By: Staff Writer
August 26, Colombo (LNW): Sri Lanka continues to grapple with its longstanding budget deficit, a challenge that has plagued successive governments due to poor financial management. Recent findings from Verité Research highlight that the country is set to miss its budget revenue targets for the 33rd consecutive year, continuing a pattern of borrowing to cover deficits.
Despite an ambitious goal in the 2024 Budget to increase revenue by 42% from the previous year, Verité Research predicts a more modest outcome, with a 14% shortfall compared to the government’s optimistic projections.
This aligns closely with the International Monetary Fund’s (IMF) forecasts, underscoring the difficulties in achieving significant revenue growth.
The government’s estimates also show a significant rise in total expenditure for 2024, with interest payments accounting for 66% of the increased allocations. However, budget deficits have consistently exceeded the prescribed limits, including the proposed deficit for 2024, which stands at 7.6% of GDP.
In the first half of 2024, Sri Lanka’s budget deficit decreased by 52% to 515.7 billion rupees, while revenues increased by 42% to 1,860.6 billion rupees.
Tax revenues saw a 43% increase, while non-tax revenues grew by 30%. Current spending, aided by stable exchange rates and lower interest rates due to effective monetary policy, decreased by 5% to 2,218.4 billion rupees.
However, the prospect of wage hikes for state workers threatens to push current spending higher unless there is a reduction in the public sector workforce.
Capital spending increased by 5% to 344 billion rupees, slightly higher than the previous year’s 234.1 billion rupees. As foreign aid projects resume with the completion of bilateral debt restructuring, capital spending is expected to rise further.
The overall budget deficit decreased to 598.7 billion rupees, or about 1.9% of the projected GDP for the year. This figure does not account for state bank recapitalization, for which 450 billion rupees have been allocated. Domestic borrowings also saw a significant decline to 515 billion rupees, compared to 1,218 billion rupees in the previous year, while net foreign borrowings increased slightly.
Interest costs decreased by 10% to 1,142.1 billion rupees, as nominal rates began to fall due to the reduced deficit and decreased demand for credit from state enterprises and the private sector. The overall budget deficit is now lower than the interest bill, with the primary account of the budget showing a surplus of 543 billion rupees.
Sri Lanka’s budget issues have roots in historical economic policies, including the collapse of the US dollar in 1971 and subsequent attempts to target money supply without a clean float. The country’s current high inflation target, which often triggers currency crises, is based on the flawed doctrine of a trade-off between inflation and growth.
Analysts warn that this flawed monetary framework could destabilize the system once private credit recovers, potentially leading to a default on restructured debt.
