ECONOMYNEXT – Sri Lanka’s budget deficit was steeply down in May 2024 to 366.8 billion rupees, from 1,014.7 billion rupees a year ago, helped by higher tax collections and a lower interest bill, official data show.
Tax collections went up 45 percent to 1,491.3 billion rupees up to May 2024 and not-tax revenues rose 38 percent to 125.5 billion rupees, helping boost total revenues 44 percent to 1,616 billion rupees.
Current spending was down 7 percent to 1,792.8 billion rupees.
Interest costs fell 13 percent to 921.1 billion rupees, after a debt restructure and falling interest rates amid monetary policy which has provided stability, which has been seen in the exchange rate.
Current spending has been kept in check with a hiring freeze and restrained wage increases so far. However, unless the public sector is trimmed, wages have to go up in the future.
Sri Lanka’s public sector expanded due to un-employed graduates being given jobs after they engaged in protest before the railway station in Colombo, adding to an expansion of the military for a civil war.
The current account deficit (total revenues less current spending) was down to 176 billion rupees in the first five months, from 817 billion rupees a year earlier.
Capital expenditure was 193 billion rupees, around the same levels as 199.2 billion rupees last year.
Sri Lanka has cut capex to reduce the deficit. Foreign projects were also suspended after a default in 2022.
However after a debt res-structure they will resume, adding to the deficit.
The overall deficit was down to 366.8 billion rupees, from 1,014 billion last year.
After the end of a civil war Sri Lanka’s debt deteriorated as monetary stability was denied under so-called flexible inflation targeting and potential output targeting, where money was printed to cut rates and create inflation levels as high as 5 percent or ‘growth’, blowing the balance of payments apart.
Foreign shortages also trigger capital flight, and makes it difficult to settle maturing debt as the domestic currency loses its attribute of being a cross-border medium of exchange, driving a spate of foreign borrowings, including by the central bank through swaps, analysts have said.
Precipitate rate hikes then push up the interest bill and slows growth worsening the overall budget deficit and debt.
After several years of output shocks driven by inflationary rate cuts, Sri Lanka macroeconomists then cut both rates and taxes to target potential output, driving the country into external default.
Sri Lanka saw severe deteriorations of budgets in the early 1980s as the currency was debased under money supply targeting without a clean float, undermining discrediting economic reforms.
An improving budget also helps bring down interest rates without rate cuts backed by inflationary policy (liquidity tools), which trigger forex shortages.
From September 2022, Sri Lanka’s central bank has provided monetary stability and also allowed the exchange rate to appreciate, barring minor episodes of exchange rate instability which amid weak private credit.
Amid the monetary stability provided, economic activities have started to recover, despite higher taxes.
As private firms raised salaries, pay as you earn taxes have also grown in addition to value added tax.
Based on the projected gross domestic product for 2024, the central government debt to GDP ratio was down to 89.3 percent by May 2024 without counting guaranteed debt.
(Colombo/July29/2024)