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Sunday June 26th, 2022

Sri Lanka Treasury cash shortfall Rs5.6bn a day: Minister

ECONOMYNEXT – Sri Lanka has a daily state revenue of only 4 billion rupees, but expenditure is 9.6 billion rupees resulting in a 5.6 billion rupee shortfall and has led to a massive crisis in government finances, Cabinet Spokesman Bandula Gunawardana said.

Prime Minister Ranil Wickremesinghe had appraised the cabinet that the country was facing a crisis in state finances as well as a foreign exchange crisis.

“The Prime Minister explained that both are interlinked,” Minister Gunawardana said.

He said, in 2014 the  daily income of the government was 3.2 billion rupees and the expenses were 4.9 billion creating a shortfall of 1.7 billion rupees.

In 2019  the revenue has increased to 5 billion dollars while expenses also increased to 9.1 billion rupees, thus creating a shortfall of 4.1 billion rupees a day. In 2021 the government income fell to 4 billion a day while the expenses were still at 9.6 billion rupees creating a shortfall of 5.6  billion rupees.

Sri Lanka’s state economists in 2019 cut taxes saying there was a ‘persistent output gap’ after two currency crises in 2015/16 and 2018 reduced growth as the rupee collapsed from 131 to 151 and 152 to 182 to the US dollar amid money was printed to boost growth (close output gap).

Related Sri Lanka fiscal stimulus to close output gap

In 2020 coupled with tax cuts, more money was printed, making it impossible to maintain a stable exchange rate.

Sri Lanka’s state finances got interlinked with the people money from 1950 after a central bank was created to print money and manipulate interest rates down.

Before that Sri Lanka had a currency board, which allowed the rupee to be fixed for 75 years and the economists at the Finance Minister could not print money and depreciate the currency.

Currencies of third world countries which set up central bank in a fit of independence’ depreciated rapidly partly due to a Western Keyensian idea that printing money and depreciating currencies would boost exports or growth (stimulus).

Ironically however the strongest export powerhouses including Germany, Japan and key East Asian nations had some of the strongest currencies, lowest inflation which allowed businesses and people to flourish.

Sri Lanka’s suffered a series of currency crises from 2015 onwards and the now the country is in the grip of the Great Output Gap/Flexible Inflation targeting crisis. (Colombo/May24/2022)

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