The government’s lack of direction is
driving the country’s economy further into
an abyss, in turn increasing the burdens on
The lack of proper economic management
has led to Sri Lanka recording the highest
level of inflation in the South Asian
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
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
According to senior government sources,
the uncontrollable and spiralling spending
on major areas have caused a huge strain on
the country’s economy.
One third of annual costs
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
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
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.
Lack of management
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
"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
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
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
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
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
Government continues borrowing
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.