Bandula Gunawardena and P.B.
By Mandana Ismail Abeywickrema
The government has said it has no option but
to print money to fund its defence
expenditure as well as to pay the new
recruits to the public sector. The statement
came just a week after passing the most
controversial budget ever presented to
The statement made by a senior government
minister stands testimony to the loose
fiscal polices followed by the government
that has resulted in the country's economy
being pushed to the edge.
Consumer Affairs Minister Bandula
Gunawardena, a qualified economics teacher,
speaking to the BBC's Sinhala language
Sandeshaya programme has said it has now
become necessary to print money because the
government had recruited 250,000 persons and
defence expenditure was increasing.
He has also said that between the years 2002
and 2003, the total government service had
been trimmed and vacancies of 120,000 had
not been filled, and that the scenario now
was quite different leading to mounting
Following are the comments made by the
Minister in response to questions posed by
the news service.
BBC: Is the government trying to pay for all
this expenditure by printing money?
Minister: Yes. There is no alternative.
BBC: The government has no alternative but
to print money resulting in higher
Minister: Yes. In that event the government
will have to stop state recruitments with
immediate effect, stop the war, stop welfare
expenditures, stop fertiliser subsidies,
stop school mid-day meals. However, the
government is not prepared to move into an
expenditure limiting programme because the
government believes it is politically bad
for the country.
Gunawardena's comments were met with much
criticism by economists who said that
Gunawardena being an economist should know
better than to say that printing of money
was the only option for a cash strapped
"If he says the only option is to print
money, then he ceases to be an economist.
The consequence of such an act is very clear
- inflation would increase even further,"
Economist Dr. Harsha de Silva said.
Gunawardena has also blamed the high oil
prices for the country's record inflation
level and has said it was a global problem
as massive amounts of money were being spent
on oil imports, resulting in "imported
However, economists have argued that
although global oil prices have an impact on
inflation, it did not have as much of an
impact as the government has made it out to
"Global prices do have an impact, but it is
not as much as they make it out to be," said
Dr. de Silva.
Other countries in the region, which are
also affected by the high global oil prices,
have managed to maintain single digit levels
closest neighbour India, with massive oil
imports, has recorded 3% inflation - a
figure more or less common to many other
countries in the Asian region including
"Sri Lanka has one of the highest levels of
inflation," Dr. de Silva said.
He also pointed out that till the government
stops printing money, the country would
continue to record a high rate of inflation.
Analysts have pointed out that the
government had printed Rs. 45 billion from
May to September this year and was borrowing
vast amounts from the state banks to fund
its survival, causing high inflation.
The Colombo Consumer Price Index (CCPI)
recorded a 4.4% increase between the months
of October and November.
Increase in expenditure value
The CCPI for the month of November was
posted at 5976.2, which is an increase of
253.2 index points higher than that recorded
in October, the Census and Statistics
"This is an increase of Rs. 512.08 in the
expenditure value of the Market Basket when
compared to October 2007," the department
Meanwhile, the countrywide consumer price
index, the Sri Lanka Consumer Price Index (SLCPI),
was at 24.1% in October this year, the
highest recorded by the index since 2005.
The SLCPI's previous high was 18% recorded
in January 2005, soon after the government
printed Rs. 65 billion to fund its fuel and
fertiliser subsidies in 2004.
Analysts have also charged that after
printing large amounts of money the
government had also proceeded to borrow vast
sums of money from foreign banks at
commercial rates of interest further
accelerating the country descent into 'debt
ridden nation' status.
The government's first sovereign bond of US$
500 million was issued in October.
Paying a higher amount
One of the country's long standing donors,
the World Bank said that although Sri
Lanka's bond issue was oversubscribed, the
country was paying a much higher interest
rate than what was currently being paid by
the emerging markets.
The bank said that Sri Lanka's offering rate
was higher than even that offered in the US
"Sri Lanka has offered 380 basis points,
which is higher than the US market. For an
emerging market, it is usually around 200
basis points," the Bank's Managing Director,
Graeme Wheeler said.
Treasury Secretary Dr. P.B. Jayasundera in
November said that Sri Lanka might sell
about US$ 300 million of bonds in its second
offering to overseas investors to help repay
This according to him was expected to
'reduce pressure on domestic debt markets in
Dr. Jayasundera had reportedly told a
business forum that the government was
looking at bonds that would mature in seven
to 10 years to change the structure of its
foreign debt portfolio.
He had said that the government was looking
at US$ 200 to 300 million for debt rollover.
Central Bank Governor Ajith Nivard Cabraal
was reported last month saying that Sri
Lanka's overseas debt sales are aimed at
easing local rates and reviving the nation's
Public debt distress
Meanwhile, the International Monetary Fund (IMF)
warned of the significant risk faced by Sri
Lanka with regard to public debt distress
due to its heavy reliance on dollar
denominated, short term commercial debt.
