budget deficit widens fur ther price revisions
Secretary, Dr. P. B. Jayasundera in an interview with The
Sunday Leader said that the government has a clear economy
policy which has been presented to and accepted by the donor
agencies. He expressed confidence in maintaining the budget
deficit at 8% by limiting the amount allocated for subsidies
at Rs. 7 or 8 billion. Dr. Jayasundera also observed that a
possible increase in the amount allocated for subsidies would
mean the government would have to revise prices.
we revised the budget deficit to a realistic 8% what we
indicated was that we would have to accommodate certain
priority expenses. The government wants to keep development
activities moving, especially the ongoing foreign projects and
there are certain margins the budget can accommodate with the
change from the original deficit to the 8% target. So there is
one and a half percent additional increase because of it.
However, up to that it is compatible with the inflation
target, the growth target, etc., but if the oil prices
continue like this unless we will have to make a revision or
the deficit could increase," Dr. Jayasundera said.
are excerpts of the interview:
Mandana Ismail Abeywickrema
Does the government have a clear economy policy? If so what is
Yes the government has a clear policy strategy. It has
been well articulated in the government economy policy
framework, which has been presented to the donors. It was
articulated at the donor conference held recently at the Sri
Lanka Foundation Institute and it has also been presented to
the private chambers. It has also been discussed widely in the
media and is being built up on that overall framework.
If as you say, the government has a policy, why are the
financial institutions like the IMF stating you don't have one
and are holding back the PRGF tranche?
It is completely wrong. The IMF itself attended this
meeting. IMF can take a position, which they can describe in
their own terminology. Definitely it is not their policy
strategy, it is a government policy strategy. If we had
presented their policies then it would be an IMF strategy. The
disbursement has been held not because the policy strategy is
not right. It has been held back because the previous PRGF was
suspended last year, so those conditions are why the PRGF has
been suspended. The IMF has to explain why those conditions
have not been met. It has nothing to do with an absence of a
policy framework. We have already explained the whole
direction and the fiscal framework to the IMF.
the IMF staff visited here they were very happy and were ready
to accept that new assessments had to be made before entering
into a programme. All the assumptions and conditions under
which the original PRGF was formulated need to be changed, so
they agreed the government must have time and they started to
be properly vigilant about what was happening and taking stock
of it. We indicated that we first want to consolidate our
original budget was presented within a PRGF framework and by
the time the first report was issued in terms of fiscal
responsibility, the deficit had already changed. Since then
when stock was taken on what has happened revenue assumptions,
expenditure assumptions all have changed. It was on that basis
the government announced that the deficit for this year is
likely to be around 8% of GDP. Since then in order to manage
the deficit within that overall framework the government has
taken a series of measures.
to ensure the continuity of the ongoing policies. On that
basis, revenue enabling legislation to give effect to the 2003
and 2004 budget proposals were made and now they are going to
parliament and on that basis we are consolidating on the
revenue side. At the same time, we are trying to protect
public investment to the levels committed by the budget. We
are trying to expedite the implementation of the donor funded
projects because those projects have been built into the
national budget and we have started talking to the major
donors, Japan, ADB, the World Bank and others. In terms of
that, the individual and bilateral development schemes have
been executed and with the World Bank itself we have executed
more than four loan schemes. With the ADB we have finalised
the country assistance strategy from 2004-2008. So its there,
it's an evolving process and once that process is completed we
will also talk to the IMF to release the PRGF.
government in my opinion should go to the IMF unless it has an
overall framework to negotiate because the IMF will have
certain views, but the government has certain views in terms
of the whole situation.
How serious an impact will the decision of the IMF have on the
economy and the budget?
The IMF does not support the budget. IMF basically provides
funds to the Central Bank to back up the reserves and that is
done over a period of time. So this is a three year programme,
each tranche is about US$ 81 million and those are the
releases in terms of conditions.
in terms of the original fund programme apart from the macro
parametres like the budget deficit, credit to government,
credit to corporations, reserve money targets, other areas
also include structural benchmarks like Revenue Authority,
People's Bank privatisation and some reforms in the labour
market about the compensation formula, etc., have been the
major ones. In terms of new conditions, definitely the IMF
will have to start working with a new budget deficit target
moving towards a medium term and the medium term fiscal
framework is being worked out with the World Bank to formulate
the 2005 budget, so it is an ongoing process.
there is nothing to say that the IMF will have an impact
because even if these conditions are met they have to take
into account how the country, when compared with others
adjusts to situations like the oil shock, for example. The
country is also going through an external shock by way of the
severe drought. That will have an impact on the growth targets
and inflation. The fund will have to rework all these and then
work towards a more related process. That process is underway
and we are planning to engage in that process. First, the
government must make its own management programme and tell the
IMF they have to fall in line. That is why the government has
already responded like any other country, having assessed the
situation, initiated price corrections in petroleum, gas,
transport, electricity. All these things are basically lined
up having recognised the hard political and social realities
in the country. That is what economic management is. The IMF
is only one component of this whole process.
