ECONOMYNEXT – Sri Lanka has seen some recovery in state revenues in the first four months of 2021 as the economy operated with minimal Coronavirus controls, but spending has rapidly accelerated compared to 2019, before a fiscal ‘stimulus’, official fiscal data show.
Sri Lanka collected 116.2 billion rupees of tax and non-tax revenues in January 2021 down 22 percent before a fiscal ‘stimulus’ in December 2019, where taxes were slashed without parliamentary approval, data show.
In 2020 138.6 billion in revenues were collected.
February revenues at 127.2 billion rupees were down 17 percent from the 2019 level of 149.9 billion in 2019 and 179.1 billion in 2020.
In March 2021 revenues recovered to 142 billion rupees, slightly higher than 138.6 billion rupees in 2019, before the tax cuts.
However in March 2021 current spending had gone up to 308 billion rupees from 138 billion rupees in 2019.
Current spending in the first four months had grown to 890 billion rupees from 750 billion rupees in 2019.
A supplementary estimate was brought to further expand spending.
Sri Lanka slashed taxes in December 2019 in a fiscal ‘stimulus’ and also cut rates and started injecting money at an unprecedented pace in 2021 in a monetary ‘stimulus’ blowing the balance of payments wide open.
Liquidity injections through mass-acquisition of Treasury bills were made despite Sri Lanka having to make debt repayments and having a weak credit rating and similar injections in 2015, 2018 triggering currency crises.
The liquidity injections were made partly to make up for lost revenues and partly to defend a pattern of interest rates in gilt based on an extraordinary idea that money printing will lower the total interest bill of the government and therefore the deficit.
However the defence of interest rates in gilt markets not only monetized the current debt but also turned maturing debt from past years in to liquidity (reserve money), triggering a rapid unraveling of the balance of payments.
Injections from around August 2019, which ended and later reversed contractionary sales of central bank held securities, had already reversed the collection of monetary reserves when the fiscal and monetary stimulus was initiated from December.
Classical have traded the problem to the failure of John Maynard Keynes, a British Treasury official, to understand the link between the trade deficit, domestic credit and international payments in the late 1920s generally described as the ‘transfer’ problem.
The mistake was illustrated in a 1929 debate between Keynes, Swedish economist Bertil Ohlin and French economist Jacque Reuff.
He believed that there was a ‘transfer problem’ in making financial payments in foreign exchange, while classical economists insisted that there was only a ‘budgetary problem’ and as long as the state raised money though taxes and borrowings the required foreign exchange would be available though an offsetting reduction in consumption, credit and investment.
The confusion also extends to a general Mercantilist obsession with the trade deficit (then called the commercial balance) which Neo-Mercantilists have extended to the current account deficit.
A commercial or current surplus, classical economists pointed out was a consequence of central bank sterilization (deflationary policy) and external payments including loans.
Keynes also failed to grasp that domestic investment or consumption of state or private inflows capital flows triggered deficit in the trade or current account. (Colombo/Aug13/2021)