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Sri Lanka 2020 budget deficit projected at 7.9-pct of GDP, 2019 gap re-stated up

ECONOMYNEXT – Sri Lanka has re-stated a budget deficit for 2019 an already published number of 6.8 percent of gross domestic product to 9.6 percent while lowering a projection for 2020 to 7.9 percent from an earlier projection of 8.5-9.0 percent in data submitted to parliament.

The finance ministry put back arrears settled in 2020, in to 2019 budget, to widen the previous year’s deficit and lower the 2020 number.

Back to the Future

In 2019 revenue fell below target as the economy slowed from a currency collapse triggered by call money rate targeting in 2018 as credit recovered (printing money) and real effective exchange rate targeting to depreciate the currency.

The new budget documents put back 123 billion rupees in current spending to 2019, taking current expenditure from a published 2,301 billion rupees to 2,516 billion rupees and widening a current account deficit of the budget from 410 billion rupees to 533 billion rupees.

In capital expenditure, 179 billion in foreign financed projects and 119 billion rupees in domestically financed projects were listed under 2019 taking a published deficit from 6.8 percent to 9.6 percent of GDP.

Sri Lanka has had a practice of carrying over spending in the last few months of the year to the following year which are then settled in part with provisional advances and central bank profits in the first quarter of the following year.

However with a change in administration there were complaints that the volume was unusually large.

Similar complaints were made in 2015 about unpaid bills to contractors but budget numbers were not altered.

Cash-Budgets

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Sri Lanka does not have accrual budgeting and produces budget numbers on a cash-basis with neither unpaid bills counted as expenditure nor uncollected taxes in arrears are counted as revenue.

As a result the budgets serve as cash flow statements, for debt markets and other market participants.

In the 2019 budget document presented to parliament arrears has come as a new financing item, though the funds were actually raised or money printed in 2020.

The part accrual accounting of the budget in 2019 may make it difficult to compare data across years.

Sri Lanka has in the past engaged in several practiced to under-state budgets including not counting capital bailouts to state enterprises, and parking some spending of state agencies which do not have revenue as contingent liabilities, critics have said.

However the liabilities eventually end up as national debt, when the ‘contingent’ liabilities are settled or the original bailout securities are rolled over.

2020 Targets

The finance ministry is now targeting a budget deficit of 7.9 percent of gross domestic product for 2020, lower than the earlier 8.5 percent projected in June.

Tax revenues are projected at 8.5 percent of gross domestic product, down from 11.6 percent in 2019, after a series of tax cuts in November 2019 and a Coronavirus hit on the economy.

Total revenues are projected at 9.9 percent of GDP down from 13.2 percent, with provincial council numbers.

The new administration froze state worker salaries and blocked a steep hike to executive officers granted by the last administration and also sharply cut capital expenditure.

Oil prices have also been maintained at current level allowing for taxes to be charged on low priced oil.

However 100,000 unemployed unskilled workers and more graduates are to be hired, raising concerns.

Most of the taxes collected from the public go to pay salaries of state workers which have been progressively expanded with unemployed graduates.

Sri Lanka’s interest rates have come down sharply with negative private credit, money printing and part settlement of foreign loans with foreign reserves, which has also absorbed some of the money printed.

Low interest rates have also helped reduce current expenses.

The finance ministry is projecting a current account deficit of 865 billion rupees compared to a 533 billion last year with arrears pushed back.

Capital expenditure for 2019 was listed as 409 billion rupees with 298 billion rupees pushed back to 2019 as arrears, making the 2019 capex a record 912 billion rupees, which also includes arrears from 2018.

Arrears for past years are not publicly available.

The 2019 deficit is projected at 1,266 billion rupees or 7.9 percent of GDP lower than a 1,341 billion rupees projected in June 2020, by the Finance Ministry and 9.0 percent estimated later.

(Colombo/Nov16/2020)

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