2013 Budget:

Curtailing Govt spending inevitable - Economic analysts

By Gamini WARUSHAMANA

The 2013 Budget will inevitably be a tough one as the government is compelled to stem expenditure to maintain macro economic stability which is under pressure from adverse global conditions and domestic issues, economic analysts said.

Dr. Sirimal Abeyratne of the University of Colombo said that a tough budget with major limits on government expenditure can be expected in terms of economic policies to achieve macroeconomic stability and face uncertainties.

Contractionary policies introduced in February this year helped the government to achieve some of the anticipated outcome, specially in rebalancing the external sector. Not only Sri Lanka but many countries in the Euro Zone and emerging Asia, have been compelled to introduce tough monetary and fiscal policies which are unpopular.

High budget and external sector deficits were the main issues faced by the Sri Lankan economy and it is unclear how long the Government can continue these contractionary policies, he said.Meanwhile, Treasury Secretary Dr. P. B. Jayasundera said last week that government spending has to be cut to meet the deficit target.

“Sri Lanka will cut spending from the 2012 Budget to keep the fiscal deficit to a targeted 6.2 per cent,” the Treasury Secretary said on Monday, adding “economic growth may fall as low as 6.5 percent this year as a result of drought and the global slowdown as reported by Reuters”. Dr. Abeyratne said that a tough Budget can be expected due to several reasons.Firstly, it is essential to achieve the expected results and come out of the fundamental macroeconomic issues such as achieving exchange rate stability, and reducing the trade deficit which have not yet been fully achieved.

Secondly it is a part of the obligations in the loan agreement with the IMF to keep the budget deficit below six percent. Explaining the reasons why the Government was compelled to introduce contractionary policies, he said that after terrorism was defeated, the perception was that there were no barriers to constrain the growth of the economy.Even today, there is potential for high economic growth but in reality we have not seen the establishment of a sound foundation for sustainable long-term high economic growth.

We had much hope about massive Foreign Direct Investment(FDI) inflows after the end of terrorism but they are being delayed. The domestic private sector is still too small to make a big leap forward while the Government has reached its boundaries in expanding public investments.

Therefore, it is at this stage that we need FDI. Expansionary policies work under different circumstances and such policies alone cannot achieve high long -term growth. Because they always create stability issues such as high inflation and weak exchange rates. He said that Sri Lanka needs structural reforms to become the preferred destination for foreign investors.

An investor looking for a location for long-term investment has a wide choice and Sri Lanka is only one option. The end of terrorism has not fulfilled all aspects of a good location for FDI and there are a number of factors that investors are concerned about.