The Central Bank said an effective monitoring system would be necessary in respect to the ongoing public investment programmes to ensure better implementation and urged the government to be extra vigilant about the global financial crisis.

The government had taken several steps to contain recurrent expenditure and the budget deficit amidst the domestic and global economic developments the country is contending with.

According to the government’s Ten-year Horizon Development Framework the budget deficit is to be reduced to around 5 percent of GDP in 2011.

The budget deficit was 8.4 percent of GDP in 2005 and had declined to 7 percent in 2008.

The Central Bank said the government’s efforts on the revenue side had shown encouraging improvements with a 20 percent growth for the first 10 months of 2008 over the corresponding period in 2007.

However more needs to be done to achieve a revenue surplus which will cover a part of the capital expenditure after meeting all recurrent expenditure requirements.

"It is necessary to introduce further measures such as broadening the tax base, revising tax rates and improving the tax administration," Central Bank Governor Ajith Nivard Cabraal said last week unveiling the bank’s policy framework for 2009.

The government has taken steps to contain recurrent expenditure of which was its policy on petroleum pricing.

"This has virtually eliminated the cost of oil subsidies, thereby reducing the pressure on the recurrent budget," Cabraal said.

He said this measure would also help contain inflation in the medium to long term.

Cabraal said however, the government may not have enough room to manoeuvre fiscal operations as much as it may want to.

This was because the government had to strengthen national security, maintain welfare programmes, incur relatively high domestic interest rates on its borrowings, provide employment, rehabilitate and reconstruct newly liberated areas and resettle IDPs.

"It is commendable that recurrent expenditure had been contained at 13.7 percent of GDP for the first ten months of 2008," Cabraal said.

Analysts point out that one way the country could weather the global financial crisis is by implementing the development programmes for which funds had already been allocated .

The Central Bank said the government has shown visible progress in implementing such public investment programmes.

It said the government was making a strenuous effort in this regard as evident in the 21 percent increase in capital expenditure and net lending during the first ten months of 2008.

"The benefits of improving infrastructure facilities are many fold. It would stimulate private sector investment and help increase the overall productivity of the country," Cabraal said.

"The implementation of a number of mega infrastructure development projects and rural infrastructure development projects simultaneously, are promising signs of the economic upliftment of Sri Lankans," he said.

Cabraal said along with these measures the government should have an effective monitoring system.

"This would be necessary to ensure these public investment programmes are better implemented," he said.

The government’s debt to GDP ratio in 2002 was 105.6 percent but has since declined to reach 78 percent as at end 2008.

The total foreign currency commercial debt stock declined from US$ 485 million at end 2007 to US$ 460 million at end 2008.

The Central Bank said the government’s risk to foreign exchange risk had been significantly reduced due to these developments.

"Notwithstanding some of these favourable achievements, we must realize that these are trying times for all governments and it is vital that the Sri Lankan government too is extra vigilant," Cabraal said.

He said the global financial crisis would to some extent negatively impact government revenue and foreign financing which poses risks to the implementation of public investment programmes.

"These issues are already known to many of us and I am sure that the government is also well aware of them and is ready to take measures to cope with these possible developments," Cabraal said.