US embassy cable - 04COLOMBO1907

UNCLAS SECTION 01 OF 02 COLOMBO 001907 
 
SIPDIS 
 
STATE EB/IFD/OMA:L. GALLAGHER 
TREASURY FOR OASIA/MDM:J. FRANCO 
 
E.O 12958: N/A 
TAGS: ECON, EFIN, EAID, CE 
SUBJECT: SRI LANKA TRANSPARENCY OF BUDGETS/MILITARY 
SPENDING 
 
Ref: STATE 239929 
 
1.  POST RESPONSE TO REFTEL FOLLOWS: 
 
A.  General Overview of Auditing Procedures: 
 
2.  In Sri Lanka, the Auditor General (AG), a 
civilian authority, audits military expenditures as 
well as expenditure of all other government agencies. 
The Constitution provides for the appointment of the 
AG by the President.  The AG has assigned audit units 
to the three armed forces and the Ministry of 
Defense.  They carry out an annual audit of each 
department supported by a continuous audit process. 
 
3.  The audits are performed according to guidelines 
established by the Auditor General's Department and 
the Treasury (including Financial Regulations of the 
Government).  There are no special audit frameworks 
for military audits.  Audit reports (i.e. performance 
audit reports) for the armed forces and the defense 
ministry are sent to the legislature (Parliament). 
They are not published for public scrutiny although 
audit reports for government agencies are required to 
be published (Mano, what does this mean? Please 
clarify - are they not published due to lack of 
resources or simply a failure to fulfill their 
obligations?).  The Public Accounts Committee (PAC), 
a standing committee of the Parliament, reviews the 
accounts and can call the armed forces chiefs and the 
Defense Secretary for discussions.  PAC deliberations 
are not open to the public.  More detailed confidential 
management reports are sent to the Secretary to the 
Ministry of Defense (a civilian) and the heads of the 
three armed forces.  PAC can call for Management reports 
prepared by the Auditor General's Department. 
 
4.  The World Bank's Country financial accountability 
assessment study for Sri Lanka (published in 2003) 
found public audit (in general) in Sri Lanka to be 
weak and identified quality, relevance, and 
timeliness of audit information as areas needing 
improvement.  The study also stated that defense 
expenditures were exempted from audit in the recent 
past by invoking a special provision in the 
Government Financial Regulation citing national 
security interests and Auditor General was denied 
access to records.  We understand that audits were 
carried out, but certain expenditures were not 
audited. (see para B. below) 
 
B.  The Military Budget and On-Budget and Off-Budget 
Revenues and Expenses 
 
5.  The Government of Sri Lanka's defense budget 
includes the budgets of the three armed forces (Army, 
Navy and Air Force).  Police are under the budget of 
the Ministry of Public Security, Law and Order. 
 
6.  The Financial Regulations of the Government 
allows the President to approve "secret payments" in 
the interest of national security.  The Auditor 
General does not audit these payments and has to rely 
on a certification by the President and Finance 
Minister.  Sources at the Sri Lanka Chapter of the 
Transparency International see this and the provision 
for single source procurement in the armed forces, 
which are not examined meaningfully by the Auditor 
General's Department, as key weaknesses in the 
auditing process of military budgets.  Further 
confirming shortcomings in military accountability, 
in 2002, the Government had to meet several 
unbudgeted (unaccounted) defense bills incurred in 
previous years (under another regime). 
 
C.  Military Component of the National Budget 
 
7.  The military component of the Government of Sri 
Lanka budget continues to hold a very important 
position and accounts for a substantial portion of 
government expenditure, due to the civil war in Sri 
Lanka.  Following the 2002 ceasefire agreement 
between the Liberation Tigers for Tamil Ealam (LTTE) 
and the Government of Sri Lanka, the war situation 
has eased and the Government has been able to reign 
in military spending to some extent.  However, as the 
LTTE has not yet given up arms and territory and not 
fully given up terrorist activities the Government 
continues to allocate large sums for defense and has 
not demobilized combatants.  The defense expenditure 
accounts for 10 percent of total government 
expenditure (2005 proposed) or about 2.48% of GDP.  A 
parliamentary debate of the defense expenditure takes 
place following the annual budget presentation. 
Lunstead