Sri Lanka’s Finance Ministry is facing one of its worst-ever cash crunch with no way to raise revenue even to pay salaries of 1.5 million public sector employees’ unless through increasing borrowing limits and printing money, official sources said. This has become a challenge at the moment due to political instability making it a mission [...]

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Printing money to pay state salaries

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Sri Lanka’s Finance Ministry is facing one of its worst-ever cash crunch with no way to raise revenue even to pay salaries of 1.5 million public sector employees’ unless through increasing borrowing limits and printing money, official sources said.

This has become a challenge at the moment due to political instability making it a mission impossible to obtain the necessary approval of the now defunct cabinet and parliament to increase the borrowing limit, a high official of the ministry said.

The prevailing political crisis is exacerbating financial issues and revenue avenues drying up government coffers due to a sudden drop in tax collection.

In addition the Treasury has to provide additional provisions for public sector employees’ salaries amounting to around Rs. 83 billion per month and other expenses immediately.

Under the present economic downturn and meagre revenue, the ministry has no other option other than increasing the credit limit to Rs. 4 trillion from the present Rs.3.3 trillion, a Finance Ministry memorandum revealed.

The Cabinet of Ministers has to approve the relevant memorandum to take necessary action to amend the Appropriation Act of 2022 in parliament with Committee on Public Finance approval, a top official said, adding that all such action should be taken soon to tackle urgent fiscal issues.

However President Gotabaya Rajapaksa has the powers to approve a mini budget similar to which he did in 2020 using his powers under Section 150(3) read in conjunction with 150(4) of the Constitution.

But this constitutional provisional is applicable for the withdrawal of money from the Consolidated Fund and to increase the borrowing limit it is necessary to obtain parliamentary approval to amend the Appropriation Act of 2022 a former Finance Ministry Secretary explained.

He further pointed out the increase in borrowing limit was essential due to an increase in supplementary expenditure.

The current fiscal sector performance is characterised by exceptionally low government revenue, rigid recurrent expenditure, high budget deficits, and accumulated debt which is now unsustainable, a recent Finance Ministry report revealed

The weak fiscal position has manifested in credit rating downgrades, loss of access to international capital markets and foreign financing.

As a result, the Government has increasingly relied on domestic financing of the budget, including monetary financing by the Central Bank, in turn leading to significant macroeconomic imbalances, the report added.

Government revenue declined particularly sharply in the last two years due to various reasons including the economic downturn caused by the COVID-19 pandemic, import restrictions imposed to ease the external sector pressure, but most importantly, due to the ultra-low tax regime introduced in late 2019 and the COVID-19 related easing measures in early 2020.

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