Deficit bungle!

The Sri Lankan government is likely to overshoot yet another overambitious fiscal deficit target of 5.8 percent of the GDP, set out in the 2013 Budget to reach not below 6.5 percent, due to the overly optimistic revenue assumptions, according to a German global banking and financial service company.

“Given that economic growth has slowed substantially in 2Q12 and the future outlook also not indicating any sharp recovery, it will be indeed an uphill task for the authorities to achieve next year’s fiscal targets in our view,” Deutsche Bank AG (Deutsche) said in a report.

The last and the only time the country managed to contain its fiscal deficit below the 6.0 percent level was way back in 1977, just before the economy was liberalized.

“The 2013 Budget assumed revenue collection to pick up by 50 basis points to 14.7 percent of the GDP, from a likely 14.2 percent of the GDP outturn in 2012, contrary to the current trend of revenue/GDP ratio falling steadily each year. Given our growth projection, we expect revenue collection/ GDP ratio to be 14 percent of the GDP in 2013, along with our expenditure estimates of 20.5 percent of the GDP,” Deutsche Bank noted.

Meanwhile, in the first nine months of 2012, the fiscal deficit reached 6.44 percent of the GDP, exceeding the full year target of 6.2 percent. The 2011 budget deficit (excluding grants) target was also missed slightly to reach 7.0 percent of the GDP from the planned 6.8 percent.

“Of course, the government could cut back on capital expenditure aggressively to meet the headline budget deficit target (as it has done this year) but then such a development would most likely have negative implications for public investment and consequently overall GDP growth,” Deutsche Bank stated.

Further, the Sri Lankan government has a much more ambitious target in 2014 to cut the fiscal deficit to 4.7 percent of the GDP and to bring public debt to 65 percent of the GDP by 2015, from the existing 78 percent.

The Global Markets Research team at Deutsche also forecasted in their ‘Asian Economic Special’ under Sri Lankan Chapter the economy to grow not above 6.2 percent and 7.0 percent for 2012 and 2013, respectively.