Budget proposals for 2010

The 2010 Budget revenue has been estimated at Rs. 817.8 billion and expenditure at Rs.1279.8 billion. The tax revenue is Rs. 729 billion while the non tax revenue is Rs.88.8 billion



BUDGET SPEECH:


1. Honourable Speaker, it is with great honour that I present to this House the Budget for
2010 under the astute leadership of His Excellency the President Mahinda Rajapaksa.

2. At the very outset, it is my fervent duty to thank the people of this country who gave a
resounding mandate to His Excellency the President at the Presidential Election
concluded in January 2010 and the United People’s Freedom Alliance (UPFA) at the
General Election concluded in April 2010. The landslide victory at both elections is a clear
endorsement of policies pursued by the government since 2005 under the leadership of
His Excellency the President. Almost two thirds of our voting population placed
confidence in the bold leadership of His Excellency the President in the successful
elimination of LTTE terrorism and restoring peace. The mandate from the two elections
was also an expression of whole‐hearted support to the ‘Mahinda Chintana Vision
for the
Future’ ‐ the election Manifesto of the President which promised to transform Sri Lanka
into the ‘Emerging Wonder of Asia’.

3. Hon. Speaker, the previous Parliament in November 2009 approved a Vote on Account
for the first four months of 2010 due to Presidential and Parliamentary Elections held
during that time. Thereafter, due to the limited time available to go through a full budget
cycle, His Excellency the President in terms of Section 150(3) of the Constitution of the
Republic, authorized expenditure for a further period of three months in 2010. This
Budget incorporates expenditure incurred by the government under these two
arrangements into the 2010 annual appropriation account and further seeks
parliamentary approval for expenditure for the balance part of this year to carry out
government operations. Therefore, the Draft Estimates placed before this august
Assembly, provide details of the annual provisions under each of the ministries and
programmes that require approval from the Parliament. In essence this is a transitional
Budget reflecting expenditure under previously functioning ministries adjusted to new
ministries and a stepping stone in making provision to firmly prepare the work plans
towards the 2011 Budget ‐ which is scheduled to be presented to the Parliament before
the end of the year.

4. Hon. Speaker, our government has managed many challenges. The 26 year conflict was
brought to an end and the entire country has been unified. We owe a special gratitude to
our brave soldiers who made peace and a unified Sri Lanka, a reality. The humanitarian
operation conducted by our brave soldiers under the leadership of our President as the
Commander in Chief that rescued nearly 300,000 hostages who were under the grips of
the LTTE leadership, was not only an admirable mission but also a mission that was
conducted while respecting all international Conventions and norms. There is nothing
that we need to hide and cover. As such, nobody has any right to interfere with our
internal affairs. Day to day life in the Tsunami affected coastal belt ‐ which was the area
most affected by the worst ever natural disaster experienced by our country ‐ has been
normalized. In comparison to other countries which have been confronted with similar
disasters, our Government and its machinery demonstrated unique progress in
implementing the post disaster recovery program. Sri Lanka’s unique standing in
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managing both natural disasters as well as manmade disasters are admirable and
certainly a model for even others to follow.

5. Our government managed to withstand the global economic and financial crisis without
experiencing a collapse in our banking and financial institutions. Despite serious financial
constraints and fiscal stress we have successfully carried forward infrastructure
development initiatives. The country is witnessing a steady progress in the construction
of power plants, sea and airports, expressways, the road network and bridges, new
irrigation schemes, water supply projects, schools, universities, hospitals, stadiums,
convention centres and several other infrastructure investments initiated under the
leadership of His Excellency the President ‐ under the ‘Randora’ programme to transform
Sri Lanka as a modern and well performing economy in the region. Our policies towards
restoring food security in the wake of an unparalleled global food crisis enabled the
country to move towards self sufficiency goals in rice, cash crops, animal feed, fruits and
vegetables. Ending the conflict in the North and East has helped the country to move onto
a large scale expansion in agriculture, livestock, fishery resources etc. On the economic
reform front, we also kept our commitment to refrain from privatization and persued a
viable alternative to neo‐liberal economic reforms. We placed confidence in three key
segments ‐ private, public and cooperative sectors in our economy. The government
made good progress in strengthening public services, including island‐wide educational
and health services, the regulatory framework and the rural economy.

6. Hon. Speaker, our economy like all other economies in the world, faced grave
uncertainties in 2008/9. Growth had started decelerating and external reserves as well
as fiscal reserves have started declining. The cost‐of‐living and inflation were rising. The
global economy was facing scarcity in food supplies and major supplying countries were
resorting to protectionism. It was not clear to policy makers in many countries and to
international financial institutions, how the global economic crisis would eventually
unfold. The global economic outlook at that time was bleak. In the meantime we had to
manage two key major internal challenges. First, the humanitarian operations launched
by the government in 2006 ‐ to liberate the nation from terrorism and pave the way for
peaceful living to our people in our land ‐ had reached the final phase and was
demanding an uncompromising commitment of our time, resources and the strength of
unity to end the conflict. Second, infrastructure initiatives which we had launched to
address lagging supplies in key facilities such as electricity had reached a mature stage of
construction, which could not have been suspended. Hon. Speaker, our government acted
intelligently in managing these internal and external complexities. Today, I can say with
confidence that we have weathered these crisis and challenges. The international
Monetary Fund (IMF) which extended support to stabilize our economy with US$ 2.6
billion Stand‐By Arrangement (SBA) has endorsed the ‘Mahinda Chintana Vision
for the
Future’ as a way forward to transform our economy. We also plan to claim our eligibility
for IBRD Credit considering our graduation to a middle income country status.
Improvements witnessed by us in the area of international finance has enabled us to shift
our medium term international bonds to long term debt, providing a better debt profile
to be managed.

