Sri Lanka Brief
FeaturesSri Lanka revenue crunch continues in 2012

Sri Lanka revenue crunch continues in 2012

 High state spending is continuing to put pressure on the economy with billions of rupees being printed in April to meet expenses on top of earlier bank borrowings, official data shows.

 The Central Bank’s Treasury bill stock which fell to a low of 214 billion rupees from a high of 259 billion rupees on May 09 amid collection of foreign reserves, surged again to 256 billion rupees.
 Printed Money

On Thursday excess liquidity in the banking system which had fallen to 3.4 billion rupees surged to 21.6 billion rupees, Central Bank data showed.

An increase in the Central Bank’s Treasury bill stock and a fall in excess liquidity points to sterilized sales of foreign exchange and foreign reserve losses.

An increase in the T-bill stock and a simultaneous increase in bank liquidity points to money printed to finance the budget deficit.

In April the state pays twin salaries to its workers and similar money printing has been seen in some past years, amid higher a demand for cash April, which has tended to reduce the negative effect of such ‘quantity easing’.

Analysts say in some years, the steep surge in reserve money has put pressure on the currency from May. The central bank could however mop up the liquidity by non-sterilized sales of foreign currency.

In countries with more stable currency pegs, such as Hong Kong or Singapore, seasonal cash demands are met, not by the creation of new money but by a running down of statutory reserves, which tends to keep reserve money stable.
 Budget Gaps

Data released by the finance ministry said that in 2011, total revenues and grants at 974.29 billion rupees was 33.5 billion rupees less than the planned 1,007.8 billion rupees, a shortfall of 33 billion rupees.

However in January the state borrowed 67.5 billion rupees from banks indicating an even greater fiscal crunch. Borrowings from the Central Bank, was another 25.8 billion rupees.

In January the Central Bank gives a so-called provisional advance with printed money to the budget due a flaw in Sri Lanka’s monetary law, which causes inflation or currency weakness or both.

Total borrowings from the banking system in January alone were 93.2 billion rupees, which is one fifth of the entire 468 billion rupee budget deficit projected for 2012. State enterprises borrowed a further 3.2 billion rupees from banks in January.

Interest Rate

State borrowings and energy price manipulations were key triggers of the current balance of payments crisis, along with the lack of high enough interest rates to cover such spending.

The finance ministry has said earlier that it was unable to collect taxes on fuel from the Ceylon Petroleum Corporation mainly due to subsidies given to the state electricity utility.

In February fuel prices were raised. On March 31 taxes on vehicles were raised, including motor cycles and three-wheelers.

While high taxes on cars had in the past discouraged imports and led to a reduction in imports and tax revenues, analysts view higher taxes on motor cycles and three-wheelers as a method to extract more taxes to cover state spending.

In the monetary policy statement on Friday the Central Bank said state spending cuts would also help.

“[I]it is essential that the current shortfall in Government revenue is effectively addressed and public expenditure is further rationalised, so as to significantly lower the reliance on bank sources to finance the Government budget deficit,” the statement said.

“Such a course of action would reverse the trend observed in the first quarter of 2012, and in that context, the recent upward revision of customs and excise duties on selected items by the Government is a display of its commitment to the necessary fiscal consolidation process.”

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