Rajapaksa government has been continuously hiking the military budget since 2009 when the Eelam War ended with the decimation of LTTE. Observers are, however, surprised at latest hike, which, according to them, is even greater than during the three decade long fight against the Tamil Tigers. Apparently, the exercise is aimed at strengthening the military, which has emerged as a key instrument of furthering Rajapaksa agenda.
The 2013 budget proposals project a deficit of Rs. 1.2 trillion, which will be covered by borrowing from the open market and the lender of last resort, IMF-World Bank combine. The total expenditure will be Rs.2.5 trillion. And income is estimated at around Rs. 1. 3trillion.
When President Mahinda Rajapakse, presents the budget in Parliament on Nov 8 in his capacity as the finance minister of the country, he can be expected to tweak the tax rates and prune the social sector outlays. He has promised to spare the common man of additional burden but the pre-budget tariff hikes have made potatoes and onions costlier. Alcohol and cigarettes are not spared either with the incidence of new taxes on them ranging from 10 to 30 per cent. Cost push factor has also come from the devaluation of rupee and the exchange rate, which has been allowed to float.
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Media reports show that by July, the overall budget deficit for 2012 touched 5.56 percent of gross domestic product (GDP). At this rate it may cross the seven percent mark before end December. Since the IMF has prescribed a fiscal deficit target of 6.2 per cent for the year, the Rajapaksa government will have the unenviable task of making sharp cuts in spending over the next two months. If there is no squeeze on spending, the fiscal deficit target will remain unachievable.
The government has opened discussions with the IMF officials on borrowing $500 million under the IMF’s Extended Fund Facility. If this money is not forthcoming, then the treasury will consider tapping the market, the preferred route being bonds. Sri Lanka received the final instalment of a $2.6 billion IMF standby loan secured a couple of months after the Wanni war ended in 2009. So, the new loan highlights continuing economic woes, as also a willingness to accept tough belt tightening measures of the global lender.
Will the government risk budget cuts on education and health? These are the sectors that President Rajapaksa had promised to give priority on development agenda, though he was forced to make a 1.8 per cent cut on education and 2.1 percent cut on health last fiscal..
Appropriation Bill for expenditure shows that education ministry’s outlay will be up by Rs. 7.5 billion. Yet, it will remain below the allocation of 6 percent of GDP demanded by university teachers who were on a three-month long strike till recently. The health ministry like wise will see its bill go up by Rs. 18 billion. These are not significant hikes when compared to the favours showered on the defence and urban development ministry which has seen its outlay jump by Rs.60 billion. Reading of the fine print on the bill shows a cut of nearly Rs. 50 million on resettlement of war refugees.
The global slow down has not hit very badly garment exports which is Sri Lanka’s biggest revenue earner. Available data for July shows that garment exports dropped by more than 14 per cent, while Tea, a major export item, suffered a 12 per cent drop. Exports of food and beverages fell by 32 per cent and rubber by 14 per cent. The cumulative affect is that Sri Lanka’s trade deficit is expected to soar to $ 13 billion in 2012, which will be $ 3 billion more than in 2011. With debt repayments, which constitute the single largest expenditure, expected to soar to Rs. 1.2 trillion, the Sri Lankan economy is entering a rough phase .
