Budget deficit slashed to 5.4% amid expenditure cuts, higher revenue

By Chandeepa Wettasinghe
The Central Bank revised Sri Lanka’s budget deficit for 2016 downwards to 5.4 percent of gross domestic product (GDP) recently due to expenditure cuts, bringing the key indicator in line with government expectations again, following lapses in 2014 and 2015.
But an official Finance Ministry document, which was distributed this January, placed the budget deficit at 5.6 percent of GDP.

Finance Minister Ravi Karunanayake, who in the past year has never hidden his desire to bring the independent Central Bank under his thumb and who has now started drafting legislation to such effect, at a media briefing last week said changes to the figures took place at the behest of his ministry. “The Central Bank governor presented the annual report yesterday. There were some modifications that we wanted that have taken place as required. That should be commended,” he said.
According to the finance minister, the fiscal deficit narrowed further than initially reported due to more efficient taxation mechanisms.
“Revenues have gone up, not in areas of increasing taxes, because VAT had not come in by that time (but) because (of) revenue slippages—taxes which were not collected had come in. Revenue, which were not collected before, which had political privileges, had now come in,” he said.
He further added that customs revenue and excise duty revenue have also increased, while unwanted expenditure has been trimmed down, contributing to further fiscal discipline.
While Karunanayake’s claims of higher revenue collection were indicated in the Central Bank data, they also showed that the performance still fell below expectations.
The total revenue for 2016 reached Rs.1,686.06 billion or 14.2 percent of GDP, below the goal of Rs.1,822.97 billion, although showing a marked improvement from the Rs.1,454.87 billion or 13.3 percent of GDP year-on-year (YoY).
The government couldn’t reach its targets since the value-added tax (VAT) amendments Karunanayake gazetted last May as part of the 2016 budget proposals were found illegal by the Supreme Court in late July, pushing back proper implementation to November 2016.
The government expects revenue targets to hit 14.9 percent of GDP this year.
Recorded expenditure cuts were even sharper than the loss in revenue, with Rs.2,333 billion in expenditure in 2016 compared to a target of Rs.2,578.12 billion, but remaining higher than Rs.2,290.39 billion YoY.
The primary deficit, which compares revenue to recurrent expenditure, fell down by over 10 times YoY to 0.2 percent of GDP, which points towards an improving capacity of Sri Lanka to repay its massive borrowings, estimated to be 79.3 percent of GDP.
Karunanayake called the fiscal discipline “a tremendous success”. He won the London-based The Banker magazine’s ‘Finance Minister of the Year for Asia Pacific’ award for the country’s fiscal performance last year.
This was after he managed to push the fiscal deficit to 7.4 percent of GDP compared to a projected 4.4 percent of GDP in 2015, when an election year pushed the government to dole out goodies in exchange for votes.
Former President Mahinda Rajapaksa, who was also the country’s former Finance Minister, failed to keep the budget deficit down in 2014 as well, amidst an effort to stay in power during elections in January 2015.
Except in 2014, the past government had managed to keep the budget deficit targets since the end of the civil war in 2009.