1Q budget deficit slightly up on revenue slippage

• Revenue loss estimated at Rs.35.3bn; total revenue and grants at Rs.407.2bnÂ
• Shortfall could be attributed to temporary suspension in economic activities since mid-March
• Tax revenue for the 3 months was Rs.341.3bn, down from Rs.406.5bn a year ago
• CB forecasts 2020 fiscal deficit at 7.9% with pandemic affecting revenue generation negativelyÂ

Sri Lanka reported a slightly stretched budget deficit of 2.1 percent of the estimated gross domestic product (GDP) for the first quarter ended March 31, 2020, up from 1.8 percent recorded in the corresponding period in 2019, as State revenues slipped from the year earlier period, latest data showed. Â

Sri Lanka’s economy was gathering steam with reinvigorated business and consumption activities after the government cut taxes and reduced cost of capital, enabling job creation and income generation across the economy, before the new coronavirus forced the well functioning economy to shutter from mid-March.Â
The revenues as a percentage of estimated GDP declined to 2.6 percent from 2.8 percent recorded in the corresponding period in 2019.Â

This translated into a revenue loss of Rs.35.3 billion during the first three months to end with total revenue and grants of Rs.407.2 billion.Â

While the relatively small shortfall could be attributed to the temporary suspension in economic activities since mid-March, this was much less an impact when compared with the disastrous projections on State revenue erosion by many experts, think tanks and external agencies that came soon after the tax cuts were announced.Â

Tax revenues for the three months were Rs.341.3 billion, compared to Rs.406.5 billion in the year earlier period. Non-tax revenues rose from Rs.35.7 billion to Rs.63.9 billion, making up for some of the loss revenues from tax.Â
While the full year fiscal gap is widely expected to be wider than earlier expected due to coronavirus related economic damage and government stimulus provided to support the economy and livelihoods, the tax cuts appeared to have had the potential to generate more revenue to the government from the elevated economic activities if the momentum continued towards the year-end.Â

Early data on corporate performance, strong upswing in consumer spending and upsurge in the private sector credit provided ample evidence of heightened economic activity in the first two and a half months.

The Central Bank recently revised its fiscal deficit target to 7.9 percent for 2020 after taking into account the coronavirus related impact on the economy.Â

Meanwhile, the government expenditure and net lending as a percentage of estimated GDP remained unchanged at 4.7 percent as recorded in the corresponding period of 2019, the CentralÂ
Bank said.Â

In absolute terms, total expenditure and net lending rose to Rs.743 billion during the three months to March 2020 from Rs.730.1 billion in the corresponding quarter in 2019.Â

The recurrent expenditure rose to Rs.648 billion from Rs.576 billion a year ago while the capital expenditure and net lending declined to Rs.95 billion from Rs.154.1 billion in the corresponding period in 2019.Â

“In financing the budget deficit, domestic financing increased to 2.3 percent of estimated GDP in first three months of 2020 compared to 2.0 percent of GDP in the corresponding period of 2019, while foreign financing as a percentage of estimated GDP remained unchanged at 0.2 percent of net repayment during the first three months of 2020 as recorded in the corresponding period of 2019,” the CentralÂ
Bank said. Â

“In nominal terms, outstanding central government debt increased to Rs.13, 763.2 billion by end of March 2020 from Rs.13,031.5 billion as at end 2019. Accordingly, total outstanding domestic debt increased by 7.4 percent to Rs.7,116.8 billion, and the rupee value of total outstanding foreign debt increased by 3.8 percent to Rs.6,646.3 billion by end March 2020,” it added.