ISSN: 1391 - 0531
Sunday, December 03, 2006
Vol. 41 - No 27
Financial Times  

Mahinda’s Budget not realistic at all?

By Dinesh Weerakkody

Mahinda’s 2007 budget was aimed at boosting economic growth and to increase per capita income to $3000. According to analysts the plans to achieve those targets however were not very convincing and realistic. In addition there was very little economic relief for the poor man who voted for the Mahinda Chintana expecting handouts. In fact from 1994 to 2006 the COL rise has been over 200%. The basket of goods one bought for Rs 1000 in 1994 would now cost over Rs 3000. Sadly, wage increases have not kept up with that rise. The 2007 budget in general was progressive, but not realistic at all. The revenue target of 600 billion for 2007 is certainly overambitious when considering the 2006 performance. In effect an increase of nearly 120 billion, a 24% increase. The additional revenue will mostly come from taxes on Goods and Services and income tax. Then on the expenditure side he proposes to increase government expenditure to 834 billion, an increase of 134 billion. The increase is essentially to fund public investments, defense expenditure and wage increases. Public investments will increase by 80 billion, government wages by 22 billion and defense by 45%. Interestingly, subsidies have been cut by around 9 billion. So the relief the poor were expecting to face the COL war has been overlooked for want of funds. On the financing side foreign borrowing are set to rise by over 70%. This shows Mahinda has decided to ignore the JVP and plug into the global financial grid for support. However foreign grants which saw a rise in the previous years is set to decline by around 50%. Non-bank borrowings will also increase by over 10 billion. Overall the budget deficit will increase by 17 billion. If the government fails to meet its revenue target there could either be a cut back on public investments or more inflation and rising interest rates.

President Mahinda Rajapaksa delivering the budget speech
President Mahinda Rajapaksa delivering the budget speech

Economic growth
Mahinda is talking about 8% growth in 2007. This 8% economic growth must be shared by everyone and not limited to a few individuals or corporates. To get to this balanced growth he needs a game plan. His strategy of removing withholding tax on fixed deposits up to a certain limit and removing VAT from electricity is a good thing. He must take advice from people who have wide experience in helping numerous other countries in similar predicaments as ours. So perhaps what we would have like to know in the budget in addition to his public infrastructure development plan, is the strategy to deal with the imbalance in the regions. In fact while the Western province has grown by over 40% over the last five years, other regions have grown by only 20%. The other issue Mahinda needs to be more assertive and responsive is on poverty reduction and that too in the regions. In general poverty reduction in many regions has been much slower than in the Western province because successive governments have failed to integrate the rural economy with the Western province. To realize this goal the private sector and the public sector should work together to create a conducive regulatory framework by improving infrastructure and access to capital. Effective Rural Banking would contribute significantly to rural sector growth and poverty reduction. The other issue we need to address urgently to reduce poverty is to develop our rural human capital. The more global and information based and fast moving the economy becomes the more economically valuable are the human elements in a country. Therefore more emphasis should be given to develop our human capital, both natural and trained.

Development strategy
Foreign borrowings and repayments are set to increase in 2007; the rupee could therefore depreciate big time causing hardships to the general public who are now beginning to feel the full impact of the rising COL. With rising government expenditure the Central Bank will find it hard to hold interest rates down, Perhaps if we can get the peace process off the ground and thereby convince our aid donors to give us the money they promised in Tokyo things could be very different. For that the government desperately needs to improve its human rights record. So far official flows have not come in the way we would have liked. However official aid will not solve the problems we have forever. Most aid has to be paid back. Therefore exports and FDI must fill the gaps. To deal with this problem, which is becoming a very serious problem, real investment and investor friendly policies are needed. Foreigners should be encouraged to buy land and companies without heaping too many taxes on them. On the other side printing money to meet government expenditure only pushes inflation and does not help the poor. With the pressure building on the rupee outdated economic measures won’t help. The government cannot any longer say the reason for galloping inflation is rising world oil prices. Keeping savings rates at 8% when inflation is around 18% does not help the poor saver.

Then lending rates are around 15% to 18%, the pensioners to some extent are subsidizing the borrowers. They are being paid to borrow. Today it makes no business sense to buy Treasury Bills when inflation is over 18 percent. The UNP was lambasted for lowering interest rates despite inflation being much lower and people were getting positive returns for their deposits. All governments in the past have artificially managed the interest rates and generally rates are not market based. But this government for some reason has shown that economic theory does not apply to them.

To achieve the revenue target of 600 billion in 2007 we need peace and stability and good governance. We all know the state coffers are relatively empty and government revenue is not keeping up with the ever-increasing demands. As a result the government overdraft has increased. The money the government collects may be sufficient only to meet our current expenditure. The government at current levels of income cannot fund development or the reconstruction and rehabilitation process. Our prospective donors would wait for the peace process to reconvene to release their funds. Lack of funds can surely endanger the very peace process that the international community and the people support. What this country needs is development and peace to travel together. This is the only way Mahinda can rally all Sri Lankans to support the peace process. Therefore Sri Lanka needs all the support it can from the donor community to put the economy back on the fast track. Today a mutually beneficial resolution to the North East problem is something that all citizens truly desire. Mahinda must realize that the expectation of a large peace dividend is truly high and Ranil’s inability share this gain during his tenure with the poor caused him dearly at the April 2 general election in 2004. However as important as it may be, it will certainly not be the panacea to all the economic and political ills in the country. Therefore, the government needs to simultaneously work on removing the roadblocks that have impeded the growth process and seriously get a few development projects off the ground. Therefore, the need of the hour is for the government and the LTTE to hammer out a compromise formula to restart the stalled peace process.

What the people want is the implementation of development projects and to stop the abuse of state resources for political gain. Because that is where the jobs are. So the proposed increase to public investments is a good thing provided they are done in a transparent way and covers the entire country and is done without printing money.

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Copyright 2006 Wijeya Newspapers Ltd.Colombo. Sri Lanka.