Sri Lanka's revenues have fallen sharply while a plethora of election pledges are set to bust the budget as the government aims to raise 250 million dollars in new foreign loans.
Revenues fell by 11.41 percent to 45.8 billion rupees (472 million dollars) in the first two months of this year over the same period last year while spending rose 3.1 percent to 78.6 billion rupees.
The Central Bank of Sri Lanka said inflationary pressure was mounting, putting pressure on interest rates, while the exchange rate saw slow but steady depreciation.
Information Minister Reginold Cooray said the government was spending 360 million rupees on giving biscuits to school children while more money would be poured into maintaining roads and bridges.
Implementing a pre-election promise to pay some 60 dollars a month to 27,000 unemployed graduates will cost a staggering two billion rupees (20 million dollars) which has not been set aside in the national budget.
"We've seen various statements from government officials and ministers, but we are yet to see a clear policy statement on how all these will be financed," an official at a multilateral lending agency here said.
The official, who declined to be named, said International Monetary Fund and World Bank budget support for Sri Lanka would be based on a policy review which has still not taken place since the new government came to power after the April 2 elections.
Earlier this month, the central bank brought down its growth forecast for 2004 from 6.0 percent to 5.5 percent, but private analysts say that is still too optimistic given the high level fiscal slippage.
Planned privatisation revenues are also doubtful given pressure from the main Marxist ally of the government not to sell off state-run utilities, treasury officials said.
In a bid to ease pressure on domestic interest rates, the central bank said the government planned a 250-million-dollar bond issue in July to help finance the budget deficit and try to maintain it at forecasted levels of 7.3 percent of GDP this year.
The proceeds will help ease the country's rupee debt and prop up official reserves, which stood at 2,277.5 million dollars at the end of February, down 2.2 percent from the end of last year.
However, diplomats here said a 4.5-billion-dollar aid package pledged by Sri Lanka's international donors in June last year was still available, provided the new government pushed peace efforts. The economy had shown signs of benefiting from a truce with Tigers in place since February 2002.
The central bank, in its latest report, said Sri Lanka's economy grew by a better-than-expected 5.9 percent last year, up from 4.00 percent in 2002. It shrank 1.5 percent in 2001.
Sri Lanka's main financial backer, Japan, announced last week a resumption of peace talks could see faster delivery of international aid.
Japan's top peace envoy, Yasushi Akashi, said Japan, Norway, the United States and the European Union would meet June 1 in Brussels to review the peace process on releasing money from the 4.5-billion-dollar aid package.
He could not immediately say how much of the aid pledged was given to the island, but said political upheavals since November had slowed aid delivery.
Sri Lanka's central bank, too, underlined the need for peace.
Prospects appear to be promising, the bank said "provided the policy challenges are met effectively for high quality economic growth and reducing risks involved, which are mainly in the continuation of the peace process."
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