Will the government be able to provide the 70% salary hike in
the forthcoming budget?
Government does not speak of a 70% salary hike as far as I am
aware. What the government has said consistently in terms of
that is when the election manifesto speaks of a correction in
salary anomalies. It is said very clearly. Various people are
speaking on political platforms of various numbers, but upon
having taken over the responsibilities of a government, it
appointed an interim commission on administration with very
wide terms of references. One of the terms of reference was to
look into salary anomalies and move on to a more realistic,
sustainable, credible salary structure in the public service
and the reason why salary anomalies have become an issue is
because there has been some sectoral wage corrections in the
last one year which have created huge salary anomalies.
now, the universities and the health sector are such examples.
Now in the case of universities there was a separate committee
appointed. If it is within the university sector it could be
corrected, but if it is in other sectors there may be issues.
interim commission is looking into recommendations made by a
previous salaries commission and everybody is waiting and
struggling for their own demand and at the same time there is
a technically feasible duration within which you have to
address these problems.
for next year's budget, the government and the cabinet all
have indicated that they want to work with a fairly decent
wage increase for the public sector. It is also committed
providing employment to many unemployed people as a matter of
priority. In the context of the current economic difficulties,
the only way people can face these challenges is by increase
in income. So we have to look at the entire tax structure,
expenditure policy and in that context the government remains
committed to accomodating a wage increase.
Will the government go ahead with the third player in the
petroleum market - Bharath Petroleum Corporation (BPC)?
No, it depends. The trade unions have made representations to
the President and the ministers and they have said that they
can submit viable alternative proposals, so the President
agreed that the proposals will be given due consideration. We
are expecting those proposals to come and the relevant
agencies - the Strategic Enterprise Management Agency and the
Ministry itself will examine those proposals and once the
overall cost benefits are examined; I suppose the government
will take a decision.
With regard to the BPC issue, the JVP being part of the
government instigated a strike by the CPC trade unions. What
do you have to say on the matter?
I didn't see it as a JVP instigated thing as a partner
of the government. I have seen many such events in my career
under different governments sponsored by partners of the
government. The harsh reality in Sri Lanka is that trade
unions belong to political parties, which would have a direct
or indirect involvement with the government. So when the trade
unions go on strike, you can't say the stakeholders of the
government are responsible for it.
But in this case, JVP ministers have gone on record voicing
their disapproval of bringing in the third player?
Well, in this case, I have also seen SLFP ministers voicing
their disapproval. The Power and Energy Minister had his views
on the matter. There are certain people who think this is
wrong. Some politicians even think that you don't even need a
the case of the CPC, it is not a case of supporting or not
supporting a third player, it is an ongoing transaction. From
the credibility point of view, the government, be it the UNP
or the PA, unless it is a transaction totally unjustifiable,
should ensure the continuity of the process. This transaction
was internationally advertised and so many companies applied,
which reflected the confidence the people had on Sri Lanka,
and three were shortlisted and asked to bid.
because a government changes, you don't abandon the process.
When the present government took over, their expressed desire
was to slightly alter the process and continue with the
government must ensure the continuity of the right thing. A
change of government is to correct the wrong things and in
this case I think there has been a lot of misinformation and
Isn't there a danger in bringing in a third player also from
India, making us totally dependent on India for oil?
Today in the global market environment having many companies
operating in Sri Lanka even on the one field will not be the
indicator that the country is dependent on that country. In
that case, why did Sri Lanka enter into a free trade agreement
with India? The agreement has even extended to the service
area. So that is basically recognising the positive benefits
of much more integrated regional cooperation. India itself has
very large competitive oil suppliers. India is also importing
oil. As a result, having a fuel company here would not mean we
are relying on India.
fact, in my view, a third player is certainly in the best
interest of the country. Definitely three players are better
than two players and that is how it should be looked at.
Has India agreed to offer the US$ 150 million credit line to
buy petroleum products from India and if so what are the
Yes. That is final now. The terms are that it is repayable
over a period of seven years with a one year grace period and
it is on a interest of libor plus .5%. From that credit line
we can import petroleum products from India.
Do you see an impact on the economy due to the dollar rate?
No. The credit line is a major support factor to stablise
the exchange rate. The dollar has been under pressure because
of the significant demand rising from the high oil prices, so
the annual cost of imports has now gone up to about US$ 1,200
to 1,300 million from about US$ 850 to 900 million range, so
that there is no additional pressure and US$ 150 million can
be taken out from India.
