ECONOMYNEXT- Sri Lanka has raised the limit on Treasury guarantees, which allows off-balance sheet borrowing and spending through incorporated state agencies outside the central government to 15 percent of gross domestic product from the current 10 percent.
In 2003 under an economic framework based on monetary stability to protect the poor and fiscal restraint to reduce the burden of the state on the public, a Fiscal Responsibility law, was brought to limit Treasury guarantees to 5 percent of GDP.
Sri Lanka’s elected ruling class then proceeded to borrow and spend pushing an anti-austerity ideology, raising Treasury guarantee limits to limit and pushing forward goalposts in the law.
To reduce the burden of the state on the poor and private citizens the national was targeted to be limited to 65 percent of GDP by 2013.
Central government borrowings – without Treasury guarantees – rose to 101 percent of GDP in 2020, after tax cuts for ‘fiscal stimulus’ amid a Covid-19 crisis.
In the changes to the law passed on June 08, the goal post was shifted to 2030.
Treasury guarantees are mostly use pump savings of ordinary people in state banks into loss making state enterprises to further an anti-privatization ideology.
By 2020 December Treasury guarantees amounted to 1.34 trillion rupees or 8.9 percent of GDP though not all of it was utilized.
Around two billion US dollars of Treasury guarantees have also been issued to cover forced unhedged forex borrowings of Ceylon Petroleum Corporation, which is prevented from buying dollars due to forex shortage coming from call-money rate targeting, output gap targeting or outright monetization of debt.
However in 2020, Sri Lanka’s credit was downgrade to ‘CCC’. (Colombo/June08/2021)