Sri Lanka budget deficit exceeds revenue up to April 2021
Sri Lanka’s overall budget deficit of 520.5 billion rupees for the first four months of 2021 has overtaken revenues of 481.7 billion rupees in a remarkable development official data showed, following tax cuts in December 2019 compounded by a Coronavirus pandemic.
Sri Lanka slashed value added taxes in December 2019 without approval of the island’s parliament in as ‘stimulus’ fever gripped the urban intelligentsia in its history earning a downgrade as state finances were thrown into disarray.
The deficit was 3.2 percent of gross domestic product and revenues were 2.9 percent.
At the time Sri Lanka was recovering from a currency crises and output shock triggered by a so-called ‘stop-go’ monetary debacle in 2018 involving printing money (monetary stimulus) to target an output gap despite sharp tax hikes to fix the budget deficit and market pricing of oil.
The rupee collapsed from 153 to 182 despite tax hikes and market pricing of oil due to output gap targeting.
In the first four month of 2020, state revenues plunged to from 598.1 billion rupees to 476.7 billion rupees. In late March Coronavirus lockdowns were imposed adding another blow to revenues.
In the first four months of 2021 total revenues had just recovered to 481.7 billion rupees as the economy recovered with the control of Coronavirus but were still down 19 percent from 2019.
Tax revenues at 427.3 billion rupees up to April 2021 were up from 408.5 billion rupees in 2020 but were still down 23 percent from 551 billion rupees in 2019 prior to fiscal stimulus.
Meanwhile current spending which grew 70 billion rupees from 750 billion rupees in 2020 to 820.7 billion rupees in 2021, expanded by a further 70 billion rupees to reach 890.1 billion rupees for the first four months of 2021.
Sri Lanka expanded the state workers by giving jobs to 56,000 unemployed graduates in 2020 and hired further 35,000 under-educated persons in a remarkable strategy to ‘reduce poverty’ in 2020.
Sri Lanka gives state jobs for 65,000 unemployed graduates, 35,000 less educated
Hiring unemployed graduates into the state service and giving them salaries and lifetime jobs is a highly successful policy dissemination of Sri Lanka’s Janatha Vimukthi Peramuna, popularized in a fiscal counter revolution in 2002/2004 against public sector rationalization (rajya sevaya kappadu kireemer).
Other key planks of the JVP fiscal counter-revolution was jettisoning market pricing of energy (removing the World Bank plug) and anti-privatization (selling national assets) which were embraced by subsequent administrations and expanded to outright expropriation.
The IMF also jumped on the JVP bandwagon and pushed a ‘revenue based fiscal consolidation’ strategy of taxing private citizens to expand the state, instead of encouraging expenditure rationalization with predictable consequences.
The strategy was aimed at pushing the tax to GDP ratio to some arbitrary number to give more room for the state to spend.
The revenue deficit or the gap between total revenues of and current spending expanded to 408.4 billion rupees up to April 2021 from 344 billion last year. It was 2.6 times bigger than the 152 billion rupees in 2019 and was around 2.5 percent of projected GDP.
Capital spending was kept down at 112.7 billion rupees from 211.3 billion rupees in 2019, keeping the overall budget deficit at 520.5 billion rupees or 3.2 percent of GDP.
Almost the entirely of the deficit was financed domestically with only 16 billion rupees coming from foreign sources. Sri Lanka got a 500 million dollar loan from China in April but the country had been repaying debt after the 2020 downgrades.
Central Bank Finance
In the first four months the central bank printed 201.6 billion rupees to keep rates within a price ceiling of around 5.2 percent for 12-month Treasury bills running a balance of payments deficit of 929 billion US dollars in the process.
In 2020, 505 billion rupees were printed to run a 2.3 billion US dollar balance of payments deficit.
Sri Lanka’s domestic rupee interest rates are now below dollar yields and in the swap market forward exchange rates are going at a discount.
The government paid 7.4 percent for 10 month dollar denominated bonds sold in the domestic market while money is printed to keep 12-month yields at 5.23 percent.
Sri Lanka is now under the worst import controls since 1970 with sovereign credit at CCC.
Instead of rolling over debt to real buyers at market rates, the central bank has turned potential paper credit into liquidity which is redeemable against forex reserves.
A US ‘money doctor’ built a Latin America style central bank in Sri Lanka in 1950 abolishing and East Asia style currency board and the country had been subject to ‘stop-go’ policies and trade restrictions from shortly after.