Sri Lanka budget deficit overshoots 2015 target in July

ECONOMYNEXT – Sri Lanka’s budget deficit has been fully domestically financed up to July 2015, with the seven month gap of 523 billion rupees overshooting the full year target of 499 billion rupees, official data show.

Domestic financing of 523 billion rupees in fact exceeded the total deficit, with a net payback of 12.1 billion rupees of foreign debt, generating a steep shock on domestic credit system which was partly absorbed liquidity releases which triggered a run down on foreign reserves.

Up to July Sri Lanka raised 721 billion rupees of revenues, made up of 663 billion rupees of tax revenues and 58.2 billion rupees of non-tax revenues.

Current spending was 954 billion rupees, generating a deficit in the currency account of the budget (revenue deficit) of 232 billion rupees.

The government also maintained capital spending at 290.8 billion rupees, generating the overall deficit of 523 billion rupees or around 4.7 percent of estimated gross domestic product at the time of the budget, compared to a full year target of 499 billion rupees or 4.4 percent of GDP.

The International Monetary Fund has said the full year budget may be close to 6.0 percent of GDP.

Comparison data is not available for 2014 as the ousted Rajapaksa administration suppressed monthly releases of fiscal data, reducing fiscal transparency.

But data released to journalists during a Central Bank media conference showed that tax revenues up to July grew 13 percent and budget deficit was

Sri Lanka domestic budget and off-budget financing reached these levels in 2011 when state energy enterprises borrowed close to 2.0 percent of GDP from state banks adding to the pressure on the domestic credit system and triggering a balance of payments crisis.

In 2011 and 2012 the Central Bank indirectly financed the subsidies through sterilized foreign exchange sales.

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In early 2015 the borrowings were financed by liquidity releases, involving termination of repurchase deals involving borrowed securities and outright monetization (printing money) began after June.

Up to June official data showed that only 68.9 billion rupees as coming from Central Bank credit, as monetization is recognized only when outright purchases of Treasuries.

This year heavy domestic dependence on the budget came from sharply higher expenditure and a failure to sell a 1.5 billion US dollar bond in capital markets.

Sri Lanka was only able to sell a 650 million dollar sovereign bond which was only little above 500 million maturing deal, in 2015. Foreign investors in rupee bonds also started to sell out steadily after a rate cut spooked them in April.

The new administration gave salary hikes, pension increases and subsidies, popularly known as ‘sahana’ or ‘benefits’ a dangerously deceptive political practice in the country, for which the people eventually pay through higher taxes, currency depreciation and inflation.

The Treasury has increased some taxes, but monetary policy continues to be loose, which analysts say is dangerous.

In 2004, parties backed by the Janatha Vimukthi Peramuna a fiscally irresponsible party which analysts is the most dangerous to the poor, Sri Lanka’s elected ruling class re-started the deception, expanding the state to place renewed burdens on the poor and helping build what is known as a ‘fiscal Ponzi’.

(Colombo/Oct12/2015)

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