Sri Lanka budget slightly behind target in August

Dr. Ganeshan Wignaraja and Dr. Dinusha Panditaratne

Nov 01, 2010 (LBO) – Sri Lanka’s budget performance for the first eight months of the year is broadly on track though a gap between revenues and current spending has overshot the the full year target, official data show. The revenue deficit in the budget which involves cash items such as salaries puts pressure on domestic credit markets, which makes the central bank to monetize debt (print money) and de-stabilize the economy with high inflation.

Analysts have pointed to higher levels of monetization up to August 2010. Since then the government has floated a billion US dollar soveriegn bond to repay central bank credit, but markets remain highly liquid amid a pick up in credit growth and inflation.

Capital spending for the first eight months was up 15.1 percent to 158.3 billion rupees, putting the overall budget deficit (before counting grants) to 5.8 percent of GDP, which is better than the 7.54 percent gap last year. The budget gap after grants is 5.72 percent of GDP.

Roughly annualised it puts the overall year-end deficit at 8.58 percent of GDP, higher than the planned 8.0 percent of GDP gap for 2010.

In 2009, an increase in profit transfers was also balanced by faster disbursement of loans in Chin