Financial Times

No reckless state spending-PBJ
The International Monetary Fund said last week it was ready to renegotiate the aid programme with the new government, given its different priorities even as government planners set out a strategy of raising more revenue by reallocating resources and improved collection to fund the new subsidies and support domestic production and export ventures.

"We are not preparing for a reckless spending spree," declared the Finance Ministry and Treasury Secretary Dr P.B. Jayasundera. "Every effort will be made to have a low interest rate regime."

The six-year plan (of the UPFA manifesto) has a two-year accelerated development programme under which it is reviving development projects started by the PA before the former government was in power.

The thrust of the government's development programme is on production for domestic consumption and for exports. "We are looking at the quality of spending and want to reduce waste," Jayasundera said. "We will re-allocate some of the resources in the budget for employment generation and at the same time look at the issue of revenue which has been neglected over the years."

The new government intends to arrest the deteriorating trend in revenue collection and look afresh at some of the tax concessions. "I am optimistic that we could raise Rs 10 billion more revenue from the ongoing budget if we fine-tune our collections," Jayasundera said. "According to the former government's original estimates, revenue would drop by Rs 15 billion.

We are revisiting these figures."
Most of the new revenue raising measures are expected to be in place by June. The government is optimistic it can contain the budget deficit to below eight percent of GDP in the medium term. "We have told the IMF that overnight we cannot change these things. They understand our problem," Jayasundera said.

An IMF mission will visit the island towards the end of May to discuss these issues with the government. Jeremy Carter, Senior Resident Representative of the IMF, said the lending agency was aware of the changing priorities of the new government.

"We have to see how the new priorities can be financed and fitted in to the aid programme." Asked about the fate of the previous regime's Regaining Sri Lanka programme, Carter said: "From our point of view it is the current strategy paper."

However, he said the IMF was flexible and was prepared to review the progress of the aid under the related programme, Poverty Reduction and Growth Strategy.

"Some benchmarks and targets under the PRGF had been met and some not. But with the passage of time there would have been changes and we're naturally prepared to review the progress of the programme with whichever government is in power. We don't stick rigidly to previous targets."

About a billion dollars of the $4.5 billion in aid pledged in Tokyo was disbursed last year, up from the $700 million disbursed in each of the previous two years. The disbursement of further aid would depend on progress in the peace effort and the economic reforms.

Carter said the IMF was "comfortable" with the increased fertiliser subsidy as it was not a very large budget item, amounting to a fraction of total spending, but was more concerned about how the government can fund the new expenditure and proper targeting.

"My concern is less the direct cost of the subsidy but more whether the money is best spent for the people you're targeting. In many cases the benefits of subsidised fertiliser do not go to poor paddy farmers but in general to the larger plantation firms."

Even before the change of government the IMF had been warning that revenue was an issue since the country was losing revenue and not getting new revenue.

"We understand that the government needs to spend - it has got social welfare and infrastructure commitments, a large civil service structure - all of which needs to be paid for," Carter said.

"We remain concerned that the revenue base needs to be expanded and tax administration be made as efficient as possible." The IMF prefers "as broad a tax base as possible" to help raise the extra funds and a policy that reduces evasion and smuggling.

The disbursement of the second tranche of $81 million under the PRGF requires the completion of the IMF's review which depends on the outcome of the talks with the government on the new economic policy and development programme.

"We need to talk to the new government to find out what their strategy is for poverty reduction. Regaining Sri Lanka was the previous government's strategy. We have to look at the intentions of the new government and see if they want to complete the PRGF."

Treasury Secretary Jayasundera said the emphasis would be on rural sector development beyond urban centres."We need to create employment. More jobs will tackle the cost of living problem."

Meanwhile an NGO representing plantations, women's organisations, fishermen, farmers, labour unions and environmental activists held talks with two representatives from the World Bank, Jeremy Carter of the IMF and the ADB's country chief John Cooney last week.

The Alliance for the Protection of National Resources and Human Rights urged the aid agencies to consider the April 2 polls result as a rejection of the Regaining Sri Lanka programme which they said was detrimental to the interests of the people.

Its spokesman Sarath Fernando said the programme had been prepared in secrecy contrary to claims that it had been discussed with the people. The aid agencies, at last week's meeting, had agreed to give the new government time to formulate its own policies and to take into consideration the views of civil organisations such as theirs, Fernando said.

The organisation said it was pleased that on the first occasion that presented itself, the people have categorically rejected the proposals, as is evident from the results of the recently concluded general election.

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