Sri Lanka president prepares budget with eye on election

* President, also finance minister, unveils budget on Friday

* Rajapaksa seeks unprecedented third term as leader

* Aims to trim borrowing despite likely populist steps

* Opposition questions foreign loans, off-budget spending

By Shihar Aneez

thCOLOMBO, Oct 23 (Reuters) – Sri Lankan President Mahinda Rajapaksa is expected to present on Friday a populist election budget for 2015 that manages to contain borrowing thanks to an expected pick-up in the pace of economic growth.

The 68-year-old leader, who is also finance minister, will seek early re-election in January for an unprecedented third term, his party said on Monday, seeking to pre-empt any decline in support after nearly nine years in power.

On Thursday, Rajapaksa tweeted that the budget theme will be ‘Unstoppable Sri Lanka’.

So far, he faces no challenger from a divided opposition, though one should emerge. His record features winning a 26-year civil war and building massive infrastructure, but issues could include allegations of corruption and nepotism in his administration.

In 2010, when one year was left in his six-year term, Rajapaksa called an early election and got 58 percent of votes.

The 2015 budget gives Rajapaksa an opportunity to play up his economic record – Sri Lanka’s per capita output at $3,280 is twice India’s – but he has dismissed speculation that he will offer giveaways to voters.

The budget “will consist of many proposals that will upgrade the standard of both the people and country,” Rajapaksa was quoted in state media as saying on Sunday. “The budget is not prepared targeting elections.”

Rajapaksa has forecast Sri Lanka will grow 8.2 percent in 2015, up from this year’s expected 7.8 percent. He wants to trim the budget deficit to 4.4 percent of gross domestic product (GDP) from this year’s planned 5.2 percent.

POPULIST INITIATIVES

He aims to reduce total public debt by four percentage points to 71 percent of GDP, while increasing public investment to 6.5 percent of GDP in 2015 from 6 percent.

Sasha Riser-Kositsky, an analyst at the Eurasia Group, said he expects Rajapaksa to commit to high-profile infrastructure projects, hike civil service wages, lower loan-costs for farmers and raise defence spending to ensure loyalty among the military.

“To aid the campaign, the government is likely to use the budget to launch populist initiatives,” Riser-Kositsky said in a research note.

“Despite the anticipated new spending, the government remains committed to its … fiscal deficit target of 4.4 percent of GDP, suggesting that populist announcements will not be immediately implemented.”

A massive infrastructure drive has boosted the economy since the end of a 26-year war against Tamil Tiger separatists in 2009, though the private sector is yet to expand and invest more despite record low interest rates.

Credit growth remains sluggish, which some banks and economists attribute to high taxes and low disposable income. Analysts say a lack of transparency in government contracts had also dampened sentiment.

OPPOSITION CRITICISM

Harsha De Silva, economic affairs spokesman for the main opposition United National Party, said the budget would rely on sleight of hand to deliver upbeat economic numbers and pay rises for government workers.

Rajapaksa “is going to take a lot of the expenditures off the budget,” De Silva said.

He said the government had used foreign loans of more than $1.7 billion, borrowed by state-banks from international capital markets, since early last year.

“These loans don’t come into the budgets. They will be on the banks’ balance sheet… there is absolutely no fiscal responsibility,” he said.

Treasury Secretary P.B. Jayasundera has said the 2015 budget will not be a “bag full of election goodies”, but a development-oriented budget in line with the government’s medium-term direction.

“The fiscal deficit is being managed in a consistent direction towards 3 percent of GDP in the medium term,” he told a forum in Colombo. (1 US dollar = 130.75 Sri Lankan rupee) (Reporting by Shihar Aneez; Editing by Douglas Busvine and Richard Borsuk)