Hard reality hits the public only later. It is usual to over-estimate revenue, under-estimated current expenditure and show impressive expenditure allocations.

Fairy Tale

In the 2008 budget, Sri Lanka originally projected revenues of 750.7 billion rupees, current expenditure of 712.8 billion rupees and capital expenditure of 331.2 billion rupees.

In November, with only one month to go ,the revised out-turn was presented to Sri Lanka's gullible lawmakers as 709 billion rupees of revenue, 743.3 billion in current expenditure and 278.1 billion as capital expenditure.

The provisional data released in the central bank annual report now show that the finance ministry has only raised 655.2 billion rupees in revenue (95.5 billion rupees below target) and current expenditure was 743.7 billion rupees (30 billion above target).

Capital expenditure was 252.4 billion rupees or 78 billion rupees below target.

Meanwhile a projected 37.8 billion surplus in the current budget (total revenues less current expenditure) turned into a record 88.4 billion rupee deficit.

The overall budget deficit was also higher at 340.8 billion rupees, up from an originally projected 293.4 billion rupees.

Balance of Payments crisis

The government was originally targeting 109 billion rupees of foreign financing but an outflow of commercial loans resulted in a net 4.6 billion rupee payback to lenders.

Meanwhile the central had printed 118.4 billion rupees (central bank credit) to finance the deficit, triggering a balance of payments crisis as it defended a dollar peg.

Rapid acquisitions of domestic assets (money printed to buy treasury securities) by a central bank results in either currency depreciation or an equivalent loss of foreign reserves, if the exchange rate is not allowed to fall.

Sri Lanka has now turned to an IMF bailout with the interventions ended to conserve foreign reserves and new taxes being imposed to shore up revenues and reduce money printing.

This year's revenues were hard hit by collapsing external trade but even in good years such as 2007 when Sri Lanka posted record economic growth there have been wide gaps between original budget targets and the final achievements.

In 2007 inflation was also high. High inflation bloats state revenues and is a common ruse used by Third World policymakers to boost revenues and impoverish the population without making visible rate changes in taxes.

Usual Story

In 2007 the administration projected 599.8 billion rupees of revenues, parliament was told in the next budget that the revised numbers were 605.3 billion rupees, and ultimately achieved only 565.0 billion rupees.

Current expenditure was promised at 596.4 billion rupees, but 622.7 billion rupees was busted. Capital expenditure was promised at 240.4 billion rupees, but was later cut to 218.8 billion rupees.

A 3.6 billion rupees surplus projected in the 2007 current budget, eventually turned into a 57.7 billion rupee deficit.

The central bank printed billions from the second quarter of the year, triggered a minor currency crisis, but managed to reverse the problem by floating the currency.

Following a 500 million dollar sovereign bond issue, the central bank managed to sell down its Treasury bill stock and boost reserves in 2007.

But in 2008, global markets turned, and commercial lenders fled.