Budget deficit in first 5 months up as lockdowns hit revenue

• Fiscal deficit increased to 3.9% of estimated GDP, up from 2.8% in 2019 
• Tax revenue down to Rs.508bn from Rs.705bn last year 
• State leans more on domestic borrowings to bridge fiscal deficit due to falling borrowing cost
• Total outstanding debt rises by Rs.864bn to Rs.13.9tn

Sri Lanka’s budget deficit for the five months up to May rose as the economic shutdown triggered by the pandemic hit the tax revenues, but the government cut public investments to keep the deficit from over-stretching. 

Tax revenues during the first five months to May fell to Rs.508.3 billion from Rs.705.0 billion during the same period in 2019 as the economy lost momentum half way through March. 
Due to the coronavirus outbreak, the government had to restrict economic activities barring a few essential services causing the State to forego some crucial tax revenues. 

Sri Lanka’s economy was on a solid path to recovery, incentivised by both fiscal and monetary stimulus before pandemic-related lockdowns damaged it as they affected some crucial manufacturing industries, mainly oriented towards exports from as early as February, while the State lost two of the most economically active months of March and April going into the festive season. 

Sri Lanka’s economy contracted by 1.6 percent during the first quarter with industry and agricultural activities contracting by 7.8 percent and 5.6 percent respectively, while the services sector recorded 3.1 percent growth. 

Further, taxes less subsidies on products contracted by 10.8 percent during the quarter. 

Meanwhile, non-tax revenues to the State in the first five months grew from Rs.65.8 billion last year to Rs.75.0 billion. 

However, the total State revenues from taxes, non-taxes and grants fell form Rs.771.3 billion to Rs.585.3 billion in the current year. 

This translated into 3.7 percent of the estimated gross domestic product (GDP) from 4.9 percent of GDP recorded in the corresponding period in 2019, the Central Bank said. 
Meanwhile, the recurrent expenditure of the State increased to Rs.1, 043.9 billion in the five months to May from Rs.958.8 billion in the same period in 2019. 

The pandemic prompted the government to ramp up its fiscal spending to provide cash handouts to millions affected by the lockdowns during April and May; to sustain the health and defense sectors, which played a crucial role to contain the pandemic and also to continue certain essential services throughout the country.   

However the government substantially cut its public investments during the period as ‘capital and lending minus repayments’ fell from Rs.247.3 billion in the first five months of 2019 to Rs.151.5 billion in 2020. 

As a result, the total government ‘expenditure and lending minus repayments’ during the first five months fell to Rs.1,195.4 billion from Rs.1,206.1 billion in the same period last year. This translated into 7.6 percent of estimated GDP, slightly down from 7.7 percent of GDP in the same period in 2019. 

Accordingly, the total budget deficit for the first five months increased to 3.9 percent of estimated GDP from 2.8 percent recorded in the corresponding period last year. 

Meanwhile, in financing the budget deficit, the government increasingly leaned on domestic financing, which increased to 4.7 percent of the estimated GDP in the first five months compared to 2.2 percent in the corresponding period in 2019. 

This is because the government had limited options to raise foreign borrowings due to the pandemic while the cost of domestic borrowings fell significantly in response to aggressive monetary policy easing.Meanwhile, the foreign financing as a percentage of estimated GDP recorded a net repayment of 0.8 percent during the first five months of 2020 compared to a net borrowing of 0.6 percent recorded in the corresponding period of 2019, the Central Bank said. 

“In nominal terms, outstanding central government debt increased to Rs.13,895.9 billion by end of May 2020 from Rs.13,031.5 billion as at end 2019. Total outstanding domestic debt increased by 11.3 percent to Rs.7,381.4 billion, and the rupee value of total outstanding foreign debt increased by 1.8 percent to Rs. 6,514.5 billion by end May 2020,” the Central Bank noted.