Dissecting budget: Who says what

It’s going to be a bleak new year for consumers with the cost of living soaring higher and higher and the budget offering little by way of relief. According to the Hector Kobbekaduwa Agrarian Research and Training Institute the prices of many essential items have increased many fold since last year. The prices of rice, dried chillies, onions, eggs and some varieties of fruit have increased by as much as 55% in a brief period of just one year.

Despite these increases the government has failed to provide relief to the already over-burdened public through the budget while increasing taxes on many items such as vehicles, textiles and other items considered non-essential. In addition to this, increasing the Economic Service Charge to 1%, import and export license fees, the Social Responsibility Levy to 1.5% will lead to increased prices of all imported goods.

The increased taxes on imported items would eventually seep down to the consumers who would have to pay more for imported goods. In his budget speech the President had also proposed to impose a Cess of Rs.50 per kilogram on textile imports while removing VAT from Yarn imports to encourage the production of better quality fabrics as well as to boost the domestic textile industry.

Hameedia’s finance director Sumith Dissanayake said the charge on textile imports was too high to go unnoticed by the importers as well as the consumers.“There is likely to be an increase in prices on imported textiles and consumers will have to bear the burden of those increases,” he said.

However, Central Bank Governor Ajith Nivard Cabraal defending the budget said that the cost of living was in fact lower than what was portrayed in news reports. Mr. Cabraal provided statistics from the Department of Census and Statistics countering the claims of the rapidly increasing cost of living.

He said that the cost of living was being controlled effectively by the government while the rate of inflation was lower than most of the other countries in the region. The budget proposals focused mainly on improving local industries which will be warmly welcomed by domestic industries. However, some proposals may result in some negative effects if they are not implemented cautiously.

The President had also proposed a further allocation of Rs.300 million to the ‘Api Wawemu – Rata Nagamu’ programme. He had also made proposals to promote local productions of various items such as milk powder, sugar and wheat flour.However, Ministry of Trade and Consumer Affairs secretary R.M.K Ratnayake said since Sri Lanka did not produce wheat flour in the country it would be not possible to control its prices.

Dr. Ratnayake said the local demand for wheat flour had dropped by more than 30% from 60,000 metric tonnes a month to 40,000 metric tonnes due to the increase in prices. He also said that government’s move to increase the guaranteed price paid to local milk producers to between Rs.30 to Rs.40 per litre was part of the government’s attempt to boost local industries. However the local milk food market met only 20% of the demand in the country whereas consumers depended heavily on imported milk powder for their day-to-day consumption.

The President also proposed to ensure high prices for such local productions of milk powder, sugar, vegetables, fruits and wheat flour by providing safeguards from imports as the country spends almost Rs.30 billion a year for importation of these items.This move came just a few months after the government announced that all taxes on imported milk foods would be removed to curtail milk food companies from hiking their prices or withdrawing products from the local market.However, Fonterra Brands Lanka Ltd, Corporate Affairs Director Roshan Kulasuriya said that this was a an optimistic move by the President but it would not affect the prices on imported milk food for the time being.

“The local production of milk is not sufficient at the moment to meet the large demand in the country and therefore the effort to uplift local farmers could be very positive to Sri Lanka. However, the proposal would not affect our line of brands directly,” he said. Nevertheless, the government’s bid to ensure high prices for local dairy farmers may add to the burden of the consumers as a litre of fresh milk is likely to rise above Rs.40 while imported milk food brands continue to maintain their steep prices.

President of the Ceylon National Chamber of Industries, A.K. Ratnarajah said that these proposals may result in a negative result if the government was not careful.“With a population of 20 million it is difficult to close the economy. Even though improving local industry will benefit the country the question of whether we can produce enough to meet the demand remains a question,” he said.

Increasing local production may also increase the risk of shortages in stock or decreases in demand. Mr. Ratnarajah said that this situation may cause a chain reaction which would result in the cost of living rising which in turn would fuel inflation and increase budget deficits. The problem of the large number of unemployed graduates in the country was also raised in the budget by the President as he proposed the recruitment of 15,000 graduates through a recruitment procedure and examinations.

However, President of the Combined Association of Unemployed Graduates (CAUG), Sujith Kuruvita said such proposals and promises have been made before but never fulfilled.“The proposals last time which promised to recruit 8,000 graduates were not even remotely fulfilled within the course of the year. At least last year they presented a practical plan to employ these graduates but this year they have been vague about the steps they are going to take,” he said.

Mr. Kuruvita said that not even 500 graduates were given what they were promised last year adding that the CAUG would pursue the matter and would even take to the streets if the promises are not fulfilled this time. Even with the price of crude oil hitting a dizzying price of 98$ a barrel, the President proposed to maintain the prices of kerosene and diesel while reducing VAT on petrol from 15% to 5%. However, he also warned that this would be only a temporary measure while reminding consumers that if international prices continued to rise the government would have no choice but to increase fuel prices.

CPC chairman Ashantha De Mel said the VAT reduction on petrol would save the corporation Rs.6 on a litre of petrol while international prices are tipped to dip in the early part of next year. Mr. De Mel also said that the CPC was currently coping with large losses largely due to the profits made from the refinery as well the slight increase in the value of the Sri Lankan Rupee against the American Dollar.

Minister of Petroleum and Petroleum Resources, A.H.M. Fowzie said even though the government was losing Rs.2 billion a month due to the current fuel prices in Sri Lanka, it hopes to grant a Rs.100 kerosene subsidy to Samurdhi beneficiaries as well as other low income households that do not have electricity. “There are 685,000 Samurdhi beneficiaries as well as 300,000 others who will be entitled for this subsidy,” he said.

A similar subsidy was granted to Samurdhi beneficiaries a few months ago but was halted just one month after its implementation due to lack of government funds. Meanwhile, the President also proposed to give a limited quantity of petrol at a reduced rate to all three wheeler owners. The subsidy would however only be granted to three wheelers fitted with a meter. However, it is unlikely that three wheeler drivers would consider fixing meters as they would suffer large losses in revenue.

Amidst the growing inflation the government has decided to grant public servants an increase of a mere Rs.375 on their cost of living allowance from January 2008, making it Rs.2875 a month while no mention was made of offering relief to private sector workers.