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Wednesday June 19th, 2024

Sri Lanka budget deficit down in 2023, tax revenue up 54-pct

BUDGETING WITH BAD MONEY: Sri Lanka’s Finance Ministry brought down the overall deficit absolutely to Rs2,282bn in 2023 (8.3-pct of GDP) from Rs2,460bn (10.2-pct). There was a primary surplus, indicating that interest costs were bigger than the deficit, mostly due to monetary instability.

ECONOMYNEXT – Sri Lanka’s tax collections in 2023 have totalled 2,750 billion rupees, up 55 from 2022 and higher than a revised out-turn presented at a November, official data show.

Sri Lanka originally targeted 3,130 billion rupees of tax collections in 2023 or 10.3-pct of gross domestic product despite an economic contraction but with an inflated economy at hikes in rates, while the International Monetary Fund projected only 3,005 billion rupees (10.1-pct of GDP).

In a budget for 2024 presented to parliament in November, the tax target was revised down to 2,596 billion rupees, or 9.2 percent of GDP.

But the actual collections have turned out to be 2,720 billion rupees for 2023, which is 8.9 percent of GDP.

With non tax revenues of 100 billion rupees, lower than expected, total revenues were 3,048.8 billion rupees or 11 percent of GDP, in slightly lower than the 11.3 percent in the original budget but in line with the 10.9 percent IMF projection.

High Nominal Rates and Monetary Instability

Current spending climbed 34 percent to 4,699 billion rupees in 2023, largely driven by interest cost of 2,455 billion rupees, up 57 percent.

In countries without a credible monetary anchor, frequent balance of payments crises and high inflation drive up nominal interest rates as one currency crises follows another and stabilization program come in their wake.

Sri Lanka is operating flexible inflation targeting (trying to target inflation without a clean floating exchange rate), triggering currency crisis as soon as private credit recovers, when inflationary open market operations are deployed to cut rates.

Sri Lanka started to suffer from severe currency deprecation and inflation after 1978 as the country was cut off without a credible anchor after the IMF’s Second Amendment to its articles.

At the time money supply targeting without a clean float was peddled to the country, just as inflation targeting without a clean float has been peddled now, critics say.

Flexible inflation targeting was also combined by macro-economists with potential output targeting (printing money for growth) after the end of a 30-year civil war, leaving the country with rapidly rising foreign debt and eventual default, instead of a peace dividend.

Deficit

The high current spending driven by interest costs, left the government with a revenue deficit (deficit in the current account of the budget), 1,650 billion rupees, higher than a revised target of 1,632 billion rupees and up 7 percent from 2022.

The overall deficit was contained by sharply cutting capital expenditure to 656.9 billion rupees, from 952.9 billion rupees in 2022.

In 2023 most bilateral projects were halted after the country defaulted in 2022.

The overall deficit came in at 8.3 percent of GDP, slightly higher than the 7.9 percent of GDP projected in the original budget, and 8.0 percent projected by the IMF.

But the overall deficit was sharply lower than the 10.2 percent recorded in 2022. The overall deficit and also down in absolute terms to 2,282 billion rupees in 2023 from 2,460 billion rupees in 2023.

Primary Surplus

The primary account, (deficit before interest) was a surplus of 173.34 billion rupees.

The International Monetary Fund targets the primary deficit in countries with balance of payments crisis, instead of the overall deficit as steep rate hikes are required to correct currency collapses and kill private credit.

Targeting the primary deficit, reduces the incentive for trigger happy central banks to print money to try and reduce the interest bill and trigger further meltdowns of the economy, which has been put in jeopardy by inflationary rate cuts.

A primary surplus indicates that the country’s interest bill is so bad (usually from monetary instability) that it exceeds the overall budget deficit.

The overall budget deficit is usually contained by cutting capex which is not really required in a country going into a monetary meltdown or hyperinflation after rate cuts.

Sri Lanka has rarely recorded primary surpluses, except in extreme crisis years.

In order to bring down deficits, debt, the economic principle is to run a surplus in the current account, which also requires cutting spending as well as revenue gains and long term monetary and exchange rate stability to bring down interest rates and tax rates.

In the run up to the default Sri Lanka has been operating revenue based fiscal consolidation (avoiding spending cuts and allowing a bloated state to expand further in an unusually statist strategy), and also aiming for primary surpluses, while current account and overall deficits deficits worsened.

Overall deficits generally worsen in stabilization years and can be brought down if macro-economists allow people to work and grow their businesses and personal finances without triggering monetary stability by chasing conflicting anchors or printing money to cut rates.

A current account surplus indicates that all current spending is financed by revenues and there is a little left over for capital spending.
(Colombo/Apr27/2024)

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Central banks expect to increase gold reserves after buying 1,037 tonnes in 2023: Survey

ECONOMYNEXT – About 29 percent of central banks in the world intended to increase their gold reserves in 2023, up from 24 percent in 2023 and just 8 percent in 2019, a survey by the World Gold Council showed.

“The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks and rising inflation,” the WGC said.

About 81 percent of 70 central banks that responded to the survey expected global central bank holdings of gold to go up, from 71 percent in 2023.

While in prior years, gold’s “historical position” was the top reason for central banks to hold gold, this factor dropped significantly to number five this year.

