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World Affairs



This is Paradise






Govt. facing severe cash crunch

Ravi Karunanayake, Nivard Cabraal
and Mahinda Rajapakse

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 even further.

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 the year.

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. 170 billion.

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, 2008.

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, 2008.

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 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, 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.

Deficit financing

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.

Wasteful expenditure

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 wasteful expenditure.

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 endeavours.

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.

Thumping salaries

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 additional allowances.

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 personal staff.

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 conference.

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 million.

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 US dollars.

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 printing.

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 increase.

Given the increase in its expenditure, the government has now run out of options to counter the cash crunch that is in need of immediate attention.

The only solutions before the government is to minimise wasteful expenditure, further tighten fiscal policies and attempt a slow down in inflation.


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