Deficit reduced to 1.8% in first four months

Govt. marks strong fiscal performance Jan-April 

Nominal tax revenue increases 25.6% mostly on VAT and RAMIS

Revenue as GDP percentage increased to 4.5%

net lending hike to 6.3% and interest payments to 23.8% leads to higher recurrent and capital expenditure

By Uditha Jayasinghe 

Despite being beset by political challenges, the Government ramped up their fiscal performance, increasing tax revenue by 25.6% in nominal terms to Rs. 544.3 billion and shrinking the Budget deficit marginally when compared to the first four months of 2016.

Revenue as a percentage of GDP increased to 4.5% during the first four months of 2017, the Central Bank said in its latest update of monetary policy this week. This, together with the nominal increase in tax revenue, helped to reduce overall Budget deficit as a percentage of GDP to 1.8% or Rs. 233.2 billion in the first four months of this year. In the previous year the deficit for the same period was 1.9% or Rs. 233.4 billion.

The increase in tax revenue was largely driven by the VAT hike, which increased from 11% to 15%. Improved compliance due to the Revenue Administration and Management Information System (RAMIS) adopted by the Inland Revenue Department also contributed to the hike. 

However, total expenditure and net lending increased to 6.3% of estimated GDP during the first four months of 2017 due to higher recurrent and capital expenditure. The increase in interest payments by 23.8 % largely contributed to the higher recurrent expenditure. 

Broad money (M2b) growth remained high at 21.2% (y-o-y) in June 2017, compared to 21.4% in May 2017. Average broad money growth was 19.7% during the first half of 2017 compared to 18.2% in the first half of 2016 and Rs. 18.1% for year 2016. 

Central Bank Governor Dr. Indrajit Coomaraswamy told reporters that he expected the interest rate cycle to begin its downward curve over the next few months, predicting that reduced securities interest rates would transfer to credit interest rates. 

“My gut reaction is we are close to the top of the interest rate cycle, but there are important qualifications there: one is what happens to the Budget. If for various reasons there is slippage in the Budget, we will have to respond to offset that. The other thing is if headline inflation goes up significantly, then we have to be careful of results from that because it can lead to wage demand and expectations, in which case one may have to increase rates to anchor expectations,” the Governor said.

Year-on-year growth of credit to the private sector decelerated to 18.6% in June 2017, compared to a growth of 18.9% in May 2017. In the Monetary Sector, going forward, credit growth is expected to moderate further with the full transmission of monetary tightening measures, the Central Bank assured the media.

The average private sector credit growth was 20.0% during the first half of 2017, compared to the 25.9% recorded in 2016. In absolute terms, private sector credit granted by commercial banks during the month of June was Rs. 80.3 billion.