Sri Lanka ups deficit spending through off-budget guarantees

Nov 22, 2012 (LBO) – Sri Lanka has upped Treasury guarantees in 2012 and has announced plans to increase such spending in the future, helping the state deficit spend without expanding the officially defined budget gap and the debt ratio.

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