THE COLOMBO PLAN

exports of the three main products. The rate of income tax has been raised since the war and the incidence of export duties is heavy. It has been estimated that taxation already amounts to over 20 per cent, of the national income, and the Government consider that they cannot base their programme on any assumption of an increased yield, beyond that already taken into account in the expected contribution from budgetary surpluses. The internal expenditure of Rs. 840 million involved in the programme should have no serious inflationary effect, and the external finance needed to implement the programme will largely be required to meet the balance of payments deficit arising from the increased level of developmental imports. The development expenditure to be financed from internal sources will average about R5.135 million annually. This compares with an average expenditure over the years 1947-48 to 1950-51 of R5.116 million, which is being incurred on the Government's current programme due to be completed in 1953. The difference between the average expenditures of R5.116 million and R5.135 million is the measure of the additional effort which Ceylon is itself ready to expend on the 1951-57 programme. 15. At the present time Ceylon's balance of payments has changed from a deficit of Rs.2B million in 1949 to an estimated surplus for 1950 of Rs.loo million ; but, apart from the uncertainty of how long this will continue, it is inadequate to cover the increased imports which will be necessary to carry out the programme. Indeed it is the view of the Government that, even excluding new development, Ceylon is likely to go into deficit during the next few years if there is some reduction in the prevailing high export prices. The vulnerability of the position is illustrated by the fact that a reduction of only 10 per cent, in export income would amount to approximately R5.135 million annually. In these circumstances, while it is clearly difficult to forecast the balance of payments over the next few years with any accuracy, the Government estimate that to implement the six-year development programme would bring the balance of payments deficit over the period up to a total as high as Rs.Boo million. They have in this estimate assumed that the prices of the three export commodities will fall below the high prices now prevailing, and used an approximate average price for rubber of Is. Bd. per lb., for tea of 3s. 6d. per lb., and for copra of £67 per ton. (Additional information on Ceylon's balance of payments will be found in Appendix 2.) They propose to find R5.250 million of the total deficit of Rs.Boo million by drawing on Ceylon's sterling balances. On the assumptions made above, this will still leave a deficit of R5.550 million. In a situation where the total of the budgetary surpluses and the full amount of loans which can be raised from the public are being devoted to development, the Government deem it imprudent to draw down their sterling balances by more than R5.250 million, since the amount not needed as a currency reserve is required to cushion the economy against the uncertainties of international trade. 16. On account of the rising population the current rate of investment is doing no more than maintain the present standard of living and the social services which now form an essential part of that standard. The Government of Ceylon consider that further progress, on which political and social stability in the Island may well depend, cannot be achieved without a higher level of capital investment. Moreover, failure to implement the six-year programme would mean that diversification and the expansion of food production so necessary to the stability of the economy would have to be indefinitely postponed.

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