Sri Lanka government bank overdraft tops half a trillion rupees

ECONOMYNEXT – A Sri Lanka government overdraft by mostly at state-run banks had topped half a trillion rupees by August 2020, spiking over 140 percent, official data showed as the budget deficit soared following a tax cut for ‘stimulus’ and import controls and a Coronavirus crisis hit revenues.

The Treasury’s bank overdraft reached a historic high of 541.5 billion rupees by August 2020, rising 147 percent from 2019 billion rupees a year earlier, a finance ministry report showed.

The overdraft in December 2019, just as the tax cuts were ordered was 274.3 billion rupees.

Sri Lanka’s tax revenues fell to 801.4 billion rupees down 556 billion rupees from an estimated 1,358 billion rupees as Coronavirus lockdowns and import controls compressed revenues.

Customs import duty fell 66 percent from 140 billion rupees to 73.2 billion rupees, and a ports and airports levy fell 43 percent to 71 billion rupees from 115 billion rupees.

In Sri Lanka there is a strong Mercantilist belief that currency falls and balance of payments troubles come from imports rather than credit and money printing.

When import revenues fall, money is printed, triggering outflows in non-controlled items, out of sync with inflows, putting further pressure on the currency and balance of payments.

Interest rates have also fallen amid money printing. However foreign reserves are falling with financial account outflows, which analysts say points to below market rates to keep the external sector in balance already.

Unlike Western nations which have been handing out untargeted cash, Sri Lanka’s government has directed spending to the neediest, though state workers have been paid full salary. A salary hike initiated the by the last administration had been shelved.

However unemployed graduates, who have a history of running a scheme to get hold of tax money through state jobs and pensions, after earning degree at the expense of society, are being hired to expand an already bloated sector.

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Also another 100,000 least educated persons would also be hired.

Sri Lanka’s total expenditure was 1,883 billion rupees up to August, and revenues 906 billion rupees giving a budget deficit of 977 billion rupees.

By August 171 billion rupees had been printed (central bank credit) for the budget, though a part had gone to repay foreign loans through the forex reserves. (Colombo/Jan03/2021)

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