Sri Lanka likely to overshoot budget deficit continuously till 2020

Sri Lanka’s economy is heading towards a tumultuous ride in the next three years as widespread policy uncertainty and macroeconomic imbalances will slowdown the economy, push up prices and scare away the investors.      

According to an independent analysis by senior economist Prof. S.S. Colombage, Sri Lanka will overshoot the budget deficit consecutively during the three years to 2020, as fiscal slippage is inevitable, given the fragile revenues and unimaginable recurrent expenses.

Finance Minister Mangala Samaraweera last week presented his maiden budget and the third by the coalition government, which aimed at bringing down the fiscal deficit to below 4.8 percent and to bring it to further down to 3.5 percent by 2020.

But Colombage, based on his own computations, said the government would continuously overshoot the targets and record over 5.0 percent deficits as a result of the macroeconomic imbalances in almost all sectors of the economy.

“Future outlook is not very bright. I have calculated the average GDP growth of around 4.9 percent for the next three years from 2017 to 2020. 

Exports to GDP will come down from 16 percent in 2017 to 13 percent in 2020 and the import to GDP ratio will remain around 25 percent. That means we will continue to run deficits in our current account of the balance of payment.

And the budget deficit is most likely to be over 5.0 percent of GDP from 2017 to 2020.    
So, all in all, the macroeconomic imbalances will continue to remain in the near future. So, it will be difficult to attract foreign direct investments (FDI),” Colombage said speaking at the recently concluded Sri Lanka Economic Association Annual Sessions in Colombo.

Sri Lanka is undergoing a prolonged drought of FDIs and he questioned as to how the country could attract the investors amid these macroeconomic imbalances and corruption at ministerial levels.
Colombage’s bleak outlook of the economy is an unflattering verdict on the performance of the coalition regime, which has been in power for close to three years.

While calling the government’s medium-term economic policy ‘Vision 2025’ as a mere wish list, he said the government had not achieved much so far. 

“The government has completed half of its term. I don’t know whether they will be re-elected.”

His doubts over the achievement of the fiscal deficit target is based on the fact that Samaraweera hasn’t made any attempt to support the Central Bank’s inflation targeting framework from the budget.
Thus, he suspects the budget will continue to pump excess liquidity into the economy fuelling inflation.
This happens when the government resorts to borrow from the banking system and more so from the Central Bank as printed money.

Budget 2018 targets to borrow as much as Rs.120 billion from the banking system, which accounts for about 18 percent of the budget deficit.

But Colombage expects the government to overshoot this amount.

In 2017, the government has borrowed as much as Rs.170 billion although the original estimated borrowings were only Rs.32 billion.