US embassy cable - 05COLOMBO1935

UNCLAS SECTION 01 OF 02 COLOMBO 001935 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR SA/INS:CSIM; PLEASE PASS TO TREASURY:C.CARNES; 
COMMERCE:A STERN; USTR:J. ROSENBAUM; MCC:S. GROFF, D. 
NASSIRY, E. BURKE 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, CE, ECONOMICS, Elections, Political Parties 
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