ECONOMYNEXT – Sri Lanka has financed a 13.9 percent of gross domestic product budget gap in 2020 including at least 3.4 percent of GDP in central bank credit, data show though the number was lowered to 11.7 percent by reclassifying a part of the financing back to the past.
The central government debt also went up by around 14 percent to 101 percent of GDP.
Sri Lanka’s finance ministry in early 2020 forecasted the budget deficit at 7.9 percent of GDP in 2020 after slashing taxes in a so-called ‘fiscal stimulus’.
Meanwhile the central bank started a money printing spree in a ‘monetary stimulus’ tearing the balance of payments apart.
Central Bank financing of the government was disclosed as 505 billion rupees or about 3.4 percent of GDP in monetary data, though it is not clear whether it is the actual net credit number.
In 2020 however the central bank reduced its provisional advances to the government as tax revenues plunged.
Sri Lanka ran a 2.3 billion US dollar balance of payments deficit in the wake of the injections.
Back to the Past
In a budget for 2020, arrears from 2019 were excluded by the incoming fiscal team following a change in administration.
Sri Lanka has a practice of running arrears in the tail end of the year to show a lower deficit number.
Sri Lanka classified 123 billion rupees of current payment arrears financed in 2020 to 2019, though the country runs a cash basis budget raising concerns.
The reclassification reduced the current spend in 2020 by 0.8 percent in 2020 and increased the 2019 number by the same amount, according to fiscal data published by the central bank, following the basis in a budgets presented to parliament for 2020.
In the capital budget, 2.0 percent of GDP worth payments were reclassified into the 2019, raising the deficit in 2019 by a similar amount.
The 2019 budget deficit which was previously reported as 6.8 percent of GDP went up to 9.6 percent of GDP as a result.
The overall budget deficit was listed to be 11.1 percent of GDP and not the 13.9 percent financed in 2020.
The deficit as a share of GDP went up partly due to a contraction in nominal GDP coming from a Coronavirus pandemic and difficulties in re-financing foreign debt, after the monetary and fiscal stimulus triggered credit downgrades.
2020 total revenues fell 27 percent to 1,373 billion rupees due to combined tax and Coronavirus shock. Tax revenues fell 30 percent to 1,216 billion rupees.
Taxes have started to improve after the economy re-opened but import controls are driving credit and spending to areas which are considered ‘desirable’ by the bureaucracy and the elected ruling class, which bring lower taxes.
Current spending rose 5 percent to 2,548 after removing 123.4 billion in arrears.
The capital budget fell 46 percent to 492 billion rupees, after reclassifying 299.2 billion rupees into the past.
The deficit was shown as 1,667 billion rupees or 11.1 percent of GDP. If the arrears were included the deficit would have been 2.085 billion rupees or 13.9 percent of GDP.
The central government debt however went up by 2,085 billion rupees to 15,117 billion rupees to 101 percent of GDP from 86.8 percent. The increase in debt also includes depreciation.
Sri Lanka pushed up the rupee dollar exchange rate in the last week of December.
In the past Sri Lanka understated fiscal numbers by excluding bonds given to loss making state enterprises from the national debt.
The bonds are later included in national debt when they are rolled over making the debt grow faster than the deficit. (Colombo/May06/2021)