June state borrowings from CB and banks surge as restrictions deprive tax incomes

The borrowings by the government from the commercial banks and Central Bank shot up in June, due to the tax-killing virus-related restrictions on economic activities, while the sale of liquor, which generates most incomes to the state coffers by way of Excise duties, was banned, throwing the government 
finances into a fix. 

The Treasury borrowed a whopping Rs.170.6 billion in June 2021, up nearly three times from Rs.58.9 billion in a month ago and Rs.39.5 billion in April, as the restrictions, which gradually transformed into lockdowns by mid-May, kept most small businesses shuttered.

Treasury Secretary Sajith Attygalle last week was reported to have said that although the state revenue through June-end was 8.0 percent higher from the year earlier period, partly due to base effects, it largely lagged the budget, as it failed to generate 40 percent of the revenue share the government typically generates during the first half of an year. 

In general, 40 percent of the budgeted revenue in a fiscal year is generated in the first half, while the balance 60 percent coming in the second half, due to relatively heightened economic activity typically associated with that period.

Attygalle attributed the loss of Value-Added Tax from consumption-killing restrictions and the loss of Excise duties stemming from the liquor sales, as selling of liquor was banned.

However, the lockdowns and the related restrictions were lifted on June 21, with little to no change in the daily case load and the number of dead by the virus as the Treasury coffers ran dry, scores of people were pushed into poverty and millions of schoolgoing age children are losing years of learning, potentially taking a slice of the future economic growth of the country. 

The Central Bank had to inject billions of rupees to the government in return for Treasury bills, making the largest share of the state borrowings in June. 

By end-June, the Central Bank holdings of government securities or the cumulative liquidity injections were at Rs.919.24 billion, from Rs.856.65 billion at the beginning of the month. 

This stock surged to Rs.1,141.05 billion by July 30, as the Central Bank printed Rs.213.48 billion in fresh money on July 26, to repay a billion dollar sovereign bond with coupons on the following day. 

But this doesn’t trigger inflation, as these moneys don’t come into circulation, as they were swapped for dollars to settle the bond. 

Commercial banks gave Rs.46.3 billion as fresh credit to the government in June. 

Meanwhile, during June, the total outstanding credit to the public corporations rose by Rs.19.4 billion, matching the same amount in May.