Sri Lanka budget deficit illegal, fiscal rules should be relaxed says Harsha

COLOMBO – Sri Lanka’s budget deficit for 2024 of 7.6% of gross domestic product violates a fiscal management responsibility law, and the law should be amended for the year to make it legal chairman of the parliament’s Public Finance Panel Harsha de Silva said.

The deficit is 9.1% of GDP with bank bailout costs.

“This is against the Fiscal Management Responsibility A “which states we have to maintain the budget deficit at 5%,” de Silva told parliament Monday (20).

The law had previously been changed to increase state enterprise raise the ceiling on guaranteed debt including to the Road Development Authority, which had no revenue to speak of and understated the debt.

Transport Minister Bandula Gunawardana who was Deputy Finance Minister when the law was brought in 2003 by an administration run by current President Ranil Wickremesinghe as Prime Minister has said Treasury officials had misled legislators into raising the ceiling.

De Silva said the law had been breached several times, with various amendments brought in 2013, 2016 and 2021.

“We have to bring an amendment stating that ‘yes, the law says 5%, but we expect a 6.5 or 7% budget deficit’; we can’t openly violate the law.”

The limit was only met by late finance minister Mangala Samaraweera, he said.

Samaraweera, however, could not give the benefit of a lower deficit to the public or the then administration, due to the policy rate enforced by inflationary open market operations.

In 2018, when the budget deficit was brought down from 5.0 to 5.1% of GDP according to revised numbers, (5.5 to 5.3 before fresh econometrics) the central bank printed 247 billion rupees to mis-target interest rates, triggering a 1.1 billion US dollar BOP deficit, busting the rupee from 151 to 184 to the US dollar in the process.

Under the International Monetary Fund program, rates can be or are encouraged to be cut by printing money when inflation falls due to a so-called monetary policy consultation clause, which is at direct conflict with a reserve target, leading to missed targets, collapsing currencies and the ouster of reformist finance ministers.


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