Sri Lanka budget deteriorates in 2014, raising new questions
COLOMBO (EconomyNext) – Sri Lanka’s budget in 2014 had deteriorated sharply despite an optimistic out-turn reported to parliament in late October, official data shows, while raising new question about reported deficit and national debt data in recent years.
The Central Bank’s annual report said the overall budget deficit after grants rose to 6.0 percent of gross domestic product or 591 billion rupees, sharply up from 500 billion and 5.0 percent of GDP revised outturn reported to Parliament in October 2014.
Revenues were down to 1,195 billion rupees, from 1,394 billion reported to Parliament in October 2014.
But current spending at 1,323 billion rupees was slightly below the 1,386 projected in the revised outturn. Current spending rose from 1,205 billion rupees in 2013.
A highly optimistic 0.1 percent of gross domestic product surplus in the current account of the budget (the difference between total revenues and current expenses), a feat not achieved since 1987, was also projected to parliament.
The current account surplus originally projected in the budget was an even more incredible 1.1 percent of gross domestic project.
Ex-finance or deputy finance ministers in People’s Alliance and United People’s Freedom Alliance administration’s starting from G L Peiris in the 1990s had forecast surpluses but had failed to achieve them.
The current account deficit of the budget had deteriorated to 128 billion rupees by December 2014, raising questions how such optimistic numbers had been presented to parliament just two months earlier.
However analysts say it may give an inkling why the Rajapaksa budget was more cautious in giving deceptive handouts or ‘sahana’ than the new administration which ratcheted up state salaries and subsidies in a revised January 2015 budget, worsening balance of payments trouble.
The debt taken to finance such subsidies will burden the ignorant voters and their children who enjoyed some transient happiness for a few months, through unsustainable consumption.
Such viciously deceptive ‘people friendly’ budgets, pursued by Sri Lanka administrations backed by the Janatha Vimukthi Peramuna party in particular such as the post 2004 ‘Rata Perata’ administration generates currency depreciation and backfires directly on the poorest and low wage earners.
The overall deficit in 2014 was contained by cutting capital expenditure.
The 591 billion rupee deficit in 2014 was plugged by 212 billion rupees of foreign financing, down from the 286 billion rupees originally projected in a November 2013 budget. As a result domestic financing rose to 378 billion rupees from a projection of 229 billion rupees. This included at least 35.6 billion rupees in printed money.
The Central Bank’s annual report said there was a further financing of 68.7 billion rupees or 0.7 percent in 2014 to bail out state owned enterprises which was not included in domestic financing. No explanation was given for why it was not included.
Sri Lanka has also excluded 95.9 billion rupees (around one percent of GDP) debt taken up to bailout out state enterprises from the reported domestic central government domestic debt of 4,277 billion rupees.
This is made up of 4.39 billion rupees of Treasury bonds issued to CWE in 2003, a state trading firm, 78.4 billion rupees issued to Ceylon Petroleum Corporation in 2013 and 13.12 billion rupees give to capitalize SriLankan Airlines in 2013. Bailouts of state-run Bank of Ceylon and People’s Bank in the 1990s however were reported as debt.
No explanation was given why they were excluded and whether interest on those bonds is charged to the budget. In another revelation, the Central Bank annual report said interest in ongoing projects were capitalized from 2013 under a circular issued in November 29, 2013.
In 2013, 18.9 billion rupees had been capitalized and in 2014, 7.2 billion rupees. Capitalization of interest understates current spending and bloats capital spending, and will show a lower current account deficit compared to prior years, unless they were also adjusted accordingly.
The Rajapaksa administration started to count grants as revenue in a bid to reduce the reported deficit figure departing from earlier practice, and adjustments were made to prior years, contracting original deficits reported in the 1980s and 1990s.
The Rajapaksa administration also made the Road Development Authority, borrow directly outside the budget from Treasury guarantees, again departing from the previous practice of on-lending, to what is clearly a non-revenue agency, against understating the overall deficit and government debt.
The Central Bank Annual Report has revealed that the RDA has borrowed 5.1 billion rupees in 2012. In 2013 the debt has climbed to 23.3 billion rupees and in 2014 it had climbed to 58.3 billion rupees.
It is not clear how these debts are service as the RDA is a non-revenue agency, except for some expressways.
If only the debt repayments are brought to the budget, the total capital expenditure from 2012 are understated, compared to previous practice.
Last year the Rajapaksa administration also stopped reporting monthly budget data to the public through the Central Bank’s weekly data, reducing fiscal transparency.
The practice has not been resumed by the new administration yet.
CORRECTION – The budget deficit in 2014 was 591 billion rupees not 691 billion rupees.