Fiscal deficit widens; expenditure exceeds revenue by 83% in first four months of this year

In the first four months since January, the government expenditure surpassed government revenue by 83 per cent resulting in a budget deficit of Rs. 524.1 billion which is 0.7 per cent higher than the Rs.520.5 billion budget deficit in the same period last year, a Treasury report revealed. 

The government expenditure increased by 15.2 per cent to Rs. 1,155.2 billion in the first four months, compared to Rs. 1,002.8 billion in the same period last year while recurrent expenditure grew by 14.2 per cent to Rs. 1,016.8 billion in the first four months due to the increase in expenditure on interest payments, salaries and pension payments. 

The Mid-Year Fiscal Position Report- 2022 published under the Section 10 of Fiscal Management (Responsibility) Act No 3 of 2003 on Thursday is due to be submitted to the Parliament by Prime Minister Ranil Wickremesinghe in the coming weeks in his capacity as  Minister of Finance, Economic Stabilization and National Policies.

Under the Act, the Minister of Finance is required to present the Mid-Year-Fiscal Position Report which provides updated information on the government’s fiscal performance as per the fiscal strategy of the government to the public by the last day of June of the year and thereafter submit before Parliament.

The report also shed some insight into how the cash-strapped government is struggling to secure funding to finance government expenditures. The total borrowing limit approved by Parliament for this year amounted to Rs. 3,200 billion within which the utilization of government borrowings for the period from January 1 to April 31 was recorded as Rs. 1,754.1 billion. 

The expenditure on salaries and wages of public servants including Provincial Councils increased by 15.3 per cent to Rs. 316.1 billion in the first four months, compared to Rs. 274.0 billion in the same period last year while, the expenditure on pension payments increased by 14.1 per cent to Rs. 99.7 billion in the first four months, the report found. 

The rupee has recorded a depreciation of 44.3 per cent against the US dollar during the year up to May 13, the report stressed. “The country’s reserve position as of end April  was provisionally estimated at USD 1.8 billion,  including the swap facility from the People’s Bank  of China equivalent to around USD 1.5 billion, which  is subject to conditionalities on usability,” 

The workers’ remittances, which have been  the second-largest source of foreign currency  earnings, declined significantly by 53.1 per cent to  USD 1,335.6 million in the first five months  compared to USD 2,845.9 million recorded in the 
same period last year. 

Price escalations in fuel and coal in the world market and the rupee devaluation have led to an increase in the direct generation cost of Ceylon Electricity Board (CEB)  significantly by 68 per cent from Rs. 59,849 million to Rs.100,615 million during this period.  

Owing to the significant increase in the generation cost, CEB has incurred a large operating loss of  Rs. 47,190 million in the first four months compared to the loss of Rs. 7,515 million in the same period last year.

The total outstanding obligations of CEB to Ceylon Petroleum Corporation (CPC) and Independent Power Producers have decreased to Rs. 121,811 million as at end of April with the government providing a subsidy of  Rs. 45,000 million to CEB to settle its outstanding obligations to CPC, the report revealed.

The Independent Power  Producers, mainly in the Renewable Energy sector, have also faced severe financial difficulties due to non-payment by the CEB. Furthermore, the outstanding obligations to the state banks have also increased to Rs.115,964 million as of the end of April due to the increase in overdraft facility  while the total outstanding to the banks including project loans stood at Rs. 429,062 million at the end of April.

Meanwhile, sales of petroleum products increased marginally by 4 per cent in the first four months compared to the 1,920 million sold in the corresponding period last year even though the import volume of petroleum and petroleum-related products was limited to around 11 million barrels in the first four months “due to the significant bottlenecks in the supply chain both globally and due to domestic foreign exchange shortages,”. 

 As the international price of a barrel of Brent crude oil has increased by 24 per cent up to USD 105 bbl in the first four months of the year,  CPC’s total import cost of petroleum products increased by 40 per cent to USD 1,254 million in the  first four months of 2022, compared to USD 894 million in the same period last year.

The report also cautioned that CPC’s financial position would continue to be at risk due to foreign currency-denominated liabilities on its balance sheet.  “A depreciation of the rupee results in added foreign exchange losses for CPC which weakens its bottom line. 

“The exchange rate loss during the first four months was Rs. 549,955 million compared to Rs. 26,738 million were recorded in the same period last year. This has led to the CPC ending up with an overall loss of Rs. 628,381 million at the end of April,”

The total liability payable to the two-state banks as of April 30 has reached Rs. 1,223,635 million. The CPC’s accumulated losses and negative net worth amounted to Rs. 1,047,391 million and Rs. 985,886 million, respectively as at end of April. At the same time, the outstanding dues from various enterprises, primarily from Ceylon Electricity Board and SriLankan Airlines stood at Rs. 175,927 million at the end of April. 

The loss-making national carrier- SriLankan Airlines (SLA) has Rs. 618,677.61 million in liabilities, including interest-bearing facilities  such as a sovereign guaranteed USD 175 million  international bonds, Treasury guaranteed bank  loans from state banks, aircraft leases, and debt with trade creditors, primarily CPC. 

“In this context, the  government is no longer able to finance SLA’s  losses and there is an urgent requirement to  restructure SLA’s balance sheet and convert its operating model into a profitable structure,” the report added. 

During the first four months of this year, SLA earned a revenue of Rs. 71,825 million and the total cost has been Rs. 320,266 million. Accordingly, the loss for the period is Rs. 248,441 million. SLA experienced a significant one-time  exchange loss of Rs. 145 billion in March as well.