Sri Lanka has a debt to gross domestic product (debt to GDP) ratio of about 80 percent, down from over 100 percent a decade ago.
Over the first three quarters of 2012 83 billion rupees of new guarantees or about 1.1 percent of GDP have been issued to domestic banks for state entities to borrow.
Another 23 billion rupee guarantee had been given to a Dubai based bank for a loan given to SriLankan Airlines.
In addition to commercial enterprises, entities such as the Road Development Authority which traditionally received direct subventions from the Treasury have also started to borrow from commercial banks, including private ones.
About 30 billion rupees in guarantees (about 0.4 percent of GDP) had been given to the RDA and the ministry of defence and urban development. There was no disclosure about the actual utilization of the guarantees.
Had the guarantees been fully utilized Sri Lanka's effective budget deficit would be around 6.6 percent of GDP based on budgeting practices consistent with previous years and not 6.2 percent as expected.
The use of guarantee-backed spending also helps understate the debt to GDP ratio.
The administration is also planning to break a 4.5 percent restraint on guarantees placed on the state by the Fiscal Management Responsibility Law.
"Considering the proposed reduction in public debt to DGP ratio, it is proposed to increase the guarantee limit specified in the section 03 of the Fiscal Management (Responsibility) Act No. 03 of 2003," budget documents released to the parliament said.
The budget also said that local government authorities would be allowed to issue 'Municipal Bonds" with the approval of the Treasury opening up another avenue for state deficit spending.
In 2011 and 2012, heavy banks borrowings by the state, especially energy enterprises, helped trigger a balance of payments crisis, sending the rupee plunging from 110 to 130 levels against the US dollar despite the budget deficit measured in conventional terms coming down.