The fiscal deficit for 2019 amounted to LKR 1.02tn, ~6.5% of GDP, compared with 5.3% of GDP in 2018. This comes in marginally better than our forecast of ~6.8% but significantly better than the government’s expectation of over 7.0%. Overall deficit for 2019 widened 33.6% YoY, largely due to higher expenditure (+8.2% YoY) coupled with lower revenue (-1.7% YoY)
Government revenue was ~12.2% of GDP (13.3% in 2018), down 1.5% YoY, despite tax revenue picking up 1.3% YoY. Data indicates that revenue from corporate and personal income taxes increased significantly, by 60.8% YoY, while PAYE tax revenue (which is now taken out) rose by 19.5% YoY.
Meanwhile, non-tax revenue dipped 24.9% YoY for the year. In our view, this was a result of lower imports which recorded a 10.3% YoY decline in 2019 (vehicle imports alone recorded a 48.2% YoY decline in 2019), combined with a slow growth environment, where we forecasted overall GDP growth of 2.5% YoY.
Data published by the Ministry of Finance also indicates a significant variance between the estimated and actual revenue collections, which would have added pressure on the fiscal deficit during the period under review.
| Actual vs. estimated revenue collection by the Govt (LKR Bn) | |||
|---|---|---|---|
Estimated | Actual | Variance (%) | |
Tax revenue | 2,077 | 1,735 | -16.5 |
o/w Income tax | 385 | 428 | +11.1 |
Taxes on goods & services | 1,122 | 843 | -24.8 |
o/w VAT | 529 | 444 | -16.1 |
Tax on external trade | 284 | 219 | -22.7 |
Total revenue | 2,344 | 1,891 | -19.3 |
Source: Sri Lanka Ministry of Finance
Meanwhile, overall expenditure was up 8.2% YoY, amounting to ~18.7% of GDP (18.6% of GDP in 2018). According to the Ministry of Finance, this was mainly due to higher recurrent expenditure, which was up 10.1% as a result of higher interest payments (+5.8% YoY), salaries and wages (+9.6% YoY), pension payments and other welfare programs. The government curbed its public investments, focusing only on completing on-going development projects. As such, public investments to GDP declined to 4.1% of GDP (4.3% of GDP in 2018).
In terms of financing the deficit, domestic financing was the main contributor, growing by 120% YoY to LKR 654bn, while foreign financing decline by 21.9% YoY.
| Government Fiscal Operations (LKR bn) | 2018 | 2019 | YoY (%) |
|---|---|---|---|
Total Revenue & Grants | 1,932 | 1,899 | -1.7 |
Total Revenue | 1,920 | 1,891 | -1.5 |
Tax Revenue | 1,712 | 1,735 | +1.3 |
Non-Tax Revenue | 208 | 156 | -24.9 |
Grants | 12 | 8 | -36.7 |
Total Expenditure | 2,693 | 2,915 | +8.2 |
Recurrent | 2,090 | 2,301 | +10.1 |
Capital and net lending | 604 | 614 | +1.8 |
Public Investments | 625 | 631 | +1.0 |
Budget Deficit | -761 | -1,016 | +33.6 |
| |||
Deficit Financing | |||
Foreign Financing (Net) | 465 | 363 | -21.9 |
Domestic Financing (Net) | 296 | 654 | +120.7 |
Source: Sri Lanka Ministry of Finance
Outlook
Looking ahead, given 1) lower taxes announced in November 2019 and January 2020, 2) slow economic activity amidst curfews, 3) lower corporate taxes and 4) higher expenditure associated with curbing the impact of COVID-19, we expect stress on the fiscal balance. However, we note that at this point, the higher expenditure incurred is a key positive in terms of the moves made by the government to support the economy, and minimise the structural impact of slow activity. We expect assistance by agencies like the ADB, and China Development Bank to help fund the government’s higher funding requirement in 2020.
We note that our economic forecasts are currently under review, pending revisions.