This year, the top reason for central banks to hold gold is “long-term store of value / inflation hedge” (88%), followed by “performance during times of crisis” (82%), “effective portfolio diversifier” (75%) and “no default risk” (72%).

Concerns about sanctions were listed as by 23 percent of emerging market central banks (0 advanced).

De-dollarization as a reason to hold gold gained ground, but was not among the main reasons.

About 13 percent of emerging market central banks listed de-dollarization as one of the reasons to buy gold up from 11 percent last year and 6 advanced nations said the same from zero last year.

Around 49 percent of central banks expected gold reserves to be moderately lower five year from now in the 2024 survey, against 49 percent in 2023 and 38 percent in 2022.

About 13 percent of central banks surveyed said US dollar reserves would be significantly lower in the 2024 survey, up from 5 percent in 2023 and 4 percent in 2022. (Colombo/June18/2024)

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Sri Lanka rupee closes weaker at 304.75/305.40 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed weaker at 304.75/305.40 to the US dollar Tuesday, down from 304.15 to the US dollar Friday, dealer said, while some bond yields edged up.

Sri Lanka’s rupee has weakened amid unsterilized excess liquidity from earlier dollar purchases.

Excess liquidity fell from as high as 200 billion rupees, helped by some sales of maturing bills and also allowing some term contracts to run out.

However the central bank has started to inject liquidity again below its policy rate to suppress interest rates.

On Tuesday 30 billion rupees was printed overnight at an average yield of only 8.73 percent.

Separately another 25 billion rupees was printed till June 25 at 8.09 percent to 9.05 percent, which was still below overnight the policy rate of 9.5 percent.

Nobody has so far taken the central bank to court for printing money beyond overnight at rates lower than the overnight rate.

Sri Lanka operates an ad hoc exchange rate regime called ‘flexible exchange rate’ which triggers panic among market participants, as the central bank stays away when spikes in credit either creates import demand or unsterilized credit is used up.

“If large volumes of unsterilized liquidity is left, the exchange rate has to be closely defended to prevent speculation involving early covering of import bills and late selling of exports proceeds,” EN’s economic columnist Bellwether says.

“Just as an appreciating or stable exchange rate leads to late covering of import bills, a falling rates leads to immediate covering of import bills.

“Keeping exchange rates stable is a relatively simple exercise but it is difficult to do so if short term rates are also closely targeted with printed money, as liquidity runs out, as if the country had a free float and no reserve target.”

“When there is a large volume of excess liquidity remaining (except those voluntary deposited for long periods by risk averse banks) the the interest rates structure is under-stated compared to the reported reserves.

“Interest rates would be a little higher than seen in the market if the liquidity was mopped up and domestic credit and imports were blocked to prevent the reserves from being used up.”

In East Asia there is greater knowledge of central bank operational frameworks, though International Monetary Fund driven flawed doctrine are also threatening the monetary stability of those countries, critics say.

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Vietnam selling SBV bills to stabilize the Dong, as Sri Lanka rupee also weakens

Sri Lanka’s rupee started to collapse steeply after the IMF’s Second Amendment in 1978 along with many other countries as flawed operational frameworks gained ground without a credible anchor.

A bond maturing on 15.12.2026 closed at 10.10/30 percent up from 10.05/30 percent Friday.

A bond maturing on 15.10.2027 closed at 10.60/57 flat from 10.60/80 percent.

A bond maturing on 01.07.2028 closed at 11.15/35 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 closed at 11.80/90 percent unchanged.

A bond maturing on 15.10.2030 closed at 11.90/12.00 percent.

A maturing on 10.12.2031 closed at 11.95/12.10 percent.

A bond maturing on 01.10.2032 closed at down at 11.95/12.10 percent, down from 12.00/10 percent. (Colombo/Jun14/2024)

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Sri Lanka’s Ceylon Chamber links up with Gujarat Chamber

ECONOMYNEXT – The Ceylon Chamber of Commerce has signed an agreement with the Southern Gujarat Chamber of Commerce and Industry (SGCCI) to increase trade cooperation between India and Sri Lanka.

The MOU was signed by CCC CEO Buwanekabahu Perera, SGCCI President Ramesh Vaghasia, in the presence of Dr Valsan Vethody, Consul General for Sri Lanka in Mumbai, India.

“With the signing of the MoU, … the Ceylon Chamber of Commerce and SGCCI aim to facilitate trade between the two countries via initiatives such as trade fairs and delegations, business networking events, training programmes,” the Ceylon Chamber said in a statement.

“This partnership will open doors for Sri Lankan businesses to explore opportunities in Surat’s dynamic market and enable the sharing of expertise and resources between the two regions.”

Established in 1940, SGCCI engages with over 12,000 members and indirect ties with more than 2,00,000 members via 150 associations. It promotes trade, commerce, and industry in South Gujarat.

The region’s commercial and economic centre Surat has risen to prominence as the global epicenter for diamond cutting and as India’s textile hub, and is ranked the world’s 4th fastest growing city with a GDP growth rate of 11.5%

Surat’s economic landscape is vibrant and diverse. As India’s 8th largest and Gujarat’s 2nd largest city, it boasts the highest average annual household income in the country.

The nearby Hazira Industrial Area hosts major corporations like Reliance, ESSAR, SHELL, and L&T. (Colombo/Jun18/2024)

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