BUDGET ECONOMIC AND FISCAL POSITION REPORT - 2004 Issued by he Hon. Miniser of Finance in Terms of Secion 7 of he Fiscal Managemen (Responsibiliy) Ac No. 3 of
1. Inroducion Secion 7 of he Fiscal Managemen (Responsibiliy) Ac (FMRA) requires he Miniser of Finance o presen o Parliamen each year, on he day fixed for he second reading of he Appropriaion Ac, he Economic and Fiscal Posiion Repor. This repor is issued in compliance wih his requiremen. The purpose of his repor is o provide informaion ha will form he basis for he evaluaion of he Governmen s fiscal performance agains is fiscal sraegy as se ou in he Fiscal Sraegy Saemen issued under Secion 4 of he FMRA, and presened o Parliamen along wih his repor. The Fiscal Sraegy Saemen specifies annual medium erm arges for he budge defici, governmen revenue and expendiure and he public deb. The repor provides hree-year forecass for seleced macroeconomic indicaors as lised in paragraph 2 below. 2. Medium Term Economic Forecass The medium erm economic projecions of he Governmen indicae higher economic growh and lower inflaion. Ineres raes will decline wih he easing of inflaionary pressures. The anicipaed increase in invesmen will creae more employmen opporuniies and lead o reducion in he unemploymen rae. While, he curren accoun defici in he balance of paymens is expeced o widen driven by increased invesmen relaed impors funded by foreign capial inflows, his same invesmen would move he counry o a higher growh pah in he fuure. Fiscal consolidaion hrough revenue enhancemen and expendiure conainmen will, however, bring abou a seady reducion in he overall budge defici, over he medium erm, o mee he fiscal arges laid down in he FMRA. Consequenly, ne Governmen borrowing is expeced o decline over he medium erm. Furhermore, he increased availabiliy of concessionary donor funds will reduce governmen borrowing in he domesic marke, hereby releasing resources for privae invesmen. The medium erm projecions for he period 2004 o 2006 for seleced economic indicaors are given in Table 1. Deails of revenue, expendiure and financing, as a percenage of GDP are given in Table 2. 3. Bases for he Preparaion of Esimaes The bases for arriving a he above esimaes are lised below. a) Gross Domesic Produc Economic growh is expeced o accelerae in he medium erm on he basis ha public and privae invesmen is expeced o increase progressively from 22 percen of GDP in o 28 percen in 2006 and he expansion of he services and he indusry secors. Forecass for 2004 esimae he services secor o grow by 7 percen, 1
he indusry secor by 6 percen and he agriculure secor by 3 percen. This growh is expeced o gaher momenum in 2005 and 2006. b) Consumer Prices Inflaion is expeced o furher decline in he medium erm on he basis of coninued fiscal consolidaion and pruden moneary policy and on accoun of supply side facors, such as increased domesic agriculural oupu, rising produciviy and lower peroleum prices. c) Employmen and Unemploymen Greaer employmen opporuniies will be creaed wih he growh in he services and indusry secors and he anicipaed increases in invesmen in infrasrucure and consrucion projecs. The implemenaion of he Governmen s programmes o enable persons o acquire appropriae skills and raining o mach marke requiremens is expeced o improve employmen opporuniies. The programme wih regard o labour reforms is also expeced o faciliae his process. d) Curren Accoun of he Balance of Paymens Expors are expeced o grow a an annual rae of 8 o 10 percen (in US Table 1: Projecions for Seleced Economic Indicaors Uni 2004 2005 2006 Real Gross Domesic Produc % Change 6.0 6.7 7.0 Colombo Consumer Price Index % Change 6.9 5.9 4.9 Unemploymen Rae % 7.0 6.5 6.0 Curren Accoun Balance US $ Mn -602-978 -1,122 Curren Accoun Balance % GDP -3.0-4.3-4.5 Governmen Revenue % GDP 16.4 16.8 17.3 Governmen Expendiure % GDP 23.2 22.8 22.4 Governmen Ne Borrowing % GDP 5.7 5.2 4.3 Table 2: Revenue, Expendiure and Financing as a Percenage of GDP Revised Toal revenue 16.3 2004 2005 2006 16.4 16.8 17.3 Tax revenue 14.1 14.4 15.0 15.8 Income axes 2.6 2.9 3.2 3.5 Value Added Tax 6.2 6.0 6.3 6.9 Excise axes Taxes on inernaional rade 2 2.8 2.9 3.0 3.0 2.2 2.3 2.3 2.2
