Sri Lanka to watch revenues in 2Q and adjust budget: Eran

ECONOMYNEXT – Sri Lanka will look at revenues in the second half of 2019 and re-prioritize expenditure in the second half of 2019, State Minister for Finance Eran Wickremeratne said as the country recovers from a Easter Sunday bombings and a credit contraction is under way.

He said first quarter revenues were broadly as expected. But a review of the budget will take place at the end of the second quarter.

"If revenues are slowing we will do a review on the budget expenditure side," Wickremarante said. "We are committed to fiscal discipline, so we will have to re-look at priorities."

"If interest rates fall that will also help."

Interest payments were about 5.9 percent of gross domestic product without counting currency depreciation in 2019.

Sri Lanka has high nominal interest rates, which analysts have blamed on contradictory monetary and exchange rate policies coming form a soft-pegged exchange rate regime.

Countries with hard pegs or fully floating rates tend to have low single digit interest rates and even lower inflation.

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Sri Lanka’s bank credit contracted in the first quarter of 2019, in the wake of monetary instability and a collapse of the currency peg.

The rupee collapsed from 153 to 182 to the US dollar in 2019 despite the overall budget deficit (before currency depreciation) falling to 5.3 percent of gross domestic product in 2018 from 5.5 percent in 2017 giving the lie to the oft-repeated claim budget deficits excess demand to the economy.

Budget deficits simply transfer spending power from bondholders to the government. So-called ‘excess demand’ and currency collapses are generated only if money is printed by a central bank to keep rates down.

The central bank printed 246 billion rupees in 2018 to generate instability and to sterilize outflows when rupee bond holders fled.

All gains made by politicians from tax hikes and falling deficit was wiped out by currency depreciona.

The rupee collapse bloated dollar debt of central government debt up to 83.3 percent of GDP in 2019 up from 77.3 percent, despite tighter fiscal policy.

The loss in Ceylon Petroleum Corporation also soared to 104 billion rupees due to the soft-peg collapse despite market pricing oil at great political cost.

The 2018 collapse soft-peg came close after 2015/2016 collapse generating two busts in succession.

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With private credit weakening, interest rates are now falling, though higher spending and a salary hike will kick in from July.

After Easter Sunday blasts, debt relief has been announced for hotels.

A 2,500 million rupee allowance for about a million state worker would add about 2.5 billion rupees a month to current spending.

Wickremeratne said other programs such as Enterprise Sri Lanka (SME and start-up credit) and Gamperaliya (rural small infrastructure) is also boosting economic activity. The government had also settled about 80 billion rupees in arrears to suppliers. (Colombo/May23/2019)

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