The government’s lack of direction is driving the country’s economy further into an abyss, in turn increasing the burdens on the people.

The lack of proper economic management has led to Sri Lanka recording the highest level of inflation in the South Asian region.

The sustained increase in the level of inflation continued even up to last month when the Colombo Consumer’s Price Index recorded inflation at 24%. Even the newly formed CCPI (N) recorded an increase from the figure recorded in January.

Analysts have pointed out that the present economic crisis faced by the country has resulted primarily from the mismanagement of state finances. The government’s borrowings from the Central Bank has forced the printing of money with the final effect of driving inflation over the roof.

Excessive spending and wastage of funds by the government have been cited as reasons for the present financial crisis since the government’s spending does not commensurate revenue.

According to senior government sources, the uncontrollable and spiralling spending on major areas have caused a huge strain on the country’s economy.

The government at present annually spends Rs.214 billion on public sector salaries, Rs.61 billion on pension payments, Rs.117 billion on defence expenditure, Rs.120 billion on interest payments for bank loans obtained and Rs.50 billion on subsidies and other welfare measures.

These alone add up to Rs.562 billion — one third of the government’s budgeted expenditure for 2008.

Even though the official budget estimate for 2008 presented to parliament last year quotes an expected revenue figure of Rs.776 billion, The Sunday Leader reliably learns from a cabinet source that the revenue expected by the government this year stands at between only Rs.500 and 600 billion.

Apart from the astounding expenditure projections, the government has further compounded the problem by turning a blind eye to the wastage taking place in state owned enterprises.

One of the most controversial projects that has been sucking up billions of rupees from the public exchequer is Mihin Lanka. It has been reported that this state owned ‘budget’ airline had incurred a financial loss of Rs.2 billion in just one year.

It has been reported that the Bank of Ceylon, which remains the largest lender to Mihin Lanka, has prepared a highly confidential report on the present state of Mihin Lanka. The report has dumped the airline among the worst cash drainers such as the CEB and CPC.

Also, just the interest component to be paid by Mihin Lanka each month as at present is an astounding Rs. 36 million — or in excess of Rs. 1 million per day.

According to a senior government minister it is the lack of proper management that causes such heavy financial burdens.

Consumer Affairs Minister, Bandula Gunewardena says that although a large sum of money needs to be invested in a new venture, it is up to the management to use the funds properly in order to record profits.

"The management should know how to work to get good returns," he said.

Meanwhile, the cash strapped government is also planning on spending a colossal Rs.4.5 billion for the two day South Asian Association of Regional Cooperation (SAARC) summit to be held in August.

It is learned heavy investment is to be made on a fleet of vehicles, security equipment and other facilities with the police alone budgeting their requirements at over a billion rupees, up sharply from what was estimated earlier.

It is learned that a separate allocation is to be made for the Presidential Security Division and the Special Task Force for security arrangements totalling Rs.539 million.

However, the Foreign Ministry has stated that it was working on a tentative figure of Rs. 600 million. The Ministry shied away from ruling out the possibility of exceeding the target.

According to Minister Gunewardena, the government would have to spend extra funds on the SAARC summit, as it is ‘to be expected’ when a country hosts an international conference.

Although the government has tried to justify the large sum of money to be spent on the SAARC summit and continues to turn a blind eye to the wastage of state funds, it is an issue that cannot be overlooked due to the magnitude of the price the people have been called upon to pay to host this gala summit.

This casual signing off of billions of rupees has to be seen in the context of President Mahinda Rajapakse even last week stating that he was not prepared to go with a begging bowl to the world, no matter what situation arises in the country.

"I am not ready to go with a begging bowl to the world under any condition that may arise in the country," the President said.

Rajapakse said that Sri Lanka was no longer a poor country as it was now categorised as a middle-income country.

"We are not a poor country to go begging for funds," he said. This, he said despite the government last month announcing its decision to raise a further US$ 300 million loan at exorbitant interest rates.

In mid February, the Central Bank of Sri Lanka on behalf of the government invited proposals from 14 selected international banks and investment houses and two local state banks, and last week the government announced that Standard Chartered Bank and Deutsche Bank were selected to raise the loan.

Standard Chartered Bank (SCB) was selected to raise a syndicated loan of US $150 million on a three year maturity (with yearly put options) at an average cost of LIBOR plus effective average margin of 259 bps per annum. SCB is to raise this loan through a "club arrangement" under which funds would be provided by a few identified major banks at the agreed rate, and it would be permitted to upsize the loan amount from US$150 million up to a maximum of US$250 million depending on the investor appetite at the time of issue.

In addition to this arrangement, Deutsche Bank was mandated to raise US$ 50 million on a five-year maturity at a rate of LIBOR plus 370 bps per annum.

According to the Central Bank, the government has said that the proceeds of the loans would be used to fund infrastructure projects that have been earmarked and approved in the 2008 Budget.

Soon after the government’s announcement of the decision to raise the loan, international rating agency Standard & Poor downgraded Sri Lanka’s rating outlook from B+ stable to negative.

This new batch of high interest loans comes less than six months after the government, last October, raised a loan of US$500 million through HSBC, Barclays and JP Morgan Chase Bank at 8.5% interest.