COLOMBO – Sri Lanka has generated a primary budget surplus (deficit before interest payments) in the first quarter of 2023 exceeding an indicative target in a program with the International Monetary Fund (IMF), an official said.

Sri Lanka’s IMF program had a primary deficit indicative target (IT) of 56 billion rupees for March 2023.

But the finance ministry had achieved a surplus of 48 billion rupees, over performing the indicative target, based on preliminary data, Director General of Fiscal Policy at the Finance Ministry Kapila Senanayake told a forum in Colombo.

The primary deficit becomes a core performance criterion for the IMF’s first review test date in June 2023.

For 2022 Sri Lanka had also exceeded a primary deficit for the full year recording a 3.7% deficit against 4.0% envisaged in a budget.

Tax revenues were increased 56% from 370 billion rupees to 578 billion rupees in the first quarter.  The increase came partly from tax hikes and partly from inflation.

The total was slightly below the 650 billion rupees projected in the IMF program.

The improvement in the primary balance came from strict expenditure controls (spending-based consolidation), Senanayake said.

Sri Lanka went on an IMF driven spendthrift strategy called ‘revenue based fiscal consolidation’ (taxing citizens without controlling state spending) in a program in the run up to sovereign default, which critics say may have been a fallout Anglophone ‘progressive’ anti-state austerity ideology.

As a result, spending to GDP which was around 17% of GDP in 2014 before cost cutting was abandoned, went up close to 20% by 2019.

Taxes were then cut and money was printed to target an ‘output gap’ from 2019 as recurring currency crises from flexible policy led to output shocks (dampened growth).

Targeting an output gap with macro-economic measures without working hard (stimulus) is also an Anglophone economic strategy ‘stimulus’ that emerged in the 1920s, triggering international external disequilibrium in the ensuing years.

The IMF gave technical assistance for Sri Lanka’s trigger happy economic bureaucrats to calculate a ‘potential output’ triggering attempts to bridge the supposed gap with ‘macro-economic’ measures eventually triggering a sovereign default.

The IMF has given a concession in the currency program to allow spending cuts in the current program saying Sri Lanka’s fiscal strategy will be ‘mainly’ revenue based consolidation.

The current administration and officials are trying to contain spending as much as possible at great political cost.

The salary bill had fallen on nominal terms, with a freeze on recruitment and slashing costs in the first quarter, based on preliminary data.

The interest bill had shot up from 379 billion rupees to 673 billion rupees, amid monetary instability.

Countries with reserve-collecting central banks that also target a domestic anchor (flexible inflation targeting and their peers including money supply targeting in the 1980s) usually end up in currency crises, inflation and persistent high interest rates.

The problem of chronically high interest bill persists until dual anchor conflicts (so-called impossible trinity regimes or ISLM-BOP) are abandoned in favour of consistent single anchor regimes like a clean float or a hard peg.

Under the IMF program, a new monetary law is expected to legalize output gap targeting and also potential dual anchor conflicts by simultaneously pursuing both money and exchange policies.

Countries with dual anchor conflicts and market access, exemplified by Latin America, with revenues exceeding 20 percent of GDP and deficits around 5% of GDP repeatedly default amid currency crises.

-economynext.com