The Mid Year (January-April 2009) Fiscal Position Report released recently by the Ministry of Finance shows signs of falling revenue, ballooning government expenditure and increased domestic borrowing from banks.
Tax expert N. Gajendran said the government couldn’t expect revenue to grow due to the economic conditions in the context of the global financial crisis which is affecting the local environment.
Mr. Gajendran said private sector revenue and profits are also dropping so indirect taxes and income taxes will not be at the same level as the previous year.
He added that 95% to 98% of revenue for the Inland Revenue Department (IRD) comes from compliance so even if the IRD embarks on enforcement, they will not be able to boost revenue. "In this period, there must be some ease to allow businesses to survive before they can contribute to revenue."
Revenue
According to the Mid Year Fiscal Report, revenue for the first four months of 2009 was Rs.190 billion, down from Rs.210 billion for the corresponding period in 2008. Similarly, there was also a drop in revenue for the first five months of 2009 to Rs.221 billion from Rs.237 billion for the same period last year. There is a negative growth for the first five months of around 6.5%.
Mr. Gajendran said the projected revenue in the 2009 Budget was Rs.855 billion. Based on the first four and five month revenue achievement, he said Sri Lanka will end up with around Rs.550 billion to Rs.570 billion in revenue, around Rs.300 billion short of the budget estimate. This is almost 6% of the GDP for 2009 which was estimated to be approximately Rs.5 trillion.
Mr. Gajendran pointed out that actual revenue in 2008 was Rs.655 billion although it was projected to be Rs.750 billion.
Expenditure
Expenditure for the first four months of 2009 was Rs.389 billion which when projected for the remaining months of the year, could hit Rs.1.2 trillion.
Mr. Gajendran said expenditure in 2008 reached Rs.1 trillion. According to the Mid Year Fiscal Report data, he said there might be an expenditure overrun this year of around Rs.150 billion to Rs.250 billion compared to last year.
Mr. Gajendran said the significant element is the recurrent expenditure for the first four months of 2009 which was Rs.308 billion. Projected for the year, it could reach Rs.925 billion which is approximately a Rs.100 billion overrun from the 2009 Budget projection. He also said there could be an overrun of Rs.180 billion this year from last year's Rs.743 billion.
According to the Mid Year Fiscal Report, 'the increased disbursements on account of interest cost reflecting the high interest rates that prevailed in the latter part of 2008 coupled with the high borrowings from the domestic market in the absence of foreign capital market borrowings exerted severe pressure on the recurrent expenditure.' The Report stated that the enhanced salary and pension bills, spillovers in fertilizer payments adversely affected recurrent expenditure.
Mr. Gajendran also explained that capital expenditure projected at Rs.370 billion for 2009 might end up being around Rs.225 billion because public investment in the first four months of this year is Rs.85 billion. "If there should be an overrun at all, it should be on capital expenditure and not recurrent expenditure."
Deficit
The overall deficit for the first four months of 2009 stands at approximately Rs.200 billion. Mr. Gajendran said that in the 2009 Budget, the overall deficit was projected to be Rs.336 billion. "We have already reached Rs.200 billion which is 4% of GDP. If we project this for the year, the deficit will be around Rs.600 billion which will be 12% of the GDP and could be at the highest level since 2001."
Mr. Gajendran explained that budged deficits must be financed either through increased revenue, cutting down on expenditure or borrowing from overseas or locally. He said the International Monetary Fund (IMF) is recommended as a source of borrowing as it is long term and interest rates are low. This is why the US$1.9 billion IMF loan is crucial although it will come with conditions, he said.
The 2009 Budget projected that domestic borrowing from the banking sector was going to be zero. However, domestic borrowing from banks for the first four months of 2009 is Rs.149 billion. Projected for the year, Mr. Gajendran said the figure could be around Rs.450 billion.
"The budget deficit is ballooning and financing is not coming from overseas but from local banks." This might be an indication of inflationary pressures and the printing of money possibility may also emerge, Mr. Gajendran said.
From a fiscal point of view, Mr. Gajendran said the challenge is to look for alternate sources of funding, ideally from overseas.
The other option is to focus heavily on scaling down recurrent expenditure. |
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