Due to inefficiency, corruption, fall in income and the mounting expenditure on war, the Sri Lankan government is facing a financial crunch. This is likely to get worse in the future because of a planned rise in defence expenditure.

At last Wednesday's cabinet meeting, President Mahinda Rajapaksa had turned down requests from a number of ministers for more financial allocations, The Sunday Times reported.

A cash strapped Central government had slashed allocations to the Provincial Governments by as much as 60%, the paper said. This would affect on-going grass roots level projects.

In an economy which is highly dependent on tourism, a 23.4% fall in arrivals in the first five months of 2007, and a 40% fall in May,should cause great anxiety. According to the Central Bank, earnings from tourism had fallen by 14.8% in the first four months of this year.

Contributing to the fall in arrivals were factors like travel advisories by Western governments and the closure of the Colombo airport at night in the last three months.

Export of garments has been another major source of income.But due to increased global competition and bad industry practices, 85 factories had to close in 2006 and about 16,000 workers were thrown out of job, Lakbima News reported.

Contributing to the stress in the garment industry is a 35% increase in the Terminal Handling Charge at the Colombo port. Small garment factories, which have been the most vulnerable to hikes in rates and severe competition, have come down from 700 to 350.

As regards the other major export commodity, tea, the Chairman of the Colombo Tea Traders' Association, Tybre Akbarrali, had this to say:"The prevailing situation has not only destroyed the country's image but has become a principal factor for rise of inflation which had a bad impact on the industry during the last year."

Due to the mismatch between the international and domestic oil prices,the state owned Ceylon Petroleum Corporation is running at a loss of LKR (Lanka Rupees) 1360 million.

Sri Lanka is the most militarised county in South Asia with the highest per capita expenditure on defence, according to a Mumbai based think tank. Expenditure on the non-productive defence sector has been growing by leaps and bounds and is set to grow faster. It will pinch the economy when repayment time comes.

According to Jane's Defence Weekly, Sri Lanka has signed a $ 37.6 million deal with China's Poly Technologies. This company would have to be paid a 25% advance, and the balance in ten quarterly instalments. Sri Lanka already owes $ 200 million to another Chinese arms company NORINCO.

Sri Lanka is to buy 3D radars for $ 5 million and five MIG 29s, including a UB trainer to replace the MIG 27s which were bought only in December last year. The manpower in the Security Forces, currently at 250,000, is to be increased by 50,000.

There is really no money to pay for all this. According to The Sunday Times the Secretary to the Treasury has been making this clear.

"The only option that remains is to call upon the public to tighten their belts even further," the paper said. But this is going to betough, as inflation is already at 17%.