Budget deficit expands


After contracting for most of the year, the government’s budget deficit for the ten months up to end October 2010 has expanded 41.7 percent from the corresponding period of the previous year, latest data from the Central Bank showed.

The budget deficit for the first ten months of the year reached Rs. 376.8 billion, a 41.7 percent increase from Rs. 265.9 billion a year ago as expenditure growth outpaced revenue growth.

Year-on-year, the budget deficit had contracted 21 percent in March, 13.26 percent in May, 15.49 percent in June, 8.22 percent in July and 9.25 percent in August. The deficit expanded 1.06 percent in September.

The contractions were as a result of faster revenue growth compared to expenditure growth, which has reversed in October.

Total government expenditure grew by 21.57 percent to Rs. 1,048.7 billion during the first ten months of the year from Rs. 862.6 billion a year ago.

Total revenue grew at a slower pace, growing 12.6 percent to Rs. 671.9 billion up to end October 2010 from Rs. 596.7 billion for the corresponding period of the previous year.

Tax revenue grew by 14.66 percent to Rs. 580.3 billion during the ten month period from Rs. 506.1 billion the previous year. Non tax revenue increased by 14.77 percent to Rs. 80 billion while grants declined by 44.76 percent to Rs. 11.6 billion.

Total revenue and grants are estimated to reach Rs. 828.3 billion for 2010 and Rs. 986.1 billion in 2011.

Recurrent expenditure during the ten month period grew 3.07 percent to Rs. 787.4 billion from Rs. 763.9 billion a year ago while capital expenditure increased by 20.24 percent to Rs. 261.3 billion from Rs. 217.3 billion a year ago.

Total expenditure is estimated to reach Rs. 1,275 billion this year and Rs. 1,419.9 billion in 2011.

As a percentage of GDP, the budget deficit for the first ten months of 2010 amounted to 6.75 percent, which was 5.48 percent during the corresponding period of 2009.

The budget deficit ballooned to 9.9 percent in 2009 from the original 7 percent target and is expected to be brought down to 8 percent of GDP this year and 6.8 percent in 2011.

High budget deficits lead to higher borrowing requirements and have a bad affect macroeconomic stability with pressure on inflation and interest rates. Maintaining high deficits also limits the government’s ability to deal with external shocks, making it difficult to provide social security, welfare and invest in public infrastructure.

Earlier this year the Central Bank warned the government against reckless spending as it could threaten the low inflation and low interest rate regime. It said higher deficits would threaten private sector credit growth, which is required to double for per capita income was to double by 2016.

Loans to the private sector from the domestic banking system increased by 22.7 percent in October from a year ago, while Central Bank credit to the government fell by Rs. 15 billion in October from the previous month, latest Central Bank data showed.

Over the years, fighting terrorism has made it difficult for government’s to maintain fiscal discipline, but ill-advised policies and using the conflict as an excuse for lax fiscal discipline seems to have been the norm, so much so the Central Bank earlier this year warned against reckless spending by the government as it could pressure on inflation and interest rates and crowd out credit to the private sector.

Government debt increased to 86.2 percent of GDP last year from 81.4 percent in 2008. It is estimated to reach 84 percent this year and 79.8 percent in 2011 gradually declining to 72.5 percent of GDP in 2013 with the deficit at 4.8 percent.

The government is well aware of a problem in fiscal discipline.

"Government while placing high emphasis on quality of public spending has also expressed its commitment for implementing necessary reforms and policy initiatives to address structural and institutional issues," the Ministry of Finance and Planning said in a recent report.

"In this regard, reformulation of duties of the functions of the ministries has been done. Also, the coordination of policy implementation has been strengthened with private sector entrepreneurship being infused to public sector institutions, while a Cabinet sub committee has been appointed to made necessary recommendations to simplify the administrative and regulatory procedures, practices and related laws.

"Also, all line ministries have been requested to identify specific areas pertaining to their field of operation which can be opened for private sector (investment) with a view to enhance the use of idle assets in a productive manner," the Treasury said.

The Treasury said there were four risk factors for maintaining fiscal targets.

Two of them are from external sources; higher than expected oil and commodity prices and lower than expected global economic growth which could affect demand for Sri Lankan exports.

The other two risk factors to maintaining fiscal discipline are from domestic sources.

"New recruitments to the public service in excess of the targeted requirement and poor/under performance of state and public enterprises" are risks likely to have a material effect on the fiscal position.

As previously highlighted in The Island Financial Review, according to the Treasury the government is also incurring additional expenses on various development projects due to inefficiencies, causing huge cost overrun, price escalation, and delays.

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