Who is responsible for monitoring the dollar rate? Is it the
Central Bank or the Monetary Board?
The exchange rate surveillance is the responsibility of the
Central Bank. Central Bank is the structure and the overall
management and supervision is under the Monetary Board.
Central Bank has various departments. Certain departments have
statutory direct responsibilities like the director, bank
supervision, director, exchange rate controller and so on and
they are required to report to the Central Bank Monetary Board
and the Monetary Board is responsible for the overall
governance and the monitoring of the financial policies.
What is your position with regard to the JVP's allegation that
the Central Bank is trying to increase the dollar rate?
Those are individual perceptions. On certain occasions, I
have been blamed saying that I am behind the third player
privatisation, so that is the way certain people perceive
things to be. I have been blamed in the past for various
transactions, but that's how people perceive our actions. But
these are not individual actions, these are actions taken by
certain institutions and these are not single individuals
is a structure in the country. There is the government, the
cabinet and individually someone cannot disassociate
themselves and put the whole responsibility or blame on one
person. You must have collective responsibility there.
Similarly, the Central Bank is an organisation and if the
market perception is that the exchange rate is manipulated,
then the Central Bank Monetary Board is basically responsible.
So, I don't go by individual comments because that is not
fair, but we are used to these types of comments - sometimes
they praise you, sometimes they criticise you. You cannot
blame them as well. Sometimes even cabinet ministers take up
such positions despite the fact that they themselves formulate
them. All this is partly because they are complex problems. In
overall economy management there's politics, there's
professional involvement, a lot of expectations. People have a
lot of views and we have to live with them.
for the Central Bank issue, if you look at last week's Divaina,
the former Central Bank governor has expressed strong views on
the exchange rate saying that there are no competent people,
either in the government or the Central Bank. That's hard
reality and that maybe true. We can't say.
Do you find it difficult to have a clear cut policy and
implement them due to conflicting signals from the JVP?
I don't see a difficulty in implementing policies due to the
JVP. They are part of the government and four members are in
the cabinet and we have not seen that. Whenever they need
time, they defer to discuss the matter.
are areas where even non-JVP ministers take strong stands on
certain policies and implementing market friendly policies
within certain financial constraints is difficult.
when the going is good things are easy, but with the drought,
the political leadership in the drought affected areas don't
care what the fiscal constraints are or the situation within
which the Finance Ministry manages the whole operation. Their
priorities are different. They have to meet the needs of the
people and provide relief immediately.
the other hand, we are managing another side of the story. So,
I don't think that the JVP has made our life difficult, but
hard global realities and local realities make economic
management much more difficult. It's a dynamic process and not
static one. If the policy strategy can be implemented in a
predictable scenario it is easy. Nobody predicted a severe
drought two months ago and it has a devastating effect on
agricultural districts. Similarly, even the IMF, when
developing its policy conditions, did not think that oil
prices would increase from about US$ 30 or 32 to US$ 50 per
you look at the world economic outlook of six months ago, that
document doesn't speak of a US$ 50 per barrel of oil whereas
today it has reached that level. When we took stock of the
economy in June, everybody predicted that with the US troops
withdrawing from Iraq, the country would increase its oil
production and prices would stabilise in the range of US$ 35
per barrel. Unfortunately that whole scenario changed and then
the Saudi Arabian situation became very tense with the
situation in Venezuela also not stabilising.
the demand for oil kept increasing. The Venezuelan situation
is expected to stabilise after the presidential elections and
there is hope that the prices would decline soon. Even in
Iraq, after Ayatollah's visit, the situation started to
normalise and prices started to drop, but it is yet to revert
to previous levels.
unless the prices come down to about US$ 35 per barrel, I
don't think we could stop the price revisions. The country
needs to gradually adjust to a fairly realistic oil price
level unless the world suddenly becomes very peaceful, which
would take some time.
What are the key items subsidised by the government and is it
putting a strain on the economy?
The key items currently heavily subsidised are diesel and
kerosene. It will certainly put a strain on the economy if we
do not respond to these things. When we revised the budget to
a realistic 8% deficit target what we indicated was that we
would have to accommodate certain priority expenses. The
government wants to keep the development activities moving,
especially the ongoing foreign projects and there are certain
margins the budget can accommodate with the change from the
original deficit to the 8% target.
there is a one and a half percent additional increase because
of it. However, up to that it is compatible with the inflation
target, the growth target, etc., but if oil prices continue to
rise like this, we will have to make a correction or else the
deficit could increase. The government had the courage to take
certain bold steps. They also had the courage to make fairly
large revisions in gas prices. Those corrections have taken
the pressure out of the budget. Earlier the pressure was
moving towards the two macro instruments - the interest rate
and the exchange rate. Now the pressure is distributed because
the root cause of the pressure - not adjusting to
international prices has been taken out.