7. Hon. Speaker, reflecting the unique resilience of our entrepreneurs, the steadfast
determination of our workforce and the policy environment that our government created
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Sri Lanka has attained middle income economy status with per capita income rising from
US$ 1,062 in 2004 to US$ 2,053 in 2009 ‐ an achievement that the whole nation can
proudly speak of. This means that our government has been successful in placing our
economy at an annual average growth of 6 percent during the past five years in
comparison to a growth rate of 4 percent in the preceding five years. Unemployment has
been brought down to around 5 percent from 8.3 percent in 2004. Inflation, which was a
perennial problem for almost two decades in the area of macroeconomic management,
has been stabilized at around 5 percent. International reserves which declined to a
critical low level of US$ 1.2 billion have been raised in excess of US$ 6 billion providing
stability to the exchange rate regime. These developments have helped us, to bring‐down
the rate of interest, which was another critical impediment that our economy had been
confronted with for many years, limiting growth potential of our entrepreneurs.
Although further progress is necessary in selected regions and communities, the poverty
indicators have also drastically declined to around 15 percent of the household
population as compared to 23 percent few years ago.

8. Hon. Speaker our people today, have better access to electricity, drinking water, a quality
road network, telecommunications, transport, primary and secondary education and
health facilities, than five years ago. The connectivity between the rural and urban areas
which we have established is far superior to the status of not only our neighboring
countries, but also in terms of other emerging economies around us. Our government
embarked on an island‐wide integrated development strategy in the rural economy
which had been marginalized for several years under successive governments. The ‘Gama
Neguma’ the national integrated rural development strategy of the government, provides
rural roads, electricity, drinking water and irrigation, sanitation facilities and a wide
range of livelihood activities targeting almost all districts in the country. As a result, there
has been a unique improvement in the rural economy and once again made the rural
sector attractive to our people. Hon. Speaker, ‘Mahinda Chintana’ development
framework which has harnessed the economic growth to consolidate progress in making
development more inclusive is an eye opener to the failures of post liberal policy regimes
commenced since 1977.

Financial Situation

9. Hon. Speaker, in addition to the details provided in the report prepared in terms of the
Fiscal Management Responsibility Act to this Parliament, I wish to make a snapshot
analysis on the current status of the financial and economic situation for the benefit of
the honorable members. The economy has rebound with a 6.2 percent growth registering
in the last quarter of 2009 and a 7.1 percent growth in the first quarter of 2010. Almost
all sectors have contributed to this recovery. In the agriculture sector – the production of
paddy and maze has shown a marked increase while the production of many varieties of
up and low country vegetables have suffered production losses due to adverse weather
conditions that prevailed in recent months. Fish production in the first four months has
increased by 6.2 percent. The shortfall in chicken, meat and egg production witnessed
during the last several months has shown a recovery and a full recovery is expected by
the end of the year. Tea production during the first four months of the year ‐ has
increased by 25 percent whilst rubber production has increased by 12 percent. Output
expansion in the factory industry was facilitated by favorable improvements in both
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export and domestic markets. Food, beverages and tobacco sub‐sector registered a
growth of 6.9 percent, while rubber based industry recorded a growth of 8.1 percent due
to increased external demand for tyres and gloves in the international market. Textile,
apparel and leather products recorded only a marginal growth increase of 1 percent. In
the service sector, cargo and container handling activities have shown a marked increase
of 41 percent and 27 percent respectively. Banking and Financial Institutions too have
shown an expansion in their turnover.

10. Export earnings increased by 7.1 percent to US$ 1,764 million in the first quarter of 2010,
largely due to the expansion in agriculture sector exports. Expenditure on imports
increased by 39.5 percent to US$ 3,235 million mainly due to the increase in the cost of
oil imports. Tourist arrivals increased by 28.5 percent reflecting a significant increase in
arrivals from Western Europe and South Asian markets. Worker remittances in the first
three months of 2010 increased by 14.1 percent. A strong growth in remittance income
and income from exports of services have neutralized the deficits in the trade account
and hence contributed to a lower current account deficit. Reflecting the improvement in
the overall Balance of Payments, total external reserves as at end April 2010 stood at US$
6, 578 million. The year‐on‐year growth in broad money in April this year, recorded 16.5
percent. The expansion in net foreign assets of the banking system as well as growth in
domestic credit has contributed to this increase. The credit extended to the private
sector which was contracting for several months has recorded an increase of 1.7 percent
in April reflecting a recovery in the economy. The domestic money market continued to
experience high liquidity. The Central Bank continued to absorb such excess liquidity
through the issuance of Central Bank Securities. Interest rates continued to adjust
downward reflecting market liquidity and low inflationary expectation. On a year‐onyear
basis, inflation declined to 4.6 percent by June 2010. The annual average inflation at
present is around 3.8 percent.

