Budget deficit in 1Q widens 10%; revenue up 26%

By Chandeepa Wettasinghe 
Sri Lanka’s budget deficit for the first quarter of 2017 widened 10.49 percent year-on-year (YoY) to Rs.199.67 billion, on the back of high capital expenditure although the primary balance recorded a healthy decline due to an increase in tax collection.
The primary balance, which is the difference between revenue and current expenditure, fell 40.4 percent YoY to Rs. 48.22 billion. 
The government is expecting the primary balance to become a Rs. 55.09 billion surplus or 0.4 percent of gross domestic product (GDP) by the end of 2017.
Fitch Ratings too recently displayed confidence in the government’s ability to create a marginal surplus in the primary balance by the year’s end as well as the ability to bring the overall deficit down to 4.6 percent of GDP from 5.4 percent of GDP YoY.

Increased revenue due to the uptick in the value-added tax (VAT) legislated in late 2016 was the main reason for the fall in the primary balance. Revenue during the first quarter increased 26.15 percent YoY to Rs. 436.01 billion, of which tax revenue made up Rs. 415.08 billion, increasing 27.56 percent YoY.
Total expenditure increased 20.90 percent YoY to Rs. 636.32 billion, of which the current expenditure component increased 13.53 percent YoY to Rs. 484.22 billion.
Interest payments for government borrowings remained the largest recurrent expenditure with Rs.209.03 billion, increasing 35.46 percent YoY, amid the rise of international lending rates due to the US Federal Reserve hiking its policy rates.
Public sector salaries saw a somewhat a modest increase compared to annual increases in the past, growing 5.95 percent YoY during the quarter to Rs. 147.52 billion. Pensions increased 8.03 percent YoY to Rs. 44.18 billion, highlighting the gradually ageing population of the country.
The government’s public investment increased 57 percent YoY to Rs. 152.45 billion. While it is not yet clear how much of this capital spending is in revenue generating projects, the construction of the Central Expressway, which commenced in late 2016, may have contributed significantly towards the increase.  
During the quarter under review, the government’s net financing—the difference between its borrowings and debt repayment—increased 10.49 percent YoY to Rs. 180.71 billion.
The foreign net financing component recorded an 87.93 percent decline to Rs.2.93 billion, although over US$ 2 billion in debt was raised from the international market in the following months. Net domestic financing too recorded a 1.17 percent YoY decline with Rs. 202.60 billion.
Fitch Ratings recently advocated to roll over past debt maturing in bunches from 2019, before lending rates globally start rising further later this year. It should be noted that the Treasury has fallen far behind in releasing the monthly fiscal operations figures.