Sri Lanka government bank overdraft soars to Rs620bn

On Jul 6, 2021

A government overdraft with Sri Lanka’s state banks had soared to 620 billion rupees or 3.7 percent of gross domestic product by April 2021 up from 304.4 billion rupees as spending grew and revenues were under pressure due to tax cuts and a pandemic, official data showed.

The overdraft is now also bigger than the total government revenues in the first four months of 2021 which were at 481.7 billion rupees or about 2.9 percent of GDP and is also higher than the budget deficit of 520 billion rupees or 3.2 percent of GDP.

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Revenues in the first four months were down 19 percent from 598 billion rupees in 2019.

But current spending was up 19 percent to 890 billion rupees. Current spending grew 70 billion rupees from 2019 to 2020 and another 70 billion rupees in 2021 mostly with the salary bill.

Sri Lanka had given state jobs to 65,000 unemployed graduates over the past year despite a Coronavirus crisis and a fall in revenues due to tax cuts in December 2019 putting further pressure on spending.

Giving jobs to unemployed graduates who fast before the Colombo railway station became a mainstay of most governments from 2005 in the wake of a fiscal counter revolution launched by Sri Lanka’s Janatha Vimukthi Peramuna in 2002-2004 which was enthusiastically adopted by later administration.

Other key planks of the fiscal counter revolution were abandoning market pricing of oil which called ‘removing the World Bank plug’ and anti-privatization.

Over 200 billion rupees had been printed outright in 2021 up to April triggering a 929 million US dollar balance of payments deficit.

Sri Lanka has a Latin America style central bank modeled on one set up in Argentina and promoted by the Federal Reserve to several countries which later ended up in sovereign import substitution and sovereign default

The overdraft with state banks is sometime re-financed with lender of last resort window of the central bank.

In 2018, window borrowings were used to repay bonds in a so-called buffer strategy to trigger a 2018 currency crises and a subsequent negative growth shock.

Sri Lanka’s liquidity operations became progressively more aggressive from around 2011 worsening monetary instability.

By July 05, another 69 billion rupees had been borrowed from the lending window at 5.5 percent.