• Jan-Aug expenses overshoot budget; but slightly higher than last year’s levels 
• Deficit in first eight months was 61% of Rs.1.83tn expected for this year
• Deficit entirely met with domestic funding of Rs.1.3tn 
• Outstanding public debt hits Rs.17.2tn, up nearly Rs.2.0 tn so far this year 

Sri Lanka’s fiscal deficit expanded to over Rs.1.12 trillion in the first eight months in 2021 compared to about Rs.975 billion in the same period last year, as the pandemic and its prolonged lockdowns deprived the government of its revenues, while its expenditure sored to contain the virus and support the affected. 

According to the latest fiscal data, the budget deficit in the first eight months was 61 percent of the total deficit of Rs.1.83 trillion expected for the whole year, which is estimated at 11.1 percent of the Gross Domestic Product (GDP).  

Sri Lanka presenting its budget for next year last month indicated its strong desire to bring down the deficit to Rs.1.63 trillion or 8.8 percent of the GDP with revenues projected at 12.3 percent of the GDP from an estimated 9.4 percent in 2021. 

However, concerns have been raised over some of the contentious one-off taxes, particularly the one with retrospective nature, which estimates to rake in Rs.100 billion in fresh revenues, calling to question their ability for full enforcement, although the government hasn’t budged yet. 

Sri Lanka expects to expand its output by 5 percent this year, largely on the base effects and the stronger expected fourth quarter recovery, followed by 6 to 7 percent growth in GDP next year. But the evolving pandemic remains a hangover and could to upset the trajectory depending on how governments around the world decide to respond.

Sri Lanka meanwhile generated revenues of Rs.942.5 billion in the eight months to August, slightly higher than the Rs.906.4 billion raised during the same period last year, but significantly below what the government aimed at collecting as the virus related restrictions since April this year put a damper on a large part of the tax revenues. 

Revenues from taxes, which were close to 99 percent in line with the budget in the first three months, which was possible due to a fast rebounding economy until the April New Year, started crumbling down thereafter in every month due to harsher restrictions re-imposed to stem the virus spread from the third week of April. 

The eight-month revenue was about 61 percent of the Rs.1, 556 billion estimated for the entire 2021, and generally the second half of the year brings 60 percent of total tax income to the Treasury. 

The tax incomes in the eight-month period came in at Rs.853.1 billion, accounting for 91 percent of total State revenues, slightly higher than Rs.801.3 billion in the comparable period in 2020 but largely undermined by the virus related business closures and other economic activities. 

Meanwhile, the expenditure overshot both the budgeted figures and what the government had expensed in the same period last year with the total bill coming in at Rs.2,062.4 billion due to higher virus-related expenditure. 

The double whammy, the loss of revenues and the higher expenses, prompted the government to lean heavily against domestic sources to finance its expanding budget deficit as it raised Rs.1.3 trillion via bills and bonds, compared to Rs.1.15 trillion raised from the same sources in the comparable period last year. 

However, as the government retired some heavier foreign exchange debt during the period including a billion dollar sovereign bond in July, its foreign financing of the budget saw a net repayment of Rs.183.1 billion in the eight months compared to a net repayment of Rs.176.5 billion in the same period last year. 

However, the rupee value of the outstanding foreign debt increased by 11.6 percent to Rs.6.75 trillion, reflecting the adverse impact of the steeper fall of the rupee against the dollar, although the government settled its foreign debt on a net basis. 

With the increase in the outstanding domestic debt by 15.5 percent to Rs.10.47 trillion, the total outstanding public debt rose to Rs.17.22 trillion by the end of August from Rs.15.12 trillion at the end of 2020.