2021 budget deficit hits trillion rupees by July, Rs 549bn printed
COLOMBO – Sri Lanka’s budget deficit has hit Rs 1,016 billion rupees by July 2021, with Rs 549 billion printed, triggering a US$ 2.7 billion balance of payments deficit, official data showed amid cascading policy errors involving monetary and fiscal ‘stimulus’ in a pandemic.
Sri Lanka has now applied monetary breaks allowing interest rates to normalize and try to arrest a crisis in the external sector triggered by note-issue banking.
The overall budget deficit up to July 2021 was Rs 1,014.6 billion, up from Rs 872.5 billion in 2020 and up 94% from the Rs 521.7 billion in the pre-stimulus budget of 2019.
Of the total deficit Rs 549.1 billion was printed either to directly finance the budget, to keep interest rates down, to sterilize interventions and also to appropriate forex reserves to repay debt as the printed money created forex shortages and the government was unable to buy dollars from the market.
In another policy error, mercantilist authorities controlled imports, but the liquidity flowed into permitted areas boosting non-controlled imports to a 17-month high. In the absence of money printing imports should have at least fallen by the net fall in tourism revenues.
Sri Lanka’s cascading policy errors began in December 2019 with a tax cut and money printing was ratcheted up from around February 2021, to keep rates down as one year Treasury bill yields started to move to around 8.5%.
Sri Lanka’s forex reserves were progressively run down over two years amid liquidity injections repaying some debt. Some of the debt has been transferred to the central bank which is now seeing reserve-related liabilities move up.
Amid liquidity injections from the central note-issue bank Sri Lanka has run the biggest balance of payments deficits in history with the deficit of US$ 2.7 billion by July exceeding the full-year deficit of 2020.
Sri Lanka is now seeking credit lines to pay for imports and run up debt indirectly and widen the current external account deficit.
In previous years of money printing, including 2015 and 2018, similar credit lines have been taken transferring debt to the state-run Ceylon Petroleum Corporation, in familiar cascading policy errors.
Analysts have called for reforms of the central bank law to block the ability of stimulus happy central bankers to print money and also create a hard budget constraint for Treasury officials and other advisors to stop heedless spending and expansion of the public service with unemployed graduates by making rates go up immediately.
Sri Lanka is printing money mostly to pay salaries of state workers, who were expanded 53,000 despite a pandemic.
Tax revenues up to July 2021 grew 5% from a year earlier to Rs 798.5 billion, but were down 10% from Rs 888 billion seen in 2019.
Current spending was 8% from a year earlier to Rs 1,578 billion and was up 415 from the pre-pandemic 2019. There were however large arrears in 2019. Arrears for 2021 have not been disclosed.
The current account deficit of the budget before capital spending hit Rs 779 billion or 4.7% of projected gross domestic product, up from a Rs 232 billion in 2019.
Capital spending was up 31% to Rs 236 billion from a year earlier but was down 19% from 2019.
The overall budget deficit after grants was Rs 1,015.6 billion or 6.2% of GDP up to July 2021.
The annualized deficit based on the current trajectory was 10.6% of GDP. Based on past trends the second half of the year typically brings more tax revenues than the first, but in 2021 there were lockdowns.
Sri Lanka’s control-oriented doctors also push for alcohol sale bans during lockdowns further compounding fiscal woes and boosting sales of hooch.
Following a Rs 200 billion supplementary estimate, the budget deficit based on revised GDP projections is expected to grow to 10.7% of GDP from an earlier 9.5%.
Sri Lanka’s budget deficit implied by the growth in debt was Rs 1.62 trillion up to July 2021, pushing up debt to GDP to Rs 101.7 billion.