth rose.
But analysts say even Sri Lanka's rulers who ran the country in 2002 and 2003 did not really recognize or value economic stability when they saw it, as nobody who is now alive had experienced real economic stability, except in foreign countries.
In 2004 such policies were bastardized as 'neo-liberal' on political platforms. So far Sri Lanka has also avoided a sovereign default.
Until recently Sri Lanka has also been cautious in not going for foreign commercial borrowings, which allowed real losses on government debt to be passed on to citizens and pension funds of private sector workers through inflation.
With foreign commercial borrowings however, of which Sri Lanka now has 3.5 billion dollars, the inflation-depreciation remedy is only partly successful. Foreign fund managers do not have to wait for depreciation to hit them.
Now the country has come a full circle from the 2000/2001 crisis, of loose policy, currency intervention and an intensified conflict with flighty hot money added to the mix.
Some of controls on imports imposed during the previous crisis has been revived.
Despite this, the island now faces a serious risk of a broad political consensus by all major political parties that fiscal imprudence, and the inflation-depreciation deception is the only certain path to power.
Sri Lanka's people should perhaps take serious note of a statement made by a German central banker and oft repeated by German politicians.
Otmar Emminger, a former president Deutsche Bundesbank, once said: "Price stability is not everything, but without price stability everything is nothing."
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