How long do you intend continuing with subsidies?
Looking at the total quantum of subsidies, we can
accommodate up to Rs. 7 or 8 billion to maintain the 8%
deficit target, and beyond that also we will have to manage
with the cash flow. But beyond that price revisions would be
How do you intend meeting the subsidy costs owed to the IOC
and how soon do you intend to make those payments?
The IOC bill is a small amount of about Rs. 1.5 billion.
Money to pay the bill has been allocated, but what we are
trying to do is try to get the price corrections. We have to
verify those claims and once everything is done we will meet
the payment within this financial year. There is a lot of
paper work to be done. While we owe money to the CPC, they too
owe us some money, so there are issues like this that need to
be looked in to.
It has been said the public must be ready for price hikes.
What are the key areas you expect prices to rise?
Not really the consumer items. Most of the agricultural
products were responding to the emerging drought conditions.
As a result, there will be a less than expected harvest in
paddy for Yala. Rice prices are already high. It is not the
norm. It is definitely more. That is the reflection of the
are also different prices now for bus fares and electricity
and all those reflecting this. So it is an overall adjustment.
Now you can see the gas prices too have gone up.
Will the government subsidise gas?
As I said it is a choice you have to make. Is it worth
subsidising gas as opposed to diesel and kerosene or something
else. It is a choice. We can have the subsidy if we are
willing to compromise certain development activities. We are
providing some money for the rural tank programme, etc.
Do you think the JVP's restoration of 10,000 tanks is a viable
proposition and to what extent is the Finance Ministry ready
to fund it?
It is not a JVP programme as such. It is a government economic
strategy and we have realised that as part of our overall
agriculture capacity building programme the rehabilitation of
the small and medium irrigation schemes is one of the critical
components. The reason why that has been recognised is that in
the whole geo-political environment, the agricultural areas
have been neglected because of our major preoccupation with
the major irrigation projects.
me, this drought is an opportunity to revive this project as
it is only during a drought can we rehabilitate a tank.
Finance Ministry is supporting this project in two ways.
Firstly, the Ministry is working very closely with the
Agricultural Ministry to work out a detailed plan in getting
the community involved, in getting the cost structure very low
and we agreed on a budget of Rs. 400 million for the first
phase of rehabilitating 1,000 tanks. This is because of the
capacity. We expect rain by mid October so within that period
of time the government plans to rehabilitate 1,000 tanks. So
when the monsoons begin the country will have the capacity of
storing water in 1,000 extra tanks.
Ministry also helped by taking the initiative together with
the Agriculture Ministry to meet the banking community,
segments of the private sector, the chambers and ask them to
take part in the programme to show their corporate social
responsibilities, where they could work together with a local
community to renovate a tank.
What is the government's position with regard to the Railway
Authority and the privatisation of the cluster bus companies?
As far as the government is concerned privatisation is not an
option. It is a very clear policy. It has been stated in our
policy statement and our minister has gone on record and we
have gone on record, so privatisation of a state enterprise is
not an option. Railway and bus companies are under SEMA, which
has been given clear instructions not to privatise. They will
for the Railway Authority, the government has already made the
decision not to go ahead with it.
bus companies will be restructured under the corporate plan
that they have developed and they will not be privatised.
What are the other enterprises that are to be restructured?
There are about 12 or 13 enterprises that have been
brought under SEMA and they will be subject to a large
restructuring plan. The business plans are being developed by
SEMA and the relevant enterprises. The indication given to us
is that by mid October all the plans would be ready for
execution and submission for cabinet.
the case of non-strategic enterprises, the responsibility of
restructuring will be with PERC and there are certain
enterprises, which will continue as they are. Then other
enterprises, will initially try to make sure they adopt more
structured business strategies by restructuring their asset
portfolios to ensure that they will not be a burden to the
Treasury and try to be contributors to the government's
revenue as well.
As for the graduate employment. Will they be given permanent
Unemployed graduates after an orientation programme
will be given permanent jobs in the public service in terms of
the approved procurement means. Budgetary allocations have
already been made for the orientation period and there will be
provisions in the next budget
for their permanent careers. They will be absorbed to
identified positions in to various positions of government
agencies and they will be subject to the public service
recruitment procedures and positioning.
of the graduates who will be given employment, over 3,000 have
received first class degrees and some are with fairly high
quality qualifications. And more than 50% are less than 35
years old. Most of them are skilled to revitalise the
country's aging public service.