Sri Lanka mulls binding fiscal rules to keep runaway budgets in check

ECONOMYNEXT – Sri Lanka’s central bank has suggested binding fiscal rules to keep state finances on a planned path, going beyond a current fiscal responsibility law, Central Bank Governor Indrajit Coomaraswamy said.

"The idea is to give the act some teeth," Coomaraswamy said. "At the moment there is no statutory requirement to abide by it."

He said the central bank has exploring the idea with the government.

The current Fiscal Management (Responsibility) Law, has set limits on budget deficits and debt to gross domestic product ratio, but the targets have been pushed back repeatedly.

The government also raised the limit on guarantees, allowing more off-budget spending which tended to understate the budget deficit, analysts say.

A number of countries had binding fiscal rules which were a binding commitment, where limits were set on deficit, debt or revenue, Coomaraswamy said.

"The ideas is to see what limits are appropriate for us," he said.

Under a law with binding commitment, deviations are usually allowed in the case of natural disaster or severe recessions, but the strategy to get back on the path has to be defined.

Sri Lanka started to deficit spend heavily after a central bank was created in 1951 with money printing powers.

Whenever the central bank printed money to keep interest rates down and provide money to give subsidies balance of payments trouble, currency collapses and high inflation was the result, instead of sovereign default.





Before the central bank was created, a ‘hard budget constraint’ in the form of a currency board, kept the rupee fixed and inflation low, allowing Sri Lanka to be only second to Japan in terms of income.

The central bank is separately in drawing up an inflation targeting law, which may place some binding commitments to deliver a low inflation target.

This year, the budget is expected to continue on track to reduce the deficit.

Governor Coomaraswamy said if the budget deficit went out of line the central bank would have to raise interest rates.

In the past there had been ‘forebearance’ he said.

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