"We see the comfort margin in that because the revenue levels are basically settling down after policy reforms announced in the 2011 budget."

Points of Concern

He said the interest bill would be higher, but taxes on interest will bring in more revenue.

"Interest expense will be an additional adjustment," Jayasundera said. "But I hope if anybody is paying higher interest on those receipts they must also pay non refundable withholding tax on interest. So these things will not cause much of a disturbance."

"Expenditure other than non-interest expenditure is all well within our ceiling,"

There have been agitations for further public sector wage increases. But Jayasundera said wage increases and cost of living allowances have been given and in four months work will begin on the next budget for 2012.

Currency depreciation and inflation increases nominal state revenues and cuts the real cost of wages and debt denominated in domestic money, a phenomenon known as inflating the debt away.

"[From] project related capital expenditure have we have a little advantage with the exchange rate adjustment as well," he said.

"We have some additional rupees coming in to the system because of that."

Currency depreciation will also increase tax revenues from international trade, which will help offset slightly higher debt service costs in rupee terms, he said.

Monetary Link

Sri Lanka's rupee fell from 110 to 130 due to high credit growth accommodated by the central bank via sterilized sales of foreign exchange from around August 2011, which kept interest rates down last year.

From 1951, Sri Lanka's budgets have been connected to the country's money and exchange rate, after a central bank which has the power to print money by Treasury bill purchases was set up.

Prior to 1951that fiscal operations were completely insulated from the money supply, and deficit spending could neither create inflation nor currency depreciation, as state or private debt could not be monetized.

In 2011 the Central Bank bought 185 billion rupees of Treasury bills, effectively monetizing debt, though not necessarily for fiscal needs, as it sterilized foreign exchange sales to keep interest rates down.

Jayasundera said up to April 10, revenues were only two billion rupees below internal projects and expenses were 5 to 6 billion rupees above target.

Some debt was monetized in April to pay salary advances. Jayasundera said 38 billion rupees out of a 40 billion rupee special one month Treasury bill sold to the banking system had been repaid by last Friday.

Off-budget

Last year, though the central government budget deficit was kept to 6.9 percent of GDP state energy enterprises ran large losses and borrowed from banks. A key reason for the rupee collapse was credit demand from state energy enterprises.

The Ceylon Petroleum Corporation lost 94 billion rupees and the power utility, Ceylon Electricity board lost another 25.5 billion rupees.

The two energy entities ran up a deficit of 1.8 percent of GDP which pushed the overall public sector deficit (with only two non-financial public sector enterprises counted) to at least 8.7 percent of GDP, not counting airlines, railways and bus utilities.

State run airlines lost another 19.5 billion rupees but port and airport utilities made some profits.

In January after the fiscal year was over, CPC was given 55 billion rupees of Treasury securities (about 0.8 percent of GDP) to offset the debt run up with state agencies before that date. It is not clear as to what fiscal year that debt will be charged.

In January shortly before fuel prices and interest rates were raised government bank borrowings also shot up.

In that month the government borrowed 67.5 billion rupees from commercial banks and a further 25.7 billion rupees from the Central Bank.

Total borrowings from the banking system in January were 93.2 billion rupees equal to 20 percent of the projected 468 billion rupee projected budget deficit for 2012.

Update II