PROPOSED SRI LANKA 2006 BUDGET DEAD ON ARRIVAL

UNCLAS SECTION 01 OF 02 COLOMBO 001935

SIPDIS

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E.O. 12958: N/A
TAGS: ECON ETRD EFIN CE ECONOMICS
SUBJECT: PROPOSED SRI LANKA 2006 BUDGET DEAD ON ARRIVAL



1. (SBU) Summary: Finance Minister Sarath Amunugama
(Amunugama) presented a 2006 budget proposal of the current
Government of Sri Lanka (GSL) to a less-than-packed
Parliament on November 8, just 10 days before presidential
elections. The main opposition United National Party (UNP)
and its allied parties boycotted the presentation, describing
it as a political gimmick and a hoax. Amunugama spoke of a
budget to take the Sri Lankan economy towards a 6 to 8
percent growth path over the next 3 to 5 years, while still
giving a little to pensioners, public servants, agricultural
workers, but not much for business. The current government
promised increased pensions, government salaries and
subsidies, along with adjustments to numerous taxes. In a
wise move (should it occur),the fuel subsidy that has cost
the GSL enormously would be significantly reduced.
Nevertheless, this budget will never be debated in
Parliament, and Sri Lanka will endure the presentation of a
new budget proposal sometime following next week's elections.
End Summary.

SIGNIFICANT INCREASE IN REVENUE AND SPENDING ANTICIPATED


2. (U) Under the proposed budget, total projected revenue
would be Rs. 477 billion ($4.77 billion) with total
expenditures of Rs. 671 billion ($6.71 billion),excluding
post-tsunami reconstruction expenses. Amunugama said that
the budget would increase GSL revenue by Rs. 33.5 billion
($335 million),of which Rs. 17.8 billion ($178 million)
would be used for salary increases, pension increases,
community development program allowances and welfare
increases. New revenue proposals introduced were expected to
raise Rs. 25 billion ($250 million) over an above the printed
budget estimates.


3. (U) Extolling the government,s ability to capture more
tax in 2005 -- partially due to duties charged tsunami donors
-- the new budget anticipates that revenue will continue
increasing. Tax revenue is expected to increase by 25
percent from Rs. 345.4 billion ($3.45 billion) to Rs. 431.8
billion ($4.32 billion). All forms of revenue collection are
expected to increase by no less than 23 percent, with the
highest increase for tax on goods and services at 32 percent.
These revenue figures assume a 45 to 79 percent growth in
income, sales, and external trade taxes from 2004 to 2006.
(Comment: A 45 to 79 percent growth rate in tax revenue
would be a commendable achievement if it could be pulled off
without dragging the economy. End comment.)

TSUNAMI RECONSTRUCTION EXPENSES HIDDEN

SIPDIS


4. (U) Tsunami-related expenditures are tucked at the bottom
of a spreadsheet of budget figures prepared by the Ministry
of Finance and Planning. While Amunugama spoke of a budget
deficit of only 1 percent of GDP, this statistic does not
include tsunami-related expenditures, which are largely
funded by foreign grants and foreign borrowing. Had these
expenditures been included, they would have resulted in a
proposed 2006 budget deficit of 9 percent of GDP.

TAX MODIFICATIONS


5. (U) Numerous changes in taxes were proposed. Corporate
tax rates for quoted companies would rise from 30 percent to
33.3 percent, while tax on financial services would rise from
15 percent to 20 percent. Other tax hikes would be placed on
gambling, tobacco and liquor. Amunugama also proposed
bringing back a stamp duty on all financial transactions,
targeted at increasing government revenue by about Rs. 3.7
billion ($37 million).


6. (U) In contrast, taxes on computers, mobile phones and
motorbikes would be reduced or eliminated. Duty and VAT
exemptions on imports of large construction machinery and
equipment would be granted for the next two years under the
proposal.

OIL SUBSIDY WOULD BE REMOVED: A WISE MOVE


7. (U) Amunugama also proposed to remove the fuel price
subsidy and return to an automatic fuel price formula.
"Recurrent expenditure remains vulnerable to rising oil cost
if we do not remove our fuel subsidy," said Amunugama.
"Therefore, fuel subsidy will be limited to Rs. 3,000 million
($30 million) in the Budget and fuel prices will be adjusted
in line with formula prices next year." In 2004, the GSL
spent Rs. 20 billion ($200 million) on fuel subsidies, and a
similar amount is expected for 2005. The proposal would
provide subsidies only to portions of the transportation
sector, fisheries, and rural poor who do not have electricity.

ENTICING PROGRAMS PROPOSED


8. (SBU) More interesting for most Sri Lankans than tax
changes (unless buying a computer or motorbike over the next
year) were the multitude of spending programs. From
increases in government pensions and living allowances, tax
cuts to public servants purchasing vehicles, to widows who
wish to remarry while continuing eligibility to receive
"Widows and Orphans Pensions," the budget seemed to offer at
least a little to just about everyone either on the
government payroll or on what dole exists in Sri Lanka.
Several other proposals involved infrastructure projects
(some funded by the USG or other donors),development of the
cashew industry, prawn farming, promotion of deep-sea
fishing, textile, giftware, upmarket tourism, and printing
and packaging industries. Noting that Sri Lanka must
position itself as a "knowledge economy," Amunugama said that
Sri Lankan must become "professional service providers both
within and outside our country." Yet details of how to
further this goal were scant.

AN ELECTION TOOL AND A "HOAX?"


9. (U) Describing it as a political gimmick and a hoax, the
main opposition UNP and its allied Ceylon Workers Congress,
Sri Lanka Muslim Congress, and Upcountry People,s Front
parties boycotted the presentation. Chief opposition Whip
Mahinda Samarasinghe announced that the UNP would unveil its
budget after its "leader Ranil Wickremesinghe Wickremesinghe
is elected President."


10. (SBU) In the buildup to the presidential election,
neither of the two main candidates has ever had a clear lead.
Many continue to believe that next week,s election is
extremely close. Reportedly, a large number of voters are
still undecided. The UNP, as well as other observers,
speculated that the budget proposal would be merely a
political tool to sway undecided voters toward the current
Prime Minister, Sri Lanka Freedom Party (SLFP) candidate
Mahinda Rajapakse.

ANOTHER BUDGET PROPOSAL PROBABLY FORTHCOMING


11. (SBU) The proposed budget must pass Parliament before
next week,s presidential elections for it to determine the
GSL,s fiscal direction in 2006. Since it will not come up
for debate prior to the election, the budget was dead on
arrival, which may explain why it included
politically-suicdal items like ending the gasoline subsidy.


12. (SBU) Comment: This budget proposal could be viewed in
at least two ways: a vote-catching move by the government,
or a stab at defining the way the government would have gone
if the current administration could have stayed in power for
an additional year. It may be a little of both. Nevertheless,
we will undoubtedly report soon on another budget proposal,
one that may be quite different from this week's proposal.
LUNSTEAD