ECONOMYNEXT – Sri Lanka has recorded a budget deficit of 443 billion rupees or about 2.8 percent of gross domestic product in the first quarter of 2020 amid slightly lower revenues, Finance Ministry data showed, mostly due to a spike in spending.
Total revenues were 420 billion rupees down from 442 billion rupees a year earlier, partly helped by non-tax revenues working out to about 2.9 percent of gross domestic product.
Sri Lanka is expecting full year revenues of 1,450 billion rupees or 9.2 percent of GDP down 440 billion rupees, amid tax cuts and an economic downturn from Coronavirus.
The tax cuts or ‘fiscal stimulus; which, coupled with rates cuts and liquidity injections which led to forex shortages, helped trigger a rating downgrade and a sell-off sovereign bonds.
Earlier data showed that Sri Lanka had recorded 50 billion rupees of non-tax revenues, up to February 2020, helped by a 24 billion rupee profit transfer made as a liquidity injection which expanded reserve money.
It was the first of the so-called ‘helicopter drops’ of printed money which triggered forex shortages, raised fears about the ability to repay foreign debt, and has now led to severe import controls which is further hitting businesses and the economy, undermining a recovery from a Coronavirus crisis.
Though many countries went through Coronavirus lockdowns which hit economic activity, Sri Lanka has slammed tight import controls not seen since the 1970s, in the wake of unprecedented money printing and ‘stimulus’.
The ‘Nixon shock’ style hit on the economy is expected to further hit state revenues, businesses, worsening bad loans.
The finance ministry said current spending rose to 715 billion rupees from 576 billion rupees (about 4.6 percent of GDP).
Sri Lanka had to settle payment arrears and unaccounted for expenditure carried forward from 2019, where a deficit of 6.8 percent was recorded, the finance ministry said.
“The actual deficit for 2019 would be 9.0 percent of GDP with the inclusion of all unpaid claims,” the Finance Ministry said.
Sri Lanka however accounts for the budget on a cash basis, directly showing the impact on the credit system from government fiscal activities and there is no accrual budgeting to confuse users of budget data.
Sri Lanka has had a practice of carrying over payment some arrears to the following year.
In 2019 Sri Lanka did not print large volumes of money and sterilized dollar purchases steadily until around July 2020, keeping the external sector stable, the balance of payments in surplus, and the ability to repay foreign loans intact.
Data showed that108 billion rupees of liquidity had been mopped up, helping build forex reserves in 2019. In 2018, when there was balance of payments trouble and a credit downgrade 246 billion rupees was printed.
The current account deficit of the budget or the gap between total revenues and current spending rose to 295 billion rupees in the first quarter of 2020 or .19 percent of GDP, up from 133 billion rupees a year earlier.
Capital expenditure for the first quarter was 150 billion rupees, marginally down from 154 billion rupees a year earlier, taking the overall deficit to around 440 billion rupees or about 2.8 percent of GDP, up from 287 billion rupees a year earlier.
The overal deficit for the quarter is a little higher than total revenues, for the quarter, showing the pressure on finances. No separate data on grants were available, but up to February 1.9 billion in grants had been received.
Sri Lanka is expecting an overall budget deficit of about 8.5 percent for the full year or 1,349 billion rupees, up from 1,016 billion rupees a year earlier, or a little under revenues.
In the first quarter 360 billion rupees were allocated for loan repayment, the finance ministry said.
The 2020 budget is planning to raise 850 billion rupees from domestic markets and 491 billion rupees from foreign sources to finance the 1,341 billion rupee expected deficit.
Sri Lanka has not passed a budget for 2020 in parliament and only passed a vote-on-account for the first four months of the year.
A mini-budget was prepared for March to June and a second one till August citing presidential powers involving total outlays of 1,224 billion rupees which includes debt repayment.
The outlays for the Department of Treasury operations were 628.5 billion rupees, of which 268.42 billion rupees was for current spending and 360.1 billion rupees for capital payments.
A mini-budget from June to August showed outlays of 1,043 billion rupees of which 644 were for current spending and 398 billion rupees for capital, including debt repayment.
The outlays for the Department of Treasury operations were 486 billion rupees, of which 224.42 billion rupees was for current spending and 262.0 billion rupees for capital payments.