July budget deficit expands 46%

*Expenditure grows twice as fast as revenue


Although it is too premature to deduce what the final outcome would be, data available for the first seven months of this year suggests the government is more likely to miss the 6.2 percent of GDP budget deficit target by the year’s end having reached 5.56 percent of GDP as at end July 2012, which is also an underestimation with economic growth downgraded to 6.8 percent last week.

Government expenditure growth raced ahead twice as fact as revenue growth, Central Bank data released last Friday showed.

Total revenue as at end July reached Rs. 564.4 billion, an increase of 12.85 percent from a year ago. Total expenditure reached Rs. 981.7 billion, increasing 25.13 percent from a year ago.

Tax revenue during the period January to July 2012 amounted to Rs. 490.4 billion, growing 11.93 percent from a year earlier. Non tax revenue grew 17.53 percent to Rs. 65.7 billion while grants grew 37.7 percent to Rs. 8.4 billion.

Recurrent expenditure grew 19.40 percent to Rs. 695.3 billion while capital expenditure or public investments grew 41.64 percent to Rs. 286.4 billion.

The budget deficit as at July 2012 reached Rs. 417.3 billion, expanding 46.72 percent from a year earlier.

According to initial estimates for economic growth, the GDP was expected to reach around 7,500 billion this year, which brings the budget deficit for January to July 2012 to 5.56 percent of GDP. The target for the full year was 6.2 percent. However, last week the Central Bank downgraded economic growth for the second time this year to 6.8 percent. The earlier estimates were 8 percent and 7.2 percent.

A positive development in the latest budget numbers suggests that the government is no longer sacrificing much needed investments to develop infrastructure in order to meet bloating recurrent expenditure obligations. However, capital expenditure is not easy to monitor and economists point out that the government could easily slip into practicing a form of crony state capitalism where resources are drained from the private sector, the engine of growth of any economy.

CT Smith Stockbrokers in a recent research report said it had forecast the budget deficit to rise to 8.0 percent of GDP (-Rs.599bn) for 2012E, "largely due to higher than expected recurrent expenditure and low revenue growth". It expects the deficit to recover to 7.1 percent of GDP (-Rs.611bn) for 2013E, "amidst faster expansion of nominal GDP, and a rebound in revenue growth. The deficit is expected to remain high amidst continued high public investment (> 6% of GDP)."

Officials say the final outcome of the deficit would be difficult to estimate as revenue flows generally pick up towards the latter part of the year.

The total outstanding debt stock of the government grew 23.84 percent to Rs. 6,161 billion as at end July 2012. Domestic debt was up 15.63 percent to Rs. 3,185.7 billion and foreign debt grew 34.01 percent to Rs. 2,975.3 billion.

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