May 07, 2009 (LBO) – An International Monetary Fund (IMF) report says low income Asian nations with dollar pegs and weak state finances have few options to ‘stimulate’ demand, and Sri Lanka’s budget deficit could go over 9.0 percent of the economy. This year Sri Lanka’s revenues have been hit by a collapse in imports. The government had responded by raising import duties. Corporate profitability is also low. CT Smith Stockbrokers said profits of 212 reporting companies listed in the Colombo Stock Exchange was down 68 percent in December quarter against the previous year.
Official projections for inflation are also low in 2009, which can increase the budget deficit number as a proportion of GDP, as nominal growth in the economy will be low.
When inflation is high, nominal economic growth is also high, dwarfing the budget deficit as a proportion of GDP. Last year Sri Lanka’s economy expansion was 23 percent when inflation was included.
Deficit spending is only effective in ‘stimulating’ an economy if money can be printed or borrowed from abroad. Otherwise rising interest rates will land the country back in square one or worse by crowding out activities of non-state players.
Countries with exchange rate