More price hikes, officials warn economic crisis may explode

By Bandula Sirimanna

Increased taxes on essentials and non essential goods are on the cards as urgent revenue measures while other cost-cutting measures are also planned to reduce the Government’s rising debt, a Finance Ministry official said yesterday.

These measures come amidst proposed increases in prices of bread, gas and milk powder with producers awaiting approval from Trade Minister Johnston Fernando. Bakery Owners’ Association President N.K. Jayawardena said bakers had asked for a meeting with the Minister of Trade to decide on a price increase.

“We met on Friday and the members suggested an increase of Rs. 3 at least for a loaf of bread. Or in the alternative, the government should remove the import tax on ingredients used in bakery products,” he said. The Sunday Times learns that gas companies are also considering an increase of up to Rs. 200 for a 12.5 kg cylinder of LP gas and had asked for a meeting with Minister Fernando to get approval.
Meanwhile, milk powder prices are also likely to be increased with companies seeking approval from the Consumer Affairs Authority to raise the price of a 400 gram packet by Rs. 15.

The Sunday Times learns that none of them have been given a date to meet the minister. While these and other price hikes are on the cards, the Finance Ministry official said rising fuel prices, subsidies, the devaluation of the rupee and a possible wage hike were adding to the spiralling state expenditure against lower revenue. The 3% devaluation announced in the budget alone saw Government debt rise by an additional Rs 252 billion from a budgeted Rs. 5.2 trillion, he said, adding that the continued erosion of the rupee pegged at Rs 120 per dollar this week from Rs. 114 two weeks ago would further weaken government financial reserves.

These decisions and others to tighten monetary policy were taken at a high level meeting chaired by Treasury Secretary P.B. Jayasundera earlier this week not only to counter balance of payments pressure but also to keep inflation low.

Other austerity measures include cutting down on government spending. All ministries would be directed to stop allocation of funds for any development projects other than those proposed in the budget. Instructions had also been given to restrict spending in state institutions.

The official said the Government would seek more foreign and local borrowing to supplement a shortage of revenue. While the official declined to say what taxes would be increased, private sector economists said taxes on essential goods were inevitable. “The Government needs money. Therefore taxing non-essentials alone will not bring in the needed revenue unless essential goods are also added,” an economist said.

The Ministry official admitted that the government was facing a serious financial and foreign exchange crisis to meet spending needs. He warned that the crisis was at a point that it could blow up at any time adding that even cutting expenses for social welfare and other measures would not be sufficient for the government to emerge unscathed. Another ministry official said government spending was increasing also because of unexpected fuel subsidies. “If the government keeps spending more than it collect in taxes, eventually we will have a financial crisis," he said.

The Treasury has allocated Rs. 1.9 billion a month to provide fuel subsidy to necessary services following the increase in fuel prices. This relief will be granted to Sri Lanka Transport Board, the Railways, private buses, three-wheelers, school transport services and fishing boat owners. The government will provide kerosene subsidy to households that do not have electricity and this is expected to cost the Treasury at least Rs.128 million a month. The subsidy for fishermen (boat owners) will be Rs. 250 million a month.

In addition, every year, the government routinely increases military expenditure above the budgeted allocation. The 2011 allocation was supplemented by another Rs. 5 billion recently. Around 50% of the military allocation of Rs. 230 billion will be spent on the Army. According to government sources, part of the 2012 allocation will be used to pay for weapons bought during the war against the Liberation Tigers of Tamil Eelam (LTTE).

An official said the ministry anticipated that the government expenditure and the country’s trade deficit were likely to increase further this year. The trade deficit for 2011 was about US$ 10 billion and might increase to as much as US$ 13 billion this year.

Debt repayments will be Rs. 914 billion this year. Together, military spending and debt repayments, will account for more than 50% of total budget expenditure, and more than the expected government income for this year.

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