A senior economist said now that the government has the confidence of the people after eliminating terrorism it should be bold enough to tackle the politically sensitive, deep rooted fundamental problems plaguing government budgets.

"The government should make use of the confidence it has earned to educate the people about some of the necessary changes that must take place if development is to sustained in the long term," said Dr. Sirimal Abeyratne, Senior Lecturer in Economics, University of Colombo.

"There are public sector institutions that are White Elephants. Some of them should be eliminated while some can be handed over to the provincial councils. Now is the right time to infuse a sense of commercial viability into these institutions," Dr. Abeyratne told the Island Financial Review.

According to the Central Bank Annual Report for 2008, The Ceylon Electricity Board made an operating loss of Rs. 35 billion. It owed a sum of Rs. 45 billion to the Ceylon Petroleum Corporation which also made an operational loss last year.

The Sri Lank Transport Board made a loss of Rs. 3.5 billion while Sri Lanka Railways recorded a loss of Rs. 4.5 billion in 2008. The National Water Supply and Drainage board made a loss of Rs. 1.7 billion.

The latest Auditor General’s Report for 2007 shows there are 99 institutions (93 companies and 6 regional banks) owned in part or fully by the government with a total share capital value of Rs. 20.9 billion.

The report says the government is not even aware of their shareholdings in respect of 26 of these companies whose share capitals combined exceeded Rs. 7.5 billion.

The Auditor General’s Department is also seriously understaffed, running with vacancies at 551 or 33 percent of the approved cadre.

Any attempts at trying to reform public sector enterprises are met with stiff resistance driven by political forces. Governments have succumbed to such resistance in order to maintain their popularity. And this has hurt the country.

Dr. Abeyratne said the Mahinda Rajapaksa’s government now had a responsibility to change this mind set and educate the public on the necessity to make unpopular economic decisions for the sake of the future.

While it is necessary to provide subsidies and social welfare payments, they are at present wasteful and do not target those who need them the most.

According to the Central Bank, the Samurdhi Social Protection scheme benefited 33 percent of the population in 2008, but the number of people below the poverty line is 15.2 percent. Allowances under this scheme amounted to almost Rs. 10 billion in 2008; half of this was paid to those who did not need it.

With reference to state-owned enterprises (SOEs) the Central Bank says: "The performance of some State-owned enterprises (SOEs) still remain a concern and the financial viability of major State-owned trading enterprises (STEs) remains a strain on the government budget, highlighting the necessity to introduce appropriate measures to rectify these issues."

Challenges…

The county has always grappled with bad budgets but with the war over, the responsibility of the government is even greater firstly to ensure the internally displaced people are restored to their homes and livelihoods and secondly that economic activity develops in the once war-torn regions.

In the current context, Sri Lanka’s economy is faced with three challenging issues; the ongoing global economic crisis, home grown balance of payments and budget problems and thirdly, post-war economic activities in the North and East which comes after resettlement and rehabilitation activities.

"The government budget is a serious issue, especially in light of the global economic crisis and the humanitarian work that is taking place with the internally displaced people," Dr. Abeyratne said.

"The war budget is about 5 percent of GDP, or Rs. 180 billion and now that the war is over it does not mean that these expenditures can be diverted elsewhere. We still need to maintain security so this expense must still stand," he said.

The Central Bank points out that the government’s revenue collection for 2008 was Rs. 95 billion short of its budgeted target. Total expenditure and net lending amounted to Rs. 996 billion, below the Rs. 1,044 billion target due to the lower than expected capital expenditure. Recurrent expenditure on the other hand over shot estimates by Rs.31 billion.

The overall budget deficit as a percentage of GDP expanded to 7.7 percent, as against 7 percent estimated for 2008.

The Central Bank says given the importance of developing the Northern and Eastern provinces, measures should be taken to minimize the revenue shortfall and control additional expenditure.

Dr. Abeyratne said government revenue is likely to shrink while expenditure expands.

"Many things the government spends on is unavoidable and even necessary, especially with regard to the humanitarian work in the North but there are things that the government can do," he said.

Dr. Abeyratne said the government should not take on irreversible expenditure patterns such as new subsidies and recruitments to the public sector work force because once committed, these expenses cannot be revoked in times of crisis.

"The government should also carefully review its expenses with regard to loss making public institutions and the very size of the government," he said.

Hope for better times…

The North and East are 40 to 50 years behind the rest of the country in terms of economic development and Dr. Abeyratne said their economies can now undergo a revival, which will benefit the entire country.

However, he said the country must be patient.

"The North and East have not only lost lives and physical assets during the long war, but also investments which could have been made in the region. The regions also lost in terms of human resources development, they do not have skills; for example, there are no carpenters, masons and plumbers in the North," he said.

He said the government will also have to take on a greater responsibility to establish civil society institutions.