Sri Lanka budget deficit to reach 7-pct of GDP in 2019: Finance Ministry

ECONOMYNEXT – Sri Lanka’s budget deficit could reach 7 percent of gross domestic product in 2019, the finance ministry said, with revenues falling after the latest collapse of the island’s highly unstable soft-pegged exchange rate regime.

“The expected fiscal deficit for 2019 will be more than the estimated and could settle around 7 percent of GDP, due to both a significant dip in revenue than expected mainly due to slow growth and increase in election related spending,” the finance ministry said in a statement.

‘..[T]he Sri Lankan economy has recorded a less than 2 percent growth in GDP together with rising inflation outlook.”

Analysts had warned that the contradictory dual anchor regime in backed by an International Monetary Fund deal with a 8 percent inflation ceiling (domestic anchor) and foreign reserve target (involving pegging or an external anchor called a ‘flexible exchange rate’), would generate monetary instability and stagflation.

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Sri Lanka’s newly elected regime has announced a series of tax cuts including cutting value added tax from 15 percent to 8 percent, to boost economic activity. Income tax of construction firms will be halved to 14 percent from 28 percent.

The tax free threshold for personal income tax would be raised to 250,000 from 100,000 rupees a month.

The finance ministry said the tax cuts would be followed by expenditure cuts and state enterprise reform.

Cabinet ministers had been cut, and non-priority expenditures have been restricted.

“Ministries, Departments, state enterprises and other institutions…must…control their expenditures, including managing the staff, establishment costs, restricting vehicle purchases, building and office spaces and undue year end purchases,” the finance ministry said.

“..[T]he low growth in credit and monetary aggregates along with underperforming economy, there is leeway to provide a substantial fiscal and credit stimulus to increase aggregate demand in the economy,: the statement said.
“Hence this is timely as it stimulates economic activities and ease the tax burden on the general public.

“This will also create a conducive environment for the private sector for their business planning and investment decisions thereby more economic activities will be generated in the short to medium term, boosting economic growth.”

Sri Lanka is expecting to end 2020 with a deficit or 5-pct of GDP an official said.

The tax cuts would also reduce state expenditure, the statement said.

Analysts have observed that private credit usually recovers from the collapse of a currency after about 18 months, if the economy is left undisturbed.

Balance of payments trouble usually comes to Sri Lanka when private credit recovers and liquidity is injected by the central bank to keep interest rates down.

In 2018, two runs on the rupee were triggered with liquidity injections just as the economy was recovering from a currency collapse in 2015/2016.

In 2015, the deficit expanded to 7.6 percent of GDP when a so-called, 100-day stimulus was given and fuel prices were cut, amid a very strong recovery in private credit, from a currency collapse in 2012. (Rupee, Sri Lanka, in trouble after Keynesian stimulus)
Colombo/Dec02/2019)