Deficits in a time of COVID

Tuesday, 4 May 2021 00:00 -     - {{hitsCtrl.values.hits}}

The worsening pandemic situation in Sri Lanka is also increasing existing Government headaches, as the latest Central Bank Annual Report attests. Caught between a rock and a hard place, the major worry at this point is that even if the pandemic is brought under control, Sri Lanka’s economic worries could still have serious impact that could last for years.   

It would seem for all its economic concerns the Government appears reluctant to either take strong measures to control COVID-19 spread or implement reforms to put the economy on a more sustainable path. The Central Bank’s latest Annual Report, released on Friday, makes for some very bleak reading. In it the monetary authority points out that Sri Lanka’s fiscal deficit swelled to a record 11.1%, higher than what has been seen in two decades. 

Correspondingly, the country’s debt to GDP ratio also raced to 109.7%, rising from 94.3% of GDP in 2019 partly due to the pandemic. The Annual Report also pointed out that past efforts towards fiscal consolidation by phasing out the relatively high fiscal deficit and Government debt have fallen short of expectations with the targets being kicked down the road by successive administrations. 

Against this backdrop, the Government needs to strike a fair balance between firming up fiscal consolidation and continuing the facilitation of economic recovery and growth. As per the Government’s medium term fiscal framework, a budget deficit of 9.4% has been forecast for 2021 and to be progressively reduced to 7.5% next year, 5.6% by 2023, 4.7% in 2024, and 4% by 2025. 

However, as new variants of COVID-19 emerge and Sri Lanka continues to struggle with a massive third wave, the hope of a second half recovery appears elusive. Blatantly foolhardy policies such as keeping the travel bubble between Sri Lanka and India open, despite appeals from health officials to end the practice, and allowing guidelines to be flouted by VIPs, are not helping. 

At a time when local health facilities are burdened and medical professionals are calling for greater support the Government has to understand that the prognosis for the economy will not get better by playing deaf. Aside from the COVID-19 crisis the Government also has to keep an eye on recurrent expenditure, which could rise as pressure mounts for State support for unemployed and other social welfare needs.

The Central Bank also said going forward, near-term risks to the fiscal sector could remain elevated due to low revenue mobilisation and the large foreign currency debt service requirements. Persistent deviations of the budget deficit and the elevated level of outstanding Central Government debt warrant a firm commitment towards fiscal consolidation as envisaged in the National Policy Framework of the Government. 

Balancing these multiple commitments will be tricky but the best way to tackle it is by getting policy priorities in order and placing public interest at the centre of the decision making process. The Government is looking down the double barrel of another double digit budget deficit, and perhaps more worryingly, funding the $ 1 billion debt repayment due in July. It is therefore essential to completely rethink public budgets. The best place to start is ensuring healthcare gets more allocations than defence.

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