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Sri Lanka 2020 first half budget deficit up 41-pct, taxes down 28-pct

ECONOMYNEXT – Sri Lanka’s tax revenues have fallen 28 percent 580.8 billion rupees in the first half of 2020, the overall deficit grew 41 percent to 737 billion rupees, while foreign borrowings were negative, official data shows, driving domestic borrowing and central bank financing up.

Sri Lanka’s tax revenues have been hit by a combination of a ‘fiscal stimulus’ at the beginning of the year, a Coronavirus containment measures and money printing by the central bank, which had triggered import controls.

Deficit

Total revenues fell 25 percent to 663.3 billion rupees from 888 billion rupees last year, with tax revenues down from 811.6 billion rupees to 580.8 billion rupees.

Non-tax revenues rose 7.9 percent to 82.4 billion rupees, while grants rose to 2.1 billion rupees from 600 million rupees last year.

Current spending grew 10 percent to 1,237.4 billion rupees driving the current account deficit of the budget up 147 percent to 574 billion rupees.

The overall budget deficit grew at a slower 41 percent to 735 billion rupees, with capital expenditure slashed 44 percent to 163.7 billion rupees.

The overall deficit grew to 4.7 percent of gross domestic product for the first half, compared to an 8.5 percent deficit projection for the full year 2020 made by the Finance Ministry based on the then expected GDP for 2020.

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A contraction of the economy would drive the deficit number higher.

Financing

Sri Lanka had borrowed a record 882.5 billion rupees domestically, up from 463 billion rupees last year amid a net repayment of 146 billion rupees for foreign loans.

Negative foreign borrowings tend to contract the trade or current account deficit and could even push it into surplus. Trade deficits are primarily driven by financial account inflows.

Domestic borrowings include 193.7 billion rupees from the central bank which partly reflect reserve appropriations made for debt repayments.

But liquidity injections could drive private credit and create forex shortages in a soft-pegged monetary regime.

Sri Lanka’s credit was downgraded to B- by Fitch and Standard and Poor’s amid shock tax cuts in the form of a fiscal stimulus (regime uncertainty) and rate cuts and liquidity injections which led to a collapse of the currency (monetary instability), raising fears of debt repayment.

After a contraction of private credit in May and June driven by a collapse in consumption, the rupee has stabilized.

However the central bank is now also re-financing private credit which may hit the exchange rate and trigger forex shortages when credit picks up, analysts have warned.

Debt

Sri Lanka has sufficient reserves to repay a maturing bond in October and repay the balance 2.5 billion US dollars of foreign debt due this year, officials have said.

While the deficit calculated in terms of revenues was 736 billion rupees Sri Lanka’s national debt rose by 1,020 billion rupees to 14.05 trillion rupees.

The debt to GDP ratio based on the last available GDP projection had risen to 89.5 percent by June from 86.3 percent in December.

(Colombo/Sep02/2020)