Debt -financed Govt. spending rises
The Sri Lanka government has been continuing its spending spree during the first four months this year surpassing the revenue by 83 per cent resulting in a budget deficit of Rs.524.1 billion, 0.7 per cent higher than the Rs.520.5 billion budget deficit in the same period of 2021, the Finance Ministry fiscal position report revealed.
Total expenditure amounted to Rs. 1.15 trillion reflecting a 15.2 per cent increase in the first four months of 2022 compared to Rs. 1 trillion in the same period of 2021.
The total debt increased to Rs. 2.33 trillion by the end of April 2022 from Rs. 1.76 trillion at the beginning of January 2022, Ministry data showed.
The then administration has obtained debt more than the estimated expenditure in the 2022 budget and government reserves have not been increased accordingly during this period, two economic experts Prof. Wasantha Athukorala of the University of Peradeniya and Dr Nandasiri Keembiyahetti of the Ruhuna University pointed out in a recent economic review.
In the Interim Debt Policy, the Ministry of Finance has taken measures to settle certain amounts on Sri Lanka Development Bonds (SLDBs) (equivalent to US$96 million of principal and interest) were settled in rupees shortly after the implementation of this policy,
These limited amounts were consistent with the Central Bank’s monetary objectives at that time.
Investors have been informed that the majority of SLDBs debt service from mid-April to End-June has either been refinanced or suspended. The same applies to SLDBs debt service onwards, notably in Q3 and Q4 2022.
The authorities ultimately took the view that it was too difficult to pursue this option of making payments in rupees to holders of the affected debts (including ISBs), who wished to receive it due to the limitations in the relevant documentation of some debts (notably the ISBs) and the current economic conditions in Sri Lanka.
The then government’s much debated tax cuts as an attempt of encouraging industrialisation, along the lines of the Southeast Asian economic miracle and other measures, such as fixing the dollar rate of the rupee and flattening interest rates were among the major reasons for the fiscal crisis, two economic experts said.
The economic situation has worsened owing to continuation of additional livelihood support for “Samurdhi” and other welfare recipients and payment of an additional Rs. 5,000 for public servants and pensioners together with the increase in expenditure on interest payments, subsidies and transfers, salaries, and pensions.
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