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An economy in
dire straits
By
Mandana Ismail Abeywickrema
Strapped for cash, the cabinet has last week
approved the Appropriation Bill for the 2008 budget which has indicated an
increase of approximately 18% in recurrent expenditure and 14% in capital
expenditure.
The Appropriation Bill is to be presented to
parliament on October 10.
State Revenue and Finance Minister, Ranjith
Siyambalapitiya last week told a private electronic media institution that the
government has decided to allocate Rs.725 billion for recurrent expenditure and
Rs. 791 billion for capital expenditure for 2008.
He has further said that the government was
focused on providing relief to the masses and on infrastructure development
projects.
However, with a little over a month to go for
the presentation of the 2008 budget, the budget deficit currently stands at 8%,
which is US$ 1.76 billion.
Off targets
Although there is a likelihood of the government
achieving its rupee value revenue targets as it includes inflation, currently at
17.3%, the revenue as a ratio of GDP, which is as pointed out by analysts the
more important one, will be off target.
According to analysts, growth targets will also
be most definitely off. "Even the government has downgraded it to 7% from the
earlier 8% plus. But others put it at even lower. Quarterly growth last quarter
is only 6%, the lowest in two years," they say.
The government has so far been unable to achieve
its targets set out for the year as highlighted in the last budget presentation.
President Mahinda Rajapakse presenting the budget last year in his capacity as
Finance Minister termed it as a '10-year horizon' - a national development
strategy to achieve the Millennium Development Goals (MDGs). It is, he said, a
commitment to eradicate poverty.
Blurred vision
He noted that his vision under the Mahinda
Chinthana was to create a 'new Sri Lanka' that would have the physical and human
infrastructure to build a diversified economy that would take development beyond
the Western Province.
Government revenue for the year 2007 was
estimated at Rs.584 billion against a total sum of Rs.597 billion for current
expenditure, which created a deficit of Rs.13 billion in the last budget
presentation.
"This is not desirable and must be eliminated,"
Rajapakse said before presenting the budget proposals for 2007, which included
stringent financial controls on the public sector, tax incentives for various
sectors and implementation of the balance salary increments to the public sector
promised in 2006. One year later these proposals still remain just that,
proposals.
Now the government in a desperate bid to finance
its expanding deficit before the presentation of the next budget has decided to
impose taxes that would further burden the masses.
Key among them was the tax on mobile phones.
According to economists, this telecom tax is an anti-poor or regressive tax.
Further tax
"The average telephone bill of the six million
mobile phone users is (based on Dialog data) only Rs.344 a month (90% are
pre-paid users). So a Rs.50 tax on them is 15% as opposed to 1% on a rich
person's bill of say, Rs.5,000. Already the average person pays Rs.53 in taxes.
With the Rs.50 flat tax and the 5% increase in the levy the average user will
have to pay (even after reducing his/her use) Rs.117 to the state as taxes,"
explained an economist.
He also noted that at a time the country was
expecting mobile telecom penetration to reach 64% by 2010, this tax would reduce
penetration to 55%. "Mobiles help increase productivity of people and save
money, so this will reduce the economy-wide benefits through mobiles. The mobile
tax will have a huge impact on millions of people," he added.
However, out of the five bills presented to
parliament on September 6 by the government to increase the existing taxes, only
one made it through and the rest are to be taken up afresh on October 11.
Cut in subsidies
The government also in a bid to secure a
commercial loan of US$ 500 million secretively pledged to investors to make
"dramatic cuts in subsidies" from this year onwards.
The government's decision to cut down
expenditure on subsidies was first revealed to HSBC, JP Morgan and Barclays in a
presentation on July 11, which banks the state has approached to issue a US$500
million bond.
However, the government has so far remained
silent on the decision to cut down on subsidies in the face of solid proof that
it did make the pledge to the banks.
Cut spending - WB/ADB
The figure of the slash given was from 5.1% of
GDP in 2006 to 3.9% in 2007 to 3.8% in 2008. In rupee terms this is a drop from
Rs.144 billion to Rs. 126 billion to Rs. 142 billion, an analyst said.
Be that as it may, the multilateral lending
agencies - World Bank and the Asian Development Bank (ADB) recently said that
Sri Lanka needed to cut government spending to reduce fiscal imbalances, lift
real interest rates, and rein in money supply growth to stabilise the economy.
Representatives from the World Bank and the ADB
had reportedly said that the government also needed to ensure that public sector
workers increased productivity in exchange for a wage rise, and it had to take
long-term steps to cut the high current account deficit.
"Sri Lanka should reduce its fiscal imbalances,
slow down monetary growth, and bring the economy back to the long-term trend,"
Senior Country Economist, Claus Pram Astrup said.
"Managing the economy in the short run is not an
option - the wheels of the economy are spinning too fast," he had further said.
According to him, the labour market was tight,
and strong consumer spending was adding to import demand and a wider current
account deficit.
