16 May 2011

Sri Lanka Budget Deficit Shrinks to 1.9pct of GDP for First TwoMonths of 2011 as Government Fscal Discipline Improves

16th May 2011, www.island.lk

Government fiscal discipline seems to improve with latest data showing that the budget deficit contracted nearly 3 percent during the first two months of 2011 to Rs. 106.5 billion from Rs. 109 billion a year earlier, as revenue growth out paced expenditure growth. Also encouraging is the increase in long term government investments.

As a percentage of GDP, the fiscal deficit for the first two months of 2011 is estimated at 1.9 percent, a steady improvement from 2.25 percent a year earlier.

After the budget deficit ballooned to 9.9 percent of GDP in 2009, resulting in a temporary halt of the US$ 2.6 billion IMF standby facility arrangement, government fiscal discipline showed much improvement recording a deficit of 7.9 percent in 2010, a little better than the 8 percent IMF target.

Poor fiscal discipline over the years has made it difficult to maintain low inflation. The Central Bank said it was in precarious position in 2009 long before the actual deficit numbers came out and think tank the Institute of Policy Studies said fiscal indiscipline was the bane of macroeconomic stability in Sri Lanka.

According to Central Bank data released a few days ago, government revenue growth during the first two months of 2011 has outpaced expenditure growth, resulting in a slight, but significant, contraction of the deficit.

Total revenue was up 24.74 percent to Rs. 135.4 billion from Rs. 108.6 billion a year earlier. Tax revenue increased by 23.16 percent to Rs. 126 billion, non-tax revenue was up 51.78 percent to Rs. 8.5 billion. Grants increased by 14.28 percent to Rs. 800 million from Rs. 700 million a year earlier.

Total government expenditure increased by 11.16 percent to Rs. 241.9 billion from Rs. 217.6 billion a year ago. Current expenditure grew 9.15 percent to Rs. 198 billion while capital expenditure or long term investments increased 20.99 percent to Rs. 43.8 billion.

Earlier this year the IMF said the Sri Lankan government was in a position to absorb the flood related expenditure within its budget. The government was also expected to increase domestic fuel prices, which it has already done, in order to breakeven the Ceylon Petroleum Corporation and Ceylon Electricity Board (CEB). This means inflation would spike but the government would be able to sustain better fiscal control and medium to long term macroeconomic stability.

"It is a tough choice. Will the government sacrifice medium to long term stability for short term relief, or sacrifice giving the people relief today for a more stable economy tomorrow? It is a very tough choice and requires a tight-rope kind of balancing act," an analyst told The Island Financial Review.

"This is where the government has to take good governance, accountability and transparency seriously, so that people can better understand the choices they face," he said.

Meanwhile, total outstanding government debt increased by 10.56 percent Rs. 4.71 trillion as at end February 2011, from Rs. 4.26 trillion a year ago. Total domestic debt grew 7.25 percent to Rs. 2.66 trillion while foreign debts increased 15.16 percent to Rs. 2.05 trillion.

Related Info :

Sri Lanka Budget Deficit Falls to 7.9pct of GDP in 2010 - Annual Report of the Central Bank of Sri Lanka

Sri Lanka’s January Exports Up 72.4pct. Garment Exports to Europe Up 143.5pct without EU GSP+ and Trade Deficit Contracts 10pct

Sri Lanka Trade Deficit Doubles During First Nine Months of 2010

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