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ECON0MYNEXT – Sri Lanka state revenues surged 38 percent from a year earlier to 1,448 billion rupees in the eight months to August 2022, Finance Ministry data showed as the economy inflated in the wake of a currency collapse after two years of money printing.

Tax revenues surged 35 percent to 1,283 billion rupees amid tax hikes and high inflation even as the real economy contracted as attempts were made to stop the currency crisis, in familiar repeated phenomenon seen in countries with soft-pegged central banks.

The government has also hiked taxes, bringing in more revenue.

As a share of GDP tax revenues were still at 5.4 percent down from 5.7 percent as the economy was estimated to inflate to at least 23.8 trillion rupees in 2022 from 16.8 trillion rupees.

Current spending rose 20 percent from a year earlier to 1,571 billion rupees driven mainly by rising interest costs.

High and volatile interest costs are also a familiar feature of countries with soft-pegged (intermediate regime) central banks which generate monetary instability.

Interest costs rose to 927.4 billion rupees from 833.0 billion rupees as breaks were put on the currency crisis amid a deficit.

Current spending was down to 6.1 percent of GDP from 6.3 percent a year earlier as the economy inflated, a phenomenon where budget and debt become manageable as debt is inflated away known as high inflation and financial repression.

Sri Lanka’s inflation hit 70 percent in the third quarter but interest rates were only around 30 percent.

Classical economists and analysts have called for a currency board to be set up so that money cannot be printed by interventionists (post-Keynesians or Mercantilists) to create currency crises which are then followed by output shocks and high interest rates.

Sri Lanka saw heightened monetary instability in the wake of ‘flexible’ inflation targeting, perhaps the most deadly dual anchor conflicting soft-pegging regime ever peddled to hapless developing nations without a doctrinal foundation in sound money, according to critics.

The framework which helped drive a country at peace into default with surging ‘cover up loans’ as forex shortages made in difficult to repay foreign debt (a phenomenon known as the transfer problem) is to be legalized under a deal with the International Monetary Fund.

Policy makers in such countries – characterized by Latin America – have both ‘fear of floating’ and currency board phobia preventing the operation of a consistent single anchor monetary regime with low interest rates and external stability.

Such countries have long term low growth as about 18 months in a four year credit cycle is spent recovering from the previous currency crisis from ‘flexible’ and ‘data driven’ policy.

The lags in inflation allowed Sri Lanka central bank to suppress rates with money printing and bombard the exchange rate peg until it collapses, creating currency crises in 2015/16, 2018 and in 2020/2022.

The current account or revenue deficit of the budget, or the gap between total revenues and current spending was 851.7 billion rupees, down 18 percent from 1,036 billion rupees.

As share of GDP the current account deficit was down to 3.6 percent of GDP from 6.2 percent.

Capital spending was up 35 percent to 395.6 billion rupees up to August. However as a share of GDP it remained at 1.7 percent as the economy inflated.

The overall deficit was 1,244 billion rupees down 6 percent from a year earlier. As a share of the inflated economy, the deficit was down to 5.2 percent from 7.9 percent a year earlier.

The primary deficit, which is the deficit before interest costs fell to 317.06 billion rupees up to August down from 495.25 a year earlier.

The IMF usually targets a primary deficit because interest costs tend to rise as a currency crisis triggered by the soft-pegged central bank is halted.

Up to August 2022, 1,217 billion rupees were printed (classified as central bank credit to government), up from 665.5 billion rupees last year, compared to a deficit of only 1,244 billion rupees.

It is as if no private sector or EPF money was used to finance the deficit.

Critics have said that Sri Lanka’s central bank usually monetizes not the annual deficit, but the gross domestic finance requirement (maturing bills from past deficits) due to an obsession with controlling Treasuries yields, and the action is then blamed on the ‘budget deficit’.

In 2022 Sri Lanka’s central bank repaid state foreign loans, and also sterilized interventions after using deferred payments on Asian Clearing Union dues from India.

Offsetting reserves sold for imports is effectively private sector financing, but due to the use of Treasury bills for the activity, the practice is also blamed on ‘budget deficits’.

( Information from economynext.com was used in this report. To Read More, click here | Also if you have any problem of this article or if you need to remove this articles, please email here and we will delete this immediately. [email protected] or [email protected] )

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