ADB's Country Economist Johanna Boestel said at
the seminar that low foreign exchange reserves along with high public debt and
inflation was a risky combination..
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Desperate attempts
The present administration which assumed
office on a 'pro poor' mandate with a pledge to uplift the local industries,
especially the agriculture sector, has now secretively called on the Asian
Development Bank (ADB) to remove a loan grant by the bank amounting to US$
60 million for the uplift of the agriculture sector.
Instead the government had allegedly
requested the bank to release funds for infrastructure projects. ADB
officials confirmed to The Sunday Leader that the government had made a
request for funding for infrastructure development projects.
However, ABD officials refused to state the
amount of money requested by the government.
The main opposition UNP last week charged
that Treasury Secretary Dr. P. B. Jayasundera on behalf of Finance Minister,
President Mahinda Rajapakse had on September 20 requested the ADB to cut the
loan grant for agricultural development and instead to grant US$ 300 million
for infrastructure development in the country. The call for the US$ 300
million loan comes in the backdrop of the government already seeking a
US$500 million loan from HSBC for infrastructure development.
The ADB Aide Memoir of the review mission
states, "On 31 August 2007, ADB agreed to remove the loan of US$ 60 million
for the ensuing Agribusiness Development Project from the ADB country
programme 2008-2011. The request to remove this loan was made by the
Secretary to the Treasury during his meeting in Manila with the Director of
Agriculture, Natural Resources and Social Services Division. This request
confirmed earlier meetings the ADB Country Director had with his team and
the Ministry of Finance officials, including the Secretary to the Treasury,
and was further confirmed on 18 September 2007 in a follow up meeting with
the ADB Country Director and the Deputy Secretary of Finance."
The memoir has been authorised by ADB Team
Leader, Marzia Mongiorgi.
ADB officials confirmed that the government
had indeed requested for the removal of the loan. However, they said that
the matter was up to the government and refrained from making any further
statements on the matter.
Less milk for same price
Trade, Marketing Development, Co-operatives
and Consumer Services Minister, Bandula Gunewardena confirmed last week that
several local milk powder dealers were planning on reducing the weight of a
milk powder pack but selling at the current prices.
Last week several milk powder dealers
decided on reducing the weight of a 400 gram milk powder pack to 300 grams
in order to reduce losses.
Gunewardena told The Sunday Leader that the
milk powder importers have agreed not to increase the price of a 400 gram
and a one kilo pack of milk powder for the next two months given the
government's decision to reduce import taxes slapped on milk powder imports
to the country.
"The tax on milk powder is now only Rs. 5
per kilo and as a result, the milk powder importers agreed not to increase
prices," he said.
He further said that he too heard of the
decision of several local milk powder importers to reduce the weight of the
pack to minimise losses.
"Milk powder importers say that even with
the reduction in taxes they are still incurring heavy losses. I too heard of
the decision of several local milk powder importers to reduce the weight of
a 400 gram pack to 300 grams to minimise the losses. However, I have not
been officially informed any such decision by the milk powder imports,"
Gunewardena said.
However, Gunewardena said that the
government could not control the weight of the milk powder pack and that
there was no legislation to prevent a milk powder importers from reducing
the weight of a pack.
"The Consumer Affairs Authority so far has
the mandate only to decide on prices of a 400 gram and a one kilo pack of
milk powder. A 300 gram pack does not come under its purview. However, there
is no legal action that can be taken against an importer who decides to
reduce the weight of a pack. As long as the importer clearly states the
weight of the pack and sells milk powder to that particular weight, his
actions can be justified," Gunewardena said.
Bread - up, up and away
One thing that has struck consumers is that
when this government increases prices, which is an everyday occurrence, it
does so in style - increasing prices by a whopping margin. So it was with
the price of a kilo of wheat flour last week, which was increased from Rs.
53 to Rs. 66.
According to the Trade Ministry Secretary,
the price increase was 'beyond the control of the government' as it was
'based on the global market prices.'
However, he said that the government was
'looking at ways' to import cheaper wheat flour to the country.
Meanwhile, the Bakery Owners Association
announced its decision to increase the price of bread by Rs. 5. A loaf of
bread that cost Rs. 12 in 2004 with the latest price increase would now cost
Rs. 35.
The association said that prices of all
wheat flour based products would be raised.
President's call for
'sacrifice'
Presenting the budget for 2007 last year,
President Mahinda Rajapakse took the opportunity to recall an incident that
took place at a function in Homagama, which also gave people a hint on what
the future would be.
"When I mentioned that the cost of living is
high, the spontaneous response from the crowd was that they would bear it,
and that I should look after the country. I believe that this is the shared
view of the majority of our people. The message is that the majority is
ready to make sacrifices in the interest of the country," Rajapakse
observed.
The President through the statement,
undoubtedly indicated to all Sri Lankans what they have been expecting all
along - the country is on the brink of war and the people are to sacrifice
their needs in the national interest.
Having made that statement Rajapakse and the
government have in the past year spent taxpayers' money lavishly on
themselves. |
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