• FCR forecasts double-digit budget deficit for this year similar to last year
• SL recorded highest budget deficit of 11.1% of GDP in 2020
• FCR says COVID-19 related restrictions kill ability of biz to generate tax revenues 
• Implies more money printing likely to manage govt.’s expenditure needs
• Printed money stock grown from Rs.78bn in March 2020 to Rs.868bn in June 9, 2021

The government is likely to end up with a blowout in the fiscal gap this year with the deficit potentially reaching double digits amid slowing tax income due to COVID-19 related restrictions and heightened expenditure on virus control and welfare spending on those affected by the pandemic. 

Sri Lanka recorded its highest budget deficit in 2020, which reached 11.1 percent of the gross domestic product (GDP). But the current restrictions are already having a vicious impact on revenues and expenses, forcing First Capital Research (FCR) to forecast another year of double-digit deficit in the budget for 2021. 

“Government further revised its already high budget deficit upwards to 9.5 percent of GDP, but is most likely to reach a double-digit deficit similar to 2020 amidst the continued infrastructure spending and additional unplanned spending required due to third COVID wave,” FCR said in a recent research note.  

The toxic combination of losing revenues, rising expenses and extremely limited options available for the government to finance this deficit will lead to more money printing, which has already reached excessive levels due to the Central Bank liquidity provided to the government since the onset of the pandemic last year.

The Central Bank’s holding of Treasury bills and bond stock or the printed money stock gradually grew from Rs.78 billion in March 2020 to Rs.868 billion in June 9, 2021.  

“This trend is likely to continue as the government continuously falls short of the revenue targets leading to money printing measures,” the research firm noted. 

Sri Lankans already contend with rising food inflation, just shy of 10 percent every month as excessive money printing sans corresponding improvement in productivity leads to runaway inflation. 

Meanwhile, excessive money printing has also resulted in weaker rupee, as a part of that money was spent on imported goods as seen from the March trade deficit data this year. 

Further, part of the record amount of money sent back by way of worker remittances are also spent on imports by their recipients, further weighing on the rupee against other currencies. 

 With the thinning tax revenues, the government will have to print more money to pay a bloating public sector who get their full salaries, while the private sector that fuels the economy, gets reduced salaries due to the COVID-19 economic impact on businesses. 

Certain industries are already calling for wage subsidy models from the government for them to keep their employees in payrolls. Adding to the fiscal woes, the government is now forced to print more money to transfer welfare benefits to millions who lost their livelihoods due to virus related restrictions and many such rounds would be required to sustain the public if the government decides to extend the current restrictions.