Budget delay could handicap fiscal measures required to soften COVID-19 impact: CB

• Points out importance of strengthening revenue mobilisation to minimise adverse impact on fiscal policy and debt sustainability
• Submission of budget for 2020 was delayed amidst the presidential election held in November 2019 
• Cautions govt. against plans to increase public sector recruitment 
• Calls for fiscal consolidation efforts through improved revenue mobilisation and prudent spending

By Nishel Fernando
The Central Bank (CB) has cautioned that the possible delays in presenting the government budget for 2020 would limit the space for implementing new fiscal measures for 2020, which are considered to be crucial to avert the adverse impact stemming from COVID-19 pandemic on fiscal policy and debt sustainability of the country. 

In 2019, the overall State revenue declined to 12.6 percent of GDP from 13.4 percent of GDP in 2018 while the total State expenditure and net lending as a percentage of GDP increased to 19.4 percent in 2019 from 18.7 percent in 2018 due to the increase in recurrent expenditure despite the decline in public investment. 
Consequently, the fiscal deficit rose to 6.8 percent of GDP in 2019 from 5.3 percent in 2018.

Due to fiscal stimulus and adverse economic impacts stemming from the COVID-19 pandemic, the CB projected the State revenue would decline to 9.8 percent of GDP this year, further expanding the budget deficit to 7.9 percent of GDP for the year.

“In this backdrop, it is important that adequate measures are initiated to strengthen government revenue mobilisation, particularly in the context of renewed risks to economic recovery amidst the widespread COVID-19 outbreak globally and its adverse impact on fiscal policy and debt sustainability in Sri Lanka,” the CB asserted in its 2019 Annual Report, which was released this week. 

The submission of the Budget for 2020 was delayed amidst the presidential election held in November 2019. 
Accordingly, a Vote on Account for the first four months of 2020 was approved by the Parliament in October 2019, by postponing the preparations of the government budget for 2020.

Following the presidential election, the Parliament was dissolved on March 3, 2020 without approving an annual budget or a VoA and the nominations of candidates were accepted by the Election Commission for a general election, which was scheduled to be held on 
April 25, 2020.

However, the general election was postponed by the Election Commission due to the spread of COVID-19 disease in the country.

“Accordingly, the submission of the government budget for 2020 could be delayed, which would limit the space for implementing new fiscal measures for 2020,” the CB cautioned. 

Following the dissolutions of the Parliament, President Gotabaya Rajapaksa empowered the Secretary to the Treasury with powers concerning spending monies from the Consolidated Fund to continue public services and development activities initially during the three months starting from March 6, 2020 as per the Constitution. 

Meanwhile, key Opposition parties have urged President Gotabaya Rajapaksa to reconvene the old Parliament, pointing out that the President is not empowered to spend State funds following the expiry of the three months and to avoid a potential constitutional crisis in the midst of a pandemic.

Underscoring the outcome in fiscal operations in 2019, the CB reiterated the necessity for strengthening fiscal consolidation in the period ahead, supported by prudent expenditure rationalisation and revenue enhancement.
In particular, it recommended curtailing the fast rising recurrent expenditure of the government to support strengthening fiscal balances over the medium term. 

In 2019, recurrent expenditure increased both in terms of GDP and in nominal terms. Accordingly, recurrent expenditure, as a percentage of GDP, increased to 15.3 percent in 2019 from 14.5 percent in 2018, while in nominal terms, recurrent expenditure increased to Rs. 2,301.2 billion in 2019 from Rs. 2,089.7 billion in 2018. 
The CB said the notable increase in recurrent expenditure was due to higher expenditure on subsidies and transfers, salaries and wages and interest payments.

The CB also advised the government to evaluate the lasting impact on government expenditure as it plans for mass scale recruitment to the public sector.

“While the government plans to increase recruitment to the public sector partly to address issues such as youth unemployment, poverty, regional disparity etc., any large scale recruitment to the public sector could eventually result in a lasting impact on government expenditure on account of salaries and wages and pension payments, particularly in the context of the non existence of a contributory pension scheme for the public sector,” the CB pointed out. 

The CB cautioned that expanded budget deficits, unless contained, could result in narrowing the fiscal space needed for public investment in the areas of health, education and social protection, thereby resulting in a deterioration of productivity and dampened economic growth, endangering poverty alleviation efforts of the government gains in the primary balance.

Further, it warned that such prolonged budget deficits could undermine fiscal consolidation efforts and seriously challenge debt sustainability in the period ahead unless real economic activity boosts up significantly.

Sri Lanka has US$ 5-6 billion external debt repayment commitments per annum on average due in the medium term including high proportion of commercial loans, which are generally characterised by higher interest costs together with relatively short maturities than concessional sources, as per the CB.

In this context, it is envisaged that Sri Lanka would need to rollover the existing debt by issuing international sovereign bonds (ISBs) and through syndicated loan facilities from international financial markets.

In particular, the CB cautioned that revisions to Sri Lanka’s sovereign rating could result in raising the cost of rolling over the increased commercial debt stock in the period ahead, exerting pressure on international reserves, the exchange rate and fiscal operations. 

“In this context, along with the active liability management framework, it is vital that fiscal consolidation efforts are continued through improved revenue mobilisation and prudent spending while adopting sound fiscal rules to ensure overall public debt sustainability as well as external debt sustainability,” the CB stated. 

The central government debt to GDP ratio rose to 86.8 percent by end-2019 from 83.7 percent at end-2018, mainly reflecting the impact of the increased budget deficit and the relatively modest growth in nominal GDP in 2019. 
Due to the prevailing adverse environment, the CB projected that Central Bank debt would reach 92.4 percent of GDP at the end of this year.