Sri Lanka 2019, 2020 budget deficit data controversy hots up

ECONOMYNEXT – Suddenly changing published data to overstating a budget deficit for 2019 and understating a deficit for 2020, flouting accounting conventions will undermine investor confidence and backfire on the country, opposition legislator Harsha de Silva warned.

Sri Lanka’s Finance Ministry in November suddenly submitted data to parliament claiming that the 2019 budget deficit was 9.6 percent of gross domestic product and not 6.8 percent as earlier reported and projected a 7.9 percent deficit for 2020.

“It is not possible to deceive international financial markets with this type of data,” opposition legislator Harsha de Silva warned.

“We ourselves will be deceived. Our people will suffer. Greece got into serious trouble by trying numbers magic. They mis-reported revenues and expenses. 2010 May Greece said the budget deficit was 7.5 percent of GDP.

“Later they said it was 12.5 percent. The International Monetary Fund later said it was 15.4 percent.”

De Silva said the numbers did not match with the data already published by the central bank.

The Finance Ministry had pushed back expenses of 421 billion rupees to 2019 though they were settled in 2020 to lower the deficit in 2020 and hike the deficit in 2019.

In a further complication on November 17, a budget for 2021 showed a deficit projection as 8.9 percent, worse than the 7.9 percent in 2020, which shows a reversal of fiscal management and not the fiscal consolidation usually expected in budgets.

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However Sri Lanka prepares budget on a cash basis, and over time the numbers balance out.

Gona, Mee Haraka budget

“There is a recognized accounting convention in making fiscal data,” de Silva said. “The data is prepared on a cash basis. It is not done on an accrual basis.

“It is done in the same way every year. For example in 2015 when the new government came, I asked the Treasury how much arrears there were. I was told there were over 240 billion rupees on unsettled bills.

“But that government did not put them into 2014. They were accounted for in 2015. The revenue is recorded that way so is revenue.

“In that case revenues should also be put back because the taxes came from the previous year.

“There is no hybrid accounting system here or anywhere else. There cannot be a cow and buffalo (ela harakai mee harakai) budgets.”

Education Minister Bandula Gunewardene charged that in 2016, then Finance Minister Ravi Karunanayake had also mis-represented data.

He said non-existent data had been presented.

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De Silva said the projected nominal GDP for 2021 of 16,030 billion rupee also did not gel with growth projections and expected inflation. He said it was not possible to fudge numbers for a long time.

He said the 2020 deficit would be higher if the GDP number is lower.

“Investors go to know about it,” de Silva said. “That is why they exited Greek bonds. I am not equaling Sri Lanka to Greece but there are lessons to be learnt.”

Sri Lanka’s sovereign bonds are also selling at a discount now.

Analysts have warned that Sri Lanka has a Latin America style central bank where the effects on the economy of a sovereign default could be different to Greece.

Monetary instability and currency falls in 2018 and 2020 had earned the country two downgrades including a total of three notches to Caa1 (CCC+) by Moody’s which has virtually locked the country out of capital markets.

Greece could not depreciate the currency as it was part of a Euro monetary union and bank deposits, salaries or most pensions of the people did not melt away.

But in Latin America all debt, public and private as well as salaries are melt as currencies fall, making vast swathes of people destitute.

The economic program of the former administration where de Silva was a state minister was also brought down by a two successive currency collapses, coming from call money rate targeting and Real Effective Exchange Rate Targeting, critics have said.

With the IMF coming up with never ending programs without fixing the central bank, a so-called backlash against what was called neo-liberalism – the type of economics practiced in East Asia with good central banks – emerged in the region starting from Chile. (Colombo/Nov18/2020)

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