An Echelon Media Company
Monday June 3rd, 2024

Sri Lanka 2020 budget deficit could rise to 7.9-pct of GDP amid tax cuts: IMF

ECONOMYNEXT – Sri Lanka’s 2020 budget deficit could rise to 7.9 percent of gross domestic product from an earlier forecast 5.3 percent and 6.2 percent in 2019, the International Monetary Fund has said, the highest since 2015, when a so-called 100 day program of a newly elected administration de-stabilized state finances.

The IMF said the primary deficit of the budget – a measure that removes the effect of rate hikes giving the central bank a free hand allow rates to move up and avoid printing money maintain monetary stability – would rise to 1.9 percent from an project 0.7 percent surplus.

Sri Lanka has slashed value added tax, and a series of direct taxes, in a bid to ‘stimulate’ the economy, which was hit by the after effects of a currency collapse in 2018, coming from the island’s highly unstable soft-peg with the US dollar.

Spiking Deficit

Sri Lanka has a habit of running payment arrears during the last few weeks of the year in a bid to understate the deficit and repaying them early next year, sometimes with foreign market borrowings or printed money (provisional advances).

“Under current policies, as discussed with the authorities during the visit, the primary deficit could widen further to 1.9 percent of GDP in 2020, due to newly implemented tax cuts and exemptions, clearance of domestic arrears, and backloaded capital spending from 2019,” IMF mission chief Manuela Goretti said in a statement.

“Given risks to debt sustainability and large refinancing needs over the medium term, renewed efforts to advance fiscal consolidation will be essential for macroeconomic stability.”

Sri Lanka has not presented a formal budget for 2020, but is operating on a vote-on-account limited to the first four months of the year, when general elections are expected to bring in a new parliament.

Finance ministry has asked parliament to support a supplementary estimate of 155 billion rupees to support payment arrears amid the tax cuts. There were also foreign debt projects which were not provided for, parliament was told.

You may also read

Sri Lanka seeks to raise more debt, hike spending in vote on account

By cutting taxes Sri Lanka has effectively jettisoned a policy plank of a three year IMF program that is now drawing to a close, based on so-called ‘revenue based fiscal consolidation, where many new taxes were imposed private citizens and the proceeds were given mostly as salary hike to state workers.

The projected deficit for 2020 at 7.9 percent would be the worst since 2015, when a newly elected administration ratcheted up subsidies, and hiked state salaries driving the deficit to 7.6 percent of GDP.

The central bank then cut rates and injected large volumes of money to keep overnight rates down, terminating term repo contracts triggering a currency crisis amid a strong recovery in domestic credit from an earlier collapse of the soft peg.

In 2018, the central bank cut rate and injected printed money to keep overnight rates down triggering monetary instability, despite new taxes bringing in more money and a freeze on state salaries, helping bring down the deficit steadily over two years to 5.3 percent of GDP.

The rupee then collapsed to 182 to the US dollar, triggering involuntary rate hikes and an output shock.

Economic output and revenues then fell, and election spending also went up. The IMF has said the 2019 budget deficit could rise to an estimated 6.2 percent of GDP, from a revised target of 5.7 percent, busting the final targets in a three year program.

You may also read

Sri Lanka misses 2019 budget deficit, forex reserve targets in IMF program

The central bank cut rates on January 30, to 7.5 percent from 8.0 percent, despite inflation hitting 5.4 percent, saying inflation will fall later.

Under a so-called highly discretionary ‘flexible’ inflation targeting’ framework the central banks cuts rates when inflation is low or high, but is then forced into involuntary rate hikes when the currency peg collapses.

State Credit

Private credit has so far been weak since the collapse of the soft-peg in 2018 from 153 to 182 to the US dollar, though a recovery is being seen.

Analysts have said that the economy tends to recover on its own about 18 month after each currency crises triggered by the soft-peg.

Sri Lanka’s Ceylon Electricity Board is going through a financial crisis, accommodating growing new demand with expensive thermal power, adding to losses at state enterprises.

President Gotabaya Rajapaksa has said he wants to make SOEs more efficient.

“The team welcomed the authorities’ plans to enhance the efficiency of state-owned enterprises, enabling them to operate on a sound commercial basis,” Goretti said.

“These plans would need to be supported by a visible commitment to strengthen governance and transparency, notably in the energy sector, and renewed efforts to tackle corruption.” (Colombo/Feb08/2020)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Sri Lanka Navy assisting in rescue operations (Pic courtesy SL Navy)

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

Continue Reading

UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

Continue Reading

300 of 100,000 trees in Colombo considered high risk: state minister

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)

Continue Reading