Sri Lanka plans to cut deficit to 6.8-pct of GDP in 2023

ECONOMYNEXT – Sri Lanka is planning to cut the budget deficit to 6.8 percent of gross domestic product in 2023 from an expected 9.9 percent in 2022 with a combination of tax hikes and spending cuts, cabinet spokesman Minister Bandula Gunewardena said.

The cabinet of ministers had approved a fiscal framework for 2023-2025.

“Sri Lanka is facing the worst fiscal crisis in its history,” Minister Gunewardena said. “We have to eventually bring down the deficit to 5 percent of GDP to manage debt, reduce money printing and have low inflation.”

“We will reduce the deficit by increasing revenues (revenue based fiscal consolidation) and cutting spending (spending based consolidation).”

Sri Lanka expects to increase state revenues to 11.3 percent of GDP in 2023 from 9.1 percent this year.

Government spending will be cut to 18.1 percent of GDP from 18.9 percent.

The primary deficit (before interest costs) will be reduced from a negative 4.0 percent of GDP to a negative 1.0 percent of GDP.

The overall budget deficit tends to be high immediately after a currency crisis due to high interest rates required to smash private credit, reduce outflows and restore the credibility of the soft-peg.

A soft-peg is usually broken by sustained money printing for post-sterilization of reserves used for imports (to maintain the policy rates) or to keep interest rates artificially low.

Sri Lanka is to begin a round of discussions with a visiting International Monetary Find this week.

A primary deficit target reduces the incentive for a third world currency crisis central bank to attempt to keep rates down by printing money.