Building buffers

As worries of another spike of COVID-19 cases grow, the biggest challenge before the Government is figuring out how to handle the economic fallout from a slower than expected recovery. Given the state of Sri Lanka’s public finances, this will provide to be an effort that will require long-term plans.  

The latest Mid-Year Fiscal Position Report 2020, released earlier this month, indicated that fiscal performance is likely to be under severe stress during the remainder of the year, given the local and global shocks of the COVID-19 pandemic. There are also fears of a second wave, and Sri Lanka’s debt metrics call for strong fiscal management not just in the second half of the year but also in 2021, depending on how the economic recovery moves forward. 

Total Government revenue declined considerably by 20.3% to Rs. 476.7 billion during the first four months of 2020, compared to Rs. 598.1 billion recorded in the same period of 2019. Tax revenue declined significantly by 25.9% to Rs. 408.5 billion in the first four months of 2020, compared to Rs. 551.5 billion in the same period of 2019. 

Total Government expenditure fell by 3.2% to Rs. 930.9 billion in the first four months of 2020, compared to Rs. 961.9 billion in the same period of 2019. However, recurrent expenditure increased by 9.3% to Rs. 820.7 billion in the first four months of 2020, compared to Rs. 750.5 billion in the same period of 2019. 

Given Sri Lanka’s comparatively large public sector and dominance of State Owned Enterprises, it is difficult to stem recurrent expenditure. The additional COVID-19 social welfare demands made on the Budget, such as the Rs. 5,000 hand-out done by the Government for two months during the curfew, has also placed more stress on public finances. These were necessary and part of the Government’s responsibility, but they also ran contrary to the fiscal consolidation measures and other reforms that would have kept Sri Lanka’s Budget on a more sustainable path. 

This is why it is essential to implement reforms in a timely manner, and at the start of a Government’s term, rather than delaying them till the end and leaving them mostly undone. 

The Finance Ministry had earlier estimated the Budget deficit could be 8% for 2020, but rating agencies have predicted it can be higher, depending on how slow the domestic economy is to recover. Even though the Government has rolled out stimulus packages, using largely monetary policy to assist the private sector to deal with the outcomes of the virus, there are concerns that increasing growth could come with high inflation that could exert fiscal pressure, such as demands for salary increases by the public sector. These are weighty issues that will need to be addressed by both the Executive and the next Parliament. 

Undoubtedly, the biggest task for the new Parliament is the next Budget. This will be a more-than-usually important document, because it will have to set the policy agenda for the Government’s next four years, make sense of at least two Votes on Account formulated by the Finance Ministry, and set out how Sri Lanka is going to address its fiscal consolidation needs. The Government has already started discussions with India on a $ 1 billion SWAP arrangement, and it is hoped that it can carry out its plans to meet debt repayments as planned. But next year could prove even more challenging.