Sri Lanka to manage overall budget deficit: finance minister

COLOMBO (EconomyNext) – Sri Lanka will keep the overall budget deficit under control, raise revenues by clamping down on large scale untaxed alcohol manufacture using imported ethanol, Finance Minister Ravi Karunanayake said.

Sri Lanka’s new administration is to present an interim budget on January 29, giving higher salaries to state workers, pensions and cutting a series of autarky taxes on food as well as high taxes on fuel.

"The overall budget deficit will not be increased," Minister Karunanayake said.

According to a budget for 2015 presented by the ousted Rajapaksa regime the 2014 deficit would have been brought down to 5.0 percent of gross domestic product and this year’s deficit would only be 4.6 percent.

There have however been doubts about the budget numbers as state agencies such as the Road Development Authority which have hardly any revenues on its own has been borrowing directly from banks and payments arrears have also mounted in the last quarter.

Foreign Borrowings

The arrears are then cleared early the following year helped by foreign borrowings which helps keep interest rates lower than if such funds were borrowed domestically.

A 1.5 billion US dollar sovereign bond planned for January has not taken place so far and a 500 million dollar bond will be repaid back this week. Sri Lanka will start a new program with the International Monetary Fund as a first step to re-structuring debt, Karunanayake said.

Questions have also been raised about the nominal GDP itself, which may mean past numbers may not be reliable.

Karunanayake said it was too early to say whether economic numbers were credible or not, but the finance ministry was collating data to find the ‘real situation’ regarding the debt and GDP.





Karunanayake said there will be savings in the capital budget, from trimming inflated costs of Chinese financed projects.

The administration has already suspended a 245 billion rupees expressway program, though it is not clear how much was set aside for the project this year.

"I am saying with authority that we will be taxing the super-rich and ensuring that money is channelled to the poor who cannot earn a 100 rupees a day," he said.

"We are reducing the costs, eradicating corruption. Already the surplus cabinet has been removed. Loss making institutions will be reduced."

The number of ministers however has been creeping up since the first swearing in.

Tax Cuts

Falling fuel prices had helped boost the finances of energy utilities which were earlier running bank financed losses adding to the total public sector deficit. Fuel prices were slashed Wednesday night.

A strengthening dollars from better Federal Reserve policy has sent commodities plunging, but there can be a slight upswing due to a phenomenon known as ‘commodity price snapback’ classical economists say.

Fresh money printing by the European Central Bank may also put some upward pressure on oil, metals and food commodities. But a price formula for petroleum, which is based on costs can protect state revenues.

Massive revenue leakages had been experienced on alcohol sales, he said.

He said as much 60 billion rupees is estimated to be lost due to tax unpaid alcohol produced and sold in a large scale.

Industry sources in the know say from 1994 news alcohol sales licenses were given to politically connected people who in turn ‘leased’ them to the actual operators.

As a result key politically connected distilleries which also produced some tax-paid alcohol were able to produce and sell large volumes of tax-unpaid alcohol through legal channels, and officials were helpless to check the practice.

Police have already caught truckloads of alcohol bottles believed to be connected to a politician in Sri Lanka’s Wayamba province.

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