Budget deficit surpasses Rs.2tn or 12.2% of total output

• Revenue plunges 8.7% of GDP from recent highest of 13.8%

Sri Lanka’s fiscal deficit reached an all-time high of Rs.2, 057.9 billion in 2021, which is equivalent to a massively unsustainable 12.2 percent of the total economic output as revenue plunged amid low tax rates and virus-related lockdowns, while the government’s purse strings were kept loosened, inviting the worst economic catastrophe ever faced by the island nation. 

The 2021 fiscal gap is compared with Rs.3, 041.0 billion or 11.1 percent of Gross Domestic Product (GDP) in 2020, which signaled to the authorities a year ago that the path that country was treading at the time was highly risky and an unsustainable one. 

But, policymakers didn’t budge to change the track, instead they decided to double down on it, making a complete mess out of the debt-ridden economy. 

Meanwhile, Sri Lanka’s revenues plunged 8.7 percent of GDP, from 9.1 percent in 2020 and 12.7 percent in 2019.  The ratio reached its recent high of 13.8 percent in 2017 in the first year of the previous programme with the International Monetary Fund. 

The expenditure, on the other hand, continued to climb to 21.0 percent of GDP from 20.2 percent and 22.3 percent in 2020 and 2019, respectively.  

Sri Lanka cut taxes in 2019 in a fiscal stimulus promised by the Rajapaksa administration to resuscitate the then wobbling economy. 

However, the pandemic induced lockdowns and the resulting shutdown of the economy in less than three months into the administration caused the government to lose nearly Rs.600 billion in tax revenues annually in 2020 and 2021.  This caused two back-to-back budget deficits leading up to the current economic crisis characterised by the worst ever Balance of Payment crisis, which has caused food and other commodities shortages, soaring inflation and insolvency due to high indebtedness.

According to Treasury data published by the Central Bank, the government revenue increased to Rs.457.1 billion in 2021 compared to Rs.1,368.0 billion recorded in 2020. But, this was below potential by at least Rs.500 billion due to the lower tax rates, a condition which was exacerbated by virus-related lockdowns. 

Sri Lanka also printed at least Rs.2.0 trillion in new money since the pandemic began in March 2020, following the herd led by the United States Federal Reserve and other leading global central banks to provide monetary stimulus.  All central banks are now fighting inflation as they had to reverse course on stimulus and raise rates faster than expected causing a financial sector meltdown as assets are being now re-priced at higher borrowing costs and potentially throwing the economies into recessions, which could result in massive job losses.