Sri Lanka aims for lowest deficit in decades, banks on returning foreign bond buyers
ECONOMYNEXT – Sri Lanka has claimed a budget deficit of 5.3 percent of gross domestic product for 2018, amid monetary instability and capital flight, and has aimed for the lowest deficit in decades of 4.4 percent of GDP, banking on foreign investors to come back to rupee bonds.
The overall policy coherence was maintained in the budget, except for hiccups such as a 3.5 percent e-commerce tax.
A budget for 2018 placed a revised deficit for 2018 at 5.3 percent of gross domestic product, which can change when the final GDP number is compiled by the statistics office.
Over the past two years, the out-turn at budget time has come in at about 0.2 percent lower than the final number, compared to earlier years when it was out by a large margin.
Sri Lanka posted a 5.5 percent of GDP deficit in 2017 and a 5.4 percent of GDP deficit in 2013.
For 2019, Sri Lanka is aiming for an ambitious deficit of 4.4 percent of GDP. Sri Lanka last recorded a deficit of 4.5 percent of GDP in 1977.
From then on, deficits deteriorated with a collapsing currency triggering a period of unprecedented monetary instability and high inflation which only ended in 1995, when A S Jayewardene was appointed Central Bank Governor.
The 2019 budget expects ambitious tax and non-tax revenue growth of 21 percent to 2,451 billion rupees (15.7 percent of GDL).
In 2018, Sri Lanka planned for revenue to grow to 2,316 billion rupees from 1,924 billion rupees, but only achieved an increase to 2,013 billion rupees (14.0 percent) with money printing by the Central Bank to keep artificially low rates generating monetary instability and trade restrictions.
In 2019, Sri Lanka is expecting current spending to grow 10.7 percent to 2,415 billion rupees or about 15.5 percent of GDP.
Current spending grew from 2,021 billion rupees in 2017, maintained at a GDP of 15.2 percent for two years.
In 2019, Sri Lanka is planning a 36 billion rupee surplus in the current account of the budget, an outcome which has not been achieved since 1987 though repeated wishful estimates are made.
Capital spending has been placed at 734 billion rupees, up 21 percent from 604 billion rupees in 2018, which was lower than the 750 billion rupees originally planned.
Sri Lanka is aiming for an ambitious overall deficit of 685 billion rupees in 2019 after grants of 12 billion rupees, down from 761 billion rupees in 2018.
The budget is expecting a steep rise in domestic financing to 630 billion rupees in 2019, up from 296 billion rupees in 2018.
For 2019, Sri Lanka is expecting 180 billion rupee positive inflow into bond markets by foreign investors 362 billion rupees raised from domestic investors and 88 billion rupees of bank borrowings.
In 2018, a 296 billion rupee domestic financing number was made up of 279 billion rupees of borrowings from non-bank sources, 38 billion rupees of bank borrowings and 108 billion rupees of divestiture proceeds.
In 2018, there had been 129 billion rupees of capital flight by foreign investors in bonds. Sri Lanka’s Central Bank generated monetary instability in 2018, cutting rates with printed money to keep rates artificially down.
There was also an incident of resorting to bank overdrafts to repay bonds. Resorting to bank overdraft generates monetary instability and currency pressures as banks may short statutory reserves expanding base money or to central bank discount windows.
In Sri Lanka, currency depreciation is not counted in the budget deficit, though it is a cashflow item for debt payback. However, currency deprecation expands the debt to GDP number outside of the deficit.