Budget deficit expands 40%

* Reaches 4.03% of GDP in six months
* Debt escalates by 23.25% to Rs. 5.9 trillion as foreign debt grows twice as fast as domestic borrowings

The budget deficit for the first six months of this year expanded by almost 40 percent from a year ago with expenditure growth outpacing revenue growth, latest data released by the Central Bank showed.

The outstanding government debt stock rose 23.25 percent to Rs. 5.95 trillion as at end June 2012 from Rs. 4.82 trillion a year earlier.

Domestic borrowings grew 14.87 percent to Rs. 3.15 trillion while foreign borrowings grew twice as fast at 34.30 percent to Rs. 2.79 trillion, the Central Bank said.

During the period January to June 2012, total government revenue grew 15.40 percent to Rs. 496.8 billion while total expenditure grew at a much faster pace, up 23.52 percent from a year earlier to Rs. 799.7 billion.

Tax revenue grew at a modest 14.05 percent to Rs. 426.1 billion during this period.

Non-tax revenue and grants showed healthy growth rates during the first six months of this year.

Non-tax revenue grew 20.23 percent to Rs. 62.4 billion, while grants, which had been declining, grew 66 percent to Rs. 8.3 billion.

Recurrent expenditure grew 17.43 percent during the first six months of the year to Rs. 563.8 billion while capital expenditure had grown 40.94 percent to Rs. 235.8 billion, a very positive sign considering governments had in the recent past been sacrificing capital expenditure (or public investments) for runaway recurrent expenditure.

The budget deficit for the six months period expanded 39.64 percent to Rs. 302.9 billion. As a percentage of GDP, the deficit amounts to 4.03 percent.

The government has said it would remain committed to achieving a budget deficit to GDP target of 6.2 percent for the entire year even though it has already completed a programme with the IMF where this target was originally set by the government.

Standard Chartered Bank, which earlier this year downgraded its outlook for the Sri Lankan economy from positive to stable, said the budget deficit could reach 7 percent this year, missing the 6.2 percent target of the government.

"Sri Lankan authorities have implemented a number of measures in recent months, that have helped stabilise foreign exchange reserves. However, they will need to stay the course in order to prevent stresses building up again on the fiscal and external fronts," the bank said.

According to the Central Bank, gross official reserves reached US$ 7 billion as at end July 2012; however debt and short term capital make up a bulk of these reserves as already reported in these pages.

After allowing pressure to build up on the balance of payments, the authorities were forced to adopt a slew of policy reversals earlier this year which has seen interest rates increase and the rupee fall against the dollar.

The dollar closed at Rs. 132.37 last week. It traded at Rs. 110.10 a year ago.

The average weighted prime lending rate offered by banks to the more affluent has increased to 13.82 percent by the end of last week from 9.37 percent a year earlier.

Inflation peaked at 9.8 percent in July before easing to 9.5 percent last month.

Private sector credit and import growth are easing but export earning have declined, recent data showed.

The corporate sector is reporting profit declines and the country’s ranking in the World Economic Forum Global Competitiveness Report for 2011/12 also fell 16 places to 68th.

Meanwhile, Treasury Secretary Dr. P. B. Jayasundera told Reuters last week that economic growth this year may range between 6.7 percent and 7.2 percent depending on the impact of a drought that has lasted since the beginning of the year. The central bank had forecast 7.2 percent economic growth this year, after revising it down in March from the original 8 percent. Growth last year was a record 8.3 percent.

"The economy is slowing down not because of global recession or anything. It is because of the drought," Jayasundera told a Reuters forum in Colombo. He said he was optimistic about reaching this year’s budget deficit target of 6.2 percent of gross domestic product against last year’s figure of 6.9 percent.

He said year-on-year inflation, which eased to 9.5 percent in August from the previous month’s 43-month high of 9.8 percent, should show further declines from the first quarter of 2013. The economy, he said, will see the full benefit of this year’s tough measures - including two interest rate rises to two-year highs and the introduction of a flexible exchange rate - by the first quarter of 2013 and interest rates would dip.

"By the first quarter, when we see the economy cooling for a full year, I see prospects, not necessarily for an easing of monetary policy, but for seeing a low interest rate in the country," he said. The Sri Lankan rupee has depreciated more than 13 percent so far this year as the government switched to a flexible exchange rate policy in February, Reuters noted.

Both the central bank and treasury have said macroeconomic fundamentals support a rupee level of 125 per dollar. "Now it has stabilised around 130-131 level without central bank intervention. It may remain at that level," Jayasundera said. The central bank spent nearly one-third of the country’s foreign exchange reserves trying to prop up the rupee in the last four months of 2011 before moving to a flexible exchange rate in February. The central bank has said it will consider concerns including those of importers and exporters when deciding where the exchange rate target should be, instead of allowing a market-led exchange rate. "I am not a great fan of that advice," central bank Governor Ajith Nivard Cabraal said at the same event when talking about letting the market decide the exchange rate, Reuters reported.

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