Govt. forced to borrow even for day-to-day operations: CBSL
by Sanath Nanayakkare-May 11, 2016, 6:49 pm
The Central Bank of Sri Lanka (CBSL) said on Tuesday that the government is forced to have recourse to borrowings even for its day-to-day operations.
Mahinda Siriwardana, Director of Economic Research, Central Bank of Sri Lanka stated this at the Centre for Banking Studies at Rajagiriya yesterday while delivering a public lecture on the 'State of the Economy as reflected in the Central Bank Annual Report-2015'.
The Annual Report 2015 highlights several issues and challenges faced by the Sri Lankan economy, especially 'structural vulnerabilities' of the economy that had built up over time.
CBSL Governor Arjuna Mahendran, Deputy Governor Dr. Nandalal Weerasinghe and principal officers of the Central Bank were present on the occasion where numerous members of the general public had also assembled to learn what's in store for them under near and medium term Central Bank policy decisions. Siriwardana said the performance in government finances reflected 'serious structural weaknesses' in the government budget.
"As reflected in the sizable deficit in the revenue account, the country’s revenue is not sufficient even to finance the maintenance expenditure of the government," he told a surprised audience.
Speaking further he said,"This weakness in the structure of the budget lessens the channeling of adequate expenditure for development needs."
Outlining the way forward through these huge obstacles, he pointed out the measures taken by the government to address these issues.
Those measures include redrafting of tax laws with technical assistance from the IMF to simplify the tax laws, improvements in tax administration, automation of revenue agencies, the information system (RAMIS) at Inland Revenue Department, Single Window System at Sri Lanka Customs, Integrated Treasury Management Information System at the Ministry of Finance, the zero-based budgeting system by the Ministry of Finance and the setting up of a Budget Implementation and Monitoring Unit to ensure close monitoring of expenditure programmes.
"Total expenditure and net lending increased by 27.5% to Rs. 2,290 billion in 2015. Recurrent expenditure increased by 28.6% to Rs. 1,702 billion, exceeding the budgetary target of Rs.1, 552 billion. Expenditure overrun reflected the increased expenditure on salaries and wages, interest payments, current transfers and subsidies, he said.
Shifting to an optimistic note Siriwardana said,"Sri Lanka’s economy is projected to expand at a rate of 5.8% in 2016 and strengthen over the medium term to achieve a higher growth path of around 7%.Positive developments in the domestic and global economies with recent policy initiatives are expected to result in a favorable outlook for the external sector."
"With the strengthened fiscal consolidation process, the budget deficit is expected to be reduced to 3.5% of GDP by 2020, while the debt to GDP ratio is to be reduced to 60.0%. The conduct of monetary policy will focus on maintaining inflation in mid- single digit levels while facilitating the economy to realize its potential."
Pointing out the strong need for decisive steps to be taken, Siriwardana said, "Decisive steps are necessary to correct these vulnerabilities to ensure the country’s progress along a high growth- low inflation path. It is expected that with right policies, the economy will return to a high growth path in the medium term.
"Policy focus will need to be on Improving fiscal performance through essential reforms, reforms in State Owned Enterprises, Introduction of a robust pricing formula for petroleum products, attracting non-debt creating FDIs and long term financial flows, strengthening external sector sustainability through external trade, optimum utilization of trade agreements and arrangements, proactive policies for inclusive growth, meeting high quality human capital needs, evolution of the current education system into a demand driven one, addressing the issues in the agriculture sector and plantation sector, promotion of public–private partnerships and so on.
"Immediate improvements to public transport are needed to curb the economic loss caused by road traffic congestion. Ongoing changes in weather patterns and volatilities associated with fuel prices reiterate the need for strengthening of the national policy on renewable energy development.
"Introduction of market oriented pension and superannuation that ensure wider coverage of the labour force is needed. Financial deepening is needed to enable high growth momentum of the country, inclusive of the poor in the peripheral districts.
"The strategic position of the island of Sri Lanka in the Indian Ocean in the middle of the maritime Silk Route from China to Europe must be exploited to harness the potential of the country", Siriwardana noted.
The following points too surfaced at the Central Bank forum:
*Unemployment rate increased to 4.6% during 2015, compared to 4.3% recorded in 2014.
*Earnings from exports contracted by 5.6% in 2015, reflecting a decline across almost all major export categories.
*Overall expenditure on imports declined by 2.5% although expenditure on non-fuel imports increased significantly by 9.6%.
*Fuel import bill declined by US$ 1.9 billion to US$ 2.7 billion due to the significant decline in international oil prices, but higher expenditure on importation of personal motor vehicles and other consumer durables contributed to the increase in non-fuel exports.
*Earnings from tourism increased by 22.6% to US$ 2,981 million while worker remittances declined by 0.5% to US$ 6,980 million.
*Current account deficit amounted to US$ 2,009 million in 2015 compared to US$ 1,998 million recorded a year earlier. As a percentage of GDP, it narrowed slightly to 2.4% in 2015 compared to 2.5% in 2014.
*The BOP deteriorated in 2015 largely due to lower than expected financial inflows and higher capital outflows.
*In 2015, the BOP recorded an overall deficit of US$1.489 million in comparison to the surplus of US$1,369 million recorded in 2014.
*Modest performance of the current account together with the comparatively low level of inflows to the financial account and higher outflows contributed to the deterioration of the BOP.