2005 2006 Revised 2004 Oher 0.2 0.3 0.2 0.2 Non ax revenue 2.3 1.9 1.8 1.6 Toal expendiure and ne lending Curren expendiure 24.2 23.2 22.8 22.4 19.2 17.6 16.4 15.6 Civil Service wages and salaries 3.2 3.2 3.0 2.9 Oher civilian goods and services 1.2 1.1 1.1 1.1 Securiy relaed expendiure 3.5 3.5 3.2 3.1 Of which: defence expendiure 2.7 2.8 2.5 2.4 Subsidies and ransfers Households Of which: Samurdhi Of which: Pensions Insiuions, corp., oher gov. 1.3 Ineres paymens 7.0 Foreign 0.6 Domesic 6.4 Capial expendiure and ne lending 5.0 Capial expendiure 4.3 Ne lending 0.7 Overall Balance ( Excluding grans and privaisaion) -7.8 Financing 7.8 Ne exernal financing 2.1 Ne domesic financing 4.5 Bank -0.8 Non-bank 5.3 Asses sales 0.8 Grans 0.5 Memorandum iems: Curren accoun balance -2.8 Primary balance (excl. grans ) -0.8 3 4.3 3.9 3.4 3.2 3.0 3.0 2.6 2.4 0.5 0.4 0.4 0.3 1.8 1.8 1.6 1.5 0.9 0.7 0.7 6.0 5.7 5.4 0.8 0.8 0.8 5.2 4.9 4.5 5.5 6.4 6.7 4.6 5.4 5.7 0.9 0.9 1.0-6.8-5.9-5.0 6.8 5.9 5.0 2.5 2.7 2.7 3.2 2.5 1.6-0.5 0.0 0.0 3.7 2.5 1.6 0.6 0.3 0.2 0.5 0.5 0.5-1.3 0.4 1.7-0.8-0.2 0.4
Revised Nominal GDP 1788.0 Real GDP growh 5.5 Toal deb 100.1 2004 2005 2006 2027.9 2293.7 2576.9 6.0 6.7 7.0 94.9 90.0 85.0 dollar erms) for he period 2004 o 2006, while impors will grow a a slighly faser rae reflecing an increase in demand for inermediae and capial goods. The rade defici is herefore expeced o widen. However, an increasing surplus is expeced in he services accoun, paricularly on accoun of ourism and por services. This will conain he curren accoun defici o around 3 o 4 percen of GDP in he medium erm. e) Revenue A gradual increase in revenue is expeced wih he coninued recovery in he economy and from he implemenaion of several revenueenhancing reforms of he Governmen aimed a simplifying he ax sysem and broadening he ax base. The esablishmen of he proposed Revenue Auhoriy would help o improve ax adminisraion and increase compliance. Consequenly higher ax collecion, paricularly from Value Added Taxes and income ax, is expeced in he medium erm. f) Expendiure Recurren expendiure is expeced o be conained primarily hrough he decline in ineres paymens resuling from he deceleraion and beer managemen of public deb and he beer argeing of social welfare 4 benefis, and hrough he implemenaion of several cos saving measures o raionalise he public secor. I is anicipaed ha wih he savings in recurren expendiure, capial expendiure will be increased o mainain public invesmen a a level of 6 percen of GDP in order o provide adequae infrasrucure o faciliae privae secor, and hereby economic growh. g) Governmen Borrowing The Governmen borrowing requiremen, as a percenage of GDP, is expeced o reduce over he medium erm. Domesic marke borrowings are expeced o decline, while foreign borrowing on concessionary erms is expeced o increase. 4. Saemen on he Sensiiviy of he Esimaes The medium erm economic projecions lised in paragraph 2 are based on a scenario, which includes he following: progress wih he peace process; poliical and social sabiliy; coninuaion of economic reforms and policy adjusmens; he srenghening of macroeconomic managemen cenred around fiscal susainabiliy;
he implemenaion of a ime bound programme of srucural reforms; he developmen of infrasrucure faciliies; he effecive uilisaion of exernal assisance; and a favourable inernaional economic environmen, i.e. recovery of he global economy and expansion in inernaional rade, lower peroleum prices. These projecions are sensiive o variaions on he assumpions menioned above. Two alernaive scenarios have been considered below: High Growh Scenario Envisages peace being achieved earlier han anicipaed and an acceleraed implemenaion of policy adjusmens and srucural reforms. Economic growh could hen accelerae o 8 o10 percen of GDP. The medium erm fiscal arges would be more easily achieved; and inflaion and unemploymen would decline a a faser rae. Low Growh Scenario Any delays or reversal in he peace process would however reard he process. Combined wih slow progress in he implemenaion of economic policy reforms, his could resul in economic growh falling below 3 percen. This would impac he budge defici, inflaion and unemploymen, all or any of which would rise. compared wih Rs. 18 billion a he end of las year. The share of Treasury guaranees as a percenage of GDP has, however, declined marginally from 1.13 percen as a he end of 2002 o 1.12 percen a midyear. Key proposals of he Governmen in connecion wih Governmen spending no included in he esimaes are refleced in he Three Year Developmen Programme of he Governmen and in he Physical Infrasrucure Developmen Programme. 5. Saemen of Risks The risks ha may have a maerial effec on he fiscal posiion are given below: The oal value of ousanding Treasury guaranees amouned o Rs. 20 billion as a he end of June 5