Fiscal adjustments towards containing the budget deficit below 7% of GDP in 2009 suffered a setback due to less than expected recovery particularly in trade based activities and due to more than envisaged adverse impact of the global economic crisis of 2008/09 on the Sri Lankan economy, the Treasury said week. In its Pre-Election Budgetary Position Report 2010, it said the budget deficit of Rs.469,627 million turned out to be 9.7% of GDP in 2009 although the projected deficit was around 7.5%.
According to the Report, this was primarily due to a fall in projected revenue by Rs.23,580 million or 0.5 % of GDP, rise in interest payments by Rs.38,464 million or 0.8% of GDP and increase in public investments by Rs.48,074 million or 1% of GDP over the projected level for 2009.
Consequently, government revenue declined from the estimated level of Rs.725,708 million to Rs.702,128 million while total expenditure increased from Rs.1,091,566 million or 22.2% of GDP to Rs.1,197,240 million.
The report stated that the aberration in revenue outcome in 2008/2009 was a result of a continued deterioration in revenue collection from VAT, import duties and excise taxes levied at the point of import, due to the erosion in the value of imports as the tax base. The revenue from these 3 major sources declined to 8.2% of GDP in comparison to 9.5% in 2007 in spite of some offsetting measures taken through the introduction of high CESS rates underpinning the impact of an erosion in import based revenue collection as well as the vulnerability of the fiscal performance of the country to global economic fluctuations.
The value of imports declined to Rs.1,135,368 million in 2009 from Rs.1,516,681 million in 2008. In the wake of tight monetary policy stance adopted by the Central Bank (CB) to counter demand pressures in the economy which resulted in the rise in interest rates in excess of 18% on one year Treasury bills, interest payments on government debt increased to Rs. 308,292 million or 6.4% of GDP in 2009 from Rs.212,474 million or 4.8% of GDP.
High interest rates together with a depressed global economic outlook reduced credit growth to the private sector by the banking system to -5.2% in 2009 from 7.8% in 2008, compressing private sector investment to 16.6% of GDP from 21.1% of GDP. However, the Report stated that domestic savings were raised to 17.2% of GDP in 2009 from 14.1% of GDP the previous year which in turn facilitated stability in the wake of a high fiscal deficit, which primarily stemmed from high public investments in major infrastructure projects essential for private investment in the long run.
Although recurrent expenditure at Rs.884,664 million which is 18.4% of GDP, is in excess of the targeted level of Rs.829,641 million (16.9% of GDP), the Treasury stated that this increase was almost entirely explained by the overrun in interest payments which was in excess of Rs.38,464 million (0.8% of GDP).
The non interest recurrent expenditure moderately increased from the targeted level by Rs.16,559 million reflecting pressure for salaries and welfare expenditure in the wake of high inflation until the end of the first half of 2009 and additional claims n account of immediate post conflict rehabilitation and humanitarian expenditure. Expenditure on account of public sector wages and pension and operational costs of public services reflected the cost of the expanded public services.
Government spending
The Report states that according to the provisional data, the overall expenditure at Rs.1,197,240 million in nominal terms recorded a 20% growth in 2009. This constituted recurrent expenditure of Rs.884,664 million and public investment of Rs.314,654 milion. The recurrent expenditure increased by 19%. Major contributory factors were enhanced relief assistance provided to internally displaced persons after liberating the North from terrorists, enhanced public investments, an increased cost - of – living allowance for public servants and pensioners and more than expected cost of interest payments on public debt.
Donor funds
The total commitment made by donor agencies and lenders to Sri Lanka during 2009 was US$2,221.7 million which is the highest commitment recorded so far. Until 2009, the highest commitment of US$2,069 was reported in 2008. Of the total commitments, loans accounted for US$1,942.1 million and grants accounted for US$279.6 million.
The Government of China, the Asian Development Bank and the World Bank were the three main donors who accounted for US$1,872.2 million or 84.3% of the total commitment in 2009. Apart from the grant of US$2.4 million, Chinese assistance was in the form of preferential buyer’s credits and buyer’s credits and accounts for 54.3% of the total commitment.
External debt and service payments
The Report shows that the government’s external debt stock as of December 31, 2009 stood at US$15.3 billion (Rs.1,760.4 billion). This was an increase of 8% or US$1 billion compared to the debt stock at 31 December 2008. However, the rupee value of the debt stock has increased by 21% or Rs.311 billion during the same period. According to the Treasury, the higher rate of increase in rupee terms was due to the depreciation of the Sri Lankan Rupee against the other major currencies. The total external debt service payments made in 2009 amounted to US$1,043.2 million. Of this US$815.3 million was for principal payments and the balance US$227.9 million was on account of interest payments.
Government debt
The total debt of the government amounted to Rs.4,161 billion at end 2009 agaist Rs.3,589 billion at end 2008. The increase in total debt exceeded the nominal growth in GDP. The total debt consists of Rs.2,401 billion of domestic debt and Rs.1,760 billio foreign debt while foreign debt constitutes 42.3% of the total debt.
Revenue
The Treasury is projecting revenue for 2010 as a whole to be Rs.825 billion with tax revenue of Rs.735 billion and non tax revenue of Rs.89 billion. These revenue estimates are based on the assumptions that the Sri Lankan economy would grow by 6 – 7% in 2010.
Expenditure estimates
According to the Treasury, the total expenditure for 2010 is estimated at Rs.1,263 billion which constitutes of Rs.933 billions of recurrent expenditure and Rs.342 billion of public investment. Salaries and wages are estimated to be around Rs.297 billion while the pension bill would be Rs.93 billion. Considering that prevailing interest rates will not deviate significantly, the Report states that the interest cost for 2010 is estimated at Rs.345 billion.
Borrowings
The Treasury is expecting that borrowings for 2010 on net basis would be in the region of Rs.415 billion. The total foreign borrowing on net basis would be Rs.102 billion, while the balance will be borrowed domestically. With these developments, it is expected that the revenue deficit would decline to1.5% of GDP and the budget deficit to around 7.5% of GDP in 2010.
IMF facility
Referring to the delay in the 3rd tranche until the IMF review is completed, as at this stage the Treasury said there is no urgent requirement to further strengthen external finance. |
E-mail
