ECONOMYNEXT- Sri Lanka’s budget deficit up to April 2023 expanded 57 percent from a year ago to 824 billion rupees, driven by interest costs, data showed as exchange rate appreciated amid complementary money and exchange policies.
Measured as a share of debt to projected nominal GDP, the deficit expanded from 2.2 percent to 2.7 percent.
Tax revenues surged 37 percent to 820 billion rupees, amid higher value added and income tax rates.
Current spending grew 46 percent to 1,485 billion rupees.
Current spending before interest went up only 12.6 percent to 666 billion rupees from 590 billion as the Treasury contained the wage bill and increased welfare payments after a currency collapse worsened poverty.
The current account deficit of the budget or total revenues less current spending grew 72 percent to 664.9 billion rupees, largely driven by interest costs.
Capital spending and net lending grew 16 percent to 160.5 billion rupees but was down as a share of GPD to 0.5 percent from 0.6 percent.
The overall budget deficit after grants was 824.3 billion rupees (2.7 percent of GDP) up 57 percent from 524.1 billion rupees a year ago.
Interest costs surged 92 percent to 819 billion rupees in the four months to April 2023.
Interest costs generally go up under an International Monetary Fund program as the central bank abandons artificially low policy rates maintained by liquidity injections which triggered the currency crisis.
As a result, the IMF tracks a primary balance, excluding interest costs in stabilization programs.
In this currency crisis, which ended in default, interest costs rose more than they usually do, due to a flaw in the IMF’s default framework, where a cut-off date for domestic debt restructuring is not given.
As a result, bond yields rose close to 28-30 percent compared to around 20 percent in previous money printing crises.
The primary deficit before interest costs was only 5.26 billion rupees down from 97 billion rupees last year as non-interest spending was contained.
The entire deficit was financed domestically.
The equivalent of 77 billion rupees was repaid on foreign borrowings.
Despite the deficit expanding, despite foreign debt being repaid on a net basis the rupee appreciated, amid deflationary open market operations, especially after a surrender rule was lifted, ending money and exchange policy conflicts.
Sri Lanka and other countries with monetary instability usually print money to keep interest rates low, buying maturing debt (monetizes the gross financing need) and macro-eocnomists blame the budget deficit for inflation and currency trouble.
However, rolling over interest is a paper transaction as long they are sold to real buyers and not the central bank. In the absence of a policy rate enforced by open market operations budget deficits perfectly crowds out the private sector keeping external sector stable.