By Mandana Ismail Abeywickrema
The country's economic crisis has reached
boiling point with the government now
running the risk of being unable to pay the
salaries of public servants in the country.
The government's excessive spending has
dried up the state coffers leaving the cash
strapped government few or almost no
alternatives to remedy the situation without
pushing the country's already high inflation
Analysts have warned that it was just a
matter of time before the government had to
face the cash crisis head on as the problem
has been simmering since the beginning of
Economist, Dr. Harsha de Silva says that the
crisis has already happened.
He explained that when the government earns
a revenue of Rs. 750 billion, of which, Rs.
580 billion is paid as loans and interest
payments, the state is left only with Rs.
The allocation for defence expenditure for
the year also stands at Rs. 170 billion,
which leaves the government grappling for
funds to meet other expenses including
salaries of the public sector workers
(excluding members of the armed forces and
police) and other welfare payments.
Government facing crisis
Dr. de Silva pointed out that excluding the
members of the armed forces; the government
faced a crisis in meeting the salaries of
the remaining public sector work force.
The only options left for the government
would be to borrow money or to print money;
both actions would definitely drive
inflation over the roof.
It is in such a backdrop that the 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 informed of the
revised cost of living payments that is to
be effective from July 1, 2008.
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.
Salaries and pension bill
However, even without the addition of the
newly allocated Rs. 1,000 to the salaries of
the public sector workers, 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
absorbed in 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,
more than double in less than five years.
As pointed out by analysts, the government
would now be compelled to either print or
borrow money to pay the salaries of the
public servants. The increase in the number
of overdrafts of state banks is a clear
indication of a government on a borrowing
spree to meet its basic expenses.
The government in its Mid Year Fiscal Report
has already admitted to 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.
According to analysts, 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%.
Dr. de Silva noted that the dollar was
gaining and the already high interest rates
would further shoot up if the government
continues its borrowings.
He also said that the risk premium on
interest rates have also seen a drastic
increase. Citing an example, Dr. de Silva
said that while the initial interest on the
US$ 250 million borrowed in 2006 was at 140
basis points over LIBOR, the interest on the
US$ 250 million loan taken by the government
in June this year was 290 basis points over
LIBOR, which is a drastic increase.
Analysts have stated that the heightened
domestic borrowings by the government have
further fuelled inflation.
The inflation rate reached an all time high
of 28.2% in June. The New Colombo Consumers'
Price Index (CCPI - N) hit 28.2% in June. It
was recorded at 26.2% in May.
The high inflation rate has made it
impossible for the government to even
consider money printing as an option while
the credit downgrading has had an adverse
impact on the government's plan to borrow
money from the international market.
While grappling to find the necessary funds
for public salaries as well as other basic
payments, the government continues with its
Apart from the high fund allocation for
defence expenditure, the government spends
excessively on maintaining its large number
of ministers as well as on other wasteful
It has been reported that a cabinet
minister, non-cabinet minister and a deputy
minister are entitled to two official
vehicles and two back-up security vehicles.
However, every minister uses at least 10-15
vehicles apart from the back-up vehicles.
Leader of the House, Health Minister Nimal
Siripala de Silva responding to a question
raised by JVP Parliamentarian Ranaweera
Pathirana, told parliament recently that the
six Nation Building Ministers were using 43
vehicles, incurring a staggering monthly
fuel bill of Rs.752,500.
All cabinet ministers receive a basic salary
of Rs.65,000 while a non-cabinet minister
and a deputy minister receive Rs.63,500. A
parliamentarian receives a basic salary of
Rs.54,285. All of them receive a host of
Apart from the basic salary an allowance of
Rs.500 is paid for each parliamentary
sitting and Rs.200 for attending a Select
Committee meeting. Depending on how many
days they attend parliament sessions and
Select Committee meetings the allowances
vary and the final package that a
parliamentarian receives is more than
Rs.100,000 per month. Ministers and deputies
receive over Rs.130,000.
Further, every cabinet and non-cabinet
minister is entitled to a monthly fuel
allowance of Rs.75,000, a deputy minister is
entitled to Rs.50,000 and parliamentarians
are entitled to Rs.29,000 depending on the
distance to his/her constituency, before the
recent price hike. According to the Public
Administration and Home Affairs Ministry,
Rs.20,000 is paid for a private land phone
and Rs.10,000 for a mobile phone in addition
to unlimited local and IDD facilities for
official telephone lines every month.
Apart from all these payments, there are
other additional expenses incurred by the
government for the maintenance of
parliamentarians' official residence and
The UNP last week charged in parliament that
the government was set to spend Rs 5.1
billion, on the upcoming SAARC summit, and
not the Rs 2.8 billion originally requested.
Rs.5 billion bust up
UNP MP Ravi Karunanayake told parliament
that apart from the supplementary budget
request for Rs 2.8 billion tabled in
parliament, the government had spent an
additional Rs 2.1 billion to import vehicles
for the use of world leaders during the
It was also cited that there was a disparity
between the Foreign Ministry's claims that
Rs. 222 million was to be provided for the
CMC, as the Colombo Mayor U.M. Imthiaz was
quoted in the media stating that Rs. 374
million would be spent for this purpose.
It was also revealed in parliament recently
that the government has imported 31
bulletproof vehicles for the use of
parliamentarians at a cost of US$ 8.6
Chief Government Whip Dinesh Gunawardena
made the disclosure to parliament responding
to a question by Karunanayake.
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
Also, the government's decision to hold two
provincial council polls before the
stipulated time has cost the government an
additional Rs. 400 million. It has been
reported that the preliminary election work
would cost the government up to Rs. 110
million while a sum of Rs. 90 million will
be spent on police, postal and state
Out of options
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 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
Given the increase in its expenditure, the
government has now run out of options to
counter the cash crunch that is in need of
The only solutions before the government is
to minimise wasteful expenditure, further
tighten fiscal policies and attempt a slow
down in inflation.