Sri Lanka 2007 spending to soar as defence doubles

Sri Lanka's government plans to double defence spending as part of a budget bill to raise overall spending more than 40 percent next year amid renewed civil war.Sri Lanka will raise spending to 804.6 billion rupees ($7.7 billion) in 2007 from that budgeted for this year, a government bill showed on Thursday .Defence spending will rise 100 percent next year to 139.6 billion rupees from 69.5 billion budgeted for 2006, the appropriation bill seen by Reuters ahead of its presentation to parliament showed."The expenditure of the government ... will be 804,643 million for the service of the period beginning January 1, 2007, and ending December 31, 2007," the bill said.The government forecast its overall expenditure would total 568.3 billion rupees in 2006.

Analysts said the increase in spending was higher than anticipated, expecting the budget deficit to widen due to increased defence expenditure, and wondering where the government will find the money."It looks as though they might be planning to upgrade their defence hardware, which means they will have to raise foreign money," said Dushyanth Wijayasinghe, head of research at Asia Securities in Colombo."They could do that partly from dollar bond issues and partly from long-term credit lines from (arms) suppliers," he added. "They need to get public sector spending under control ... and improve tax collection. There's no other way."

Analysts say much will depend on whether a new round of peace talks between the Tamil Tigers and the government due later this month will defuse weeks of the worst fighting since a 2002 truce and halt a new chapter of the island's two-decade civil war.Many investors have either cancelled or held back investments in the $23 billion economy amid a rash of violence that has killed hundreds of civilians, troops and rebel fighters this year and flared into military offensives in August."The peace process will be key," Wijayasinghe said. "If they can take it forward, that will relieve a lot of pressure on the inflationary front and enable the corporate sector to take a longer view."

Inflation rose to 11.2 percent in September as measured on a 12-month moving average, due largely to the impact of high international oil prices on a country that produces no crude of its own. The central bank has had to raise its policy rates three times so far this year in a bid to tame inflation.Some analysts, however, fear fighting between the government and Tamil Tiger rebels could hit the economy and dent growth prospects. The central bank and government have forecast economic growth of around 7.0-7.5 percent for 2006 and 8.0 percent in 2007. ($1=104.00 rupees)