Sri Lanka aims to cut deficit, have non-traditional budget in 2022

ECONOMYNEXT – Sri Lanka aims to make a ‘significant reduction’ in the country’s runaway fiscal deficit in 2022 and have a ‘non-traditional budget’ senior officials said as the country is also facing severe monetary instability due to artificially low interest rates.

“This is not a traditional budget. From the mingling I had with the finance minister and finance ministry officials, I have an understanding that he (finance minister) will make this as a transformation budget,” Presidential Secretary P B Jayasundara told a media briefing on Tuesday (02) at the Presidential Media Centre.

“The budget will focus on increasing the country’s revenue as a whole based on the president’s“Vistas of Prosperity and Splendour,” he said referring to President Gotabaya Rajapaksa’s election manifesto.

Treasury Secretary Attygalle said a new economic growth is expected along with the normalization of the country.

“We are planning to reduce the budget deficit by a significant level. Maintaining a higher budget deficit is against the state’s fiscal policy,” Attygala said.

Attygala said the budget will curtail non-priority spending while maintaining funds for government’s development projects unhindered.

“The government’s policy is to reduce the budget deficit to 4.5-5 percent (of the GDP). We are getting into that path of reducing the budget deficit by a significant portion while maintaining the government expenditure and development activities,” he said.

Sri Lanka’s last year budget deficit hit close to 14 percent of gross domestic product, which was reported 11.1 percent through number juggling its worst in 37 years, after a reckless tax cut in December 2019, shortly before a Coronavirus pandemic hit.

Money printed to finance the deficit and keep rates artificially low has depleted foreign reserves and also effectively transferred a part of the central government foreign debt to the central bank, which is now having negative net reserves.

With money printing injecting rupee reserves to the banking system, demands to transfer money out have risen above inflows.

The monetary instability has raised fears of external debt default, with the central bank finding it difficult to provide dollars (convertibility) to the money printed for current imports, let alone repay debt.

The budget document is seen as President Gotabaya Rajapaksa administration’s first economic blueprint to spell out the economic policy through 2024 amid the county facing a risk of sovereign debt default, a claim rejected by Jayasundera.

Finance Minister Basil Rajapaksa will deliver the 2022 budget on November 12 and it is expected to be one of the trickiest budgets in Sri Lankan history amid sharp revenue shortfall.

Sri Lanka is a victim of several years of ‘revenue-based-fiscal-consolidation’ where spending-based-consolidation was pooh-poohed as part of a US-driven global drive to eliminate tax holidays backed by the International Monetary Fund critics say.

Sri Lanka has been brought to the brink of default through a combination of ‘revenue-based-fiscal consolidation which pushed up state spending to over 20 percent of GDP from 17 percent and un-anchored monetary policy for ‘stimulus’ which generated external instability.

The ‘fiscal stimulus’ tax cut in December 2019 came on top of spending hikes from ‘revenue-based-fiscal consolidation’ from 2015.

Sri Lanka has pursued ‘flexible-inflation-targeting’ a highly discretionary framework which allowed the central bank with a domestic anchor involving a high-inflation target of up to 8 percent.

It was compounded by a ‘flexible-exchange-rate’ a highly discretionary external anchor, which involves rapid switching between pegged and floating exchange rates that leads to steep currency collapses and almost immediate downgrades.

In 2018 Sri Lanka was downgraded as the currency collapsed in a ‘flexible-exchange-rate’ amid money printing despite a steep tax hike and a correction in the deficit.

Another downgrade followed in a March 2020 currency collapse and later in the year.

Rating agencies have warned of further downgrades if foreign reserves fall. (Colombo/Nov03/2021)

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