ECONOMYNEXT – Sri Lanka has likely met the primary deficit target for 2022, based on preliminary data, officials said as President Ranil Wickremesinghe oversees the most difficult revenue correction in history following a currency crisis which ended in default.
Sri Lanka is managing budgets without printing money, State Minister for Finance Ranjith Siyambalapitiya told reporters in Colombo.
Sri Lanka’s revenue and grants for 2022 is estimated at 1991 billion rupees.
Total revenues would be around 1976 billion rupees or close to 95 percent of 2,084 billion rupees set in an interim budget. Non-tax revenues would be 226 billion rupees.
Current spending is estimated at around 3,595 billion rupees giving a current account deficit, of around 1,618 billion rupees or 6.8 percent of estimated gross domestic product.
The overall deficit could be around 10.4 percent of GDP (about 2,500 billion rupees).
Central Bank Governor Nandalal Weerasinghe told a business forum hat Sri Lanka had met the primary deficit target of 4.0 percent of GDP.
The target was in an interim budget and a staff level agreement with the International Monetary Fund.
When money is printed by intermediate regime central bank (soft-peg or flexible exchange rate) to supress rates triggering a currency crisis interest rates tend to soar as brakes and applied and targeting an overall deficit is pointless.
As a result the IMF usually targets non-interest based spending involved in a primary deficit.
Interest costs are estimated at around 1,635 billion rupees for 2022, giving a primary deficit of around 870 billion rupees or about 3.8 percent of GDP.
The 2022 budget numbers are bloated due to effective lending to the Ceylon Petroleum Corporation linked to a 700 million US dollar credit line from India, officials said.
Without that the correction in non-interest spending could be even higher.
President Ranil Wickremesinghe and his team has brought back classical fiscal consolidation involving spending based consolidation or expenditure restraint abandoned earlier in favour of revenue based fiscal consolidation – an unusually leftist or ‘progressive’ strategy of expanding the government.
Wages are frozen for the moment. President Wickremesinghe has said that a state wage hike could be considered at the end of 2023. Since wages eventually adjust for currency depreciation lasting changes in spending comes from reducing the sizes of the state.
Revenue based fiscal consolidation sans spending restraint in recent years involved expanding the size of the government to 20 percent of GDP and pushing up revenues to a nice round number like 15 percent to keep pace. (Colombo/Jan31/2023)