Sri Lanka sitting on a budget deficit time bomb: economist

June 01, 2007 (LBO) – A large budget deficit is a fiscal time bomb, and central bank attempts to stabilize the economy may not work unless support comes from fiscal discipline, a British economics don has said. “In the end, no matter how successfully the central bank tries to maintain financial and monetary stability, if governments keep spending more than they collect in taxes, eventually you have a time bomb,” Peter Sinclair, Professor of Economics at the Birmingham University said.

“Sooner or later it is going to blow up.”

The one time director of central banking studies at the Bank of England was responding to questions from the audience after delivering a lecture on monetary and financial stability in Colombo.

Printing Press

In 2007, Sri Lanka’s central bank has stayed back from printing money to bridge the government’s estimated 9.2 percent of the gross domestic product (GDP) deficit after printing 38.5 billion rupees to bridge the 8.4 percent of GDP deficit in 2006.

“If governments run deficits which are financed by the printing press, the consequences are going to be rapid inflation, quite possibly accelerating inflation,” Sinclair said.

“It is a dangerous thing to