Budget deficit likely to exceed 6.2% target and reach 8% of GDP

The Sri Lankan rupee (SLR) will stabilize at Rs.130-132 against the US dollar by the end of 2012, depreciating 16 percent year-on-year (YoY) and is likely to depreciate from 2 to 3 percent in 2013, a recent report by a local stockbrokerage said.

According to CT Smith Stockbrokers, the Sri Lankan rupee has depreciated 15 percent during the first eight months to Rs.131 levels against the US dollar.

“The easing of pressure on the balance of payments is expected to contribute to the appreciation of the SLR from current levels.

We expect Sri Lanka to post a balance of payment surplus of US$ 0.2 billion by end 2012E,” the report noted.

It also said that slower growth in credit and broad monetary aggregates, followed by improved liquidity in the money market should further help stabilizing the currency in the near term.

In November last year, Sri Lanka devalued its currency by 3 percent and later, the authorities allowed the interest rates and exchange rates to be determined by the market forces amidst depleting foreign exchange reserves.

In the meantime, the Central Bank tightened its monetary policy stance during the first half of 2012, in the wake of currency pressure on account of a sharp rise in demand for import credit.

However, according to the report, further tightening of the monetary policy is not expected due to reducing import demand pressure.

Trade deficit reduced to US$ 663 million in June 2012, the lowest since February 2011, as a result of the shrinking of imports.

However, CT Smith in its report forecasted a balance of trade deficit of US$ 10.1 billion by the end of 2012, which is 17 percent of the country’s GDP. Sri Lanka’s trade balance stands at US$ 4.7 billion during the first half of 2012, up 12 percent YoY.

“Despite successes in curtailing high import growth (due to excise duty hikes, currency weakness and higher interest rates) and anticipated higher foreign inflows into the capital and services accounts, the magnitude of the BOT deficit, 17% of the GDP, remains a key concern,” the report noted.

It also pointed out that given the fiscal performance, it seems unlikely Sri Lanka will meet its deficit expectation of 6.2 percent of the GDP by the end of 2012.

“We forecast the budget deficit to rise to 8.0% of the GDP (-Rs.599 billion) for 2012E, largely due to higher than expected recurrent expenditure and low revenue growth,” the report said.

The recently released Central Bank data showed that Sri Lanka has incurred a deficit of 4 percent of the GDP in the first half of the year.