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
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
"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
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
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
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
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
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.
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.
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
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
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
The 'New Sri Lanka' promised by President
Mahinda Rajapakse when assuming office seems
to have had a stillbirth.
Cost of living allowance upped from July 1
Treasury Secretary in a circular dated July
18, 2008 to all ministry secretaries and
chairmen of all state corporations,
statutory boards and government owned
companies has announced revised cost of
living payments to be effective from July 1,
According to the circular, employees who
received a monthly salary less than Rs.
25,640 and a cost of living allowance of Rs.
2,500 under the Management Services Circular
No. 30 are to receive an increased cost of
living allowance of Rs. 3,500 from July 1,
Workers receiving a salary above Rs. 25,640
are to receive a cost of living allowance of
Rs. 2,875 from July 1, 2008.
The circular also states that a daily wage
earner could be paid Rs. 116.66 on a daily
basis or a payment not exceeding Rs. 3,500
as cost of living allowance from July 1,
President Mahinda Rajapakse on June 29,
called trade unions for a discussion to
resolve the workers' demand for an increase
in wages, and offered Rs. 1,000 (inclusive
of the Rs.375 cost of living allowance) to
be added to the salaries of all public
sector employees from July 1.
Trade union leaders however scoffed at the
offer claiming it was insufficient.
Govt. continues with its spending spree
While on the one hand trying to fight hard
to bridge a widening budget deficit due to
the increase in expenditure and shortfall in
revenue, the government on the other hand
was continuing with its wasteful
It was reported last week that the
government had issued 661 duty-free vehicle
permits to parliamentarians and provincial
councilors to the value of US$ 146,30,000 or
Rs. 1550 million to import under CIF value
According to information released by sources
at the Sri Lanka Customs and Local
Government and Provincial Councils Ministry,
the market value of these vehicles exceeds
Rs. 6.2 billion after tax, levies and other
According to reports, all 225
parliamentarians have so far obtained their
vehicle permits from the Parliamentary
Affairs Ministry. The Local Government and
Provincial Council Ministry has issued
vehicle permits to 386 provincial councilors
According to information revealed by sources
at the Provincial Councils Ministry all
provincial councilors except those in the
North and East Provincial Councils had
obtained the facility.
Parliamentarians are issued vehicle permits
with a ceiling of US$ 35,000 and Provincial
Councilors with US$ 17,500.
Interestingly, while a presidential
directive issued on January 4, 2006 outlines
that a minister could use two official
vehicles with the maximum market value of Rs.
7.5 million each after all taxes were paid,
the value of a vehicle used by the majority
of ministers is around Rs. 14 to 15 million
or even more.
These vehicles are imported in addition to
highly expensive bulletproof vehicles that
are imported for the VVIPs.
It was recently revealed in parliament that
the government has imported 31 bulletproof
vehicles for the use of parliamentarians at
a cost of US$ 8.6 million.
Chief Government Whip Dinesh Gunawardena
made the disclosure to parliament responding
to a question by UNP Parliamentarian Ravi
Increase in govt. vehicle imports
According to the official response, 15 of
these vehicles had been bought for 3.7
million Euros inclusive of duty, 12 for 1.8
million US dollars, and four for 1.3 million
The increase in government vehicle
importations has resulted in an increase in
the profits of vehicle importers. One such
company benefited is United Motors Lanka (UML).
The company in its annual report for 2007
states, "However the company has succeeded
in securing a fair share of orders from
senior government officials who have been
granted vehicle permits by the government.
These orders are expected to boost profits
during the second half of this financial
year. Concerns have however been raised
over the long term implications of rising
oil prices, its effect on inflation and
increases in fiscal levies imposed on
vehicle imports from time to time."
"Under the government vehicle permit scheme,
we achieved the highest sales volume in our
history, making up for the slump in demand
in the passenger vehicle segment," Chairman
United Motors Lanka (UML), Ranjith Fernando
has said in the Annual Report.