UPDATE 2-Sri Lanka sees budget deficit falling, but strain on economy remains

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(update throughout)

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Colombo, Nov 12 (Businesshala) – The Sri Lankan government will reduce the budget deficit to around 8.8% of GDP in 2022, Finance Minister Basil Rajapaksa said in his budget speech on Friday, though it missed the 2021 deficit target .

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The minister said that the government will also implement the Goods and Services Tax announced in the budget from January 2022 to 2021.

“We are passing through one of the most challenging times in history in terms of people’s lives, livelihoods, sources of income and job security,” Rajapaksa said.

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“I firmly believe that even in the midst of these challenges, we are equipped with all the necessary strengths to manage the economy and overcome such challenges.”

The new projected 11.1% budget deficit for 2021 is higher than the 9.5% target set by the government in June, which itself was revised upwards to 8.9%.

“This budget is a credit positive,” Dimantha Mathew, head of research at First Capital, told Businesshala.

“A significant amount of taxes are coming up and the government is looking to increase revenue by 46% next year, while expenditure is expected to increase by only 16%. So fiscal concerns are being addressed.”

However, he warned that there could be some tightening in the economy due to cuts in public and capital expenditure, which could impact consumer spending. Sri Lanka has a large public sector which constitutes about 2 million out of 21 million population.

Sri Lanka’s central bank announced in October that it would keep its 2021 5% growth target unchanged. The growth numbers for the next year are yet to be announced by the government and no estimates were included in the budget speech.

The budget also includes support due to the COVID-19 pandemic for specific sectors such as tourism, apparel, plantation and agriculture as the government seeks to boost growth.

In late October, Moody’s downgraded Sri Lanka from CAA2 to CAA1 over debt stability concerns and a challenging external environment. Moody’s forecasts revenue to be around 10% of GDP over the next few years while interest payments will continue to absorb around 60-70% of revenue.

Sri Lanka owes $4.3 billion in debt in 2022 and reserves have come down to $2.6 billion at the end of October. ($1 = 201.000 Sri Lankan rupees) (Reporting by Uditha Jaisinghe, Writing by Alasdair Pal, Editing by Timothy Heritage)

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