Annual Report 2008 - Ministry of Finance and Planning

2. Fiscal Developments - 2008
46
An Overview
The fiscal strategy of the government in 2008 based on the
Medium Term Macro Fiscal Framework, 2007-2010 was
steered along to fulfill the desired targets in the backdrop
of a very challenging environment stemming from the
developments in the external and domestic fronts.
was maintained at the same level as in 2007, reduced
the recurrent expenditure as a percentage of GDP to 16.9
percent from 17.4 percent in 2007 and maintained the public
investment at 6 percent level for the fourth consecutive year
in spite of the reduction in Government revenue from 15.8
percent of GDP in 2007 to 14.9 percent in 2008.
The unprecedentedly high prices on food and petroleum
products that prevailed in international markets warranted
the Government to grant duty concessions on such items
with a view to curb the rising domestic market prices,
compressed the revenue flows in 2008. Continued operations
to liberalize Northern part of the country from the thrust
of the terrorists, necessitated the Government to allocate
funds for these activities while expediting the humanitarian,
resettlement and development work in the Eastern Province
and the newly liberated areas in the Northern Province.
Priorities attached to the development work to achieve a
regionally balanced economic development through rural
development initiatives the “Gama Neguma”-”Jathika
Saviya” and national infrastructure projects under “Randora”
programme, while maintaining the social safety net to
protect the vulnerable groups of the society and the human
resource development through better health and education
systems also required additional resources. Amidst these
external and domestic challenges, fiscal performance in
2008 produced mixed results.
The revenue shortfalls arising from the granting of duty
concessions coupled with the global financial crisis
which intensified in the latter part of 2008 resulting in a
slowing down of domestic economic activities, drying up
of foreign investments for budgetary operations coupled
with premature withdrawals of foreign investments on
Government securities and increased funds required for
fertilizer subsidy exerted pressure on budgetary operation
in 2008. These adverse developments caused deviations in
the underlying assumptions of the 2008 Budget. Even in
this background government was successful in maintaining
public investments at 6 percent of GDP.
With regard to fiscal consolidation effort, the overall
budget deficit including the fully foreign funded projects
The Government revenue effort was thwarted mainly due
to revenue shortfalls which arose in external trade taxes
stemming from granting duty concessions on motor vehicles
for public servants and tax concessions granted on essential
commodities to stabilize the domestic prices on such items.
The effect of these concessions was felt throughout the year
where the revenue forgone from these measures alone was
around 0.7 percent of GDP. Consequent to these measures
and economic slowdown in the backdrop of intensified global
financial crisis in the latter part of the year, the government
revenue as a percentage of GDP declined to 14.9 percent
from 15.8 percent in 2007.
Channeling enhanced funds to strengthen the national
security, new recruitments to the armed services to protect
the newly liberated areas, high international prices on
fertilizer resulting in enhanced funds required for the
fertilizer subsidy, revisions in domestic petroleum prices
to mitigate the unprecedentedly high international prices
creating over runs in the budgetary allocations in the fuel and
related expenditures, maintaining the welfare programmes
for vulnerable groups in the society and high interest rate
structure that prevailed during the year stemming from the
tight monetary policy stance adopted by the Central Bank
of Sri Lanka, exerted pressure on expenditure management.
Even with these developments the Government maintained
its high priority given to the development of infrastructure
facilities in the lagging regions and implementation of
mega development programmes under the “Randora”
Infrastructure initiative. Sri Lanka recorded both highest
commitment and the highest disbursement of foreign funds
in 2008. The gross disbursement stood at US $ 1,226 million
while commitments of foreign funds during 2008 were US $
2,067 million. The disbursement of foreign funds continued
for projects such as Norochcholai Power Plant, Hambantota
Port Development, Upper Kothmale Hydro Power Project,
Ministry of Finance and Planning Sri Lanka
Annual Report 2008