Borrowings by the State from the Central Bank and licensed commercial banks plunged in February, which could be a sign of improving government revenues by way of taxes as economic activities are increasingly becoming normalised as virus scare recedes.  

According to the latest available data, in February, the Sri Lankan government borrowed Rs.35.1 billion on net basis, substantially down from Rs.209.9 billion in January.

These borrowings consisted of Rs.72.2 billion worth of fresh borrowings from the Central Bank liquidity, but the government settled borrowings worth Rs.36.9 billion to licensed commercial banks, cutting the net borrowings to half. 

During February, the outstanding stock of government securities held by the Central Bank, which is also referred to as Central Bank liquidity, rose by Rs.73.72 billion, about the same amount under State borrowings from monetary authorities. 

Since then, fresh Central Bank liquidity has risen by Rs.34.06 billion to Rs.844.02 through April 1, 2021. The government is making the most of the historically low borrowing costs to manage its finances by skewing its borrowings towards domestic market from foreign sources, with the dual objective of reducing the reliance on foreign borrowings to bridge the budget deficit and also to re-build foreign reserves via non-debt creating inflows.

Despite the unwarranted pressure levelled at the rupee since January, the Central Bank continued to remain a net buyer of foreign exchange. It bought around US$ 50 million through March 23, after it bought US$ 23.42 million in February. The Central Bank yesterday refuted a news report that it was planning to defer settlements to domestic holders of foreign currency debt issued by the government coming due this year.  

Improvement in government finances happens in lockstep with the improvement in the overall economy as a working economy generates more tax incomes even at lesser rates. 

Sri Lanka’s tax incomes in August and September last year came closer to their 2019 levels when the economy staged a quick rebound from its re-opening. 

Further, the data available through August 2020 showed that revenue from corporate income taxes increased significantly by 12.1 percent to Rs.132.1 billion during the eight months. 

Sri Lanka’s debate about tax should not be about whether the rates are too high or too low, but whether the tax income is properly collected, i.e tax administration, and more importantly if the tax moneys are spent on sectors and areas where they are ought to be spent, without being siphoned off.  

Meanwhile, net credit to the public corporations by the licensed commercial banks increased by Rs.21.9 billion in February, coming down from Rs.56.0 billion in January. 

With the robust private sector credit growth in February which came in at Rs. 79.4 billion and the net credit to the State and the public corporations, the money supply measured by way of Broad Money or M2b rose by 23.8 percent from the same month in 2020, slightly accelerating from 23.7 percent in January.