Severe Sri Lanka state cash crunch revealed

Nov 08, 2007 (LBO) – Though budget numbers tabled in Sri Lanka’s parliament suggested that no money had been printed in 2007, other documents showed a large bank-financed hole in state finances just weeks earlier.

The budget showed that 10 billion rupees would be paid back to the banking system by the end of this year, though Sri Lanka’s economy was rocked by money printing until mid-October.

However disclosures made under a fiscal responsibility law showed that up to September state finances had been dogged by a severe cash crunch.

The government had originally expected to get a 443 billion rupee cash inflow and spend 429 billion by September. But eventually it had got only 411 billion rupees but had to spend 437 billion.

At the time overdrafts from banks alone stood at 39 billion rupees.

By end-August central bank credit to government was at 127 billion rupees or half of the country’s base money.

Economic analysts say Sri Lanka had managed to repay the banking sector and show a better position to parliament using the 500 billion bond proceeds.

By September the revenue account of the budget – the difference between tax revenues and day-to-day expenses – was 45 billion rupees in deficit. This was 1.4 percent of gross domestic product (GDP).

From about June the government went on a heavy money printing and reserve appropriation binge severely undermining economic stability and sending inflation rocketing up.

However in the provisional budget data presented to parliament the government said the revenue deficit would only be 0.7 percent of GDP and the overall deficit would be 7.2 percent for this year.

Originally the government was predicting a 0.1 percent surplus on the revenue account which was widely disbelieved and a 9.1 percent overall deficit, which came under fire for its potential ability to de-stabilize the country and push inflation up.

Meanwhile last year’s budget deficit, which was originally listed as 8.4 percent of GDP was now presented as 8.1 percent.

It now appears that the budget numbers presented to parliament had been based on the gross domestic product calculated by the department of census and statistics while they were originally generated using central bank numbers.

Central Bank suddenly stopped releasing its GDP numbers earlier in the year. The Central Bank numbers tended to show a lower economic growth number than the Census Department ones.


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