By IPS Correspondents
COLOMBO, Nov 11 2008 (IPS)

President Mahinda Rajapakse’s annual budget, that increases spending on the armed forces, has drawn mixed reactions. While supporters have welcomed it as a budget that breaks away from dependency on foreign loans and grants, opponents say it will exacerbate economic woes.

Presenting the budget on Nov. 6, Rajapakse indicated that offensive operations in the country’s north, targeting the Liberation Tigers of Tamil Eelma (LTTE), would continue despite international pressure to seek a negotiated settlement to the long-standing ethnic war on the island.

To underline his determination, Rajapakse upped defence allocation to Rs 177 billion rupees (1.6 billion US dollars) which is an all time high and represents a 6.5 percent increase over the 2007 allocation.

“It is to eradicate terrorism through this true humanitarian exercise that we spent a substantial amount of money on national security during the last three years, ” Rajapakse explained as his presented his fourth budget since being elected to office.

Rajapakse also indicated in his budget presentation that he was not ready to bow to foreign financial pressure.

“The European Union has adopted a new trend, wherein conditions are being attached to concessions granted by them such as GSP plus. It is unfair to engage in international trade and investment within a framework through which political objectives are tried to be achieved,” the President said, referring to a concessionary garment export programme from the EU.

Rajapakse repeated his request to the Tigers to disarm. “My earnest plea to the terrorists is to lay down arms and join the democratic process, even at this last moment,’’ he said.

Observers in Colombo feel that the government has reached a point of no return. “They might as well finish it [the war] off without dragging it on for years,” the country manager of a leading multi-national firm in Colombo told IPS. “If they can finish the war soon then people may bear with them, but not forever.”

Economist Muttukrishna Sarvananthan said that as long as the military maintains its successes in the northern battles, Rajapakse would be able to muster public support despite the country’s economic woes.

“In spite of being the second largest public expenditure [after public debt repayments] and the major contributor to widening budget deficit , as long as the military advances and successes continue on the ground there is very little likelihood of the huge defence budget impacting negatively on the overall economy of Sri Lanka in the short to medium term,” Sarvananthan told IPS.

The war and its success appeared to be the lynchpin of the budget. “We should not forget that the budget was presented at a time when the country is facing a major terrorist problem,” parliamentary leader of the National Freedom Front, Wimal Weeravansha, said.

However Sarvananthan, who is a Fulbright Visiting Research Scholar at George Washington University, told IPS that despite the budget’s focus on improving national industries, there were no major incentives to promote investments.

“I do not think there are any realisable measures taken to promote investment in the proposed budget for 2009. Any improvement in investment climate will largely depend on the improvement in the security situation in the current theatre of war, in the [financially vital] western province and the country at large,” he said.

The Sri Lankan Central Bank also holds similar views. ”It is imperative, whilst finding a long-term solution to the ongoing conflict in the country, to create an investor- friendly environment in the island for the realisation of better living standards,” the Bank said in its annual review released two days prior to the budget.

However, Rajapakse’s supporters disagreed. “This is a budget that breaks away from neo-liberal economic policies… it tries to strengthen the national economy,” Weeravansha said.

On its side the LTTE, two days after the budget presentation, reiterated willingness to enter into ceasefire with the government, but were rebuffed.

“There is no hesitation on our side to reiterate our position that we have always wanted a ceasefire. It is the Government of Sri Lanka that unilaterally abrogated the ceasefire,” LTTE political head Balasingham Nadesan said on Nov. 8.

Nadesan told the pro-LTTE ‘TamilNet.com’ portal that the Tigers were fighting a defensive war and that it was the government which had abrogated a long-standing ceasefire. In January, the government formally scrapped a five-year-old ceasefire with the LTTE, brokered by the Norwegian government in 2002.

However government officials shot down chances of a truce. “Any ceasefire is possible only after the Tigers give up arms,” defence spokesman and minister Keheliya Rambukwella said.

Heavy fighting since the abrogation of the ceasefire, especially in areas under the control of the LTTE in Sri Lanka’s north known as the Vanni, has displaced tens of thousands civilians.

Acording to United Nations figures at least 230,000 civilians remain trapped in areas north east of Kilinochchi, the LTTE political nerve centre, now besieged by government forces.

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