Fiscal Framework

11. Hon. Speaker, our fiscal strategy from 2005, has three fundamental objectives. First, we
consider that the historically high Budget deficit in this country must be phased out in
order to reduce the debt burden and strengthen the financial situation so that our people
will have better access to finance from our financial institutions. However, we do not
believe that such a deficit reduction should be done at the cost of economic growth. We
also do not recognize privatization of state enterprises, selling state assets and cutting
down public investments for fiscal adjustment. We believe such adjustment should be
done through improvement in the quality of government spending, by putting state
assets into productive use and collecting revenue through a broad based and low tax
regime. Implementation of such policies will certainly be conducive for business
development by the private sector and also be conducive to generate a high growth rate
in excess of 8 percent. Second, it is important that our operational expenditure is
managed well within our income. Therefore we believe that generating a revenue surplus
by a gradual increase in government revenue and economizing operational expenditure
of the government will be a way forward for a sustained improvement in government
finance. The generation of a revenue surplus will be the most constructive way of
reducing the budget deficit because it will provide fiscal space to accommodate high
public investments. Third, we believe that maintaining a public investment in the range
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of 6 to 7 percent of GDP in support of infrastructure development is essential to induce
the private sector to increase their investment. Unless strategic infrastructure is
provided by the government in a meaningful manner, private sector investments are
unlikely to generate desired development and create an inclusive growth.

12. Hon. Speaker, although the adverse global economic climate, high debt services and
global food insecurity, disrupted our policy direction towards generating a revenue
surplus, particularly during 2008/9, and disturbed our deficit reduction path, our
government managed to maintain public investment in excess of 6 percent of GDP every
year since 2005 in comparison to around four percent prior to that. Consequently, a
satisfactory progress has been realized in resolving the infrastructure bottlenecks of our
country. This infrastructure development enabled the country to function free from
power cuts, which was a common phenomenon prior to 2005. A decisive improvement
has been made to the road network by completing about 6000 kilometers of national and
provincial roads and 40 large bridges connecting previously unreachable destinations.
The capacity of providing drinking water has been increased, providing greater access to
quality drinking water to our people. The port facilities to cater to both transshipment
and international trade which were lagging are being developed. The country would
witness the completion of two international ports and a second international airport
towards the middle of next year ‐ expanding the growth potential of our economy.
Several major irrigation schemes including the ‘Uma Oya’ and ‘Moragahakanda’ projects
have been commenced to provide the much needed irrigated water to both southern and
northern districts in the country. Our vision is to increase the area under irrigation to
reduce vulnerabilities of our agricultural sector to the vagaries of weather.

13. All these together with several other infrastructure facilities are being undertaken with
grants and long term loans from our friendly countries, multilateral institutions, and the
capital market as well as from our domestic saving institutions such as the Employees’
Provident Fund. This naturally forms part of our debt, but the creation of such debt has
been done with a conscious commitment to create an asset base which will multiple in
value and be capable of generating a stream of income that can service such debt
comfortably. This is why Hon. Speaker, our government has been able to bring down
public debt in relation to GDP from 102 percent, in 2004 to around 80 percent at present.
Such a reduction is possible only when the growth in government borrowing is kept
below the growth in national income of the country. Hon. Speaker, this Parliament which
is solely responsible to manage our public finance must appreciate that the external debt
is also managed in an environment that many global currencies are subject to
unmanageable volatilities causing us to meet extra liabilities. It is in this background that
the conduct of macro public finance must be examined.

14. The deficit and debt reduction process which witnessed a temporary aberration in
2008/9 due to the global financial crisis will be arrested in 2010. Our government is
determined that both the Budget deficit and public debt will be brought down from 9.9
percent of GDP and 87 percent of GDP respectively in 2009 to 8 percent and 80 percent
respectively in 2010. Hon. Speaker we have framed this Budget with the prime objective
of consolidating our finance to reduce the revenue deficit from 3.7 percent in 2009 to 2.1
percent in 2010 and maintain public investment at 6.5 percent of GDP. Such an
adjustment will enable us to keep the deficit at 8 percent of GDP which is a 2 percentage
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point reduction over the last year. This down‐ward path will be maintained in the next
three years. This also means that our debt in proportion to GDP will be placed below 70
percent of GDP in 2012. Our debt profile is well diversified, is less commercial and has a
long term maturity. The long term fiscal strategy of our government is to create a wealth
base far in excess in value of our total debt to make our nation free from the burden of
debt. More detailed policy initiatives which are now being gradually implemented and
expected to accelerate with the forthcoming Budget, will be placed before this House by
His Excellency the President in November 2010.

Medium Term Roadmap

15. Hon. Speaker, the realization of a ‘mine‐threat‐free’ Sri Lanka and complete re‐settlement
of internally displaced people are very critical targets in our development strategy in the
conflict affected areas. When the Northern Province was liberated from t