ECONOMYNEXT – Sri Lanka’s nominal central government budget deficit has expanded in the five months to May 2019 from a year earlier, but there have surpluses at state enterprises while foreign debt has contracted amid currency appreciation, official data show.
Revenues fell 1.0 percent to 778.9 billion rupees after monetary instability in 2018 led to a credit contraction and spending restraint with capital flight worsened after a political crisis in October 2018.
Up to April revenues were down 3.9 percent, indicating a slight recovery, data released by the central bank show.
Current spending expanded at a double digit 13.5 percent to 958.8 billion rupees, sending the current account deficit of the budget soaring to 188.8 billion rupees up to May 2019 from 66 billion rupees in 2018.
Capital spending also grew 3.4 percent to 247.3 billion rupees. The Treasury has asked for a cut in capital spending for 2019.
The budget deficit expanded 42 percent to 434.8 billion rupees up to May or 2.8 percent of gross domestic product from 302.1 billion rupees last year.
Domestic borrowings had grown to about 340 billion rupees from around 210 billion rupees last year, but interest rates in Sri Lanka had fallen amid weak private credit.
In 2018 monetary and economic instability was worsened by borrowings at state enterprises. Analysts have pointed to data showing how the Ceylon Petroleum Corporation may have sabotaged a price formula by borrowing dollars, generating massive losses.
But from December 2018 to May 2019, state enterprises borrowings fell absolutely by 29 billion rupees, compared to a 218 billion rupees increase in 2018.
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With the central bank no longer printing money, but withdrawing liquidity from money markets amid weak credit the rupee had appreciated.
Despite about 90 billion rupees of new foreign debt taken to finance the deficit in 2019, outstanding foreign debt had fallen from 5.95 billion rupees from 5.86 billion rupees.
In 2018, despite posting a deficit of 685 billion rupees, down from 761 billion rupees a year earlier, the national debt ballooned increasing the central government deficit after depreciation to 1.6 trillion rupees.
Sri Lanka rupee collapsed from 153 to 182 to the US dollar in 2018 due to the operation of a so-called ‘flexible exchange rate’ or a remarkably unstable soft-peg based on contradictory dual anchors and multiple convertibility undertakings, analysts have said. The rupee has since appreciated to about 176 to the US dollar.
Amid currency appreciation, the deficit implied by the increase in debt was only 154.7 billion rupees.
Analysts have pointed out that there is no prosperity at the end of monetary destruction, which goes against the economic principle of sound money, but is followed by countries that want to remain a so-called ‘miserable developing country’. (Colombo/Aug05/2019)