Issuing a statement at the conclusion of the
IMF Directors' Article IV consultations with
Sri Lanka recently, the IMF directors called
on the local authorities to improve debt
"Directors noted the significant risk of
public debt distress in Sri Lanka, arising
from heavy reliance on dollar-denominated,
short-term commercial debt. They stressed
the need to lengthen and smoothen the
maturity profile of the debt to reduce
rollover and liquidity risks, including
through capital market refinancing, and to
improve debt management in general," the IMF
Be that as it may, the country's economic
issues have been further compounded by the
2008 budget, which has also been termed as a
"war budget" by economic analysts.
The legislators on December 14 gave the
final nod to the 2008 budget, which has made
the highest allocation for defence in the
Analysts say that with the addition of other
indirect costs, the defence expenditure for
next year would definitely be far greater
than that presented by President Mahinda
Rajapakse in the 2008 budget.
It is predicted that defence expenditure
could rise up to Rs. 200 billion in 2008.
Higher allocations for defence
Since 2006, there has been a significant
variance with regard to the estimated sum
for defence and actual expenditure.
In 2006, the government estimated to spend a
sum of Rs. 96 billion on defence when the
actual amount spent amounted to Rs.111
In 2007, the initial estimate of Rs. 139
billion for defence funding increased to Rs.
156 billion by end November.
In 2008, the government is expected to spend
a sum of Rs. 166 billion, which is Rs. 456
million (US$ 4 million) per day on defence
and public security, which is huge for a
lower middle-income country.
However, going by the earlier defence
spending since 2006, the government
estimation of Rs. 166 billion for next year
would undoubtedly see more billions added by
the end of the year.
According to analysts, if the additional
costs such as pensions and disability
expenditure on service personnel and
instalment payments for military
procurements are also taken into
consideration, defence expenditure for 2008
will easily exceed Rs. 200 billion.
At the conclusion of the last budget,
government members walked down the corridors
of parliament singing what were termed
'patriotic' songs. However, at the going
rate with funds hard to come by and expenses
soaring, the very same legislators may soon
have to sing for their (government's)
Addressing CoL issue - Basil
Senior Presidential Advisor,
Parliamentarian Basil Rajapakse soon
after the third reading vote of the
budget said that the economic issues
faced by the country couldn't be
solved in one budget and that the
cost of living issue had to be
He told The Sunday Leader that the
government had a clear policy and
that through the Mahinda Chinthana
would work accordingly with the set
targets in mind.
When asked about a target date by
which the government hopes to
address all the economic issues
faced by the country, Rajapakse said
the government was working to a
He also said that the government
would work according to the Mahinda
Chinthana policies, which were
approved by the people, and added
that the 10-year development
programme presented has been well
accepted by the donor community.
"The donor countries have supported
our 10 year development plan and we
have addressed key areas like power,
irrigation and highways," he said.
He said that the government was
working well within its targets.
However, when questioned about the
issue of the sky rocketing cost of
living, Rajapakse said that the
government was concerned about the
situation and added that the issue
has to be addressed.
"We have however addressed it in
some ways, but there is still more
to be done," he said.
Rajapakse also said that the only
way out of the present cost of
living problem was to increase
"That is the only way out. We have
to produce locally to meet our needs
and the Mahinda Chinthana is all
about that and we will work
accordingly," he said.
Rajapakse also said that although
most political parties represented
in parliament have been critical of
the 2008 budget, the effectiveness
of the budget itself lay on the
implementation of the proposals.
He said that one couldn't pass
judgment on the budget taking into
account what is in print, but decide
on it after looking at the success
of the programmes once implemented.
"The success of the budget would
only be known in 2008 judging by our
performance. You cannot make a
comment looking at the accounts. You
have to wait and see. We have to
however address the criticism
levelled against it and we welcome
positive criticism be it from the
government or opposition," he said.
He also said that the opposition
must not push the country into a
standstill and should look at ways
to work together.
Decline in growth
The Census and Statistics Department
last week said that the economy grew
by 7% in the third quarter of this
However, the 7% growth figure is a
decline from the 7.7% recorded
during the same quarter in 2006 with
the decline in tourism, a drought in
the North Western Province which hit
agriculture and higher cost of
thermal power generation being cited
It was also stated that with the
rising level of inflation, the GDP
deflator for the third quarter was
13.8% against 11.5% recorded last
year. According to statistics
released by the Census and
Statistics Department, the services
sector recorded a growth of 7.4%, a
decline from the 8.2% recorded in
the same quarter last year. The
industry sector has grown by 7.5%,
which is a decline from 8.4% in
The agriculture sector too had
recorded a decline. The sector grew
by 3.7%, a decline from the 4%
recorded last year.