By Mandana Ismail Abeywickrema

The sad plight of the country's economy has now been further revealed with the government admitting an increase in domestic borrowings in order to bridge the budget deficit, which has seen an almost 26% increase in the first quarter compared to the corresponding period last year.

An analysis of the Finance Ministry's Mid Year Fiscal Report for 2008 has also indicated a drastic drop in foreign grants and loans during the first four months of this year compared to the same period last year.

Principal Researcher, Point Pedro Institute of Development, Dr. Muttukrishna Sarvananthan says that one of the startling revelations of the Mid-Year Fiscal Position Report 2008 is how the government has financed its budget deficit in the first four months of 2008 compared to the first four months of 2007.

He pointed out that the overall budget deficit has increased by almost 26% in the first four months of this year compared to the corresponding period last year.

Finance by domestic

borrowings  

"In 2007, little over 50% of the budget deficit was financed by domestic borrowings, 35% by foreign loans and 15% by foreign grants. In 2008, domestic borrowing accounted for almost 80% of deficit financing, foreign loans 16% and foreign grants 4%," he said.

Dr. Sarvananthan notes that the figures indicate drastic drops in foreign grants and loans during the first four months of this year compared to the same period last year and as a corollary, domestic borrowing has increased enormously in 2008.

According to Dr. Sarvananthan, heightened domestic borrowing by the government has fuelled inflation.

The inflation rate reached an all time high of 28.2% in June and that too on the newly introduced, custom designed price index, creating fresh fears among the people that inflation was going over the roof and the government was turning a blind eye to the problem.

The New Colombo Consumers' Price Index (CCPI - N) hit 28.2% in June. It was recorded at 26.2% in May.

Analysts point out that there has been a 2% increase in the index from May to June. The 2% increase in the index according to analysts was equivalent to an approximate increase of Rs. 680 in the cost of living between May and June.

Highest in the region

Although the government has worked hard to scrap the CCPI that showed actual inflation, the current rate of 28.2% is still the highest to be recorded in the region.

Analysts have warned that the sustained increase in inflation and the cost of living have now created the possibility of the country going through a bout of spiral inflation.

According to analysts, there is no point in talking about inflation any more as the authorities were not showing any real interest in bringing down the sky rocketing inflation rate.

Dr. Sarvananthan also states that the drastic drop in foreign aid is likely to lead to balance-of-payments problems.

He said that official statistics reveal that foreign aid is drying up contrary to the  oft-repeated claim by top government officials.

Statistics have revealed that when financing the overall deficit, foreign grants that amounted to 10,878 (14.65%) in the first four months of 2007 has reduced to 3,585 (3.84%) in the first quarter of 2008.

A similar pattern has been witnessed with regard to foreign loans as well.

Drastic decline

Loans that stood at 25,826 (34.78%) in the first quarter of 2007 have declined to 15,170 (16.24%) in the same period in 2008.

The drastic decline would undoubtedly pose a problem to the government where balance of payments was concerned.

According to the Mid Year Fiscal Report, government revenue generated Rs. 261.4 billion during January-May 2008, a 23% growth over the same period in 2007. Additional revenue collected between the two periods amounted to Rs. 49 billion. As a percentage of GDP it increased to 5.9% while the tax revenue was 5.4%.

The government however states that the growth in revenue was not enough and had fallen short by about Rs. 8 billion to meet cash flow requirements.

As for the expenditure component, the overall public expenditure for the first four months of 2008 has been recorded at Rs. 303,847 million, which constituted of Rs. 229,236 million for recurrent expenditure and Rs. 74,611 for capital expenditure.

According to the government, the increase in disbursements as fertiliser subsidy owing to high international prices, increase in interest cost reflecting the high rates that prevailed during the second half of 2007, enhanced salary and pension bills, increased costs on fuel and food rations to security forces exerted pressure on the recurrent expenditure resulting in a 23% increase over the same period of 2007.

Fertiliser subsidies

The National Secretariat for Fertiliser has requested cabinet for another Rs.12 billion to meet the fertiliser subsidies for the rest of the year.

According to the secretariat, since the initial allocation of Rs.15 billion was made for this year's fertiliser subsidy, the price of fertiliser has seen a staggering increase.

Meanwhile, the government's salary and pension bill for the year is expected to cost a colossal sum of money.

Since the present government assumed office, about 300,000 new employees have been recruited to the state sector with salaries being increased to a minimum of Rs. 11,730 and the salary bill stands at Rs. 214 billion.

The increase in the wage bill between 2003 and 2007 stands at Rs. 113 billion.

The pension bill that was Rs. 31 billion in 2003 has now increased to Rs. 68 billion, which is a Rs. 37 billion increase.

The report also states that despite the high recurrent expenditure, the government's commitment to accelerate strategic development programmes in areas such as power generation, ports, roads and irrigation activities continued while the rural development initiatives were also carried out with enhanced resources. Public investments increased by 24% during January-April 2008 compared to the same period last year.

The country's economy continues to be bad news - going from bad to worse with the powers that be showing no interest to arrest the situation and continuing with its spending spree.

The 'New Sri Lanka' promised by President Mahinda Rajapakse when assuming office seems to have had a stillbirth.